The New York State Department of Financial Services is the state’s primary regulator of financial institutions and activity, with jurisdiction over approximately 1,400 financial institutions and 1,800 insurance companies. This year, the agency will undergo a change in leadership with the appointment of Adrienne Harris as Superintendent.  At the same time, the agency stands ready to emerge from the COVID-19 pandemic with a continued focus on consumer protection and assertion of authority over emerging areas of significance to New York’s banking and insurance industries. In this exclusive one-hour presentation, three experienced practitioners—Mylan Denerstein, Akiva Shapiro, and Seth Rokosky—explain key developments at this important financial services regulator. They will discuss not only changes to the agency’s leadership and organizational structure, but also recent developments with respect to the agency’s guidance, regulations, and enforcement matters in a broad array of areas, including insurance, consumer protection, cybersecurity, fintech and cryptocurrency, financial empowerment and inclusion, climate change, and special-purpose national bank charters.

View Slides (PDF)

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PANELISTS:

Mylan Denerstein is a litigation partner in the New York office of Gibson, Dunn & Crutcher. Ms. Denerstein is Co-Chair of Gibson Dunn’s Public Policy Practice Group and a member of the Crisis Management, White Collar Defense and Investigations, Labor and Employment, Securities Litigation, and Appellate Practice Groups. Ms. Denerstein leads complex litigation and internal investigations, representing companies in their most critical times, typically involving state, municipal, and federal government agencies. Prior to joining Gibson Dunn, Ms. Denerstein served as Counsel to New York State; in a diverse array of legal positions in New York State and City agencies; and as a federal prosecutor and Deputy Chief of the Criminal Division in the U.S. Attorney’s Office for the Southern District of New York. Ms. Denerstein is ranked as a leading lawyer in White-Collar Crime & Government Investigations by Chambers USA: America’s Leading Lawyers for Business 2021.  She was named by Benchmark Litigation to its 2021 “Top 250 Women in Litigation” list,  and was also recognized by the publication as a 2021 “Litigation Star” nationally in Appellate, Securities and White-Collar Crime, as well as in New York. Ms. Denerstein was named to the 2020 “Albany Power 100”, 2020 “Law Power 100” and 2019 “Law Power 50” list by City & State and the 2019 list of “Notable Women in Law” by Crain’s New York Business.

Akiva Shapiro is a litigation partner in the New York office of Gibson, Dunn & Crutcher, where he is a member of the firm’s Appellate and Constitutional Law, Media & Entertainment, Securities Litigation, and Betting & Gaming Practice Groups. Mr. Shapiro’s practice focuses on a broad range of high-stakes constitutional, commercial, and appellate litigation matters, successfully representing plaintiffs and defendants in suits involving civil RICO, securities fraud, breach of contract, misappropriation, and many other tort claims, as well as CPLR Article 78, First Amendment, Due Process, and statutory challenges to government actions and regulations. He is regularly engaged in front of New York’s trial courts, federal and state courts of appeal, and the U.S. Supreme Court, and has been named a Super Lawyers New York Metro “Rising Star” in Constitutional Law. Mr. Shapiro was named Litigator of the Week by The American Lawyer in August 2021 for what it called an “extraordinary SCOTUS win for New York landlords,” obtaining an emergency injunction from the Court on due process grounds.  He was named a runner-up Litigator of the Week by The American Lawyer in November 2020 for “two big wins . . . scored late on the Wednesday before Thanksgiving,” including obtaining an emergency injunction from the U.S. Supreme Court in The Roman Catholic Diocese of Brooklyn, New York v. Cuomo, a landmark religious liberties decision. He was also named a runner-up Litigator of the Week in August 2019 for a First Amendment and due process victory on behalf of the New York State title insurance industry.

Seth Rokosky is an associate in the New York office of Gibson, Dunn & Crutcher. He is a member of the firm’s Litigation Department and focuses his practice in the Appellate and Constitutional Law group. Mr. Rokosky has extensive experience challenging and defending government policies at the state, local, and federal level. He rejoined Gibson Dunn after serving in the New York Attorney General’s Office. As an Assistant Solicitor General in the Bureau of Appeals and Opinions, his public service included representing the State and its agencies as principal attorney on 43 appellate matters. Mr. Rokosky has conducted more than 20 oral arguments and filed more than 70 appellate briefs in both state and federal court, and he maintains a robust litigation practice in trial courts with a particular focus on complex briefing and providing strategic advice to trial counsel. The Best Lawyers in America® has recognized Mr. Rokosky as “One to Watch” in the Appellate Practice.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit 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.

China’s Anti-Monopoly Law (“AML”) was adopted in 2007 and talks about possible amendments have regularly surfaced in the last few years. The State Administration for Market Regulation (“SAMR”)  released a draft amendment for public comments in early 2020. The process is now accelerating with a formal text (“AML Amendment”) submitted to the thirty-first session of the Standing Committee of the National People’s Congress for first reading on 19 October 2021. This client alert summarizes the main proposed changes to the AML, which have been published for comments.[1]

1.   Targeting the digital economy

Emphasis on the digital economy. Technology firms and digital markets have been the subject of a broad regulatory assault in China, including one that is based on the AML.  SAMR has published specific guidelines on the application of the AML to platforms in early 2021 and has imposed significant fines on these market players in the last months. For example, SAMR fined Meituan, an online food delivery platform provider, RMB 3.44 billion (~$534 million) for abusing its dominant position.[2]  The AML Amendment specifically refers to enforcement in the digital economy by making it clear that undertakings shall not exclude or restrict competition by abusing the advantages in data and algorithms, technology and capital and platform rules. At the same time, the objectives to the AML have also been updated to include “encouraging innovation.” Going forward, SAMR will need to tread the delicate line between encouraging digital innovation and curbing such advancement where it constitutes abusive market behaviour. In the most recent year, at least, in practice there has been an emphasis on enforcement rather than fostering innovation, a trend we anticipate will continue.

2.   Substantive changes

Cartel facilitators. The AML arguably does not cover the behaviour of undertakings facilitating anticompetitive conduct, in particular cartels. The AML Amendment fills the gap by extending the scope of the AML to the organisation or provision of material assistance in reaching anticompetitive- agreements. This effectively means that the AML will be extended to cover behaviour leading up to the conclusion of such agreements, and third parties may be found in breach by virtue of their role in aiding the conclusion of cartels.

Abandoning per se treatment of resale price maintenance. The application of the AML to resale price maintenance (“RPM”) is confusing. While SAMR seems to apply a strict “per se” approach, the courts have generally adopted a rule of reason analysis, only prohibiting RPM when it led to anticompetitive effects.[3]  The AML Amendment seems to favour the courts’ approach by providing that RPM is not prohibited if the supplier can demonstrate the absence of anticompetitive effects.

Safe harbour for anticompetitive agreements. The AML Amendment introduces a safe harbour for anticompetitive agreements. Agreements between undertakings that have a market share lower than a specific threshold to be set by SAMR will not be prohibited unless there is evidence that the agreement has anticompetitive effects. Given that this is not a complete exemption from the prohibition, it is very much the question whether this safe harbour will be at all useful to undertakings.

Merger review of sub-threshold transactions. The State Council Regulation on the Notification Thresholds for Concentrations of Undertakings already provides SAMR with the right to review transactions that do not meet the thresholds for mandatory review. This right would now directly be enshrined in the AML.

Stop-the-clock in merger investigations. SAMR will have the power to suspend the review period in merger investigations under any of the following scenarios: where the undertaking fails to submit documents and materials leading to a failure of the investigation; where new circumstances and facts that have a major impact on the review of the merger need to be verified; or where additional restrictive conditions on the merger need to be further evaluated and the undertakings concerned agree. The clock resumes once the circumstances leading to the suspension are resolved. It seems that this mechanism may be used to replace the “pull-and-refile” in contentious merger investigations.

3.   Increased penalties

Penalties on individuals. The AML Amendment would introduce personal liability for individuals. In particular, if the legal representative, principal person-in-charge or directly responsible person of an undertaking is personally responsible for reaching an anticompetitive agreement, a fine of not more than RMB 1 million (~$157,000) can be imposed on that individual. At this stage, however, cartel leniency is not available to individuals.

Penalties on cartel facilitators. As explained above, cartel facilitators will be liable for their conduct. They risk penalties of not more than RMB 1 million (~$157,000).

Increased penalties for merger-related conduct. One of the weaknesses of the AML is the very low fines for gun jumping (limited to RMB 500,000). The AML Amendment now states that where an undertaking implements a concentration in violation of the AML, a fine of less than 10% of the sales from the preceding year shall be imposed. Where such concentration does not have the effect of eliminating or restricting competition, the fine will be less than RMB 5 million (~$780,000).

Superfine. SAMR can multiply the amount of the fine by a factor between 2 and 5 in case it is of the opinion that the violation is “extremely severe”, its impact is “extremely bad” and the consequence is “especially serious.” There is no definition of what these terms mean and this opens the door to very significant and potentially arbitrary fines.

Penalties for failure to cooperate with investigation. Where an undertaking refuses to cooperate in anti-monopoly investigations, e.g. providing false materials and information, or conceals, destroy or transfer evidence, SAMR has the authority to impose a fine of less than 1% of the sales from the preceding year, and where there are no sales or the data is difficult to be assessed, the maximum fine on enterprises or individuals involved is RMB 5 million (~$780,000) and RMB 500,000 (~$70,000) respectively.

Public interest lawsuit. Finally, public prosecutors (i.e. the people’s procuratorate) can bring a civil public interest lawsuit against undertakings they have acted against social and public interests by engaging in anticompetitive conduct.

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   [1]   National People’s Congress of the People’s Republic of China, “Draft Amendment to the Anti-Monopoly Law” (中华人民共和国反垄断法(修正草案)) (released on October 25, 2021), available at http://www.npc.gov.cn/flcaw/flca/ff8081817ca258e9017ca5fa67290806/attachment.pdf.

   [2]   SAMR, “Announcement of SAMR’s Penalty To Penalise Meituan’s Monopolistic Behaviour In Promoting “Pick One Out Of Two” In The Online Food Delivery Platform Service Market” (市场监管总局依法对美团在中国境内网络餐饮外卖平台服务市场实施“二选一”垄断行为作出行政处罚) (released on October 8, 2021), available at http://www.samr.gov.cn/xw/zj/202110/t20211008_335364.html.

   [3]   Gibson Dunn, “Antitrust in China – 2018 Year in Review” (released on February 11, 2019), available at https://www.gibsondunn.com/antitrust-in-china-2018-year-in-review/.

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Sébastien Evrard, Bonnie Tong, and Jane Lu.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following lawyers in the firm’s Hong Kong office:

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com)

Please also feel free to contact the following practice leaders:

Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Ali Nikpay – London (+44 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Brussels (+32 2 554 72 05, criis@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202-955-8678, sweissman@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.

Diversity and inclusion (“D&I”) in the workplace including at leadership levels of organisations is an ever prominent issue brought into sharp focus during the pandemic, intensified in the wake of the recent racially motivated crimes in the US and elsewhere,  which had brought this critical issue on the agenda of many regulators, globally including the UK’s financial services regulators, the Financial Conduct Authority (“FCA”)[1] and the Prudential Regulatory Authority (“PRA”)[2]

Earlier this year, in July, the UK’s financial services regulators published a discussion paper and a consultation paper setting out proposals to enhance diversity and inclusion in the financial services and the UK listed company sectors respectively. The feedback period on both papers recently came to an end. This alert looks at some of the detail behind the proposals and considers whether in some aspects the FCA has missed an opportunity to push forward the broader D&I agenda and whether in other ways it has gone too far with certain proposals which may have a real and direct impact on the privacy of individuals and the qualitative impact of the proposals.

INTRODUCTION & OVERVIEW OF THE PROPOSALS

Joint Discussion Paper Impacting the UK Financial Services Sector

What?: On 7 July, the FCA, the PRA and the Bank of England[3] (together, the “Regulators”) issued a joint discussion paper – “Diversity and inclusion in the financial sector – working together to drive change” (“DP 21/2“)[4]  expounding how meaningful change in respect of diversity and inclusion in the financial services sector can be accelerated and the paper should be viewed as the starting point for the implementation and formalisation of the related requirements. The Regulators’ make it clear that their primary focus is enhancing “diversity of thought” or “cognitive diversity” whilst recognising that diversity of thought can be influenced by many factors including demographic characteristics which are visible and measurable (e.g. gender, age, ethnicity) and invisible (e.g. disability, sexual orientation and education).

Which firms does it impact?: DP 21/2 affects the whole UK financial services sector including firms authorised and regulated jointly by the FCA and PRA (e.g. banks, building societies, designated investment firms, credit unions and insurance firms) or solely by the FCA. Payment services and e-money firms, credit rating agencies and recognised investment exchanges regulated by the FCA and FMIs regulated by the Bank of England fall within the broad reach of the paper.

Next steps: The proposals are only at a “discussion paper” stage but will be the foundations upon which further steps towards change in this area are built upon. Whilst the official deadline for feedback on the discussion paper passed on 30 September, the regulators propose to continue to engage with firms and other regulators on the topics presented in the paper and intend to gather further data to support their analysis and eventual recommendations with a view to issuing a formal consultation paper in Q1 2022 followed by a Policy Statement in Q3 2022.

Consultation Paper Impacting Listed Companies in the UK

What?: On 28 July 2021, the FCA has published a consultation paper – “Diversity and inclusion on company boards and executive committees” (CP 21/24)[5] which sets  a number of proposals to enhance diversity-related reporting by certain listed companies in  relation to gender and ethnic diversity at both board and executive management level.

Which types of companies does it impact?: The companies in the scope of the breath of the proposals are both UK and  overseas issuers with equity shares, or certificates representing equity shares, admitted to either the premium or standard section of the FCA’s Official List (“In-scope Companies”). In addition, the corporate governance related proposals will also capture UK issuers admitted to UK regulated markets and certain overseas listed companies (subject to exemptions for small and medium companies). The FCA is proposing to exclude open-ended investment companies and shell companies. The FCA is also proposing at this stage, to exclude issuers of debt securities, securities derivatives or miscellaneous securities. The FCA estimates that there are about 1,106 issuers who would be In-scope Companies (766 large issuers and 340 small and medium-sized issuers).

Next steps: The consultation closed on 20 October 2021 and, subject to consultation feedback and approval by the FCA Board, the FCA aims to  publish a policy statement along with the new Listing  Rules and the Disclosure and Transparency Rules (“DTR”) before the end of 2021. This would mean that any new rules would apply to accounting periods beginning on or after 1 January 2022.

A MORE DETAILED LOOK AT THE PROPOSALS

Policy Options Under Consideration for the Financial Services Sector – DP 21/2

Which firms should be in scope? – The Regulators are seeking views on which of the entities identified as falling in the UK financial services sector above should be in scope and the extent that different categories of firms should fall in scope. For example, it is expected that firms which currently fall within the Senior Managers and Certification Regime (“SMCR”)[6] should fall in scope but potentially to different degrees depending on their classification for SMCR purposes (i.e. whether and ‘enhanced’, ‘core’ or ‘limited scope’ firm). The Regulators are keen also to include FMIs (even though they are not caught by the SMCR in the same way as other firms) given the important albeit unseen role they place in society and the UK financial markets. An alternative to utilising the SMCR regime as a foundation to introducing potentially new D&I rules would be to utilise existing size classifications under the UK Companies Act 2006 regime for accounting and reporting purposes (i.e. micro-entity, small, medium sized and large). The Regulators are also keen to gather views on the extent to which overseas firms operating in the UK (including through branches) should be caught – we consider that to the extent that these firms are providing financial services and products into the UK market, it would be appropriate that they fall in scope, albeit this should be in a proportionate manner.

Data Collection: One of the trickiest elements for the Regulators to navigate in putting together their proposals is in relation to data collation. The Regulators rightly see data collation (and related setting of targets or metrics) as key to driving impact and change D&I however recognise first that many firms are already collecting some data[7] (albeit not in a consistent manner) and that collection of meaningful D&I data (particularly in smaller firms) can run directly counter to data privacy rules and these will vary across different jurisdictions. In addition, the effectiveness of D&I data collation including data which requires individuals to self-identify for certain categories of diversity, is likely to be impacted by the culture of the individual firms and indeed the culture (and potentially laws and regulations e.g. rules which may prohibit certain sexual or romantic orientation) across different jurisdictions. Further, on the key diversity element of ethnicity, the appropriate ethnic categories for a firm may well be impacted by the jurisdictions in which those firms principally operate (albeit with UK operations or nexus), where they are incorporated or have their headquarters or key leadership teams. How should the regulations be structured to accommodate for this? This is also proving to be a key factor in the specific proposals for listed companies (see  below). Finally, on data collation, whilst for purposes of the discussion paper, the Regulators are gathering feedback on collection of data across the nine “protected characteristics” recognised under the UK’s Equality Act 2010[8]  plus socio-economic background, we do not expect this to result in proposals in the first instance which would cover all of these areas.

