Publications Archives

EMIR Refit[1] came into force on 17 June 2019 with the aim of amending the European Market Infrastructure Regulation (“EMIR”)[2] to address “disproportionate compliance costs, transparency issues and insufficient access to clearing for certain counterparties”[3]. While most of the changes are already in force, further changes will be implemented with effect from 18 June 2020. These changes will shift responsibility and legal liability as between certain counterparties for the timely and accurate reporting of “over the counter” (“OTC”) derivative contracts.

With a particular focus on corporate end-users of derivatives (such as corporate treasury functions)[4], this note sets out, and discusses the implications of, these changes for parties to OTC derivative transactions, including the practical steps that should be taken in contemplation of such changes.

What is the reporting obligation?

Under the reporting requirements set out in Article 9 of EMIR, all financial counterparties (“FCs”) and non-financial counterparties (“NFCs”) to derivative contracts are required to report details of any concluded OTC and exchange traded contracts (including any modifications or termination of such contracts) to a European trade repository, by no later than the next business day. European corporate derivatives end-users (which are not regulated under any of the European sectoral financial services legislation, such as MiFID II[5], AIFMD[6], etc.) fall into the NFC category.

Under the current rules, each counterparty is responsible for reporting in relation to each in-scope transaction (i.e., dual-sided reporting)[7]. While reporting can be delegated to the trading counterparty or to a third party service provider, it is not possible for corporate derivative end-users to delegate the regulatory responsibility for the reporting and therefore they remain liable in the event that reporting information is incorrect or transactions are not reported. Consequently, under the current rules it is prudent for end-users to perform periodic monitoring of any reports submitted to a trade repository on their behalf.

What is changing from 18 June 2020 for derivatives end-users?

From 18 June 2020, NFCs who are not subject to the clearing obligation (each an “NFC-”) will no longer be subject to the reporting obligation in relation to OTC derivative contracts, unless they opt to continue to perform their own derivatives reporting[8]. Where an FC trading counterparty reports on behalf of itself and its NFC- counterparty, the FC will be solely responsible and legally liable for the reporting. For the avoidance of doubt, this applies only in relation to OTC contracts and does not cause a shift in the responsibility for reporting of exchange traded derivatives.

To ensure the FC has the data it needs to fulfil its reporting obligation, the NFC- must provide to the FC the details relating to the OTC derivative contracts concluded between them, which the FC cannot be reasonably expected to possess. The NFC- bears the responsibility for ensuring that these details are correct.[9] To facilitate this, FCs are currently reaching out to their clients to request the necessary data and the execution of a new reporting agreement. In addition to this data, we are also seeing FCs requesting a range of other data from their NFC- clients, including:

whether the NFC- intends to report for themselves;
whether the NFC- will be in scope of EU-EMIR reporting or the on-shored UK-EMIR reporting regime after the transition period ends following the UK’s withdrawal from the EU;
the trade repository used by the NFC-; and
whether the FC will report lifecycle events on contracts entered into before 18 June 2020.

With respect to specific data required to be reported under Regulation (EU) 2017/104, the NFC- would be expected to provide the following details to its FC counterparties:

Field 1.2 (Reporting counterparty ID – e.g., the counterparty’s Legal Entity Identifier (“LEI”));
Field 1.6 (Corporate sector of the counterparty);
Field 1.7 (Nature of the counterparty);
Field 1.8 (Broker ID – if unknown by FC);
Field 1.10 (Clearing Member – if unknown by FC);
Field 1.11 (Type of ID of the beneficiary – if the beneficiary is different from the NFC-);
Field 1.12 (Beneficiary ID – if beneficiary is different from the NFC-);
Field 1.13 (Trading capacity);
Field 1.15 (Directly linked to commercial activity or treasury financing); and
Field 1.16 (Clearing threshold).

It is important to note that while Fields 1.2, 1.6, 1.7 and 1.16 are static fields which can be provided to the FC one time and updated immediately when they change, the other fields are specific to each OTC derivatives contract and therefore must be provided to the FC for each such contract.[10] Importantly, the NFC- will retain the responsibility for ensuring it has a valid LEI at all times and to provide such information to its FC counterparties. If the NFC- has not timely renewed its LEI, the FC will not be able to successfully report the OTC derivatives contract data to the European trade repository on behalf of the NFC-.[11]

What happens if my counterparty is not in the EU?

Under current rules, where an NFC- trades with a counterparty that is established outside of the EU (i.e., it is a third-country entity) the NFC- is required to take steps to report its side of the transaction to a European trade repository. EMIR Refit establishes a mechanism whereby the NFC- would no longer need to report the transaction itself where certain conditions are fulfilled, including where the legal regime for reporting in the jurisdiction where the trading counterparty is established has been declared equivalent under EMIR.[12] Currently, there are no equivalency decisions related to reporting and therefore when an NFC- transacts with any third-country entity, including a third-country FC, it must continue to report (or delegate reporting to its counterparty or a third party) the data for any OTC derivative contracts (and lifecycle / termination events) to a European trade repository in the same way as it does today.

From the perspective of certain NFC-s, the lack of equivalence determinations for reporting is sub-optimal because the NFC- must retain the legal liability for reporting certain transactions beyond 18 June.

What happens if my counterparty is not an FC?

EMIR Refit’s changes to Article 9 of EMIR only shift the reporting responsibility from an NFC- to an FC. In the event that an NFC- transacts an OTC derivative contract with another NFC (whether established in the EU or a third-country NFC), the NFC- would retain the responsibility and legal liability to report the data for such OTC derivative contract to a European trade repository. In other words, EMIR Refit does not address NFC to NFC transactions and therefore the same EMIR dual-sided reporting rules would continue to apply for OTC derivatives contracts entered into between NFCs.

What about transactions entered into before 18 June 2020?

The change discussed above not only applies to new OTC derivative transactions concluded between NFC-s and FCs after 18 June 2020, but also to the modifications or terminations of OTC derivative contracts existing before that date (unless the parties contractually agree that the responsibility of the FC will be limited to the new OTC derivative contracts only).

This raises some operational difficulties which counterparties to trades will need to work through in advance of 18 June. For example, if two counterparties to a transaction have each reported to a different European trade repository under the current rules, in order for the FC to report lifecycle and termination events, either the NFC- will need to transfer the contract to the FC’s trade repository using the porting mechanism under EMIR Refit or, where operationally feasible, the FC may continue to report to the trade repository used by the NFC-.[13]

Use of the porting mechanism has also thrown up certain operational issues. In particular, prior to porting trades between trade repositories, the Unique Trade Identifiers (“UTI”) originally reported by the NFC- and FC for each trade must match. If this is not the case, it will not be possible for the FC to successfully report post-trade events because the existing position will have a UTI that differs from that recognised by the FC. Therefore, where the UTI of existing positions (as reported by the NFC- and FC counterparties) do not match, such positions must be corrected before porting between trade repositories. This is another area where counterparties need to work together.

What happens if I change NFC classification?

Where an NFC which is above the clearing threshold in one or more asset classes (“NFC+”) becomes an NFC-, its FC counterparties become immediately responsible for reporting on behalf of the NFC- in respect of both new and lifecycle events. However, in order to facilitate the assumption of reporting by the FC, it is incumbent upon the NFC client to inform the FC of its change in classification.[14] Similarly, an NFC- reclassified as an NFC+ would become liable for its own reporting from the date on which the NFC calculates that its classification has changed. There would be no way for the FC to know of the reclassification in the absence of such notification.

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[1] Regulation (EU) 2019/834.

[2] Regulation (EU) No 648/2012.

[3] See Press Release, Capital markets union: Council adopts updated rules for financial derivative products and clearing, available at https://www.consilium.europa.eu/en/press/press-releases/2019/05/14/capital-markets-union-council-adopts-updated-rules-for-financial-derivative-products-and-clearing/

[4] Given this focus, this bulletin does not provide detail on the prospective transfer in reporting responsibility and liability from alternative investment funds and undertakings for collective investment in transferable securities to their managers.