Key focus areas of the Discussion Paper: The following areas are the focus of the discussion paper and where the Regulators are actively considering developing policy options (including potentially mandatory proposals):

• Governance – The Regulators recognise that in order to drive effective change in D&I, the leadership and culture of a firm is critical and boards are ultimately responsible for setting strategy and culture and holding management to account for promoting D&I. The paper queries if targets for representation at board level should be set and clarification should be delivered around succession planning for boards and the specific role of nomination committees in driving D&I.
• Accountability – The Regulators are in favour of making senior leaders directly accountable for D&I alongside collective responsibility of the board – this could be done for example through aligning this with the prescribed responsibilities under the senior management function (SMF) in firms for leading the development of firm culture and/or overseeing adoption of the firm’s culture[9].
• Remuneration – As with other areas of environmental, social governance (ESG), the Regulators also see linking remuneration (in particular variable remuneration) with progress on D&I as a key tool for driving both accountability and to incentivise progress. The Regulators are also looking to introduce explicit rules about remuneration policies set by firms and the requirement to ensure that both fixed and variable remuneration do not give rise to discriminatory practices.
• D&I Policies – The Regulators consider having clearly set out D&I policies are essential and wish to explore a requirement for all firms to publish their D&I policies on their website – and whilst not intending to be prescriptive about the content of such policies the expectation is that at a minimum the policies include clear objectives and goals and the Regulators note that for smaller firms a proportionate and simpler approach would be appropriate.
• Progression, Development & Targets – The Regulators are keen to facilitate early consideration by firms about the progression of their talent from the time of entry to the top of the organisation. This should include consideration being given to recruitment practices and beyond. Linked to this, the Regulators are keen to get views on the merits of setting targets for under-represented groups for entry into management (whether senior-management or customer-facing roles)
• Training – The Regulators believe that all employees in firms should understand D&I and its importance and that accordingly firms should institute training for employees which is focussed on real business outcomes. The Regulators are cognisant of the mixed views on D&I training and the pros and cons of mandatory (potentially tick the box training) and voluntary training (which may run the risk of poor take up) and is seeking further insights in this area.
• Products and Services – Importantly, the Regulators want firms to focus on consumer outcomes and to take care to ensure that a firm’s target market is not defined in a way that can result in unlawful discrimination. Rules already require firms to ensure fair treatment of vulnerable customers – the Regulators however are seeking views on whether their rules should go further such that product governance requirements should specifically take into account consumers’ protected characteristics or other diversity characteristics.
• Disclosure – Research cited by the Regulators shows that greater disclosure is linked to increased diversity and accordingly they wish to consult on requirements for firms to publicly disclose a selection of aggregated diversity data about the firm’s senior management and employee population as a whole. Disclosure could potentially include pay gap information and the Regulators are also seeking views on whether a template form of disclosure would be beneficial for firms. Again the Regulators are cognisant of not imposing excessively burdensome disclosure requirements and ensuring a proportionate approach.
• D&I Audits – The Regulators consider that diversity audits should be considered to assist firms to measure and monitor D&I and in particular help boards judge whether measures put in place to change culture and thus behaviour are actually working.
• Regulatory Measures – The Regulators consider that non-financial misconduct (which could for example include evidence of sexual harassment, bullying and discrimination) should be embedded into fitness and propriety assessments of senior managers. The Regulators are also keen to understand further how a firm’s appointments at board and senior management level have considered and taken into account how such appointments will contribute to diversity (e.g. in a way that addresses risks arising as a result of lack of diversity and group think).
• Authorisation – Threshold Conditions – Finally, the Regulators are seeking views on whether and to what extent D&I should be embedded into the minimum conditions that a firm must meet to carry on regulated activities (both initially at authorisation stage and on an ongoing basis)

 

New Specific Proposals for Listed Companies – CP 21/24

Key new annual reporting requirements:

Unlike DP 21/2 which is looking at a broad range of D&I characteristics potentially across the whole population of a firm, the initial focus of the FCA in  CP 21/24 is on gender and ethnicity at board and executive management level. Specifically, if the proposals are to be adopted, they will  require In-scope Companies to make the following public annual disclosures:

• Targets – A “comply or explain statement” on whether they have achieved certain proposed targets for gender and ethnicity representation on their boards:
  • At least 40% of the board are women (including individuals self-identifying as women);
  • At least one of the senior board positions[10] is held by a woman (including individuals self-identifying as women); and
  • At least one member of the board is from a non-White ethnic minority background.

Ethnic categories – The non-White ethnicity categories are to be based on the UK’s Official National Statistics (ONS) categories – which as readers will immediately appreciate would not appropriately reflect ethnic categories which may be more appropriate for companies either incorporated or based in overseas jurisdictions and where board or senior management teams are composed of persons and/or might more fairly reflect the demographics in such jurisdictions.

Where – The annual disclosure must be set out in the annual report and accounts of the issuer.

Failure to meet the targets – Where In-scope Companies have not met all of the targets, they will need to indicate which targets have not been met and explain the reasons for not meeting the targets.

• Numerical Disclosure – A standardised[11] numerical disclosure across five categories covering the gender and ethnic diversity of a company’s board, key board positions and “executive management team”[12].
• Optional Additional Disclosures – The FCA is also proposing to include guidance that In-scope Companies may in addition to the mandatory disclosures above, wish to include the following in their annual financial reports to provide potentially relevant context:
  • Summary of existing key policies, procedures and processes;
  • Mitigating factors or circumstances which make achieving diversity on its board more challenging (e.g. size of board or country where main operations are located); and
  • Any risks foreseen in continuing to meet the board diversity targets in the next accounting period and/or plans to improve the diversity of its board.

We would recommend that issuers consider taking up the opportunity to provide further disclosure and context (whether or not they have failed to meet targets and/or perceive a risk in so doing) as this additional narrative can also serve to provide a helpful platform for setting out narratives which can support and distinguish an issuer’s efforts to enhance diversity in its board and leadership teams.

Enhancing existing corporate governance disclosure requirements:

In addition to amending the Listing Rules to reflect the above new annual reporting requirements, the FCA is proposing additional specificity and more information to be disclosed  by certain issuers[13] who currently are required to publish a corporate governance statement which includes a description of diversity policies which apply to the their administrative, management and supervisory bodies (or, if they do not have one, explain not). The FCA is proposing to expand the disclosure of the diversity policy to cover the following elements:

• Scope – The diversity policy should also apply to a company’s remuneration, audit and nominations committees; and
• D&I Categories – The policy should also cover the following additional diversity elements ethnicity, sexual orientation, disability and socio-economic background.

 

POINTS OF NOTE ON THE PROPOSALS & SOME PRACTICAL CONSIDERATIONS FOR ORGANISATIONS

1. Too much data and the increasing regulatory burden – Following the publication of the Discussion Paper, concern has been expressed and feedback provided to the Regulators on the scope of the D&I factors covered by the paper – the prospect of having to comply with new disclosure requirements across the nine protected characteristics and socio-economic factors would be overwhelming for the financial services sector industry. In addition, there is concern amongst both the financial services and listed company sectors regarding the already significant and growing data sets required and to the extent there is an opportunity to merge data collation requirements and/or to use existing frameworks (e.g. the senior managers or SCMR) as a foundation to develop for example new specific rules on individual accountability for D&I matters, the Regulators should try to do so.
2. Overlap between the Proposals – There are overlaps between the proposals in DP 21/2 and CP 21/24 of course to the extent that any of the financial services firms are also In-scope (listed) Companies – the FCA recognises this and the Regulators will need to be cognisant of this when developing proposals for the financial services sector.
3. Existing Reporting by In-Scope Companies – On the subject of overlap, there are some In-scope Companies which are already voluntarily reporting D&I data against other voluntary frameworks and will need to start to give consideration now as to whether these should continue and/or how reporting can be most efficiently aligned or integrated with the proposed new reporting requirements.
4. Preparatory considerations & data collection challenges – On timing, the FCA’s proposals would as noted above, apply to accounting periods starting on or after 1 January 2022 so that reporting will start to emerge in annual reports published for 2022 on and from Spring 2023. The FCA is even encouraging companies to consider voluntary early disclosures in annual financial reports published before that time! This would potentially be a challenge for companies unless and to the extent that they are already collating the relevant data in the way prescribed by the FCA (including having given appropriate consideration as to who would fall within their “executive management” for these reporting purposes). To meet the official reporting timing, companies should already start actively considering how to collate the relevant information envisaged by the FCA. There are a number of “tricky” (potentially newer) elements in the proposals including gender data which covers persons self-identifying as women.
5. Data Privacy – We understood the Regulators’ general stance on the importance of data collation in driving efforts on D&I. including allowing for comparisons to be made across companies and sectors (and monitoring progress against targets). However, the key crucial issue which has been flagged by market participants and advisers providing feedback on both sets of proposals is the issue of data privacy. Whilst the Proposals make touching reference to compliance with data privacy requirements, there does not appear to have been an adequate assessment or analysis of how the Proposals (in particular in CP 21/24) potentially cut across data privacy requirements (including but not limited to General Data Protection Regulations (“GDPR”). As we have seen, the Proposals place or consider placing obligations on companies to collect data and personal data revealing race, ethnicity, sexuality or disabilities background or concerning ”special categories of personal data” under the GDPR (which are subject to additional restrictions). We note there are provisions within the GDPR that allow processing of special category personal data for equality of opportunity monitoring purposes, however, this is something that will need to be carefully managed to ensure no data remains personally identifiable. Further, for the proposals to work in practice companies will need the support of employees themselves who will need to be willing to provide their personal information, which to some may be deemed sensitive.
6. Modest targets … not quotas – We note that the proposed board diversity targets referred to in CP 21/24 reflect what is currently expected of FTSE 350 companies, on a voluntary basis, by virtue of the Hampton- Alexander and Parker[14] review reports, save that the FCA has increased the women on boards target from 33% to 40% and some consider that a more stretching target could have been imposed. Additionally, it is worth noting,  that it is not envisaged by the consultation paper that the proposed Listing Rule targets become mandatory quotas, but instead the FCA makes it clear (assuaging any concerns that some issuers may have) that is seeking to provide a positive benchmark for firms to aim towards.

 

MIS-STEPS? – WHAT DO WE THINK ABOUT THE PROPOSALS?

We note that DP 21/2 is broad and sweeping in nature and makes reference to all protected characteristics under the Equality Act as an attempt to consider diversity & inclusion as a whole rather than focusing on any specific area of underrepresentation. Whilst the ambition is noteworthy, If the intention is to address a broad range of D&I, some market participants would be in favour of a qualitative, in-depth approach over a more modest range of criteria, mindful of overlaps and multiple data requests that firms are facing.

Conversely, CP 21/24, whilst making positive steps in its focus on gender and ethnicity does not cover all aspects of diversity & inclusion including some other key areas including disability and socio-economic background which some market participants view as a missed opportunity.   A more ambitious set of proposals giving companies a longer lead time to start to consider, embed and eventually report on a slightly broader data set merited consideration by the FCA.

Finally, we note that neither of the papers have  tackled the question of intersectionality[15] nor how the Proposals or development of new rules pursuant to the discussion paper would adequately address this.  For example, the new and/or enhanced corporate governance disclosures could have specifically required companies to include disclosures on the extent to which they have identified and are addressing issues of intersectionality.

A QUICK LOOK ACROSS THE SEAS – GLOBAL COMPARISONS

The publication of papers with a focus on D&I is not unique to the UK or the UK Regulators, this is a current hot topic with regulators around the globe keen to ensure representation across companies to reflect all elements of diversity & inclusion. For example:

• In Hong Kong, the Stock Exchange of Hong Kong Limited published a consultation paper on its Corporate Governance Code and Listing Rules in April 2021 which considered gender diversity on boards;
• In April 2021, the Financial Services Agency in Japan published a consultation on proposals to revise its Corporate Governance Code to require companies to disclose a policy and voluntary measurable targets in respect of promoting diversity in senior management by appointing females, non-Japanese and mid-career professionals;
• In Australia, diversity and inclusion on boards’ obligations are set through the Corporate Governance Principles applicable to companies listed on the Australian Securities Exchange. Principle One, which applies to listed entities from financial years commencing on or after 1 January 2020, requires the entity to “lay solid foundations for management and oversight”. It includes the recommendation that the board sets “measurable objectives for achieving gender diversity in the composition of the board, senior executives and workforce generally”; and
• In Singapore, the Ministry of Social and Family Development has established the Council for Board Diversity to promote a sustained increase in the number of women on boards of listed companies, statutory boards and non-profit organisations. The Council has set a target for the 100 largest listed companies of 20% women on boards.

 

CONCLUSIONS

Whilst no formal changes have yet to be put into effect in the UK, it is clear to see through the publication of both CP 21/24 and DP 21/2, that the Regulators and the FCA are determined to follow and, potentially in a number of respects, lead the global momentum to drive enhancement of  diversity & inclusion in business and this is welcome. As the detailed proposals are crystallised and finalised, we will continue to review whether some of the possible unintended consequences (particularly around possible compromises on data privacy) are identified and addressed and if a proportionate set of measures are rolled out across the financial services and listed company sectors.

___________________________

   [1]   The FCA regulates part of the financial services industry in the UK. Its role includes protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers. The FCA the conduct regulator for around 51,000 financial services firms and financial markets and the prudential supervisor for 49,000 firms, setting specific regulatory standards for around 18,000 firms.

   [2]   The PRA is the prudential regulator of around 1,500 financial institutions in the UK comprising banks, building societies, credit unions, insurance companies and major investment firms.

   [3]   The Bank of England’s input to the discussion paper is in its capacity of supervising financial market infrastructure firms (FMI).

   [4]   DP 21/2

   [5]   CP 21/24

   [6]   A new set of compliance regulations introduced in the UK to reduce harm to consumers and strengthen financial market integrity by making firms and individuals at those firms more accountable for their conduct and competence. The rules were rolled out across different parts of the UK financial services sector from 2016 and apply to a range of firms in a proportionate manner depending on size and business type, including banks, insurers, FCA-solo regulated firms, PRA-designated investment firms and deposit takers.

   [7]   Research quoted DP 21/2 notes that gender is the most commonly collected data with some firms now also collecting and mapping data across the lifecycle of employees. More sophisticated firms are also now starting to collect data on ethnicity.

   [8]   These are age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation.

   [9]   Prescribed Responsibilities (PR) (I) and (H).

  [10]   i.e. Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO).

  [11]   A reporting template (in tabular form) has been proposed and is laid out in the discussion paper.

  [12]   The Listing Rules would be amended to include a new definition of executive management – “executive committee or most senior executive or managerial body below the board (or where there is no such formal committee or body, the most senior level of managers reporting to the chief executive) including the company secretary but excluding administrative and support staff”. We note that whilst there is merit in including the company secretary, this role would not normally carry executive responsibilities, hence different terminology e.g. “management” may be a more accurate and representative definition.

  [13]   This obligation is set out in the Disclosure and Transparency Rules (DTR) of the FCA’s Handbook and the relevant DTR applies to certain UK and overseas issuers admitted to UK regulated markets but exempts small and medium issuers.

  [14] Hampton-Alexander Review: FTSE women leaders – initial report and Hampton-Alexander Review: FTSE women leaders –  Improving gender balance – 5 year summary report – February 2021.

  [15]   The concept of intersectionalism is credited to Kimberlé Crenshaw, a legal scholar at Columbia University. The term is used today more broadly to refer to any individuals with multiple self-identities. Specifically, intersectionalism in the workplace does not refer only to the factors of a person’s identity. It is a concept that recognizes the multiple identity factors and how they influence privilege and marginalization, power and influence, emotional impact, and individual and intersecting behaviour (Source: DiversityCan).

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This alert has been prepared by Selina Sagayam and Shannon Pepper.

Ms. Sagayam, a corporate partner in the London office of Gibson Dunn, co-chairs Gibson Dunn’s global ESG Practice, is a member of its Global Diversity Committee and chairs its London Diversity Talent & Inclusion Committee.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Environmental, Social and Governance (ESG) practice, or the following in London:

Selina S. Sagayam – International Corporate Group (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)
James A. Cox – Labour & Employment Group (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Michelle M. Kirschner – Global Financial Regulatory Group (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)

Please also feel free to contact the following practice leaders:

Environmental, Social and Governance (ESG) Practice:
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Perlette M. Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)
Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, mmurphy@gibsondunn.com)
Selina S. Sagayam – London (+44 (0) 20 7071 4263, ssagayam@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.

Summary

• On 22 October, 2021, Executive Vice President Margrethe Vestager delivered a speech in which she stated for the first time that the European Commission (Commission) is going to expand its cartel enforcement to labor markets, including no-poach and wage-setting agreements.
• The U.S. authorities have already been active in pursuing naked no-poach and other labor market agreements, but to date the Commission has not taken any enforcement action in this area.
• The Commissioner’s statement signals a new enforcement priority and companies should prepare. We recommend that companies review their recruitment policies and HR practices in the EU to identify and remediate potential competition law risks.
• Companies should also expand compliance programs to include anticompetitive conduct in labor markets and ensure human resources personnel are receiving competition law training on a regular basis.

Background

The EU turns its attention to labor market agreements

On 22 October, Margrethe Vestager, the Commission’s Competition Commissioner and Executive Vice President, delivered a speech in which she signaled a new area of cartel enforcement for the Commission: anticompetitive labor market agreements.[1] Vestager highlighted wage-fixing and no-poach agreements as two examples of labor market agreements that could create a cartel. Under a no-poach agreement, companies mutually commit not to recruit and/or hire one another’s workers, or at least certain types of workers. Vestager argued that such arrangements can depress salaries, but she cautioned that labor market agreements could be seen as a broader threat to innovation and market entry. She explicitly shared her belief that labor market agreements can “restrict talent from moving where it serves the economy best” and can “effectively be a promise not to innovate.”

While the Commission has historically not focused its enforcement efforts on labor market arrangements such as naked no-poach agreements, Vestager’s speech is an indication that change is coming in the near future. This is part of a broader action plan with respect to EU cartel enforcement, which has historically given rise to high fines. Companies should be taking steps now to ensure they are prepared.

EU labor market interest follows growing international momentum

Vestager’s interest in labor market cartel enforcement is consistent with the growing enforcement efforts in several other jurisdictions. In 2016, the U.S. became the first jurisdiction to announce that it would treat labor market agreements as a criminal cartel matter.[2] In the subsequent five years, the U.S. Department of Justice (“DOJ”) has pursued numerous criminal investigations into potential wage-fixing, no-poach, and non-solicitation agreements. However, these investigations have only recently led to the first criminal charges, and the DOJ is now preparing for a series of criminal trials in 2022 that will test whether courts agree that such labor market agreements can amount to a cartel.

• Healthcare Providers: In 2021, the DOJ indicted two healthcare providers and a former CEO for their alleged participation in non-solicitation agreements. The DOJ charged both companies and the executive with agreeing not to solicit certain “senior-level employees” from one another. Additionally, the DOJ charged one of the companies and its former CEO with entering a separate agreement in which an unidentified healthcare company agreed not to solicit its employees—without any reciprocal commitment from the other company. Both companies and the executive have filed motions to dismiss the charges, arguing that such labor market agreements should not be treated as a criminal matter under U.S. law and that imposing criminal liability in the absence of judicial precedent would violate due process. The trial courts will first rule on these threshold legal issues and, if the DOJ prevails, the cases are scheduled for trial in March and May 2022, respectively.
• Physical Therapists: Neeraj Jindal and John Rodgers were charged in December 2020 and April 2021, respectively, as part of the DOJ’s first criminal wage-fixing case. Both individuals are alleged to have participated in a conspiracy among companies in northern Texas to lower rates paid to in-home physical therapists. Jindal and Rodgers are also charged with obstruction of justice for their actions during an earlier investigation into the same conduct by the U.S. Federal Trade Commission. The case is currently scheduled for trial in April 2022.
• School Nurses: The DOJ secured criminal charges against VDA OC and its regional manager, Ryan Hee, for participating in a conspiracy to fix wages and restrain their recruitment efforts for school nurses in Las Vegas, Nevada. During a ten-month period that began in October 2016, VDA OC and Hee allegedly agreed with a competitor not to solicit or hire each other’s nurses and to resist nurses’ efforts to increase wages. The case is currently scheduled for trial in late February 2022.

In Europe, the Portuguese Competition Authority moved to the forefront on labor market enforcement earlier this year. On April 13, the Portuguese Competition Authority announced a statement of objections against the Portuguese Professional Football League and 31 of its teams for an alleged agreement not to hire any player who terminated his agreement with another team for reasons related to the pandemic.[3] More importantly, the Portuguese authority used the case as an opportunity to outline its enforcement policies for labor market conduct. The authority released a policy paper on labor market enforcement[4] and published a Good Practice Guide entitled “Prevention of Anticompetitive Agreements in the Labor Market,” which sets out the various ways labor market agreements might be viewed as anticompetitive.[5]

Companies should prepare for a new era of labor market enforcement

Vestager’s comments suggest that the Commission is turning its enforcement efforts to labor markets. Companies should therefore be taking steps now to ensure they are identifying potential risks and working to remediate them before an investigation occurs.

As a starting point, companies should review their recruitment practices in the EU to determine whether their HR teams avoid recruiting or hiring from specific companies. In many instances, these restraints can be identified quickly in communications with external recruiters in which they receive instructions about the company’s specific hiring needs. Any such hiring restraint should be assessed to ensure it is permissible in its specific context. Any hiring restrictions agreed upon between companies or among members of a trade association that are unrelated to a legitimate commercial relationship are particularly high risk.

Companies would also benefit from reviewing their processes for setting employees’ compensation and benefits. Each company should be competing independently in setting its package of cash compensation (e.g., salaries, hourly wages, bonuses) and non-cash benefits (e.g., insurance, vacation and family policies). Any agreements or informal understandings with another company about the amount of compensation or the types of benefits that will be offered should be immediately discussed with legal counsel. Additionally, companies should be cautious about directly exchanging HR-related information with other companies in an effort to benchmark their compensation practices.

Companies should also expand the scope of their antitrust compliance programs, which have historically been focused on sales and marketing personnel and senior executives. As antitrust enforcers move into labor markets, compliance programs should be extended to human resources personnel and any other employees involved in recruiting. The programs themselves must also be updated to ensure the company’s competition law policy addresses labor market risks, competition training materials reflect labor market conduct, and employees have pathways to internally report suspected competition violations.

In the event that companies do encounter a potential antitrust breach, they should immediately seek legal counsel. The European Commission operates a leniency program that encourages companies to self-report a suspected cartel in exchange for full immunity (for the first company to report the breach). If other companies involved in the cartel can provide evidence of “significant added value,” they will be eligible for a fine reduction (between 30% to 50% for the first company, 20% to 30% for the second, and up to 20% thereafter).

Conclusion

Executive Vice-President Vestager’s statement is a clear signal that the Commission is shifting its attention to anticompetitive labor market conduct, such as wage-fixing and no-poach agreements. To prepare, companies must promptly review their HR-related practices to ensure they address any existing conduct that creates competition law risks and educate their HR employees to minimize the risk of a future infringement.

Gibson Dunn will be hosting a Webcast in November to discuss labor market enforcement in the U.S. and other jurisdictions, including the EU, as well as practical steps that companies should be taking to minimize HR-related competition law risks. Invitations to join the Webcast will follow shortly.

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[1]   Margrethe Vestager, A new era of cartel enforcement, Speech at the Italian Antitrust Association Annual Conference (Oct. 22, 2021), available at https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/speech-evp-m-vestager-italian-antitrust-association-annual-conference-new-era-cartel-enforcement_en.

[2]   U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Guidance for Human Resources Professionals (October 2016), https://www.justice.gov/atr/file/903511/download.

[3]   Autoridade da Concorréncia, AdC issues Statements of Objections for anticompetitive agreement in the labour market for the first time (Apr. 18, 2021), https://www.concorrencia.pt/en/articles/adc-issues-statements-objections-anticompetitive-agreement-labour-market-first-time.

[4]   Autoridade da Concorréncia, Acordos no Mercado de trabalho e política de concorréncia (Apr. 2021), here.

[5]   Autoridade da Concorréncia, Guia De Boas Práticas: Prevenção De Acordos Anticoncorrenciais Nos Mercados De Trabalho (Apr. 2021), here.

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The following Gibson Dunn lawyers prepared this client alert: Scott Hammond, Jeremy Robison, Christian Riis-Madsen, Stéphane Frank, Katie Nobbs, and Sarah Akhtar.

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 any leader or member of the firm’s Antitrust and Competition or Labor and Employment practice groups:

Antitrust and Competition Group:

Brussels
Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com)
Christian Riis-Madsen (+32 2 554 72 05, criis@gibsondunn.com)
Lena Sandberg (+32 2 554 72 60, lsandberg@gibsondunn.com)
David Wood (+32 2 554 72 10, dwood@gibsondunn.com)
Stéphane Frank (+32 2 554 72 07, sfrank@gibsondunn.com)
Alejandro Guerrero (+32 2 554 72 18, aguerrero@gibsondunn.com)

Frankfurt
Georg Weidenbach (+49 69 247 411 550, gweidenbach@gibsondunn.com)

Munich
Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com)
Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com)

London
Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com)
Deirdre Taylor (+44 20 7071 4274, dtaylor2@gibsondunn.com)
Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com)
Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com)
Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com)

United States
Scott D. Hammond – Washington, D.C. (+1 202-887-3684, shammond@gibsondunn.com)
Kristen C. Limarzi – Washington, D.C. (+1 202-887-3518, klimarzi@gibsondunn.com)
Jeremy Robison – Washington, D.C. (+1 202-955-8518, wrobison@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Caeli A. Higney – San Francisco (+1 415-393-8248, chigney@gibsondunn.com)
Veronica S. Lewis – Dallas (+1 214-698-3320, vlewis@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)

© 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 October 25, 2021, the Equal Employment Opportunity Commission (“EEOC”) expanded its guidance on religious exemptions to employer vaccine mandates under Title VII of the Civil Rights Act of 1964 (“Guidance”). This Guidance describes in greater detail the framework under which the EEOC advises employers to resolve religious accommodation requests.

The EEOC emphasizes that whether an employee is entitled to a religious accommodation is an individualized determination to be made in light of the “particular facts of each situation.”  Guidance at L.3. The agency also was careful to note that the Guidance is specific to employers’ obligations under Title VII and does not address rights and responsibilities under the Religious Freedom Restoration Act or state laws that impose a higher standard for “undue hardship” than Title VII.

The EEOC provided its views on the following questions.

Who makes a religious accommodation request, and what form must it take?

• Only sincerely held religious beliefs, practices, or observances qualify for accommodation. Id. at L.1.
• A religious accommodation request need not use “magic words,” but it must communicate to the employer that there is a conflict between the employee’s religious beliefs and a workplace COVID-19 vaccination requirement. Id.
• The EEOC encourages employers to create processes and/or designate particular employees to handle such religious accommodations requests. Id. Employers also should provide employees and applicants with information about whom to contact, and the procedures to follow, to request a religious accommodation, the EEOC advises.

May an employer ask an employee for more information regarding a religious accommodation request?

Yes.  An employer may ask for an explanation of how an employee’s religious beliefs conflict with a COVID-19 vaccination requirement.  Id. at L.2. Furthermore, an employer may make a “limited factual inquiry” if there is an objective basis for questioning either: (1) the religious nature of the employee’s belief; or (2) the sincerity of an employee’s stated beliefs. Id.

• The religious nature of the employee’s belief. Employers are not prohibited from inquiring whether a belief is religious in nature, or based on unprotected “social, political, or economic views, or personal preferences.” Id. However, the EEOC cautions employers that even unfamiliar or nontraditional beliefs are protected under Title VII.  Id.
• The sincerity of an employee’s stated beliefs. The EEOC explains that “[t]he sincerity of an employee’s stated religious beliefs … is not usually in dispute,” but provides factors that may “undermine an employee’s credibility.” Id. These factors are:
  1. actions the employee has taken that are inconsistent with the employee’s professed belief;
  2. whether the accommodation may have a non-religious benefit that is “particularly desirable”;
  3. the timing of the request; and
  4. any other reasons to believe the accommodation is not sought for religious reasons. Id.  

No single factor is determinative. Id. The EEOC cautions that religious beliefs “may change over time,” “employees need not be scrupulous in their [religious] observance,” and “newly adopted or inconsistently observed practices may nevertheless be sincerely held.” Id.

What is an undue hardship under Title VII? 

The Supreme Court has held that an employer is not required to provide an accommodation if the accommodation would impose more than a de minimis cost. Id. at L.3. The Guidance takes an expansive view of what types of costs might justify denying an accommodation. The EEOC suggests that such costs may include:

• “[D]irect monetary costs”;
• “[T]he burden on the conduct of the employer’s business—including, in this instance, the risk of spread of COVID-19 to the public”;
• Diminished efficiency in other jobs;
• Impairments to workplace safety; and
• Causing coworkers to take on the accommodated employee’s “share of potentially hazardous or burdensome work.”  Id.

Furthermore, an employer “may take into account the cumulative cost or burden of granting accommodations to other employees,” but may not rely on the “mere assumption” that “more employees might seek religious accommodation” with respect to a vaccine requirement. Id. at L.4. Likewise, an employer cannot rely on “speculative hardships” to deny an accommodation, according to the EEOC, but must rely “on objective information,” considering factors such as whether the employee making the request works indoors or outdoors, in a solitary or group setting, or has close contact with others, especially “medically vulnerable individuals.”

If an employer grants one religious accommodation request from a COVID-19 vaccination requirement, must it grant all religious accommodation requests?

No. Religious accommodation determinations are individualized in nature and must focus on a specific employee’s request and whether accommodating the specific employee would impose an undue hardship. Id. When assessing whether granting an exemption would impair workplace safety, the EEOC advises considering, among other factors, the number of employees who are fully vaccinated, physically enter the workplace, and will need a particular accommodation.

Must an employer provide a requesting employee’s preferred religious accommodation?

No. An employer may choose any reasonable accommodation that would “resolve the conflict” between the a vaccination requirement and an employee’s sincerely held religious belief, though it “should consider the employee’s preference.” Id. at L.5. If an employer does not choose an employee’s preferred accommodation, it should explain to the employee why that accommodation is not granted. Id.

Can an employer discontinue a previously granted religious accommodation?

Yes. An employer may be able to discontinue an accommodation if the accommodation is no longer used for religious purposes or the accommodation subsequently imposes more than a de minimis cost. Id. at L.6. Employers also should be aware that an employee’s “religious beliefs and practices may evolve or change over time and may result in requests for additional or different religious accommodations.”

Questions the EEOC did not address include what steps large employers faced with tens of thousands of reasonable accommodation requests must take to satisfy the individualized-determination requirement; what may constitute reasonable accommodations for employees entitled to exemptions, particularly when community transmission is high; and how employers can comply with recordkeeping and privacy concerns under state and federal statutes, including how to receive and store employee vaccine and testing records.

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The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Katherine V.A. Smith, Jason C. Schwartz, Jessica Brown, Andrew G. I. Kilberg, Zoë Klein, Chad C. Squitieri, Hannah Regan-Smith, and Kate Googins.

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 or Labor and Employment 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)

© 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 16, 2021, Governor Gavin Newsom signed bipartisan legislation intended to expand housing production in California, streamline the process for cities to zone for multi-family housing, and increase residential density, all in an effort to help ease California’s housing shortage. The suite of housing bills includes California Senate Bill (“SB”) 8 (Skinner), SB 9 (Atkins), and SB 10 (Weiner). Each of the bills will take effect on January 1, 2022. Some have characterized the bills as “the end of single family zoning.”  In practice the results may be more nuanced, but the net effect will be to allow significantly more development of housing units “by right.”

SB 8

SB 8 is an omnibus clean-up bill impacting several previous housing initiatives. Notably, it extends key provisions of SB 330, also known as the Housing Crisis Act of 2019 (previously set to expire in 2025),  until January 1, 2030. That act set limits on the local approval process for housing projects, curtailed local governments’ ability to downzone residential parcels after project initiation, and limited fee increases on housing applications, among other key provisions. If a qualifying preliminary application for a housing development is submitted prior to January 1, 2030, then rights to complete that project can vest until January 1, 2034. The amendment specifies that it does not prohibit a housing development project from being subject to ordinances, policies, and standards adopted after a preliminary application was submitted if the project has not commenced construction within two and a half (2.5) years, or three and a half (3.5) years if the project is an affordable housing project.

Existing law provides that if a proposed housing development project complies with the applicable objective general plan and zoning standards in effect at the time an application is deemed complete, then after the application is deemed complete, a city, county, or city and county shall not conduct more than five hearings pursuant to Section 65905, or any other law requiring a public hearing in connection with the approval of that housing development project. SB 8 expands the definition of “hearing” from any public hearing, workshop, or similar meeting to explicitly include “any appeal” conducted by the city or county with respect to the housing development project.  A “housing development project” is also defined to include projects that involve no discretionary approvals, projects that involve both discretionary and nondiscretionary approvals, and projects to construct a single dwelling unit. The receipt of a density bonus does not constitute a valid basis on which to find that a proposed housing project is inconsistent, not in compliance, or not in conformity, with an applicable plan, program, policy, ordinance, standard, requirement, or other similar provision. This section applies to housing development projects that submit a preliminary application after January 1, 2022 and before January 1, 2030.