[5] Directive 2014/65/EU

[6] Directive 2011/65/EU

[7] We note that EMIR’s dual-sided reporting regime differs from the derivatives reporting regimes of other jurisdictions (e.g., CFTC) which maintain a single-reporting regime where the legal liability for reporting lies with only one counterparty to the OTC derivative contract.

[8] An NFC- might opt to continue to do its own reporting where, for example, it has invested in building a reporting system and ongoing maintenance costs of operating such a system are not significant.

[9] See Article 9(1a) of EMIR as amended by EMIR Refit.

[10] See ESMA Questions and Answers, Implementation of the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) (updated 28 May 2020) (“ESMA Q&A”), TR Question and Answer 54(a), available at https://www.esma.europa.eu/sites/default/files/library/esma70-1861941480-52_qa_on_emir_implementation.pdf.

[11] See ESMA Q&A, TR Question and Answer 54(b).

[12] Article 9(1a) of EMIR as amended by EMIR Refit provides that the NFC- would not retain the legal liability for reporting under Article 9 of EMIR when transacting with a third-country FC if the following conditions are met: (a) the third-country entity would be an FC if it were established in the EU; (b) the legal reporting regime to which the third-country FC is subject has been declared equivalent pursuant to Article 13 of EMIR; and (c) the third-country FC has reported the information pursuant to the third-country legal regime for reporting to a trade repository that has granted the entities referred to in Article 81(3) of EMIR direct and immediate access to the data.

[13] See ESMA Q&A, TR Question and Answer 54(d).

[14] See ESMA Q&A, TR Question and Answer 54(c).

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

Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Michelle M. Kirschner – London (+44 (0)20 7071 4212, [email protected])
Martin Coombes – London (+44 (0)20 7071 4258, [email protected])
Chris Hickey – London (+44 (0)20 7071 4265, [email protected])

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

Gibson Dunn’s lawyers regularly counsel clients on issues raised by the COVID-19 pandemic, and we are working with many of our clients on their response to COVID-19. The following is a round-up of today’s client alerts on this topic prepared by the Gibson Dunn team. Our lawyers are available to assist with any questions you may have regarding developments related to the outbreak. As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s Coronavirus (COVID-19) Response Team.

GLOBAL OVERVIEW

This Alert reports on recent intellectual property law developments relating to the COVID-19 pandemic. First, we describe new initiatives launched by the United States Patent and Trademark Office (“USPTO”) and the United States Department of Energy (“DOE”) compiling helpful information for intellectual property stakeholders seeking to combat the pandemic. Second, we report on a recent copyright infringement lawsuit based in part on circumstances arising from the pandemic, namely, the creation of an online “National Emergency Library.” Finally, we discuss manufacturer 3M’s continued efforts to use trademark law to combat price gouging in connection with the sale of personal protective equipment, such as N95 respirators.
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COVID-19 UK Weekly Webinar – June 15, 2020

The COVID-19 pandemic is undoubtedly the biggest public health crisis of our times. Like many other countries, the UK Government has exercised broad powers and passed new laws that impact how we do business and interact as a society. To address the pandemic, the Government announced several sweeping regulations and ushered through the Coronavirus Act 2020. These actions have a broad impact on law, public policy and daily life, impacting areas including health, social welfare, commerce, trade, competition, employment and the free movement of people.

Join our team of Gibson Dunn London lawyers, led by partner and former Lord Chancellor Charlie Falconer QC, for a discussion of these changes and to answer your questions on how they will affect British businesses and community, including the impact on new and ongoing business relationships. In this webinar we will cover: The new travel quarantine rules, current and potential exceptions, and the airline industry’s court challenge; and novel approaches to dealing with legal disputes during and arising from the crisis, including negotiated solutions and alternative dispute resolution mechanisms.
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(1) The USPTO and DOE Launch New Initiatives to Facilitate COVID-19-Related Innovation

The USPTO: On June 3, 2020, the USPTO launched its “COVID-19 Response Resource Center,” which serves as a “central hub” of information about USPTO initiatives and other intellectual property information related to the pandemic. The resource center includes links to other sources covering patent applications and licensing, trademark counterfeiting and consumer fraud, and international updates relevant to the COVID-19 pandemic.

The linked patent sources include (1) the USPTO’s COVID-19 Prioritized Examination Pilot Program, which seeks to expedite the examination of patent applications submitted by “small” or “micro” entities (including institutions of higher education) that cover products or processes related to combatting COVID-19; and (2) the USPTO’s “Patents 4 Partnerships” program, a platform that allows patent holders (and owners of published patent applications) relating to COVID-19 technologies to list such patents and applications if they are available for licensing (prior discussion of these programs is available here). The trademark section of the resource center directs consumers to avenues for reporting fraud or counterfeiting related to COVID-19. Finally, the international section compiles updates from the World Intellectual Property Organization addressing measures foreign intellectual property offices have taken in response to the pandemic.

The DOE: To make DOE resources available to innovators seeking to combat COVID-19, the DOE’s Office of Technology Transitions added a “COVID-19 portal” to the agency’s “Lab Partnering Service” program, and created a new “COVID-19 Technical Assistance Program.” According to Secretary of Energy Dan Brouillette, these programs “will help transition” the DOE’s resources from its 17 national laboratories “into the hands of America’s motivated and talented innovation community” during the pandemic.

First launched in 2018, the DOE’s Lab Partnering Service (“LPS”) is an online tool that provides investors and innovators access to the DOE’s technical expertise and intellectual property. It consists of main three components: (1) an “expert search” function, which lists experts working for DOE’s laboratories by specialty, and provides a means to contact these experts; (2) a “technical summaries” function, which provides information about the DOE’s developing technologies, including publications from the agency’s labs and other participating research institutions; and (3) a “visual patent search” tool, which allows users to search the DOE’s U.S. patents and published patent applications resulting from DOE-funded research and development. The recent addition of LPS’s “COVID-19 portal” allows users to access these functions in a manner more targeted to COVID-19 research and technologies.

The DOE stated that its “COVID-19 Technical Assistance Program” (CTAP) will provide “targeted funding” to assist non-DOE entities working with DOE (presumably on COVID-19-fighting efforts). The agency does not yet appear to have publicly released further information about the program, and directs interested entities to contact its Office of Technology Transfer Office.

(2) Publishers Take Legal Action Against Internet Archive’s “National Emergency Library” While 3M Sues Amazon Vendor for Counterfeit N95 Masks

On June 1, 2020, four large publishing companies sued Internet Archive for copyright infringement in the Southern District of New York. Internet Archive is a non-profit organization that provides public access to various digital media collections, including searchable archives of website pages (commonly known as the “Wayback Machine”), and public domain materials.

This suit arises from Internet Archive’s “Open Library” service, which lends digital copies of books to the public for free. The complaint alleges that before the pandemic began, Internet Archive asserted that it could lend digital copies of books without infringing copyrights under a theory of “Controlled Digital Lending,” whereby Internet Archive would ensure that it had in its possession a physical copy of every publication it offered to users online.[1] In the wake of the pandemic, however, Internet Archive began offering a “National Emergency Library,” which it describes as “a temporary collection of books that supports emergency remote teaching, research activities, independent scholarship, and intellectual stimulation while universities, schools, training centers, and libraries are closed.” The publishers’ complaint asserts that neither Internet Archive’s controlled digital lending theory nor its “self-appointed role as ‘National Emergency Library’” is a legally cognizable defense to copyright infringement, and that Internet Archive’s actions have disrupted the “carefully calibrated ecosystem that makes books possible in the first place.”[2] Among other claims, the complaint seeks statutory damages for willful infringement and an accounting of Internet Archive’s “profits, gains, advantages or the value of business opportunities received” from its alleged acts of infringement.[3]

The director of the non-profit organization Public Knowledge (which is one of Internet Archive’s supporters and describes its core focus as “advocat[ing] for policies that serve the public interest” with regard to copyright and internet law) has publicly expressed disappointment with the lawsuit, asserting that Internet Archive’s National Emergency Library “is justified under the circumstances of the pandemic, when so many print books paid for by the public are inaccessible.”