SB 8 further amends the Government Code to state that with respect to land where housing is an allowable use, an affected city of county, defined as a city, including charter city, that the Department of Housing and Community Development determines is in an urbanized area or urban cluster, as designated by the Census Bureau, shall not enact a development policy, standard or condition that would have the effect of changing the general plan land use designation, specific plan land use designation, or zoning of a parcel or parcels of property to a less intensive use or reducing the intensity of land use within an existing general plan land use designation, specific plan land use designation, or zoning district in effect at the time of the proposed change. “Reducing the intensity of land use” includes, but is not limited to, reductions to height, density, or floor area ratio, new or increased open space or lot size requirements, new or increased setback requirements, minimum frontage requirements, or maximum lot coverage limitations, or any other action that would individually or cumulatively reduce the site’s residential development capacity.

SB 8 further provides that a city or county may not approve a housing development project that will require the demolition of occupied or vacant protected rental units unless all requirements are met. These requirements include that the project will replace all existing or demolished protected units and that the housing development project will include at least as many residential dwelling units as the greatest number of residential dwelling units that existed on the project site within the last five years. “Protected units” means any of the following: (i) residential dwelling units that are or were subject to a recorded covenant, ordinance, or law that restricts rents to levels affordable to persons and families of lower or very low income within the past five years, (ii) residential dwelling units that are or were subject to any form of rent control within the past five years, (iii) residential dwelling units that are or were occupied rented  by lower or very low income households within the past five years, and (iv) residential dwelling units that were withdrawn from rent or lease in accordance with the Ellis Act within the past 10 years.

SB 8 adds the general requirement that any existing occupants that are required to leave their units shall be allowed to return at their prior rental rate if the demolition does not proceed and the property is returned to the rental market (with no time limit  specified in the bill text).  The developer must agree to provide existing occupants of any protected units that are of lower income households: relocation benefits and a right of first refusal for a comparable unit (defined as either a unit containing the same number of bedrooms if the single-family home contains three or fewer bedrooms or a unit containing three bedrooms if the single-family home contains four or more bedrooms) available in the new housing development affordable to the household at an affordable rent (as defined in Section 50053 of the Health and Safety Code).

SB 9

SB 9, the California Housing Opportunity and More Efficiency (“HOME”) Act, facilitates the process for homeowners to subdivide their current residential lot or build a duplex. State law currently provides for the creation of accessory dwelling units by local ordinance, or, if a local agency has not adopted an ordinance, by ministerial approval, in accordance with specified standards and conditions. SB 9 allows for ministerial approval, without discretionary review or hearings, of duplex residential development on single-family zoned parcels.

SB 9 allows housing development projects of no more than two dwelling units on a single-family zoned parcel to be permitted on a ministerial basis if the project satisfies the SB 9 requirements. In order for a housing project to qualify under SB 9 the project must be located within a city, the boundaries of which must include some portion of either urbanized area or urban cluster, as designated by the United States Census Bureau, or, for unincorporated areas, the parcel must be wholly within the boundaries of an urbanized area or urban cluster. The project may not require demolition or alteration of the following types of housing: (i) housing that is subject to a recorded covenant, ordinance, or law that restricts rents to affordable levels, (ii) housing subject to rent control, or (iii) housing that has been tenant-occupied in the last three (3) years (with no distinction drawn between market rate and affordable housing). Further, the project may not have been withdrawn from the rental market under the Ellis Act within the past fifteen (15) years. The proposed development also may not demolish more than twenty-five percent (25%) of existing exterior structural walls, unless expressly permitted by a local ordinance or the project has not been tenant occupied within the past three years.

The project may not be located within a historic district or property included on the State Historic Resources Inventory or within a site that is designated as a city or county landmark or historic property pursuant to local ordinance. A local agency may impose objective zoning standards, subdivision standards, and design standards unless they would preclude either of the two units from being at least 800 square feet in floor area.

No setback may be required for an existing structure or a structure constructed in the same location and dimensions as an existing structure. In other circumstances, a local agency may require a setback of up to four feet (4’) from the side and rear lot lines. Off-street parking of up to one (1) space per unit may be required by the local agency, except if the project is located within a half-mile walking distance of a high-quality transit corridor or a major transit stop, or if there is a car share vehicle within one block of the parcel. If a local agency makes a written finding that a project would create a specific, adverse impact upon public health and safety or the environment without a feasible way to mitigate such impact, the agency still may deny the housing project.

A local agency must require that rental of a unit created pursuant to SB 9 be for a term longer than 30 days, thus preventing application of SB 9 to promote speculation in the short-term rental market.

SB 9 does not supersede the California Coastal Act, except that the local agency is not required to hold public hearings for coastal development permit applications for a housing development pursuant to SB 9. A local agency may not reject an application solely because it proposes adjacent or connected structures, provided that they meet building code safety standards and are sufficient to allow separate conveyance .

Projects that meet the SB 9 requirements must be approved by a local agency ministerially and are not subject to the California Environmental Quality Act (“CEQA”).

SB 9 also allows for qualifying lot splits to be approved ministerially upon meeting the bill requirements. Each parcel may not be smaller than forty (40%) percent of the original parcel size and each parcel must be at least one thousand two hundred (1,200) square feet in size unless permitted by local ordinance. The parcel must also be limited to residential use. Neither the owner of the parcel being subdivided nor any person acting in concert with the owner may have previously subdivided an adjacent parcel using a lot split as provided for in SB 9. The applicant must also provide an affidavit that the applicant intends to use one of the housing units as a principal residence for at least three (3) years from the date of approval.

A local agency may not condition its approval of a project under SB 9 upon a right-of-way dedication, any off-site improvements, or correction of nonconforming zoning conditions. The local agency is not required to approve more than two (2) units on a parcel. The local agency may require easements for public services and facilities and access to the public right-of-way.

SB 9 changes the rules regarding the life of subdivision maps by extending the additional expiration limit for a tentative map that may be provided by local ordinance, from 12 months to 24 months.

SB 10

SB 10 creates a voluntary process for local governments to pass ordinances prior to January 1, 2029 to zone any parcel for up to ten (10) residential units if located in transit rich areas and urban infill sites. Adopting a local ordinance or a resolution to amend a general plan consistent with such an ordinance would be exempt from review under the California Environmental Quality Act (“CEQA”). This provides cities, including charter cities, an increased ability to upzone property for housing without the processing delays and litigation risks associated with CEQA. However, if the new housing authorized by the general plan would require a discretionary approval to actually build the housing (for example, a subdivision map or design review), CEQA review would be required for those subsequent approvals, and the benefits of the law may prove limited.  Moreover, in contrast to SB 9, each individual city or county must affirmatively pass an ordinance authorizing the upzoning.

A “transit rich area” means a parcel within one-half mile of a major transit stop, as defined in Section 21064.3 of the Public Resources Code, or a parcel on a high quality bus corridor. A “high quality bus corridor” means a corridor with fixed route bus service that meets all of the following criteria: (i) it has average service intervals of no more than 15 minutes during the three peak hours between 6 a.m. to 10 a.m., inclusive, and the three peak hours between 3 p.m. and 7 p.m., inclusive, on Monday through Friday; (ii) it has average service intervals of no more than 20 minutes during the hours of 6 a.m. to 10 p.m., inclusive, on Monday through Friday; and (iii) it has average intervals of no more than 30 minutes during the hours of 8 a.m. to 10 p.m., inclusive, on Saturday and Sunday. An “urban infill site” is a site that satisfies all of the following: (i) it is a legal parcel or parcels located in a city if, and only if, the city boundaries include some portion of either an urbanized area or urban cluster, or, for unincorporated areas, a legal parcel or parcels wholly within the boundaries of an urbanized area or urban cluster, as designated by the United States Census Bureau; (ii) a site in which at least seventy-five percent (75%) of the perimeter of the site adjoins parcels that are developed with urban uses (parcels that are only separated by a street or highway shall be considered to be adjoined); and (iii) a site that is zoned for residential use or residential mixed-use development, or has a general plan designation that allows residential use or a mix of residential and nonresidential uses, with at least two-thirds of the square footage of the development designated for residential use.

Zoning ordinances adopted pursuant to the authority granted under SB 10 must explicitly declare that the ordinance is adopted pursuant to SB 10 and clearly demarcate the areas that are zoned pursuant to SB 10, and the local legislative body must make a finding that the increased density authorized by such ordinance is consistent with the city or county’s obligations to further fair housing pursuant to Government Code Section 8899.50. A legislative body that approves a zoning ordinance pursuant to SB 10 may not subsequently reduce the density of any parcel subject to the ordinance. The bill text does not explicitly state a sunset on this restriction.

A zoning ordinance adopted pursuant to SB 10 may override a local ballot initiative which restricts zoning only if adopted by a two-thirds vote of the members of the legislative body. The creation of up to two accessory dwelling units (“ADUs”) or junior ADUs (“JADUs”) per parcel is allowed, and these units would not count towards the ten unit count.

SB 10 does not apply to parcels located within a high or very high fire hazard severity zone, as determined by the Department of Forestry and Fire Protection, but this restriction does not apply to sites that have adopted fire hazard mitigation measures pursuant to existing building standards or state fire mitigation measures applicable to the development. SB 10 also does not apply to any local restriction enacted or approved by a local ballot initiative that designates publicly owned land as open-space land, as defined in Section 65560(h), or for park or recreational purposes. Furthermore, a project may not be divided into smaller projects in order to exclude the project from the limitations of SB 10.

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The following Gibson Dunn attorneys prepared this client update: Amy Forbes, Doug Champion, and Maribel Garcia Ochoa.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Land Use and Development or Real Estate practice groups in California:

Doug Champion – Los Angeles (+1 213-229-7128, dchampion@gibsondunn.com)
Amy Forbes – Los Angeles (+1 213-229-7151, aforbes@gibsondunn.com)
Mary G. Murphy – San Francisco (+1 415-393-8257, mgmurphy@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.

In a judgment dated 14 October 2021 related to the so-called “Case of the Century”, the Paris Administrative Court (the Court) ordered the State to make good the consequences of its failure to reduce greenhouse gas (GHG) emissions. In this respect, the Court ordered that the excess of the GHG emissions cap set by the first carbon budget be offset by 31 December 2022 at the latest. The French Government remains free to choose the appropriate measures to achieve this result.

I.   Background to the Judgment

In March 2019, four non-profit organizations had filed petitions before the Court to have the French State’s failure to combat climate change recognized, to obtain its condemnation to compensate not only their moral prejudice but also the ecological prejudice and to put an end to the State’s failures to meet its obligations.

In a judgment dated February 3, 2021, the Court ruled that the State should compensate for the ecological damage caused by the failure to comply with the objectives set by France in terms of reducing GHG emissions and, more specifically, the objectives contained in the carbon budget for the period 2015-2019. As a reminder, France has defined a National Low-Carbon Strategy, which describes both a trajectory for reducing GHG emissions until 2050 and short- and medium-term objectives. These latter, called carbon budgets, are emission ceilings expressed as an annual average per five-year period, that must not be exceeded. The Court also ordered a further investigation before ruling on the evaluation and concrete methods of compensation for this damage (please see Gibson Dunn’s previous client alert).

In the separate Grande Synthe case, the Council of State – France’s highest administrative court – on 1 July 2021 enjoined the Prime Minister to take all appropriate measures to curb the curve of GHG emissions produced on national territory to ensure its compatibility with the 2030 GHG emission reduction targets set out in Article L. 100-4 of the Energy Code and Annex I of Regulation (EU) 2018/842 of 30 May 2018 before 31 March 2022.

II.   The steps in the reasoning followed by the Tribunal

First, the Court considers that it is dealing solely with a dispute seeking compensation for the environmental damage caused by the exceeding of the first carbon budget and the prevention or cessation of the damage found and that it is for the Court to ascertain, at the date of its judgment, whether that damage is still continuing and whether it has already been the subject of remedial measures.

On the other hand, the Court considers that it is not for it to rule on the sufficiency of the measures likely to make it possible to achieve the objective of reducing GHGs by 40% by 2030 compared to their 1990 level, which is a matter for the litigation brought before the Council of State.

Second, the Court considers that it can take into account, as compensation for damage and prevention of its aggravation, the very significant reduction in GHG emissions linked to the Covid 19 crisis and not to the action of the State.

However, the Court finds that the data relating to the reduction of GHG emissions for the first quarter of 2021 do not make it possible to consider as certain, in the state of the investigation, that this reduction would make it possible to repair the damage and prevent it from worsening. It concludes that the injury continues to be 15 Mt CO2eq.

Third, the Court considers that it can apply articles 1246, 1249 and 1252 of the Civil Code, which give it the power to order an injunction in order to put an end to an ongoing injury and prevent its aggravation.

The State argued in its defense that the injunction issued by the Council of State in its decision of 1 July, 2021 already made it possible to repair the ecological damage observed. The Court nevertheless considers that the injunction issued by the Conseil d’Etat aims to ensure compliance with the overall objective of a 40% reduction in GHG emissions in 2030 compared to their 1990 level and that it does not specifically address the compensation of the quantum of the damage associated with exceeding the first carbon budget. Since the injunction sought from the Court is specifically intended to put an end to the damage and prevent it from worsening, the Court considers that it is still useful and that the non-profit organizations are entitled to request that it be granted.

Fourth, the Court indicated that “the ecological damage arising from a surplus of GHG emissions is continuous and cumulative in nature since the failure to comply with the first carbon budget has resulted in additional GHG emissions, which will be added to the previous ones and will produce effects throughout the lifetime of these gases in the atmosphere, i.e. approximately 100 years. Consequently, the measures ordered by the judge in the context of his powers of injunction must be taken within a sufficiently short period of time to allow, where possible, the damage to be made good and to prevent or put an end to the damage observed.

As the State failed to demonstrate that the measures to be taken pursuant to the Climate Act of 20 August 2021 will fully compensate for the damage observed, the Court then ordered “the Prime Minister and the competent ministers to take all appropriate sectoral measures to compensate for the damage up to the amount of the uncompensated share of GHG emissions under the first carbon budget, i.e. 15 Mt CO2eq, and subject to an adjustment in the light of the estimated data of the [Technical Reference Centre for Atmospheric Pollution and Climate Change] known as of 31 January 2022, which make it possible to ensure a mechanism for monitoring GHG emissions“.

In view of (i) the cumulative effect of the harm linked to the persistence of GHGs in the atmosphere and the damage likely to result therefrom, and (ii) the absence of information making it possible to quantify such harm, the Court orders that the abovementioned measures be adopted within a period sufficiently short to prevent their aggravation.

Finally, he adds that:

(i)      “the concrete measures to make reparation for the injury may take various forms and therefore express choices which are within the free discretion of the Government“;

(ii)     repair must be effective by 31 December 2022, which means that measures must be taken quickly to achieve this objective;

(iii)    that no penalty be imposed in addition to the injunction.

III.   The aftermath of the Judgment

The Government has two months in which to appeal against the Judgment. If the Judgment is appealed, the application for enforcement will have to be submitted to the Administrative Court of Appeal in Paris.

If the Government decides not to contest the Judgment, it will have to take the necessary measures for each of the sectors identified in the SNBC (transport, agriculture, construction, industry, energy, waste), which will probably mean imposing new standards on economic actors and individuals.

If, on December 31, 2022, the non-profit organizations consider that the Judgment has not been properly executed, i.e., if the measures taken by the Government have not made it possible to repair the damage up to the amount of 15 Mt CO2eq, they will be able to refer the matter to the Tribunal so that it may order, after investigation, a measure to execute the Judgment, which will most likely be a penalty payment.

As a reminder, in a decision of August 4, 2021, the Council of State condemned the State to pay the sum of 10 million euros to various organizations involved in the fight against air pollution for not having fully implemented its previous decisions regarding its failure to improve air quality in several areas in France.

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The following Gibson Dunn attorneys assisted in preparing this client update: Nicolas Autet and Grégory Marson.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following lawyers in Paris by phone (+33 1 56 43 13 00) or by email:

Nicolas Autet (nautet@gibsondunn.com)
Grégory Marson (gmarson@gibsondunn.com)
Nicolas Baverez (nbaverez@gibsondunn.com)
Maïwenn Béas (mbeas@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.

Fourth 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 health care 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 health care providers;
• 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)

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PANELISTS:

Jonathan M. Phillips is a partner in the Washington, D.C. office where he co-chair of the False Claims Act/Qui Tam Defense practice. Mr. Phillips focuses on compliance, enforcement, and litigation in the health care and government contracting fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes.