Separately, manufacturer 3M continues to broaden its global efforts using trademark law to combat price gouging in connection with the sale of PPE. Last week, the company filed a new action in the Central District of California against an online vendor and several affiliated companies alleging that these defendants operated an unlawful scheme to “advertise and sell counterfeit, damaged, deficient, or otherwise altered respirators to unwitting consumers,” using 3M’s trademarks.[4] The complaint asserts that the defendants further engaged in price-gouging, “by selling purported 3M-branded N95 respirators . . . at an average price . . . far in excess of 3M Company’s average list prices for N95 respirators.”[5]

As of June 8, 3M has filed more than a dozen lawsuits in its fight against price gouging and counterfeiting, and has secured the removal of more than 3,000 websites offering counterfeit products from e-commerce platforms around the world.

We are continuing to monitor intellectual property-related updates and trends in the response to COVID-19.

____________________

[1] Hachette Book Grp., Inc. v. Internet Archive, No. 1:20-cv-04160, Compl. ¶¶ 8-10 (S.D.N.Y. June 1, 2020).

[2] Id. ¶¶ 9, 13.

[3] Id. at 52 (Prayer for Relief).

[4] 3M Co. v. KM Bros. Inc., No. 2:20-CV-05049, Compl. ¶ 1 (C.D. Cal. June 8, 2020).

[5] Id. ¶ 16.

Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, or the authors:

AUTHORS: Richard Mark ([email protected]), Joe Evall ([email protected]), and Doran Satanove ([email protected]).

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

The Office of the California Attorney General (“OAG”) announced on June 1, 2020, that it submitted the final proposed regulations for the California Consumer Privacy Act (“CCPA”), and related documents, to the California Office of Administrative Law. The final text of the proposed regulations remains substantively unchanged from the March 11, 2020 version published by the OAG (please see our prior alerts regarding the substance of the previous versions here, here, and here). However, the package of documents submitted to the Office of Administrative Law contained a significant amount of information, including the final draft of the regulations,[1] a final statement of reasons supporting the changes from the original proposed draft of regulations promulgated on October 11, 2019,[2] the comments received by the OAG, the OAG’s responses to those comments,[3] and a historical log of the prior versions, notices, transcripts from public hearings, preliminary activities, and supporting documents. These documents are available on the Attorney General’s CCPA website: https://oag.ca.gov/privacy/ccpa.

Due to Executive Order N-40-20 related to the COVID-19 pandemic, the Office of Administrative Law has 30 working days and an additional 60 calendar days to approve the regulations, or until September 14, 2020, at which time the final regulations will be filed and become enforceable. However, the OAG included in its CCPA package to the Office of Administrative Law a request for expedited review, stating that “[w]hile the Attorney General is mindful of the challenges imposed by COVID-19 and Governor Newsom’s Executive Order N-40-20 granting additional time to finalize proposed regulations, the Attorney General respectfully requests that the Office of Administrative Law complete its review within 30 business days, given the statutory mandate for regulations [by July 1, 2020].” If the Office of Administrative Law takes the full time permitted by Executive Order N-40-20 to review the proposed regulations, the enforcement deadline for the regulations would be September 14, 2020. The Attorney General would still be permitted to enforce the statutory text of the CCPA, by its own provisions, starting July 1, 2020, but would not be permitted to enforce the regulations until they are approved. While it is possible the OAG will choose to wait until the regulations are in place, businesses should plan for CCPA enforcement to begin as stated in the statute—on July 1, 2020.

While much of the information in the package is not new, the Final Statement of Reasons (“FSOR”) provides justifications for the changes made to the original proposed regulations (the original proposed regulations were supported by the Initial Statement of Reasons, which is incorporated by reference into the FSOR). In addition, the OAG’s responses to all comments that were submitted (FSOR Appendices A, C, and E) provide valuable insight through text clarifications, and reasons for accepting or rejecting certain comments. The responses also postpone resolution of a few issues, stating that the OAG needed to prioritize those issues that were required for operationalizing the CCPA, and need to consider others further.[4] These documents are available on the OAG’s website, and total over 500 pages.

Below, we highlight a few notable highlights from each. If you are interested in hearing more about the most notable comments, and their application to your particular concerns, we are happy to share more complete information and discuss with you upon request.

Final Statement of Reasons

Definitions. The OAG clarified that it revised the initial proposed definition of and sections relating to “price or service difference” as it related to financial incentives to confirm that differences in price or quality of the goods or services offered to the consumer must implicate consumers’ rights under the CCPA (i.e., are “related to the collection, retention, or sale of personal information”) to be of concern. Separately, with respect to questions about whether an entity “does business in California,” the OAG declined to issue any regulation, stating that “[i]n the absence of a specific definition [it] should be given meaning according to the plain language of the words and other California law.” As a result, businesses can consider whether they are “doing business” under California tax law, for example (see, e.g., https://www.ftb.ca.gov/file/business/doing-business-in-california.html, describing relevant thresholds of California sales, property or payroll pursuant to tax law). Of course, even if an entity does business in California, it must also meet the other threshold requirements to be subject to CCPA, including being a for-profit entity meeting certain size requirements.
Notice at collection of personal information. The OAG imposes important additional notice requirements and explains that the notice at collection “shall be made readily available where consumers will encounter it at or before the point of collection of any personal information” (emphasis added). This change is considered necessary to “encompass a variety of contexts . . . such as notices delivered online regarding online collection or orally when information is collected by telephone, and physical proximity, such as notices delivered by signage in retail environments.” For example, the OAG specifies that a business collecting information offline should have flexibility regarding the manner in which businesses point to an online notice (e.g., the change to the regulations “responds to comments noting that the prior language was overly prescriptive and that the OAG should allow for a QR code or other ways to direct the consumer to the text of the notice”). In addition, the OAG confirms that for a business that does not collect personal information directly from a consumer, the OAG considered and rejected requiring such businesses to “post[] . . . an online privacy policy.” On the other hand, the OAG confirms that the regulations impose certain specific additional requirements for the notice, including that if any changes are made to the business’s practices that are materially different than what was disclosed previously, the regulations “require explicit consent [to] put the consumer in the same position they would have been had the material change been disclosed during the consumer’s first engagement with the business.” The OAG explains that “[s]imply updating an online privacy policy or providing notice without explicit consent” would be insufficient, but “[b]usinesses have discretion to determine the manner in which to notify the consumer and obtain consent within the framework of the CCPA and the regulations.” Additionally, a “just-in-time” notice is required for personal information collected from a mobile device that a consumer “would not reasonably expect.” The OAG justifies these additional requirements as consistent with the purpose of the CCPA to provide sufficient transparency, and that it is “[i]nherent in [its] authority . . . to adopt regulations that fill in details not specifically addressed by the CCPA, but fall within the scope of the CCPA.”
Responding to requests to know and requests to delete. The OAG explained that it added Section 999.313(c)(3) (alleviating a business’s obligation to search for personal information under certain conditions) in order to decrease a business’s “burden or inability to search unstructured data for a consumer’s personal information” in response to a request to know, provided that the consumer is informed of the categories of records that may contain personal information that it did not search because it meets certain conditions. The OAG believes this balances the stakeholders’ interests, as it provides a consumer information that the “business may have other personal information about them but assures them that this information is only maintained by the business in an unsearchable or inaccessible format, solely for legal or compliance purposes, and is not being used for the business’s commercial benefit.” With respect to requests to delete, the OAG noted that it considered and rejected not requiring businesses to inform consumers whose requests to delete were denied of their right to opt-out of the sale of personal information, because doing so allows consumers to control the proliferation of their personal information in the marketplace. Additionally, the OAG explained that this regulation in fact lessens the burden on businesses because otherwise it might require businesses to treat these denials as requests to opt-out.
Service providers. The OAG explains that the modifications to the regulations pertaining to service providers were designed to facilitate the engagement of service providers, on the one hand, and prevent businesses from using service providers to shirk their obligations under the CCPA to consumers, on the other. For instance, the OAG modified the definition of “service provider” under the regulations to clarify that businesses that are engaged as service providers for non-profits or public entities, which are not “businesses” under the CCPA and thus not subject to the related obligations, are still service providers. The OAG explained that non-profits and public entities might not otherwise employ service providers for fear of incurring unnecessary and burdensome costs related to CCPA compliance. Similarly, the OAG clarified that businesses that collect personal information directly from consumers (or about consumers) or that render services to a third party at the direction of another “second” business are still service providers, allowing businesses to be engaged as service providers for the initial collection of personal information without being considered “businesses” under the CCPA. On the other hand, certain modifications were designed to prevent businesses from evading their obligations under the CCPA by engaging service providers. For instance, the OAG modified the regulations to clarify that a service provider’s failure to provide services required by the CCPA pursuant to a written contract will constitute a violation of the CCPA that is enforceable by the OAG and not simply a breach of contract. The OAG noted that this modification was necessary to ensure that service providers comply with the restrictions set forth in their service-provider contracts even if the business does not enforce those restrictions. Lastly, the OAG specified that service providers must comply with requests to opt-out of the sale of personal information in order to prevent businesses from engaging service providers to avoid having to comply with such requests.
Requests to opt-out. The OAG’s modifications to the regulations pertaining to the requests to opt-out require that businesses provide consumers with “easy” mechanisms that “require minimal steps” to opt-out of the sale of their personal information and treat user-enabled global privacy controls as valid requests to opt-out. In the first instance, the OAG explained that the modification was necessary to avoid the possibility that some businesses may create confusing or complex mechanisms for consumers to exercise their rights under the CCPA. In the second, the OAG explained that the modification is “forward-looking” and counterbalances the ease with which businesses collect personal information. Requiring businesses to treat user-enabled global privacy controls as valid requests to opt-out is forward-looking because it encourages the “development of technological solutions to facilitate and govern the submission of requests to opt-out.” Furthermore, the OAG explained that its experience as the enforcer of the California Online Privacy Protection Act (“CalOPPA”), whereby businesses must state how they treat “do-not-track” signals, discouraged it from making this provision discretionary. The majority of businesses, the OAG explained, disclose that they do not respond to “do-not-track” signals because compliance with such signals is discretionary. Moreover, the alternative methods for opting-out that were proposed, such as using a business’s designated methods for submitting requests to know or delete, were insufficient on a global scale and did not adequately “counterbalance the ease and frequency by which personal information is collected and sold in online contexts, such as when a consumer visits a website.”