Robert Hur is a partner in the Washington, D.C. office where he is co-chair of the Crisis Management group. A seasoned trial lawyer and advocate, he brings decades of experience in government and in private practice, including service in senior leadership positions with the U.S. Department of Justice, to guide companies and individuals facing white-collar criminal matters, regulatory proceedings and enforcement actions, internal investigations, and related civil litigation.

Brendan Stewart is of counsel in the New York office and a former federal prosecutor. He previously served as an Assistant Chief in the Fraud Section of the U.S. Department of Justice’s Criminal Division where he oversaw a unit of health care fraud prosecutors in the Eastern District of New York from 2017 to 2021. As a prosecutor since 2012, he has led numerous complex investigations—in coordination with the U.S. Attorney’s Office, the FBI, the Department of Health and Human Services’ Office of Inspector General, State Attorneys General —focusing on potential violations of federal statutes barring health care fraud and false medical statements and other crimes.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.5 credit hours, of which 1.5 credit hours may be applied toward the areas of professional practice requirement.

This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact 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 1.5 hours.

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

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RELATED WEBCASTS IN THIS SERIES:

• The False Claims Act – 2021 Update for Financial Services (October 6, 2021)
• 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)

New York partner David Feldman and Los Angeles partner Michael Neumeister are the authors of “Sale toggles in Chapter 11 plan processes” [PDF] published by Financier Worldwide in its November 2021 issue.

Please join Jessica Brown and Lauren Elliot, authors of An Employer Playbook for the COVID “Vaccine Wars”: Strategies and Considerations for Workplace Vaccination Policies (Dec. 2020, updated Feb. 2021), for the latest information and trends relating to workplace vaccination policies. This updated briefing is highly relevant in light of the Delta variant and President Biden’s announcement of vaccine and testing mandates. Jessica and Lauren will be joined by their former colleague Jodi Juskie, Vice President and Assistant General Counsel for Keysight Technologies, for an in-house perspective on workplace vaccination and testing policies.

Topics will include the legal and regulatory landscape for vaccine mandates; OSHA’s ETS regarding COVID-19 vaccines/testing and implications for employers; vaccine mandate considerations for employers; pros and cons of different approaches to mandating vaccinations; how to deal with employees who cannot be, or claim they cannot be, vaccinated; collection and handling of vaccine and testing information; liability considerations with and without vaccine mandates; and how to build buy-in and plan for conflict resolution.

View Slides (PDF)

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PANELISTS:

Jessica Brown is a partner in the Denver office of Gibson, Dunn & Crutcher and a member of the firm’s Labor and Employment and White Collar Defense and Investigations Practice Groups. Ms. Brown advises corporate clients regarding COVID-19 liability risks, workplace vaccination policies, Colorado Equal Pay for Equal Work Act Transparency Rules, anti-harassment, whistleblower complaints, reductions in force, mandatory arbitration programs, return-to-work protocols, and matters that intersect with intellectual property law, such as noncompete agreements and trade secrecy programs. She has assisted clients to conduct audits of their pay practices for purposes of compliance with state and federal equal pay and wage and hour laws. In addition, Ms. Brown has defended nationwide and state-wide class action and individual lawsuits alleging, for example, gender discrimination under Title VII, failure to permit facility access under the Americans with Disabilities Act, and failure to compensate workers properly under the Fair Labor Standards Act. She has been ranked by Chambers USA as a leading Labor and Employment lawyer in Colorado for 16 consecutive years and is currently ranked in Band 1. She also is the current President of the Colorado Bar Association.

Lauren Elliot is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the firm’s Life Sciences and Labor & Employment Practice Groups. Ms. Elliot has defended pharmaceutical and biotech companies in cases involving a broad spectrum of well-known life sciences products. She successfully defended Wyeth (now Pfizer) in close to 400 product liability actions in which plaintiffs alleged that childhood vaccines cause autism spectrum disorders. Ms. Elliot also has defended labor and employment claims in class actions and individual lawsuits alleging violations of state labor laws and the Fair Labor Standards Act, and has been advising on COVID-19 liability risks and workplace vaccination policies. Legal Media Group has named Ms. Elliot to its Expert Guides Guide to the World’s Leading Women in Business Law for Product Liability three times and she has served two terms as a member of the Product Liability Committee for the Association of the Bar of the City of New York.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit 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.

On Friday October 15, 2021, the Commodity Futures Trading Commission (CFTC) issued an enforcement order (Tether Order) against the issuers of the U.S. dollar Tether token (USDT), a leading stablecoin, and fined those issuers $41 million for making untrue or misleading statements about maintaining sufficient fiat currency reserves to back each USDT “one-to-one.”[1] In so doing, the CFTC asserted that USDT is a “commodity” under the Commodity Exchange Act (CEA).

The Tether Order is significant for few reasons. First, it marks the first U.S. enforcement action against a major stablecoin. Second, the CFTC has now asserted that it has some enforcement authority over stablecoins, just at the time that the Biden Administration is gearing up its regulatory approach to digital currencies in general and stablecoins in particular. Securities and Exchange Commission (SEC) Chair Gary Gensler stated earlier this year that he believed that certain stablecoins, such as those backed by securities, are securities,[2] and the President’s Working Group on Financial Markets will soon be issuing a report on stablecoins.[3] Third, the CFTC’s assertion that USDT is a commodity signals that stablecoins that are backed one-to-one with fiat currency are not securities and therefore are not directly subject to the SEC’s jurisdiction.

CFTC Legal Authority

Although the CFTC is principally a regulator of the markets for commodity futures and derivatives such as swaps, it does have certain enforcement authority over commodities in the cash markets (i.e., spot commodities). Section  6(c)(1) of the Commodity Exchange Act, provides that it is “unlawful for any person, directly or indirectly, to use or employ, or attempt to use or employ, in connection with any swap, or a contract of sale of any commodity in interstate commerce, . . . any manipulative or deceptive device or contrivance, in contravention of such rules and regulations as the Commission shall promulgate.”[4] The CFTC has promulgated regulations pursuant to Section 6(c)(1), which render unlawful intentional or reckless statements or omissions “in connection with . . . any contract of sale of any commodity in interstate commerce.”[5] When those regulations were promulgated, the CFTC stated that “[it] expect[ed] to exercise its authority under 6(c)(1) to cover transactions related to the futures or swaps markets, or prices of commodities in interstate commerce, or where the fraud or manipulation has the potential to affect cash commodity, futures, or swaps markets or participants in these markets.”[6]

Tether Order

Prior to the Tether Order, the CFTC had asserted that some digital assets are commodities.[7] The Tether Order definitively states that USDT is a commodity (and, in dicta, asserts that bitcoin, ether, and litecoin are commodities as well). It then alleges that the issuers of USDT made material misstatements under Section 6(c)(1) of the CEA and its implementing regulations regarding whether USDT was backed on a one-to-one basis with fiat currency reserves and whether this reserving would undergo regular professional audits, and the issuers made material omissions regarding the timing of one of the reserve reviews that USDT issuers did take.[8] Without admitting or denying the CFTC’s findings and conclusions, the USDT issuers consented to the entry of a cease-and-desist order and civil money penalty of $41 million.[9]

Conclusion

The recent past has seen the explosive growth of the digital asset markets, with regulators globally seeking to catch up. In the United States, the challenge has been, in the absence of new legislation, to make digital asset transactions fit within existing regulatory schemes. Much initial regulation has been at the state level; most federal financial regulators have initially been attempting to regulate through enforcement. Now, however, there is the prospect of overlapping federal regulation, particularly with respect to stablecoins. The Tether Order comes at a time when media outlets have reported that the U.S. Department of Treasury will be working with U.S. financial regulators to issue a broad report on stablecoins, including how stablecoins should be regulated. And although the CFTC has taken its position on USDT, it is currently still unclear how other U.S. regulators will view stablecoins and other digital assets.

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   [1]   In the Matter of Tether Holdings Limited, Tether Operations Limited, Tether Limited, and Tether International Limited, CFTC Docket No. 22-04 (Oct. 15, 2021), available at https://www.cftc.gov/media/6646/enftetherholdingsorder101521/download.

   [2]   Gary Gensler, SEC Chair, “Remarks Before the Aspen Security Forum” (August 3, 2021).

   [3]   See, e.g., Michelle Price, “Explainer:  How the U.S. Regulators Are Cracking Down on Cryptocurrencies,” Reuters, September 24, 2021.

   [4]   7 U.S.C. § 9(1).

   [5]   17 C.F.R. § 180.1(a)(2).

   [6]   CFTC, Final Rules: Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. 41,398, 41,401 (July 14, 2011).

   [7]   See, e.g., In re Coinflip, Inc., CFTC No. 15-29, 2015 WL 5535736, at * 2 (Sept. 17, 2015) (stating that bitcoin is properly defined as a commodity within the meaning of the CEA).

   [8]   Tether Order at 8-9.

   [9]   Also on October 15, the CFTC entered into a consent order with Bitfinex, a leading digital currency exchange that has many management and operational interlocks with the USD Tether issuers, for allegedly permitting U.S. customers that were not eligible contract participants to engage in leveraged, margined or financed commodity transactions that were not carried out on a designated contract market (i.e., a CFTC registered futures exchange) in violation of the CEA’s requirements, and acting as a futures commission merchant (FCM) without being registered with the CFTC as such. The CFTC further asserted that Bitfinex had violated a 2016 CFTC order that had commanded it to cease-and-desist from such activity.  Without admitting or denying the CFTC’s findings and conclusions, Bitfinex consented to the entry of the new cease-and-desist order and a $1 million fine. See In the Matter of iFinex Inc., BFXNA Inc.,  and BFXWW Inc., CFTC Docket No. 22-05 (Oct. 15, 2021), available at https://www.cftc.gov/media/6651/enfbfxnaincorder101521/download.

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The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long and Jeffrey Steiner.

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:

Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Mylan L. Denerstein – New York (+1 212-351- 3850, mdenerstein@gibsondunn.com)
William R. Hallatt – Hong Kong (+852 2214 3836, whallatt@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Matthew Nunan – London (+44 (0) 20 7071 4201, mnunan@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@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.

Third 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 drug and medical device 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 drug and medical device manufacturers;
• 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)

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PANELISTS:

Winston Y. Chan is a former federal prosecutor and litigation partner in the San Francisco office, and Co-Chair of the Firm’s False Claims Act Practice Group. He has particular experience leading matters for health care and life sciences companies involving government enforcement defense, internal investigations and compliance counseling. From 2003 to 2011, Mr. Chan served as an Assistant United States Attorney in the Eastern District of New York, where he held a number of supervisory positions and investigated a wide range of matters, including False Claims Act violations and health care fraud.

Marian J. Lee is a partner in the Washington, D.C. office and Co-Chair of the Firm’s FDA& Health Care Practice Group. She has significant experience advising clients on FDA regulatory strategy, risk management, and enforcement actions. Her practice spans the product life cycle, including the conduct of preclinical and clinical studies, good manufacturing practices and quality systems, premarket approvals and clearances, scientific communications, product labeling and advertising, and postmarket compliance.

John D. W. Partridge is a partner in the Denver office where he focuses on white collar defense, internal investigations, regulatory inquiries, corporate compliance programs, and complex commercial litigation. He has particular experience with the FCA and the Foreign Corrupt Practices Act (“FCPA”), including advising major corporations regarding their compliance programs.

Brendan Stewart is of counsel in the New York office and a former federal prosecutor. He previously served as an Assistant Chief in the Fraud Section of the U.S. Department of Justice’s Criminal Division where he oversaw a unit of health care fraud prosecutors in the Eastern District of New York from 2017 to 2021. As a prosecutor since 2012, he has led numerous complex investigations—in coordination with the U.S. Attorney’s Office, the FBI, the Department of Health and Human Services’ Office of Inspector General, State Attorneys General —focusing on potential violations of federal statutes barring health care fraud and false medical statements and other crimes.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.5 credit hours, of which 1.5 credit hours may be applied toward the areas of professional practice requirement.

This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact 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 1.5 hours.

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

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RELATED WEBCASTS IN THIS SERIES:

• The False Claims Act – 2021 Update for Financial Services (October 6, 2021)
• The False Claims Act – 2021 Update for Government Contractors (October 14, 2021)
• The False Claims Act – 2021 Update for Health Care Providers (October 26, 2021)

On October 13, 2021, the Securities and Exchange Commission (the “SEC”) adopted amendments to modernize filing fee disclosure for certain forms and schedules, as well as update payment methods for fees related to these filings. The final rule highlighted three primary goals of the amendments: (i) update disclosure requirements related to filing fees in order to provide more certainty to filers that the proper fee was calculated and facilitate the SEC staff’s review of such fee; (ii) modernize the payment method for filing fees and reduce the cost and burden on processing fee payments; and (iii) permit filers to reallocate previously paid filing fees in more situations than what was previously permitted. An overview of these changes is provided below. The amendments also contained certain technical, conforming and clarifying changes related to filing fee-related instructions and information.

The amendments will become effective January 21, 2022, with the changes to fee payment methods becoming effective May 31, 2022. The requirements for filing fee disclosures will be phased in over time as summarized below.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Ronald Mueller, Andrew Fabens, Peter Wardle, and James Moloney.

© 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.

Deferred Prosecution Agreements (DPA) and Non-Prosecution Agreements (NPA) are the principal vehicles for bringing government investigations to closure short of a trial. In this annual presentation, a team of experienced practitioners discuss key considerations when evaluating these agreements and what to expect from the government. Topics will include:

• Trends and statistics from 2000 to the present;
• Factors that are likely to result in an NPA rather than a DPA;
• Recent enforcement developments, including the impact of DOJ’s 2020 corporate compliance program guidelines;
• Key terms in these agreements and what to watch out for, including updated compliance obligations;
• Cross-border considerations and post-resolution consequences and obligations;
• Brief survey of countries and agencies using DPA-or NPA-like resolution vehicles.

View Slides (PDF)

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PANELISTS:

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

Richard W. Grime is co-chair of Gibson Dunn’s Securities Enforcement Practice Group. Mr. Grime’s practice focuses on representing companies and individuals in corruption, accounting fraud, and securities enforcement matters before the SEC and the DOJ, along with advising companies on key aspects of their compliance programs. This year he represented two companies that resolved investigations through DOJ Deferred Prosecution Agreements. Prior to joining the firm, Mr. Grime was Assistant Director in the Division of Enforcement at the SEC, where he supervised a wide range of the Commission’s activities, including many FCPA and financial fraud cases, along with multiple insider trading and Ponzi-scheme cases. He is ranked annually in the top-tier by Chambers USA, and Chambers Global, for his FCPA practice.

Patrick F. Stokes is co-chair of Gibson Dunn’s Anti-Corruption and FCPA Practice Group. Mr. Stokes’ practice focuses on representing corporations and individuals in a wide variety of white collar investigations, including corruption, accounting fraud, securities fraud, money laundering, and financial institutions fraud. Prior to joining the firm, Mr. Stokes headed DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ Criminal Division’s Securities and Financial Fraud Unit, and was an Assistant U.S. Attorney in the Eastern District of Virginia. Mr. Stokes is highly ranked by Chambers USA and Chambers Global for his anti-corruption investigations and compliance practice.

F. Joseph Warin is co-chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and chair of the 200-person Litigation Department in Washington, D.C. Mr. Warin’s group is repeatedly recognized by Global Investigations Review as the leading global investigations law firm in the world. Mr. Warin’s practice includes representing corporations in complex civil litigation, white collar crime, and regulatory and securities enforcement – including FCPA investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. He is a former Assistant United States Attorney in Washington, D.C. Mr. Warin is continually ranked annually in the top-tier in multiple practice categories by Chambers USA, Chambers Global, and Chambers Latin America.  In 2021, Chambers named him a “Star” in FCPA, a “Leading Lawyer” in the nation in Securities Regulation: Enforcement, and a “Leading Lawyer” in the District of Columbia in Securities Litigation and White Collar Crime and Government Investigations.

Courtney Brown is a senior associate in the Washington, D.C. office of Gibson Dunn, where she practices primarily in the areas of white collar criminal defense and corporate compliance. Ms. Brown has experience representing and advising multinational corporate clients, boards of directors, and individuals in internal and government investigations on a wide range of topics, including anti-corruption, anti-money laundering, sanctions, securities, tax, and whistleblower and workplace matters. Ms. Brown has experience representing clients throughout the lifecycle of a government investigation, from the investigation stage to the completion of the post-resolution reporting period.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 2.0 credit hours, of which 2.0 credit hours may be applied toward the areas of professional practice requirement.

This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact 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 2.0 hours.

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

Washington, D.C. partner David Burns and associate Brian Williamson are the authors of “Should companies cooperate with law enforcement during ransomware attacks?” [PDF] published by Global Investigations Review on October 8, 2021.

New York partner Lindsey Schmidt and London associates Besma Grifat-Spackman and Rose Naing are the authors of “Protecting Your Foreign Investment,” [PDF] published by Corporate Disputes Magazine in its October-December 2021 issue.

Washington, D.C. partner David Fotouhi is the author of “9th Circ. Chromium Ruling May Expand Water System Liability,” [PDF] published by Law360 on October 14, 2021.

Second 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 government contracting 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 government contractors;
• 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)

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PANELISTS:

Jonathan M. Phillips is a partner in the Washington, D.C. office where he is co-chair of the False Claims Act/Qui Tam Defense practice. Mr. Phillips focuses on compliance, enforcement, and litigation in the government contracting and health care fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes.

Nicola Hanna is a partner in the Los Angeles office and co-chair of the firm’s global White Collar Defense and Investigations practice.  Mr. Hanna previously served as the presidentially appointed and Senate-confirmed United States Attorney for the Central District of California for three years. In this role, he was the chief federal law enforcement officer for the Los Angeles-based district, the largest Department of Justice office outside of Washington, D.C., and oversaw approximately 280 Assistant U.S. Attorneys. Under his leadership, the Central District brought and litigated some of the most impactful cases in the country and recovered nearly $4.5 billion in criminal penalties, civil recoveries, forfeited assets, and restitution.  During his tenure as U.S. Attorney, Mr. Hanna served as the Chair of the Attorney General’s Advisory Committee’s White Collar Fraud Subcommittee. He also was a member of the Department of Justice Corporate Enforcement and Accountability Working Group, and one of two U.S. Attorneys on the Task Force on Market Integrity and Consumer Fraud chaired by the Deputy Attorney General.

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.

Lindsay Paulin is an associate in the Washington, D.C. office. Her practice focuses on a wide range of government contracts issues, including internal investigations, claims preparation and litigation, bid protests, and government investigations under the False Claims Act. Ms. Paulin’s clients include contractors and their subcontractors, vendors, and suppliers across a range of industries including aerospace and defense, information technology, professional services, private equity, and insurance.

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MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.5 credit hours, of which 1.5 credit hours may be applied toward the areas of professional practice requirement.

This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact 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 1.5 hours.

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

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RELATED WEBCASTS IN THIS SERIES:

• The False Claims Act – 2021 Update for Financial Services (October 6, 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)

On September 10, 2021, the Democratic majority of the United States House Committee on Ways and Means (“House Ways and Means Committee”) released draft legislation of its contributions to the Build Back Better Act (the “Legislative Recommendations”), designed to be enacted through the budget reconciliation process. On September 15, 2021, following close to 40 hours of debate over the course of four days, the House Ways and Means Committee advanced the Legislative Recommendations. Ten days later, on September 25, 2021, the House Budget Committee advanced the Legislative Recommendations. If enacted into law, the Legislative Recommendations would substantially extend and expand available clean energy tax incentives, helping to bring President Biden’s campaign promise to “reform and extend” these incentives to “unleash a clean energy revolution in America” closer to fruition.[1]

The Legislative Recommendations materially extend existing incentives, including the investment tax credit (“ITC”), the production tax credit (“PTC”), and the carbon capture and sequestration credit, including incentives that had begun (or were about to begin) to expire or phase down. These extensions will make the incentives available well into the next decade, while at the same time imposing new requirements designed to enhance the benefit to U.S. workers from spending on clean energy infrastructure (including prevailing wage and apprenticeship requirements). The Legislative Recommendations also expand the scope and availability of incentives, including making the ITC available for standalone energy storage and energy transmission assets and introducing new incentives for the production of clean hydrogen.

Perhaps most importantly, investors would have the option to elect to treat the applicable credit as a payment made against the tax imposed by subtitle A (the so-called “direct pay” option), and this option would be available for classes of investors (i.e., tax-exempt entities, taxpayers with substantial losses, and certain governmental entities) that have historically not been able to benefit directly from tax credits. If enacted, the “direct pay” option may make it easier for taxpayers without substantial taxable income (and an attendant need for tax credits) to make equity investments in clean energy projects.

In addition, the Legislative Recommendations propose to make income generated by various types of renewable energy assets (as well as facilities that install sufficient carbon capture equipment) “qualifying income” for “publicly traded partnerships,” opening up another source of capital for the development of clean energy projects.

Under budget reconciliation, Democrats only need 50 votes in the Senate to pass legislation through an equally divided Senate (the Vice President breaks the tie). But Democratic progressives and moderates disagree on the price tag and the scope of the Build Back Better Act. For the Legislative Recommendations to become law, they will need to pass muster with key Democratic moderates in both the House and Senate. If the Legislative Recommendations are enacted into law, we would expect that they will spur significant new investment in clean energy projects, providing increased certainty in an area of the law that has historically been subject to year-end stopgap extensions and a complicated patchwork of ever-changing and unpredictable qualification rules.

Direct Pay

The PTC, ITC, and section 45Q[2] carbon capture and sequestration credits (each of which is discussed in greater detail in a later subsection) have historically been non-refundable credits, meaning that substantial taxable income was generally a necessary prerequisite to benefit from the incentives.[3] The Legislative Recommendations would take steps to change that through a “direct pay” option, effective for projects whose placed in service date is after December 31, 2021. Under the “direct pay” option, an owner of a clean energy facility that would otherwise qualify for certain credits (including the ITC (including for transmission property), the PTC, the carbon capture and sequestration credit, and the advanced energy project credit) is authorized to make an irrevocable “direct pay” election. If the owner makes such an election, the owner will be treated as having paid tax in an amount equal to the credit amount (such that the investor is entitled to an overpayment or refund to the extent the deemed payment exceeds its tax liability).[4] In addition, partnerships and S corporations (i.e., entities not subject to entity-level income tax) are eligible to receive “direct pay” payments. The Legislative Recommendations provide that such payments will be made directly to the partnership or S corporation (rather than to their partners or shareholders).

The irrevocable (it appears, solely for a particular taxpayer with respect to a particular year) “direct pay” election would be required to be made no later than the due date (including extensions) for the return of tax for the taxable year for which the applicable credit is determined. Under the Legislative Recommendations, it appears (but is not entirely clear) that direct pay elections will not be able to be made on a facility-by-facility basis. The Legislative Recommendations provide even less clarity as to whether taxpayers will be able to make elections on a credit-by-credit basis. Further legislative clarity on these points would be useful, although the Secretary of the Treasury is legislatively authorized to address the time and manner for making the direct pay election and so may have some flexibility to provide clarification through regulatory guidance.

In addition to making renewable energy incentives available to entities lacking sufficient taxable income, the “direct pay” option would make such incentives available to various classes of investors that have historically not benefited directly from them, including state and local governments, Native American tribal governments, and tax-exempt organizations.

The “direct pay” option would, however, be subject to various restrictions and limitations. Perhaps most notable is the “domestic content” requirement, which focuses on whether the facility is composed of iron, steel or manufactured products that were produced in the United States, where a “manufactured product” is deemed manufactured in the United States if not less than 55 percent of the total cost of the components are attributable to components mined, produced or manufactured in the United States (the “Domestic Content Requirement”). This requirement would phase in over time, first applying to facilities whose construction begins in 2024 (which would be subject to a ten percent haircut if the Domestic Content Requirement was not met), gradually ramping up in 2025 (projects starting construction in 2025 would be subject to a 15 percent haircut), and then becoming subject to a cliff in 2026 (when projects must meet the Domestic Content Requirement or face the complete loss of any “direct pay” benefit). While there is a long onramp to applicability of the Domestic Content Requirement and the Secretary of the Treasury is permitted to waive the “domestic manufacture” requirement for projects the construction of which starts later in the decade, these new requirements could become a material impediment to the utility of the “direct pay” option.

In addition, the combination of the irrevocability of the “direct pay” election and the Domestic Content Requirement may deter taxpayers from the “direct pay” option. If a taxpayer elects into the “direct pay” option but fails to satisfy the Domestic Content Requirements, such taxpayer would not only be ineligible to receive the full amount of the “direct payment,” but would also apparently lose its ability to claim any alternative tax credit (e.g., the PTC, ITC, and section 45Q credits), at least for the taxable year for which the election was made.[5] Had the taxpayer not made the “direct pay” election, such credits would, at the very least, have been available to the taxpayer.

Moreover, the Legislative Recommendations clarify that direct payments elected with respect to ITCs will be subject to recapture and basis adjustment rules similar to the existing ITC rules.

In general, the “direct pay” option would be expected to reduce the need for tax-equity investors (i.e., investors with significant taxable income that have the ability to utilize tax credits) to partner with developers to monetize clean energy tax credits. But tax-equity financing would still yield benefits because a tax-equity investor may be willing to monetize not just the federal clean energy tax incentives produced by a renewable energy project, but also the future cash flows, depreciation deductions, and other state-level incentives resulting from that project. Tax-equity financing could also provide timing benefits, as tax-equity investors generally fund before (in the case of the ITC) or shortly after (in the case of the PTC) a project is placed in service, whereas the “direct pay” payment would be a refund of a tax deemed paid, with the tax not being deemed paid until the later of the due date of the tax return for the taxable year to which the “direct pay” payment relates or the date on which the return is actually filed, resulting in a delay of cash payment to sponsors until such time. Moreover, tax-equity investors can also effectively offset tax credits received under the ITC and PTC regimes against estimated tax payments, so the “direct pay” option may result in the loss of an additional timing benefit available to some taxpayers.

In addition, the Legislative Recommendations provide that the Secretary of the Treasury may require such information or registration as the Secretary determines is necessary or appropriate for purposes of preventing duplication, fraud, improper payments, or excessive payments under these provisions. Drawing on regulatory authority to prevent any “direct payment” from exceeding the credit to which a taxpayer would otherwise be entitled, we would anticipate that the Secretary would clarify that other limitations imposed under the U.S. Internal Revenue Code, as amended (the “Code”), and any applicable Treasury Regulations (including, for example, the limitation in section 38(c) on the portion of a taxpayer’s tax liability that can be reduced through the general business credit (which includes the energy credit)) to apply to direct payments. And, if the Secretary determines that there has been an excessive payment, a penalty is imposed (in an amount equal to the sum of the excessive payment plus 20 percent).

Furthermore, given the expected size of some of the refund claims contemplated by the “direct pay” arrangement, it is uncertain whether or not such claims may in the future be subjected to mandatory review by the Congressional Joint Committee on Taxation (the “JCT”). Treasury Regulations exclude refunds of overpayments (such as estimated tax payments and withholdings reported on original returns) from JCT review. The Internal Revenue Service has interpreted the applicable Treasury Regulations to exclude all refundable credits reported on original returns as well, but historically there have been few, if any, refundable business credits. The U.S. Treasury Inspector General for Tax Administration has prepared a report that criticizes the existing Treasury Regulations on this matter, which notes that the JCT should review more original returns. Making PTCs and ITCs refundable and adding the “direct pay” option could significantly increase the pressure to move that issue forward and require JCT review of original returns claiming PTC and ITC refund claims and claims under the “direct pay” option.

Expansion and Extension of Renewable Electricity Production Credit (PTC) under Section 45

The PTC available to taxpayers under section 45 of the Code applies to “qualified facilities” (as currently defined in section 45 of the Code) at a specified percentage of certain credit amounts (as adjusted by the “inflation adjustment factor” in section 45(e)(2), the “PTC Credit Amounts”).

Under the current PTC regime, the full PTC is only available for projects the construction of which began by the end of 2016 (with the PTC phasing down for projects on which construction began in 2017 or later).

The Legislative Recommendations would extend the duration of the PTC for more than a decade, and expand the scope and amount of the credit in various respects, but would also impose new requirements that need to be satisfied in order to qualify for the credit.

In terms of the duration of the credit, for projects beginning construction between January 1, 2022 and December 31, 2031 (and for projects the construction of which began in 2020 or 2021, but only if those facilities are placed in service in 2022 or later), the credit would be available at 100 percent of the PTC Credit Amounts. This 100 percent credit would be a boon for taxpayers relative to the current regime, given that the PTC was going to be completely unavailable to projects beginning construction in 2022 or later, and (as noted) projects the construction of which began in 2017 or later were subject to phaseouts (e.g., a 40 percent reduction for a 2021 start of construction project). Importantly, however, the Legislative Recommendations do not extend the full PTC to projects the construction of which began prior to 2020. While this may be a drafting glitch, if the Legislative Recommendations are enacted in their current form, we would expect that taxpayers who already began construction on a project (under the flexible regulatory “begun construction” guidance) would have incentives to try to take available steps to abandon or otherwise recommence the work that was done previously on such project, and in light of the placed in service rule for 2020 or 2021 start of construction projects, we would expect taxpayers to delay placing in service such projects until 2022 where feasible to benefit from being able to claim the credit at a 100 percent rate.

Under the Legislative Recommendations, the PTC would be subject to a gradual phaseout beginning more than a decade in the future, with a 20 percent phaseout for projects beginning construction during the year 2032, 40 percent for projects beginning construction during 2033, and a complete phaseout for projects beginning construction after December 31, 2033.

Beyond its temporal expansion, the Legislative Recommendations would also expand the scope of projects to which the PTC is available. The Legislative Recommendations permit credits for electricity generated by solar power for the first time in nearly two decades, at a PTC Credit Amount of 2.5 cents per kilowatt hour for facilities placed in service after December 31, 2021 and the construction of which begins before January 1, 2034. In addition, the Legislative Recommendations contain proposed section 45W, which creates a PTC for zero-emission nuclear power equal to the amount by which (1) the product of (a) 1.5 cents multiplied by (b) the kilowatt hours produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year, exceeds (2) the “reduction amount” for such taxable year. The “reduction amount” is equal to the lesser of subparagraph (1) above, or 80 percent of the excess of (A) the gross receipts from any electricity produced by such qualified nuclear power facility and sold to an unrelated person during the taxable year, over (B) the product of (i) 2.5 cents and (ii) the figure calculated in subparagraph (b) above.

As part of an effort to incentivize domestic manufacturing, the Legislative Recommendations would create a bonus for certain projects, increasing the applicable PTC Credit Amount by ten percent for any qualified facility that satisfies the Domestic Content Requirement. This incentive approach deviates from the “direct pay” rules (which, as described previously, penalize taxpayers who place in service a facility that would otherwise be eligible for PTCs, make a “direct pay” election, but fail to satisfy the Domestic Content Requirement).

As noted, however, in addition to expanding the PTC in various respects, the Legislative Recommendations would impose new requirements to qualify for the full PTC, subjecting projects that do not satisfy certain prevailing wage and apprenticeship requirements to a substantial 80 percent reduction to the otherwise available PTC Credit Amounts. Such requirements would apply broadly, to any project with a maximum net output of at least one megawatt, the construction of which begins on or after the date the Legislative Recommendations are signed into law.

The proposed wage requirements (the “Prevailing Wage Requirements”) in the Legislative Recommendations would require the taxpayer to provide written certification to the government that all laborers and mechanics employed in the construction (and, for the ten-year period beginning on the date of service, alteration or repair) of a qualified facility are paid wages at rates not less than the prevailing rates on projects of similar character in the locality, as determined by the Secretary of Labor. If a taxpayer underpays its employees and its available PTC is slashed (to 20 percent of the otherwise available credit amount) as a result, it could cure such violation by both (1) compensating each of its employees that worked on the project in an amount equal to the sum of (a) the difference between the actual wages paid during the applicable period and the amount of wages required to be paid under the Legislative Recommendations, and (b) applicable interest, and (2) paying a penalty to the U.S. government of $5,000 for each underpaid employee. The Legislative Recommendations leave unanswered practical questions about how or when the determination as to whether the Prevailing Wage Requirements has been satisfied would be made. Assuming such determination is to be made on audit, that audit would likely occur several years after the relevant credit had been claimed, requiring taxpayers (and contractors who work for them) to provide service providers with additional compensation at that time, even though certain service providers might no longer be affiliated in any way with the project (or the owner of the project that is claiming the credit).