Responses to Comments Submitted

No extensions of enforcement. The OAG rebuffed repeated requests to delay CCPA enforcement and the rollout of the finalized regulations, particularly those that insisted that businesses must focus on the COVID-19 pandemic and might face special burdens with much of their workforce on “work from home.” The OAG explained that “[t]he proposed rules were released on October 11, 2019, with modifications made public on February 10, 2020 and March 11, 2020. Thus, businesses have been aware that these [related] requirements could be imposed as part of the OAG’s regulations.” However, the OAG also indicated that it would exercise “prosecutorial discretion if warranted, depending on the particular facts at issue. Prosecutorial discretion permits the OAG to choose which entities to prosecute, whether to prosecute, and when to prosecute.” This suggests that the OAG will take a more flexible tack toward enforcement, even if it will not budge on when the law will come into effect. Specifically as to COVID-19, the OAG also argued that “any delays in implementation of the regulation will have a detrimental effect on consumer privacy as more and more Californians are using online resources to shop, work, and go to school.”
CCPA compliance is fact-specific and contextual. In response to many comments regarding applicability of the CCPA and whether certain scenarios are compliant, the OAG noted that there was no clear answer, and that a “fact-specific and contextual determination” in consultation “with an attorney who is aware of all pertinent facts and relevant compliance concerns” is required. While such answers were presumably not particularly satisfying for many commenters, the consistent reaction provides room for interpretation on various issues, and supports a no-one-size-fits-all, principled, risk-based approach by businesses.
IP addresses and other information not necessarily maintained as “personal information.” In explaining the deletion of former Section 999.302, which had elaborated on the definition of “personal information” and created a safe harbor as to IP addresses not linked to particular consumers, the AG’s office indicated that “[t]he OAG [] deleted this provision to prioritize the implementation of regulations that operationalize and assist in the immediate implementation of the law..” However, the OAG also noted that “[f]urther analysis is required on this issue.” This suggests that similar guidance might ultimately return in some form. In the meantime, the OAG again stated that “[w]hether information is “personal information” is a “fact-specific and contextual determination,” requiring consultation “with an attorney who is aware of all pertinent facts and relevant compliance concerns.” While the OAG stated that “personal information” is defined broadly, and IP addresses are included in the definition, the CCPA also has provisions that “do not require a business to collect, retain, or otherwise reidentify or link information if the information is maintained in a manner that would not be considered personal information. See Civ. Code §§ 1798.100(e), 1798.110(d), 1798.145(k).”
Definition of “sale” is still open for interpretation. In response to specific questions regarding the definition of “sale,” and whether it includes or excludes, for example, “real-time bidding in online advertising” and “the passing of information for targeted advertising”—an issue that has been widely debated—the OAG did not provide a clear response. Instead, the OAG stated that whether these particular situations constitute a sale requires a fact-specific determination, “including whether or not the parties involved are third parties or service providers.” Further, in discussing service providers’ ability to use information internally, and in the advertising context, the OAG stated that “[t]he CCPA allows a service provider to furnish advertising services to the business that collected personal information from the consumer, and such ads may be shown to the same consumer on behalf of the same business on any website. See Civ. Code § 1798.140(d)(5). Prohibiting a service provider from placing such ads is [] unnecessary because the CCPA would not prohibit the business’s own marketing department from placing the same ads itself.”
Businesses should consider multiple notices. Although clear from the text that various disclosures are required, the OAG’s comments suggest that businesses should consider displaying additional notices where necessary (again, “ultimately a fact-specific determination”)—though having an omnibus privacy policy may be sufficient in certain circumstances. For instance, the OAG responded to many comments that “consumers [must] be given a notice at collection, notice of right to opt-out, and notice of financial incentive. These requirements are separate and apart from the CCPA’s requirements for the disclosures in a privacy policy.” While the OAG confirms that businesses do have the discretion to “have all the information contained in the different notices in one place through the privacy policy,” businesses must still “comply[] with its statutory requirements to separately provide” the other three notices. For example, the notice at collection can point to the appropriate section of the more detailed privacy policy, as could a notice of financial incentive point to the section of the policy related to the financial incentive when a consumer signs up for a loyalty program. Businesses should thus make a “fact-specific determination” as to whether separate just-in-time notices, specific references to the privacy policy, or other notifications are required to satisfy CCPA and regulation requirements.
Notice need not be provided to consumers if personal information is not directly collected from them. The OAG clarified that a business does not need to provide a notice at collection to a consumer if it does not collect personal information directly from them and does not sell that consumer’s personal information. In particular, the OAG specified that this exemption applies to situations where personal information is included in user-generated content, a consumer uploads another consumer’s personal information, and employees provide information about their family members.
CCPA retroactivity clarified. The OAG responded to comments relating to whether certain provisions are retroactive, giving some insight into what was required as of January 1, 2020. For example, the OAG clarified that the notice of collection does not need to contain information regarding personal information obtained prior to CCPA’s effective January 1, 2020 date (if it will not be collected going forward), and that disclosures in response to a request to know do need to include the preceding 12 months, regardless of whether that means disclosing personal information that was collected prior to the effective date. Most importantly, the OAG confirmed that it, “cannot bring enforcement actions based on conduct occurring before the effective date of the CCPA.” This last comment should provide some comfort to businesses concerned about security incidents that occurred prior to the enforcement date.
Cookie banner not necessary. Some comments exhibited a concern that the notice at collection requirement imposed an obligation to have a pop-up or “European-style cookie banner” for cookie data collection. The OAG responded that “[t]he provision does not require a cookie banner, but rather leaves it to businesses to determine the formats that will best achieve the result in particular environments,” and that “businesses have discretion to determine how to provide notice in compliance with § 999.305, which requires that the notice be readily available where consumers will encounter it at or before the point of collection.”
Imposition of burden on businesses has been carefully weighed. When confronted with the argument that a particular provision would impose undue burdens on businesses, the OAG repeatedly asserted that “[a]ny potential competitive harm is speculative, and in any case, the potential for harm is further mitigated because all similarly situated competitors in California will be bound by the same disclosure requirements.” This approach suggests a willingness to impose costs as long as they are broadly shared.
Financial incentives and loyalty programs require calculating the value of the consumer’s data. Many comments opposed the regulation requiring businesses to calculate the value of consumer data when offering a financial incentive. These critics stated that it is burdensome, unclear, and would not provide critical insight to consumers. The OAG doubled-down on the requirement, stating that the regulations only require a good-faith estimate of the value, and such an estimate is necessary for providing consumers with the material terms of any financial incentive program, as required by the CCPA. Moreover, the OAG noted that “the disclosed value of a consumer’s data to a business could . . . be relevant to enforcement of the CCPA . . . because any financial incentive or price or service difference must be reasonably related to the value of the consumer’s data.” As a result, businesses offering any financial incentive, or price or service difference, in light of collection, retention, or sale of data (e.g., collection of email in exchange for coupons, loyalty programs) should consider requisite notice and calculation of the value of consumers’ data.
Intellectual property rights may not be a valid reason not to provide information in a request to know. Several comments urged the OAG to promulgate a regulation allowing businesses to deny a request to know on the basis of preserving their intellectual property rights, such as a business’s trade secrets. In response, the OAG stated that while it has the authority to enact such an exception, “the comment[s] do[] not show that [it] is necessary to comply with state or federal law,” that “consumer personal information is itself a protected form of intellectual property,” or that “a consumer’s personal information collected by the business could be subject to the business’s copyright, trademark, or patent rights.” In addition, it states that there has not been a showing of harm in disclosing that information to the consumer directly. The OAG concludes that “any potential competitive harm is speculative,” that “potential for harm is further mitigated because all similarly situated competitors in California will be bound by the same disclosure requirement,” and that “a blanket exemption from disclosure for any information a business deems could be a trade secret or another form of intellectual property would be overbroad and defeat the Legislature’s purpose of providing consumers with the right to know information businesses collect from them.”

* * *

We stand ready and available to guide companies through the issues raised in the regulations and statute, and any inquiries or concerns left unanswered. Please do not hesitate to contact anyone in the list below with your questions.

__________________________

[1] The Office of the Attorney General, Final Text of Proposed Regulations (June 1, 2020), available at: https://oag.ca.gov/privacy/ccpa.

[2] The Office of the Attorney General, Final Statement of Reasons (June 1, 2020), available at https://oag.ca.gov/privacy/ccpa.

[3] The Office of the Attorney General, Appendix A. Summary and Response to Comments Submitted during 45-Day Period (June 1, 2020), available at available at https://oag.ca.gov/privacy/ccpa; The Office of the Attorney General, Appendix C. Summary and Response to Comments Submitted during 1^st 15-Day Period (June 1, 2020), available at https://oag.ca.gov/privacy/ccpa; The Officer of the Attorney General, Appendix E. Summary and Response to Comments Submitted during 2^nd 15-Day Period (June 1, 2020), available at https://oag.ca.gov/privacy/ccpa.

[4] Indeed, the comments frequently provided responses that deferred making any decisions, referred businesses to an attorney, determined comments were beyond the scope of the regulations, or stated that comments were not more likely to result in effectuating the CCPA’s purpose. For example, the following phrases occurred dozens of times in the responses: “The comment raises specific legal questions that may require a fact-specific determination. The commenter should consult with an attorney who is aware of all pertinent facts and relevant compliance concerns. The regulations provide general guidance for CCPA compliance;” “To meet the July 1, 2020 deadline set forth by the CCPA, the OAG has prioritized the drafting of regulations that operationalize and assist in the immediate implementation of the law. Further analysis is required to determine whether a regulation is necessary on this issue.”

The following Gibson Dunn lawyers assisted in the preparation of this client update: Alexander Southwell, Mark Lyon, Ryan Bergsieker, Cassandra Gaedt-Sheckter, Daniel Rauch, Lisa Zivkovic and Tony Bedel.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s California Consumer Privacy Act Task Force or its Privacy, Cybersecurity and Consumer Protection practice group:

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

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

United States
Alexander H. Southwell – Co-Chair, PCCP Practice, New York (+1 212-351-3981, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Deborah L. Stein (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])

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

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

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

Washington, D.C. partner Kristen Limarzi and associate Harry Phillips are the authors of “‘Killer Acquisitions,’ Big Tech, and Section 2: A Solution in Search of a Problem,” [PDF] published by the Competition Policy International Antitrust Chronicle in May 2020.

GLOBAL OVERVIEW

Federal Reserve Modifies Main Street Lending Programs to Expand Eligibility and Attractiveness

Yesterday, the Board of Governors of the Federal Reserve System (“Federal Reserve”) announced revisions to the three lending facilities the Federal Reserve is creating under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”): the Main Street New Loan Facility (“MSNLF”); the Main Street Expanded Loan Facility (“MSELF”); and the Main Street Priority Loan Facility (“MSPLF,”) (collectively, the MSPLF, MSNLF, and MSELF are referred to as the “Main Street Programs”). The Federal Reserve also released revised guidance on the Main Street Programs. The Federal Reserve Bank of Boston, which is administering the Main Street Programs, has indicated that it will soon release updated application materials that reflect these changes to the Main Street Programs.

The goal of these revisions, the Federal Reserve explained, is to “allow more small and medium-sized business to be able to receive support.” The Federal Reserve expects the Main Street Programs to be open for lender registration soon, shortly after which the Federal Reserve will begin purchasing participations in loans and upsized tranches of existing loans through the Treasury’s Special Purpose Vehicle (“SPV”).
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Practical advice for company directors facing a liquidity crunch

Covid-19 has had a devastating impact on thousands of companies around the globe. Among other challenges, the lockdowns and various restrictions have caused liquidity issues for many and will continue to do so for the foreseeable future. This article discusses some of the critical actions that company directors facing liquidity crises should consider in these unprecedented times. Originally published by International Financial Law Review on May 26, 2020.
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Key Changes to Program Terms

Changes to the Main Street Programs include:

Reducing MSNLF and MSPLF Minimum Loan Size: For the MSNLF and MSPLF, the minimum loan size decreased to $250,000 (previously $500,000).
Increasing Maximum Loan Size for All Facilities: The new maximum loan sizes are:
- MSNLF: The lesser of $35M, or an amount that, when added to outstanding and undrawn available debt, does not exceed 4.0x adjusted 2019 EBITDA (previously the lesser of $25M).
- MSPLF: The lesser of $50M, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted 2019 EBITDA (previously the lesser of $25M).
- MSELF: The lesser of $300M, or an amount that, when added to outstanding or undrawn available debt, does not exceed 6.0x adjusted 2019 EBITDA (previously the lesser of $200M).
Loan Term Extended: The loan term for all three Programs is now 5 years (previously 4).
Payment Schedule Adjusted: For all three Programs, principal payment can now be deferred for 2 years and interest can be deferred for 1 year (previously interest and principal both deferred 1 year). For years 3-5, principal is due based on the following schedule: 15%, 15%, 70%. There is no penalty for prepayment.
Reduce Lender Risk Retention in MSPLF: The SPV will now purchase 95% participations in loans under the MSPLF (previously 85%). Lenders will retain the remaining 5% of the loan.