The proposed apprenticeship requirement in the Legislative Recommendations (the “Apprenticeship Requirement,” and, together with the Prevailing Wage Requirements, the “Prevailing Wage and Apprenticeship Requirements”) would require the taxpayer to ensure that an “applicable percentage” of the total labor hours (which excludes hours worked by foremen, superintendents, owners, or executives) connected with the construction (and, for the ten-year period beginning on the date of service, alteration or repairs) on a project be performed by “qualified apprentices.” The term “qualified apprentice” means an individual who is (1) an employee of the project’s contractor or subcontractor, and (2) participating in an apprenticeship program registered under the National Apprenticeship Act. For projects beginning construction before January 1, 2023, five percent of the total labor hours must be performed by qualified apprentices. For projects beginning construction during calendar year 2023, ten percent of the total labor hours must be performed by qualified apprentices, and for projects beginning construction after December 31, 2023, 15 percent of the total labor hours must be performed by qualified apprentices. Each contractor or subcontractor who employs four or more individuals to perform construction, alteration, or repair work on a project must employ at least one qualified apprentice to assist in the work. The taxpayer may be excused for failing to satisfy these requirements if (1) the taxpayer can demonstrate that there is a dearth of qualified apprentices available for employment in the geographic area of the project, and (2) the taxpayer makes a good faith effort to comply with the Apprenticeship Requirement, including by requesting qualified apprentices from a registered apprenticeship program (even if such request is denied, the taxpayer will be excused as long as the denial is not the result of the refusal by contractors or subcontractors involved in the project to comply with the standards of a registered apprenticeship program).

Because projects whose construction begins prior to the enactment of the Legislative Recommendations would be exempted from the proposed Prevailing Wage and Apprenticeship Requirements, we can expect to see taxpayers seek to “grandfather” in projects by beginning construction before these requirements are enacted. For projects seeking to qualify for the full PTC, taxpayers will need timely and clear guidance from the government about how to meet the requirements (e.g., clear guidance from the Secretary of Labor about how to determine the prevailing wages in a particular location). While the Prevailing Wage Requirement can generally be satisfied through the mere payment of additional wages (and so should be relatively easy to satisfy), the Apprenticeship Requirement will force taxpayers to closely monitor (and force their contractors and subcontractors to closely monitor) who performs construction, alterations, and repairs on projects, likely necessitating new certification processes, particularly because the Legislative Recommendations do not have a mechanism to “cure” failures to comply with the requirement through the payment of a penalty. In terms of tax-equity financings, we would expect that tax-equity investors will seek to push noncompliance risk onto project sponsors, particularly the risk that activities that occur following funding (such as repairs) might jeopardize PTC qualification.

Expansion and Extension of Energy Credit (ITC) under Section 48

The ITC available under section 48 of the Code would be significantly extended under the Legislative Recommendations. In particular, a solar facility on which construction began prior to 2032 (and which is placed in service after 2022 but before 2036) would be eligible for the ITC without phase-down if such solar facility meets the continuity of construction requirements issued by the IRS. Without the extension under the Legislative Recommendations, the ITC would continue to phase down through the end of 2023, and for projects beginning construction in 2024 would only be available at a modest ten percent rate.

It is worth noting that the Legislative Recommendations would not increase the ITC for solar projects for which construction began after 2019 if such projects are placed in service before the end of 2021. Beginning with projects placed in service in 2022, however, certain solar projects on which construction begins prior to 2032 would be eligible for the ITC at the rate of 30 percent—which is the highest amount of the ITC for which solar projects have been eligible in recent years. Thereafter, the credit would begin to step down, with the ITC being equal to 26 percent for projects beginning construction in 2032, and 22 percent for solar projects beginning construction in 2033. In addition, the Legislative Recommendations push out the statutory deadline (December 31, 2036) by which solar projects must be placed in service to qualify for an ITC greater than ten percent. The structure of the Legislative Recommendations, as it pertains to solar projects, would seem to incentivize sponsors that are developing solar projects that are nearly complete and operational to delay placing these projects into service until after the end of this year. All else being equal (and assuming enactment), an owner of a project eligible for the ITC could receive (at least) an additional four percentage points in ITCs if the owner (or sponsor) waited to place the solar project in service until after the end of this year.

The Legislative Recommendations also expand the list of renewable energy projects eligible for the ITC in various respects (including to “qualified biogas property” and “microgrid controllers”). Most notable, perhaps, is the expansion of the ITC to “energy storage technology” which is equipment, other than equipment primarily used in the transportation of goods or individuals and not for the production of electricity, that uses batteries or certain other technologies to store energy for conversion to electricity and that has capacity of at least five kilowatt hours. Equipment that would meet these requirements, but has a capacity of less than five kilowatt hours, can qualify for this credit if such equipment is modified or refitted such that it has at least five kilowatt hours of capacity. However, no portion of the tax basis that was part of such equipment before its modification can be taken into account in calculating the ITC after modification. The expansion of the ITC to standalone batteries could be of key importance to the renewable energy industry. Under current law, only certain storage technologies that are directly tied to facilities that generate electricity and that are otherwise eligible to claim the ITC (separate from such storage technologies) are ITC eligible. Not only would the expansion of the ITC to these standalone facilities spur development of such technologies and infrastructure, but it would also support the build-out of what many industry observers have described as a missing piece of the puzzle for the renewable energy space—sufficient battery storage to build reserves of renewably generated electricity for use during the periods of time when renewable facilities are not generating sufficient energy for public consumption (e.g., storage of solar energy generated during the day for use during nights and evenings).

As with other portions of the Legislative Recommendations, for projects with a maximum net output of at least one megawatt, any credit claimed under section 48 would only be eligible for the full rate if the Prevailing Wage and Apprenticeship Requirements are satisfied. If such requirements are not satisfied, or otherwise cured, then any credit claimed under section 48 could be claimed at a rate equal to only 20 percent of the otherwise available credit amount. These requirements are similar to the requirements that apply to facilities seeking to claim PTCs, although the Prevailing Wage and Apprenticeship Requirements only apply for five years after a facility is placed in service (rather than for ten years). See the discussion of these requirements above under “Expansion and Extension of Renewable Electricity Production Credit (PTC) under Section 45.” The exception from the Prevailing Wage and Apprenticeship Requirements for projects with a maximum net output of less than one megawatt would be particularly helpful to the residential rooftop solar industry.

With respect to an energy property that satisfies the Domestic Content Requirement, such energy property is eligible for a step-up—or bonus—in the amount of ITC that can be claimed in respect of that project. For a project that meets the Domestic Content Requirement but that (1) has a maximum net output of one megawatt or more, and (2) does not meet the Prevailing Wage and Apprenticeship Requirements, that project is eligible for a two percentage point increase in the amount of ITC that can be claimed. For projects that meet the Domestic Content Requirement and that either (1) have a maximum net output of less than one megawatt or (2) satisfy the Prevailing Wage and Apprenticeship Requirements, then such a project is eligible for a ten percentage point increase in the amount of ITC that can be claimed.

Certain solar facilities with a nameplate capacity of less than five megawatts are eligible for a ten percentage point step-up in the ITC if the facility is located in a “low-income community” (defined by cross-reference to the new markets tax credit rules in section 45D of the Code). If a solar facility with a nameplate capacity of less than five megawatts is part of a “qualified low-income residential building project or a qualified low-income economic benefit project,” then it is eligible for a step-up in the ITC equal to 20 percentage points.[6] The property with respect to which this step-up in ITC can be claimed includes certain energy storage property installed in connection with such solar facility and the amount of expenditures incurred for “qualified interconnection property” (as defined in the Legislative Recommendations). In sum, under the Legislative Recommendations, certain small scale solar facilities that are installed as part of a “qualified low-income residential building project” and that meet the Domestic Content Requirements could be eligible for the ITC at an amount equal to 60 percent of the basis of the energy property placed in service in connection with that project.

Qualifying Electric Transmission Property (Section 48D)

In addition to expanding the ITC (as described above), the Legislative Recommendations provide for a new tax credit (similar to the ITC) claimable in respect of “qualifying electric transmission property” for an amount equal to 30 percent of the basis of the applicable property. “Qualifying electric transmission property” is generally defined to include an electric transmission line that is capable of transmitting electricity at a voltage of not less than 275 kilovolts that has a transmission capacity of not less than 500 megawatts and any property that, with respect to a credit-eligible electric transmission line, is necessary for the operation of such electric transmission line (or is otherwise listed as “transmission plant” in the Uniform System of Accounts for the Federal Energy Regulatory Commission).

A qualifying electric transmission line can be a replacement to, or upgrade to, an existing electric transmission line, but only if the transmission capacity of such electric transmission line, as upgraded, increases to an amount equal to the existing capacity of such transmission line plus 500 megawatts. The basis allocable to such existing transmission line also would not be eligible for any credit under section 48D. This new section 48D credit is not claimable with respect to property on which construction begins prior to January 1, 2022 or if a state or political subdivision thereof, any agency or instrumentality of the United States, a public service or public utility commission, or an electric cooperative has previously (before the date when the Legislative Recommendations are enacted) “selected for cost allocation such property for cost recovery.”

As with other portions of the Legislative Recommendations, any credit claimed under section 48D would only be eligible for the full rate if the Prevailing Wage and Apprenticeship Requirements are satisfied, although these requirements will not apply to projects the construction of which begins before the Legislative Recommendations are enacted. Depending on when the Legislative Recommendations might be enacted, however, there may be little opportunity to plan around the Prevailing Wage and Apprenticeship Requirements, given that the credit does not apply to property the construction of which begins before January 1, 2022. If such requirements are not satisfied, or otherwise cured, then any credit claimed under section 48D could be claimed at a rate equal to only 20 percent of the full credit amount.

With respect to an energy project that is composed of “steel, iron, or manufactured products which were produced in the United States” (i.e., that satisfies the Domestic Content Requirement), such energy property is eligible for a step-up—or bonus—in the amount of ITC that can be claimed in respect of that project. If a transmission project satisfies the Domestic Content Requirement but does not satisfy the Prevailing Wage and Apprenticeship Requirements, then that project is eligible for a two percentage point increase in the amount of ITC that can be claimed. Those projects that satisfy the Domestic Content Requirement and meet the Prevailing Wage and Apprenticeship Requirements are eligible for a ten percentage point increase in the amount of ITC that can be claimed.[7]

In general, any credit claimed under section 48D would have to be claimed in respect of property that is placed in service prior to January 1, 2032.

Expansion and Extension of Credit for Carbon Oxide Sequestration under Section 45Q

The Legislative Recommendations extend the date by which construction must have begun on a “qualified facility” for purposes of section 45Q from January 1, 2026 to January 1, 2032. The Legislative Recommendations leave many aspects of the tax credit rules for facilities that capture carbon oxide intact, but also makes some significant expansions and revisions to the rules.

The Legislative Recommendations would accelerate certain scheduled section 45Q rate increases (to be effective in 2022, rather than 2026 under current law): to $35 per metric ton, for qualified carbon oxide captured and used in an enhanced oil or natural gas recovery (or other allowable uses), and to $50 per metric ton for qualified carbon oxide captured and disposed of in secured geological storage.[8] For direct air capture facilities, each metric ton of qualified carbon oxide that is captured and disposed of in a geological storage would be eligible for a $180 credit, and each metric ton of carbon oxide that is captured and used in an enhanced oil or natural gas recovery (or another allowable use) would be eligible for a $130 credit.[9]

Under the Legislative Recommendations, the “qualified facilities” eligible for these expanded credits include:

1. “direct air capture facilities” that capture 1,000 metric tons or more of qualified carbon oxide during a taxable year (under current law, the applicable threshold is not less than 100,000 metric tons),[10]
2. electricity generating facilities that capture 18,750 metric tons or more of qualified carbon oxide during the taxable year and at least 75 percent of the carbon dioxide from such facilities would otherwise be released into the atmosphere by such facility during such taxable year (under current law, the applicable threshold is not less than 500,000 metric tons, but there is no minimum percentage capture requirement under current law), and
3. any other facilities that capture 12,500 metric tons or more of qualified carbon oxide during the taxable year and at least 50 percent of the carbon oxide from such facilities would otherwise be released into the atmosphere during such taxable year (the facilities described in this paragraph, “Industrial Facilities”) (under current law, the applicable threshold is not less than 25,000 metric tons, but there is no minimum percentage capture requirement under applicable law).

As with other portions of the Legislative Recommendations, any credit claimed under section 45Q would only be creditable in full if the Prevailing Wage and Apprenticeship Requirements are satisfied.[11] If such requirements are not satisfied, or otherwise cured, then any credit claimed under section 45Q could be claimed at a rate equal to 20 percent of the full credit amount.

Modification of Special Rules for Offshore Wind Projects

The Legislative Recommendations modify special rules that excepted certain offshore wind projects from ITC phase-outs under current law in light of such projects’ significantly longer development timelines. Under the Legislative Recommendations, offshore wind projects are generally subjected to the same extended construction deadlines as onshore wind projects. The Legislative Recommendations make clear, however, that the 100 percent ITC remains available in respect of certain offshore wind projects placed in service before 2022.[12]

Going forward, the Legislative Recommendations would revert to prior law regarding the geographic boundaries for offshore wind projects eligible for the ITC. Under current law (which applies to projects that begin construction before 2022), for a project to be PTC eligible, it must be located within the United States or in a possession, which is defined for PTC purposes to include an exclusive economic zone (which generally extends as much as 200 nautical miles from a territorial sea baseline). For the ITC, on the other hand (which, under current law, is available for offshore wind projects that begin construction through 2025) the facility must be “located in the inland navigable waters of the United States or in the coastal waters of the United States.” The narrower geographic ITC boundary for offshore wind projects would only apply to projects that were placed in service before 2022.

Publicly Traded Partnerships

In general, under existing law, a “publicity traded partnership” (which is any partnership if the interests in such partnership are traded on an established securities market or readily tradable on a secondary market (or the substantial equivalent thereof)) is taxed as a corporation (and therefore subject to entity-level U.S. federal income tax) unless an exception applies. The primary exception to these rules is for partnerships that earn 90 percent or more “qualifying income” (which includes a variety of types of passive income as well as income and gains from exploration, development, mining, production, processing, refining, transportation, and marketing of any mineral or natural resource). Historically, the income generated by a renewable energy facility would not have been “qualifying income.” Under the Legislative Recommendations, however, the definition of “qualifying income” would be revised to include various types of income derived from clean energy projects (including PTC and ITC eligible property and income or gain from a “qualified facility” under section 45Q(d)).

This aspect of the Legislative Recommendations, if enacted, would open up a potential source of new capital for clean energy projects, making it possible for investors in the public markets to more easily participate (through a flow-through vehicle) in such projects. The impact of this proposal on traditional tax-equity investors is not entirely clear. On the one hand, “publicly traded partnerships” could compete against tax-equity investors, reducing returns as additional capital competes for the right to invest in projects. On the other hand, publicly traded partnerships would not be well situated to directly capture the key benefits generated by renewable energy projects—tax credits and depreciation deductions—because deductions and credits attributable to an investment in a renewable energy project would generally pass through to the holders of interests in the partnership, who may or may not be able to effectively monetize those items, although (with respect to the tax credits, but not depreciation deductions) publicly traded partnerships could seek to avail themselves of the “direct pay” election, subject to the limitations and restrictions on “direct pay” described previously in this alert, and subject to the limitations described in the next sentence. In addition, certain rules that can reduce or eliminate the availability of the ITC or accelerated depreciation (including the tax-exempt use property rules) based on tax characteristics of the owners of a partnership could make it challenging for publicly traded partnerships to partner with tax-equity investors in a way that would allow those investors to effectively monetize tax benefits from a clean energy project.

Clean Hydrogen Incentives

The Legislative Recommendations also propose to add section 45X, which would provide a tax credit for the production of clean hydrogen. This new credit would be available (subject to the Prevailing Wage and Apprenticeship Requirements[13]) for clean hydrogen projects the construction of which begins before January 1, 2029 that are placed in service after December 31, 2021, and, with respect to those projects, the credit would be claimable for the ten-year period beginning on the placed in service date of the clean hydrogen project. This credit is not available for clean hydrogen produced at a facility that includes property for which a section 45Q carbon oxide sequestration credit is allowed (i.e., “blue” hydrogen facilities taking advantage of the section 45Q credit would not also be entitled to the section 45X credit).

The amount of the credit is equal to the product of (1) the number of kilograms of “qualified clean hydrogen” (hydrogen that is produced through a process that achieves a percentage reduction in lifecycle greenhouse gas emissions of at least 40 percent as compared to hydrogen produced by steam-methane reforming of non-renewable natural gas) produced during the applicable taxable year, and (2) the “applicable amount” of $3.00 (adjusted for inflation) multiplied by the “applicable percentage.” The “applicable percentage” is a percentage available to taxpayers based on the percentage reduction in “lifecycle greenhouse gas emissions” (as defined in the Clean Air Act) as compared to hydrogen produced by steam-methane reforming. The “applicable percentage” can be: (a) 20 percent (for a less than 75 percent reduction), (b) 25 percent (for a reduction greater than or equal to 75 percent and less than 85 percent), (c) 34 percent (for a reduction greater than or equal to 85 percent and less than 95 percent), and (d) 100 percent (for a 95 percent or greater reduction). In other words, the higher the reduction, the higher the applicable percentage, and therefore, the larger the available tax credit eligible to be claimed under section 45X would be.