Key New Guidance

The FAQs include the following new guidance:

Economic Injury Disaster Loans Not Disqualifying “Specific Support”: A business cannot participate in a Main Street Program if the business has received “specific support” under Subtitle A of Title IV of the CARES Act. Previous guidance has clarified that receiving funds under Section 4003(b)(1)–(3) of the CARES Act—which provides funds to specific industries such as air carriers and businesses critical to national security—or participating in the Primary Market Corporate Credit Facility both constitute “specific support” that bars participation in a Main Street Program. Prior guidance also clarified that recipients of PPP loans could participate in a Main Street Program. The revised FAQs further provide that Economic Injury Disaster Loans do not qualify as “specific support” under the CARES Act and, thus, do not bar participation in a Main Street Program.
Planned Expansion to Non-Profits: The Federal Reserve announced that, though nonprofit organizations currently remain ineligible to participate in the Main Street Programs, the Federal Reserve is “working to establish soon one or more loan options that are suitable for” nonprofits.
When Loan Is Sought By One Member of Affiliated Group, the Full Affiliated Group’s Debt and EBITDA Not Considered: If a borrower is the only business in an affiliated group that has received or sought funding through a Main Street Program, the debt and EBITDA of the borrower, and not the entire affiliated group, is used to determine whether that business can qualify for the Main Street Programs. This is the case unless the borrower’s subsidiaries are consolidated into the borrower’s financial statements or if an affiliate of the borrower has previously borrowed (or applied to borrow) from a Main Street Program. In the latter case, the entire affiliated group’s debt and EBITDA will determine maximum loan size.
Unforgiven Portion of PPP Loans Counts As “Outstanding Debt”: When determining maximum loan size, the portion of an outstanding PPP loan that has not yet been forgiven counts as outstanding debt.
Financial Records Submitted to Lender: A borrower is required to submit to the lender financial records on the calculation of borrower’s adjusted 2019 EBITDA and the financial condition of the borrower. These financial statements will provide the inputs for calculating the borrower’s 2019 adjusted EBITDA. To this end, borrowers should submit the following financial statements:
- GAAP Compliant Companies: Borrowers that are subject to U.S. GAAP reporting requirement or that already prepare financials in accordance with U.S. GAAP must submit U.S. GAAP-compliant financial records.
- Audited Financial Statements: Borrowers that typically prepare audited financial statements must submit audited financial statements. Otherwise, borrowers should submit reviewed financial statements or financial statements prepared for the purpose of filing taxes.
  - If a borrower does not yet have audited or reviewed financial statements, the borrower should use its most recent audited or reviewed financial statement.
- Consolidation: If a borrower typically prepares financial statements that consolidate the borrower with is subsidiaries (but not its parent companies or sister affiliates) it must submit consolidated financial statements. But if a borrower does not typically prepare consolidated financial statements, it need not do so unless required by the lender.
Previously Issued Loans That Conform With Prior Guidance Still Eligible: For the first 14 days the Main Street Programs operate, the SPV will purchase loans issued in reliance on the Term Sheets from April 30, 2020, so long as (1) the documentation is complete and consistent with the requirements in the April 30 Term Sheets and (2) the loan was funded prior to June 10, 2020.
Lenders Encouraged to Fund Loans Prior to Official Launch of Main Street Programs: Lenders are encouraged to fund loans eligible for the Main Street Programs before the Main Street Programs officially launch. The SPV will purchase any loan for which (1) the requirement documentation is complete and properly executed and (2) the required documentation evidences that the loan is consistent with the relevant Main Street Program requirements.

__________________________

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn lawyers with whom you usually work, any member of the firm’s Public Policy or Financial Institutions practice groups, or the following authors:

Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, [email protected])
Luke Sullivan – Washington, D.C. (+1 202-955-8296, [email protected])

* Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.

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

Join Charlie Falconer QC, Michelle Kirschner, Ali Nikpay and Matt Aleksic for a two part discussion of the current state of play of the Brexit negotiations, the legal implications of a range of potential outcomes and what to expect between now and the end of December 2020.

The first webinar included an overview of the current state of play of the Brexit negotiations, and a conversation with Charlie Falconer QC on the general legal implications of a “no deal”and other outcomes.

The second webinar features a conversation with Michelle Kirschner and Ali Nikpay focusing on the financial services and competition implications of a range of outcomes.

PANELISTS:

Charlie Falconer QC: An English qualified barrister and Gibson Dunn partner. Former UK Lord Chancellor and first Secretary of State for Justice, he spent 25 years as a commercial barrister, and became a QC in 1991.

Michelle M Kirschner: A partner in the London office. She advises a broad range of financial institutions, including investment managers, integrated investment banks, corporate finance boutiques, private fund managers and private wealth managers at the most senior level.

Ali Nikpay: A partner and head of the competition practice group in the London office. He has more than 20 years of EU and UK merger control, antitrust and litigation experience in both the private and public sectors.

Matt Aleksic: An associate in the Litigation and International Arbitration practice groups of Gibson Dunn. He has experience in a wide range of disputes, including commercial litigation, international arbitration and investigations.

Hong Kong partner Michael Nicklin, Singapore partner Jamie Thomas, and Hong Kong partners Paul Boltz and Scott Jalowayski are the authors of “Practical advice for company directors facing a liquidity crunch,” [PDF] published by International Financial Law Review on May 26, 2020.

President Signs Paycheck Protection Program Flexibility Act

On June 5, 2020, the President signed into law H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (“PPP Flexibility Act”), which relaxes a number of requirements of and restrictions on the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and clarified by subsequent guidance from the Small Business Administration (“SBA”) and the U.S. Department of the Treasury. The bill passed the House by a vote of 417-1 and the Senate by voice vote, reflecting the strong bipartisan support behind the legislation. Following is a summary of the major changes to the PPP instituted by the PPP Flexibility Act.
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The CARES Act, the Higher Education Emergency Relief Fund, and Guidance for Schools to Limit Litigation Exposure

It seems no industry has been spared the effects of the COVID-19 pandemic. The educational sector is no exception. Classroom doors are closed, classes are being held remotely, federal work-study jobs may no longer be available, and dormitories and dining halls have been shut down. The Higher Education Emergency Relief Fund (“HEERF”) offers valuable financial assistance to schools and their students. But accepting a HEERF grant undoubtedly exposes the recipient to legal risks, including potential False Claims Act (“FCA”) liability. In these tumultuous times, it is easy for careful compliance and planning efforts to fall by the wayside. Yet such efforts are crucial if schools are to avoid legal liability in the years that follow. This update presents an overview of HEERF and its conditions, potential FCA pitfalls, and advice for ensuring compliance and avoiding litigation.
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I. The CARES Act and the Higher Education Emergency Relief Fund

By now, you are likely familiar with the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and its inclusion of funds to help educational institutions and their students adapt and respond to the widespread effects of the COVID-19 pandemic. The CARES Act creates a $14 billion higher education emergency relief fund (HEERF) for the Department of Education to distribute directly to institutions of higher education. Starting in April, HEERF grants became available to schools.

The grant money consists of two different types of aid. The first, the so-called “student portion” of the aid, is $6.2 billion available to any Title IV postsecondary institution but restricted in that it must be distributed directly to the students most affected by the pandemic.[1] This amounts to 50% of the aid distributed to each institution. The second type of aid, the so-called “institutional portion,” may be used to cover “any costs associated with significant changes to the delivery of instruction due to coronavirus.”[2]

Ninety percent of the funds will be awarded to schools based on two formula factors: (1) 75% of the funds will be awarded to schools based on the school’s share of full-time equivalent (“FTE”) enrollment of Pell Grant recipients; and (2) 25% of the funds will be awarded to schools based on each school’s share of FTE enrollment of students who were not Pell Grant recipients. At institutions that provide both online and ground-based education, students who were enrolled exclusively in an online program on March 13, 2020 are not eligible for emergency financial aid grants. The formula used to calculate the distribution of funds to institutions excludes students who were exclusively enrolled in distance education courses.

The law also creates a $3 billion Governor’s Emergency Education Relief Fund for the Department to make grants to applying states and, in turn, for states to make grants to institutions of higher education and local education agencies.

The CARES Act is also designed to ensure that students affected by COVID-19 are given certain relief from conditions of their Title IV financial aid. For example, if a student begins attendance in a payment period or period of enrollment that begins on or includes March 13, 2020, and subsequently withdraws from the period as a result of COVID-19-related circumstances, that student’s institution is not required to return the student’s Title IV funds.[3]

II. A Fertile Opportunity for False Claims Act Lawsuits?

Although HEERF grants may be invaluable to schools affected by the pandemic, institutions should be aware that accepting a HEERF grant carries legal risks. In fact, a number of institutions have decided to refuse the grants. A spokesperson for one prominent university explained: “After careful review, we believe that accepting the funds, even as a pass-through entirely to students, would impose unacceptable legal and regulatory liabilities on [our institution] that could have a significant negative impact in the future. We continue to maintain our commitment to supporting students in distress through institutional and donated funds, and we will also continue to identify other sources of relief for the most vulnerable members of [our] community.”[4]

Among the risks created by HEERF grants is potential FCA litigation. The FCA, as many in the education sector know, is the government’s primary means for combating fraud in connection with government payments and government programs.[5] The FCA imposes liability for the knowing submission of a false claim for payment, or a false statement made in connection with a false claim for payment, to the government.[6] The damages from FCA liability can be catastrophic—the FCA provides for virtually automatic trebling of damages, penalties of up to $22,000 “per false claim,” and attorneys’ fees and costs.[7] And perhaps worst of all, liability under the FCA can provide a basis for suspension and debarment from further government programs or payment.[8] FCA claims may be brought by the government directly or by whistleblowers, who sue on the government’s behalf, seeking a bounty of up to 30% of whatever is recovered on the government’s behalf.[9] More about the FCA can be found here.

The Department of Justice has already said it will focus resources on COVID-19-related fraud. In a March 16 memorandum to all U.S. Attorneys and a March 20 press release, Attorney General William Barr announced that DOJ will prioritize the investigation and prosecution of coronavirus-related fraud schemes, which would include FCA-related claims.[10] Attorney General Barr also directed U.S. Attorneys to appoint a “Coronavirus Fraud Coordinator” in each district (responsible for coordinating enforcement and conducting public outreach and awareness) and established a national system for whistleblowers to report suspected fraud.[11] Additionally, the CARES Act itself creates an oversight committee—the Pandemic Response Accountability Committee (“PRAC”)—to “prevent and detect fraud, waste, abuse, and mismanagement” in connection with CARES Act funds.[12]

The education sector has not been immune from FCA liability in the past. Rather, it has been a high-profile target. For instance, much of the late 1990s and 2000s was filled with lawsuits filed by “whistleblowers” against educational institutions under the FCA, claiming that the institution received Title IV aid under false pretenses or while in violation of any one of the many rules or regulations schools agreed to as a condition for participating in Title IV programs. While none (or very few) of these cases resulted in jury verdicts for the whistleblowers or the government, the mere threat of potentially crippling liability and expense of litigating caused numerous schools to settle FCA claims for substantial amounts. These cases were not limited to the for-profit education sector. Our annual Year-End False Claims Act Updates include summaries of these settlements.[13]

With the sheer amount of funding involved with HEERF grants, and the various conditions attached, it is not unreasonable to suspect another spree of potential FCA cases against schools coming out of the pandemic. Let’s consider a few examples.

As explained above, at least 50% of the grant funds must be allocated directly to students.[14] A school that previously refunded room and board to a student or disbursed grants to students struggling with economic hardships may be tempted to use HEERF funds to reimburse itself for those previous student-directed expenditures. But the Department has stated that such an allocation would not be permitted.[15] Although each institution has significant discretion to determine how to allocate the funds, the Department has stated the student portion of the aid may not be used by the school to reimburse itself for refunds or grants that it previously offered to students.[16]
As for the institutional portion of the aid, despite the Act’s broad language regarding permitted uses, the Department has stated the grants may not be used to cover payments to contractors for the provision of pre-enrollment recruitment activities, including marketing and advertising, endowments, or capital outlays associated with facilities related to athletics, sectarian instruction, or religious worship.[17]
The CARES Act requires each institution that accepts funds from HEERF to continue to pay non-student employees and contractors to the greatest extent practicable based on the school’s financial situation.[18] Institutions may not, however, use emergency financial aid grants to students to pay employees and contractors.[19]
The law imposes extensive reporting requirements.[20] Each institution is required to report how grants were distributed to students, how the amount of each grant was calculated, and any instructions or directions that the institution gave to students about the grant.[21]

Any of these various rules could potentially provide the basis for the government, or a “whistleblower,” to at least try to assert FCA claims—and seek treble damages, penalties, and attorneys’ fees. The theory under any of them would basically be the same: the school, in knowing (or “reckless disregard”) violation of these rules, accepted and distributed HEERF grants. And whether or not such a claim had any merit, or viably did assert an FCA claim under the applicable law, litigation will be an expensive and burdensome process—even in light of compelling defenses.

III. Ensuring Compliance and Avoiding False Claims Act Liability

So, in light of the above, what can educational institutions do to mitigate risk of liability, including, particularly, FCA liability? As anyone who has worked from home since the COVID-19 crisis began can attest, it is harder than ever to stay organized and methodical at work. Yet for schools accepting HEERF grants and grappling with the accompanying requirements, careful planning and organization is essential. Here is some guidance:

Stay informed: Ensure you understand the government regulations detailing what you are required to do and when. Monitor announcements by the President, Congress, and the Department to ensure you remain informed of waivers, modifications, and other developments in regulatory requirements, or guidance for schools, which may change as the crisis continues to develop. Even unintentional or implied misrepresentations of regulatory compliance can lead to burdensome FCA lawsuits, even when meritless.

Document decisions: Institutions should carefully document institutional decision-making relating to student services, academic programs, and government aid. It is important to remember that while something may seem reasonable and obvious in the present, it may be questioned in the rearview mirror in the future. Thus, it is helpful to have contemporaneous documentation outlining a particular decision, and the rationale for making that decision at the time. Indeed, documentation may not only help defeat a later FCA lawsuit (by demonstrating the good faith basis for a decision), but such documentation can be powerful evidence before the government investigating any potential FCA issue. And much better to have documents telling your story than to have to force your employees or executives to fill in the blanks for the government via witness interviews. Advice of counsel, in particular, can constitute strong evidence of a good faith decision (but could result in waiver of privilege as to the relevant subject matter to the extent it is relied upon by the institution in litigation or an investigation).

Follow reporting requirements and document communications: Institutions should be familiar with their obligations to report decisions to the appropriate departments and agencies. Institutions also can contact the Department to argue for alternative lawful approaches other than those stated in the Department’s guidance. But do not assume that you are in the clear simply because the government is aware of your institution’s actions. Rather, in line with the above, it is critical to document a communication from the government expressing approval. This is true not only because a later whistleblower will likely know nothing of your communications with the government, but also because FCA case law tends to be more favorable to those FCA defendants who not only sought government approval, but also received approval back from the government. Compile in real-time written evidence or documentation of communications with the government, including communications regarding any modifications or waivers and their purpose to meet government or public needs. You can also consider publicly announcing any government-approved waivers or modifications to existing requirements, as well as your reliance on such actions, as doing so may make public your decision and present additional hurdles under the FCA’s public disclosure bar for any would-be FCA plaintiff.

Adopt best practices for ensuring compliance with government requirements: Continue to implement effective risk management and auditing procedures during the COVID-19 crisis. Keep in mind that while some risks of FCA liability are readily apparent even in a time of crisis, it can be easier to lose sight of other, less obvious pitfalls during an emergency. Further, what a school may believe it is doing in good faith now will be questioned later. For example, a company constructing urgently needed housing for first responders following Hurricane Katrina later settled FCA claims alleging it failed to abide by the specific requirements in its contract.[22] Best practices with respect to risk management, auditing, and compliance may not only help prevent any potential FCA issues, but will also assist in addressing and remediating them.

Ensure that you have effective reporting systems in place and take reports seriously: Statistics show that most whistleblowers attempt to complain internally within a company or institution first, before reporting items to the government or filing an FCA lawsuit. It is therefore important to have robust reporting procedures in place for whistleblowers to be given the opportunity to report concerns, even (or particularly) in this time of “work from home.” And it is just as important for those reports to be taken seriously, investigated and remedied. Further, one of the many tolls of the COVID-19 is increased furloughs and layoffs. This only creates additional opportunities for whistleblowers (or whistleblower lawyers) to attempt to bring claims. Make sure that your reporting processes are robust, and be vigilant about what is being said by both current employees and those whose employment may be ending in exit interviews—as that is often a telltale sign of whether FCA activity is afoot. And if you become aware of any claims of misconduct or fraud in connection with requests for or receipt of government funds, ensure that your response is handled by appropriate compliance or legal personnel and treat allegations seriously, including by conducting a thorough, well-documented investigation.