Tax Credits and BEAT

Tax credits are only useful to the extent they are able to actually reduce cash taxes payable. Under the Legislative Recommendations, the general business credit (which includes the PTC, the ITC, and section 45Q credits and would include the proposed section 48D and section 45X credits) would be fully creditable against BEAT liability. Under current law, only up to 80 percent of the otherwise-available section 48 ITC and the section 45 PTC (and none of the section 45Q credit) are able to reduce BEAT liability (and then only through 2025, after which the ITC and PTC would also effectively cease to reduce BEAT liability).

This modification to the rules would be expected to make the credit more desirable to tax-equity investors with meaningful potential BEAT liability, particularly if BEAT liability is expanded as has been proposed.

___________________________

    [1]  Democratic National Committee, The Biden Plan To Build A Modern, Sustainable Infrastructure And An Equitable Clean Energy Future, JoeBiden.com (last visited Oct. 13, 2021), https://joebiden.com/clean-energy/.

    [2]  Unless otherwise noted, section references refer to sections of the Internal Revenue Code of 1986, as amended.

    [3]  Substantial taxable income was not, however, needed for developers/owners of certain renewable energy projects to benefit from the “cash grant” program under section 1603 of the American Recovery and Reinvestment Tax Act of 2009.  Under this program, eligible developers/owners of certain renewable energy projects were able to forgo tax credits in lieu of a direct cash payment from the Treasury Department that would defray part of the cost of the project.

    [4]  Curiously, the payment is to be treated as a payment against “the tax imposed by subtitle A,” which includes sections 1 through 1563. Thus, if enacted in its current form, the deemed payment would offset not only income tax liability (imposed under chapter 1 of subtitle A), but also liability for self-employment taxes, the net investment income tax, and various withholding taxes (including liability to remit taxes withheld on various payments to non-U.S. taxpayers). It is possible that the offset was intended be limited to income taxes.

    [5]  As noted, it appears that election is only irrevocable with respect to a particular taxable year. Thus, for credits that accrue over a period of time (e.g., the PTC, which is available over ten years), it appears that taxpayers may be able to toggle between “direct pay” and PTCs from year to year. For facilities that would otherwise seek to claim the ITC, however, a “direct pay” election could completely foreclose the ability to claim that credit (which is a one-time credit, available in the year when a facility is placed in service).

    [6]  A solar facility is part of “qualified low-income residential building project” if (1) the facility is installed on a residential rental building that is part of one of various enumerated legislative programs (e.g., a “covered housing program” defined in section 41411(a) of the Violence Against Women Act of 1994), and (2) the financial benefits of the electricity produced by the facility are equitably allocated among the building occupants. A facility is treated as part of a “qualified low-income economic benefit project” if at least 50 percent of the financial benefits of the electricity produced by the facility are provided to households that meet certain income requirements. For purposes of determining whether there has been a “financial benefit,” the Legislative Recommendations specify that electricity acquired at below-market rates “shall not fail to be taken into account as a financial benefit.”

    [7]  The Prevailing Wage and Apprenticeship Requirements also include an exception (similar to the ITC and PTC) for projects with a maximum net output of less than one megawatt, which in this instance appears to be a drafting glitch. First, it does not comport with the 500 megawatt requirement for “qualifying electric transmission property” described in the Legislative Recommendations. Second, this requirement is not noted in the JCT’s report discussing the Legislative Recommendations, entitled “Description Of The Chairman’s Modification To The Provisions Of The ‘Clean Energy For America Act’.”  Similar issues arise with respect to the Prevailing Wage and Apprenticeship Requirements that would be made applicable to sections 45Q and 45X (discussed below). We would expect that these exceptions may be subsequently revised as the Legislative Recommendations make their way through the legislative process.

    [8]  Credit amounts are subject to inflation adjustments.

    [9]  The Legislative Recommendations expanding section 45Q appear to contain several drafting oversights. The caption for new subparagraph (B) of section 45Q(b)(1), as provided for by section 136107(c) of the Legislative Recommendations, describes a “Special Rule for Direct Air Capture Facilities” but then, by its terms, would only apply to those facilities described in section 45Q(d)(2)(C), which (as amended by the Legislative Recommendations) only pertains to Industrial Facilities and not the “direct air capture facilities” that would be described in section 45Q(d)(2)(A). We note that section 136107(e)(1)(C) of the Legislative Recommendations would also revise section 45Q(b)(1)(B) without coordination with the changes proposed by section 136107(c). Also, the “direct pay” rules for a partnership or S corporation seeking direct payments for section 45Q credits would require the qualified facility be “held” by the partnership or S corporation.

    [10]  Note that a “direct air capture facility” is any facility that captures carbon dioxide, and the eligibility for such a “direct air capture facility” for the enhanced credit under section 45Q is calculated on the basis of the number of metric tons of “qualified carbon oxide” captured. However, with respect to a “direct air capture facility,” “qualified carbon oxide” only includes, for purposes of section 45Q, carbon dioxide (1) that is captured directly from the ambient air, and (2) that is measured at the source of capture and verified at the point of disposal, injection, or utilization. As a result, and assuming that legislators clarify that a “direct air capture facility” is eligible for the expanded credit under section 45Q, any “direct air capture facility” can earn the expanded tax credits under the Legislative Recommendations only if such facility captures 1,000 metric tons or more of carbon dioxide during the taxable year, and meets certain other requirements.

    [11]  In the Legislative Recommendations, the Prevailing Wage and Apprenticeship Requirements for section 45Q contain an exception for a qualified facility with a maximum net output of less than one megawatt, which (similar to the issue in proposed sections 48D and 45X) may be a drafting glitch.

    [12]  To date, there are only two operating offshore wind projects in the United States, although a third project is reportedly slated for construction.

    [13]  In the Legislative Recommendations, the Prevailing Wage and Apprenticeship Requirements for section 45X contain an exception for a project with a maximum net output of less than one megawatt, which (similar to the issue in proposed sections 45Q and 48D) may be a drafting glitch.

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This alert was prepared by Matt Donnelly, Michael Desmond, Roscoe Jones, Jr., Eric Sloan, Mike Cannon, Josiah Bethards, and Laura Pond.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Tax, Public Policy, or Power and Renewables practice groups, or any of the following:

Tax Group:
Matt Donnelly – Washington, D.C. (+1 202-887-3567, mjdonnelly@gibsondunn.com)
David Sinak – Dallas (+1 214-698-3107, dsinak@gibsondunn.com)
Michael Q. Cannon – Dallas (+1 214-698-3232, mcannon@gibsondunn.com)
Josiah Bethards – Dallas (+1 214-698-3354, jbethards@gibsondunn.com)

Public Policy Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Roscoe Jones, Jr. – Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)

Power and Renewables Group:
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, npolitan@gibsondunn.com)
Gerald P. Farano – Denver (+1 303-298-5732, jfarano@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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Over the past few years we have observed a trend in companies seeking to outsource (and monetize) certain core, best-in-class processes. These transactions, dubbed “lift-outs”, include examples such as insurance companies lifting-out their insurance claims processing capabilities, medical device companies lifting-out their medical device manufacturing capabilities, and pharmaceutical companies lifting-out their research and development capabilities.

While the benefits of these transactions are potentially significant, lift-outs are complex and require a broad array of legal disciplines, such as technology, corporate, tax, privacy, real estate, intellectual property, and employment law specialists, often in multiple jurisdictions. They also demand a significant amount of effort and advance planning in order to address issues such as pricing, governance, change management, limits on liability, indemnification obligations, intellectual property rights, termination rights, and exit rights, among others. As a result, successful lift-out transactions require robust legal expertise in order to document and support the long term goals, opportunities and arrangements of the parties.

From a legal perspective, many of the challenges that arise from lift-out transactions stem from the fact that lift-outs are a hybrid of several better known transactions, namely IT outsourcing transactions, business process outsourcing transactions and carve-out divestiture transactions. While lift-outs have elements that on their face look familiar to either an outsourcing attorney or M&A attorney, these elements and issues are often not addressed in a traditional manner. As such, understanding how to address these elements is critical to a successful lift-out transaction. This alert will discuss several of these key elements.

The Business An important aspect of most lift-out transactions is the description of “the business”; in other words, what internal capabilities is the service provider acquiring from the company that will be used to provide services back to the company (and eventually the service provider’s other customers). This is often the most difficult aspect of a lift-out transaction because the internal capabilities being acquired are unlikely to have been operated as a separate business. Moreover, these internal capabilities are rarely even housed within a single legal entity. More often, the personnel, infrastructure and processes that make up these internal capabilities are spread across disparate pieces of a company, multiple entities and     potentially even different business units. Furthermore, the internal capabilities have typically never been commercially exploited and are rarely subject to the types of procedures and performance standards of a commercial offering. As a result, referring to these internal capabilities as “a business” is in name only. For these reasons, typical requirements of an M&A carve-out transaction, such as requiring a financial statement or a sufficiency of assets representation, are often impractical, if not impossible in lift-out transactions; and a significant degree of analysis, both legal and financial, and ultimately negotiation, is required to properly define the internal capabilities being transferred.   Purchase Agreement vs. Services Agreement Another critical aspect of most lift-out transactions is the interplay between the purchase agreement and the outsourcing agreement. Obligations and requirements in one agreement often have a direct impact on the obligations and requirements in the other agreement, and in some instances such obligations and requirements may unwind the parties arrangement in the other agreement. For example, an obligation of the service provider in the outsourcing agreement to indemnify the company for third party infringement claims in connection with the services may be unwound if the company is representing to the service provider in the purchase agreement that the assets being purchased by the service provider do not infringe on a third party’s rights. Moreover, the parties are often focused on the liabilities the service provider is assuming under the purchase agreement, and its ability to recover those liabilities under either the purchase agreement or     the outsourcing agreement. Consider for instance a typical employee-related obligation in a carve-out transaction such as accrued paid time off. Is accrued time off valued as debt, for which the service provider should obtain a purchase price adjustment under the purchase agreement, or is it an ongoing expense that the service provider can seek to recover through its pricing under the outsourcing agreement? Either of these options may make sense depending on the specific lift-out transaction, but the failure to coordinate between the documents as to how this obligation is addressed can lead to an inadvertent benefit to either the service provider or the company. As such, it is critical that attorneys negotiating lift-outs carefully coordinate the negotiations of the obligations and liabilities among the various agreements.   Indemnification/Representation Coverage One of the more complicated areas in a lift-out transaction is the tension between the indemnification provisions in the outsourcing agreement, and how much indemnification and representation coverage the service provider should be provided under the purchase agreement. Often service providers will demand more coverage than usual under a typical carve-out transaction because of the inherent limitations on the service provider under the outsourcing agreement. Moreover, in many lift-out transactions, the outsourcing agreement imposes certain limitations or even prohibitions on who the service provider may provide services to using the purchased capabilities, further limiting the service provider’s upside on the arrangement. Companies on the other hand will demand less coverage than usual     under a typical carve-out transaction due to the fact that they are often selling the internal capabilities at book-value, with little to no premium, or even at a loss. As the company is not making money on the sale of the internal capabilities, and the service provider is not paying for the goodwill or going-concern value of the internal capabilities, the company will often seek to limit its indemnification exposure under the purchase agreement. Achieving the correct balance between the two competing positions is critical to the success of these arrangements. Too one-sided in either direction can achieve the short term goal of a party under the purchase agreement, but can undermine both parties’ long term goals under the outsourcing agreement.   Transitional Services As with most carve-out transactions, the service provider in a lift-out transaction will often need the company to continue to provide the services for a period of time following the closing until the service provider can successfully transition the people, infrastructure and processes to its own systems. However, in a lift-out transaction this standard arrangement for a carve-out transaction can become circular, as under the outsourcing agreement the service provider is providing these same services back to the company. To avoid the situation where the company provides transitional services to the service provider who provides services back to the company, the parties need to tailor the transitional services with the implementation services under the outsourcing agreement. This starts with a careful inventory of all of the various people, infrastructure and processes (including third party services and contracts) that the customer uses to     perform the services. Once the inventory is documented, the parties then need to agree-on a detailed implementation plan for each, person, piece of infrastructure and process that is being transferred to the service provider, as well as identifying any gaps in people, infrastructure and processes that the service provider will need to solution, and the plan for addressing those gaps. The implementation plan should ideally be documented and agreed to in sufficient detail prior to contract signing, or at the latest, prior to closing. Otherwise, even minor discrepancies in the parties’ understanding as to how particular people, infrastructure or processes are transferring (or not) can have significant impacts on the pricing of the outsourcing aspect of the transaction.   The foregoing is a sample of the complex issues that arise in connection with the negotiation and documentation of the purchase aspects of a lift-out transaction. There are similar complex issues that arise in connection with the negotiation and documentations of the outsourcing aspects of the lift out arrangement as follows.   Pricing While lift-outs are driven by a variety of business drivers – such as introducing a change agent, getting access to best-of-breed services, and refocusing on competitive advantages – the pricing of the services back to the customer under the outsourcing agreement is often the most critical consideration. A basic goal of these transactions is for a company to obtain variable pricing for what is otherwise a fixed cost. Moreover, built-in flexibility in the pricing structure is typically a sought after feature of the pricing model under the outsourcing aspect of a lift-out transaction as companies are looking for their service provider to accommodate the inevitable changes that arise in the company’s own product and     service offerings. Given the complexity of these transactions, rarely does the pricing model fit neatly into a typical outsourcing pricing model (e.g., fixed fee, variable unitized fee, or time and materials). Instead, the pricing model under lift-out transactions is often a mix of these various pricing models. Often the pricing model in these transactions must take into account increases in the cost of raw materials, labor and other service inputs, and efficiencies that arise from new technologies and innovations in the processes comprising the internal capabilities transferred to the service provider.   Limits on Liability The liability provisions in typical outsourcing arrangements often involve the most negotiation, and lift-out transactions are no different. However, most companies and service providers will acknowledge that the standard construct whereby the service provider will seek to limit its liability for direct damages to a function of the fees paid by the company under the outsourcing arrangement, and have the company completely waive its right to seek consequential damages, does not work well for lift-out transactions. Especially given the fact that the people, infrastructure and processes used to provide the services came, in large part, from the company. Moreover, given the critical nature of the services provided     by the service provider, rarely are the parties able to agree to a straight-forward liability structure. More often, the liability structure for lift-out transactions is a complex combination of acknowledging that the people, infrastructure and processes were originally the customers, but also recognizing that the service provider will modify, evolve and potentially even replace or sunset these assets over time once in the possession of the service provider, and include numerous separate caps and baskets for certain types of liabilities, and carve-outs to the consequential damages waiver for certain liabilities.   Governance A comprehensive governance process is critical in most outsourcing transactions; and this is equally, if not more, important in a lift-out transaction. The decision making processes under the outsourcing agreement must be efficient and enable the company to respond quickly to market changes, similar to the manner in which the company was able to respond prior to the lift-out. A number of elements often contribute to an efficient and effective governance process. First, the governance model should identify the roles both parties will maintain and describe with as much precision as possible the responsibilities of those roles.     Second, contractually requiring a regular meeting cadence is important. Third, the parties should include an efficient dispute resolution process to address operational issues, before they become impediments to the transaction’s success. By providing a strong governance process upfront and addressing these and other key issues in advance, the parties to a lift-out transaction can provide a mechanism that will allow the parties to resolve future disputes when they do inevitably arise.   Exit Rights Whether due to the arrangement’s natural expiration, poor performance by the service provider, or a change in strategy by the company, exit rights vary dramatically transaction to transaction depending on the type of internal capabilities transferred, and when in the life-cycle of the arrangement the arrangement is terminated. In anticipation of the potential for a termination of the arrangement, the parties should establish in the outsourcing agreement the appropriate distribution of assets, including people, facilities, IP rights and     processes and determine whether the company will have the right to take back any of the capabilities transferred to the service provider under the purchase agreement. In almost all cases, given the complexity of these arrangements and the interdependencies between the services provided by the service provider, and the success of the company’s own business, the parties should provide for a significant transition period in the event the arrangement is terminated for any reason.   Please note that we have only highlighted some of the issues that arise in connection with these complex transactions. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these transactions. We have a team of experienced partners across the U.S., EU and Asia dedicated to assisting customers on these and related outsourcing matters. Please contact the Gibson Dunn attorney with whom you usually work, any member of the firm’s Strategic Sourcing and Commercial Transactions Practice, or the authors.     Daniel Angel Co-Chair, Technology Transactions Practice New York +1 212.351.2329 dangel@gibsondunn.com     Dennis J. Friedman New York +1 212.351.3900 dfriedman@gibsondunn.com

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