Approach the government: If you become aware of any issues with respect to government programs or potential FCA allegations, consult with counsel about disclosure obligations and outreach to the government. Your counsel will analyze whether disclosure may be required by law. And, if an FCA investigation is active, it is critical to engage the government. Each year, the vast majority (along the lines of 90%) of recoveries in FCA cases come from ones where the government intervened in the matter. As a result, it is absolutely critical to do your best to give the government the opportunity to consider all information available that might lead the government to choose to not intervene in your matter (and/or settle the matter on reasonable terms).

Keep accreditors informed: Finally, institutions should also keep accreditors informed to ensure that changes in response to the COVID-19 pandemic comply with accreditor requirements. Among the spate of FCA litigation filed against institutions in the past were claims that a school violated the FCA by misleading accreditors. It is important to keep accreditors up to date as required as well.

We hope you found this guidance helpful. For a full listing of Gibson Dunn’s alerts relating to the FCA, please visit the FCA practice group’s list of publications. And the below Gibson Dunn attorneys are available to answer any questions you may have.

________________________

[1] H.R. 748 §§ 18004(a)(1), 18004(c).

[2] Id., § 18004(c).

[3] Id., § 3508.

[4] Douglas Belkin, Joining Harvard, More Top Universities Pass Up Stimulus Funds, Wall St. J., Apr. 23, 2020, available at https://www.wsj.com/livecoverage/coronavirus-2020-04-23/card/i9lvX7ew5lO5ncDLok7j

[5] Gibson Dunn 2019 Year-End False Claims Update (Jan. 31, 2020), available at https://www.gibsondunn.com/2019-year-end-false-claims-act-update/

[6] 31 U.S.C. § 3729(a)(1)(A) and (B).

[7] Id., § 3729(a)(1)(G).

[8] 48 C.F.R. § 9.406-2.

[9] Id., § 3730(d).

[10] U.S. Dep’t of Justice, Memorandum from Attorney General William P. Barr (Mar. 16, 2020), https://www.justice.gov/ag/page/file/1258676/download;

Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (Mar. 20, 2020), https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud.

[11] U.S. Dep’t of Justice, Memorandum from Attorney General William P. Barr (Mar. 16, 2020), https://www.justice.gov/ag/page/file/1258676/download;

[12] Gibson, Dunn & Crutcher LLP, CARES Alert, Section IV, available at https://www.gibsondunn.com/senate-advances-the-cares-act-to-stabilize-economic-sector-during-coronavirus-pandemic/.

[13] https://www.gibsondunn.com/?search=news&s=&practice%5B%5D=1935.

[14] H.R. 748 § 18004(c).

[15] Higher Education Emergency Relief Fund, Frequently Asked Questions about the Emergency Financial Aid Grants to Students under Section 18004 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, available at https://www2.ed.gov/about/offices/list/ope/heerfstudentfaqs.pdf

[16] Id.

[17] Higher Education Emergency Relief Fund, Frequently Asked Questions about the Institutional Portion of the Higher Education Emergency Relief Fund under Section 18004(a)(1) and 18004(c) of the Coronavirus Aid, Relief, and Economic Security (CARES), available at https://www2.ed.gov/about/offices/list/ope/heerfinstitutionalfaqs.pdf

[18] Id.

[19] Id.

[20] H.R. 748 § 3517.

[21] Id.

[22] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Hurricane Katrina Contractor Accepts $4 Million Judgment Under the False Claims Act (Apr. 24, 2009), https://www.justice.gov/opa/pr/hurricane-katrina-contractor-accepts-4-million-judgment-under-false-claims-act.

Gibson Dunn are available to address any questions you may have about the developments. Please feel free to contact the Gibson Dunn attorney with whom you usually work, any member of the firm’s False Claims Act Group, or the following authors:

James L. Zelenay Jr. (+1 213-229-7449, [email protected])

Jeremy S. Smith (+1 213-229-7973, [email protected])

Harper L. Gernet-Girard (+1 213-229-7314, [email protected])

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

On June 5, 2020, the President signed into law H.R. 7010, the Paycheck Protection Program Flexibility Act of 2020 (“PPP Flexibility Act”), which relaxes a number of requirements of and restrictions on the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and clarified by subsequent guidance from the Small Business Administration (“SBA”) and the U.S. Department of the Treasury.[i] The bill passed the House by a vote of 417-1 and the Senate by voice vote, reflecting the strong bipartisan support behind the legislation. Below is a summary of the major changes to the PPP instituted by the PPP Flexibility Act.

Covered Period

The CARES Act established an eight week “covered period”—beginning on the loan origination date and ending no later than June 30, 2020. The portion of the PPP loan equal to the amount of loan proceeds used during this covered period for certain covered obligations, including payroll costs, mortgage interest payments, rent, and utilities, is eligible for forgiveness.

The PPP Flexibility Act extends the covered period to 24 weeks—ending no later than December 31, 2020. Borrowers who received a PPP loan prior to the PPP Flexibility Act may elect for the covered period to end 8 weeks after the origination of the loan. The PPP Flexibility Act does not address whether new borrowers can apply for forgiveness prior to the end of the 24 week covered period.

Covered Obligations

In the First Interim Final Rule published on April 1, 2020, SBA and the Department of Treasury stated that at least 75 percent of PPP loan proceeds “shall be used for payroll costs.” This ratio of payroll costs to other covered obligations was not in the CARES Act.

The PPP Flexibility Act codifies a new ratio: at least 60 percent of PPP loan proceeds “shall” be used for payroll costs in order to receive full loan forgiveness. Accordingly, up to 40 percent of loan proceeds may go to other covered obligations, including interest on covered mortgage payments, rent, and utilities.

The text of the law appears to create a cutoff precluding loan forgiveness for borrowers that spend less than 60% of PPP loan proceeds on payroll costs—as opposed to a reduction in the amount of forgiveness, as reflected in previous guidance. We expect additional guidance from SBA and the Department of Treasury to prevent this cutoff.

Loan Terms

For all PPP loan funds that are not forgiven, the CARES Act established that the outstanding balance will have a maximum maturity of 10 years and an interest rate not to exceed 4 percent. The First Interim Final Rule instituted a maturity of 2 years and an interest rate of 1 percent.

For new PPP loans originating on or after June 5, 2020, the PPP Flexibility Act extends the minimum maturity for outstanding balances to 5 years. Existing PPP loans are unaffected.

Rehiring Employees

Under the CARES Act, employers who reduced the compensation or number of full-time equivalent employees could eliminate those reductions by June 30, 2020, and avoid any reduction in loan forgiveness.

The PPP Flexibility Act extends the date to eliminate reductions to compensation or number of full-time equivalent employees to December 31, 2020.

Also, SBA and the Department of Treasury Frequently Asked Question No. 40 provided a safe harbor from the reduction in loan forgiveness with respect to laid-off employees who reject a borrower’s offer of re-employment. The FAQ states that the borrower must have made a good faith, written offer of rehire, and the borrower must document the former employee’s rejection of the offer.

The PPP Flexibility Act codifies this safe harbor, stating that loan forgiveness will not be reduced if the borrower can, in good faith, document an inability to rehire former employees or hire similarly qualified employees on or before December 31, 2020. The PPP Flexibility Act also provides a safe harbor for borrowers who cannot return to the same level of business activity at which the business was operating before February 15, 2020, due to compliance with standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.

The PPP Flexibility Act does not articulate what “business activity” means or how it will be measured. We look forward to additional guidance clarifying this issue.

Loan Deferral Period

Under the CARES Act, borrowers could defer payment of the principal, interest, and fees of their PPP loans for not less than six months and not more than one year.

The PPP Flexibility Act changes this deferral period to end when the PPP loan forgiveness amount is remitted to the lender. Also, if a borrower fails to apply for forgiveness within 10 months after the last day of the covered period, the borrower shall make payments of principal, interest, and fees beginning no earlier than 10 months after the covered period ends.

Payroll Tax Deferral

The CARES Act allowed certain companies to defer paying payroll taxes, excepting companies who had their PPP loans forgiven.

The PPP Flexibility Act eliminates this exception, allowing companies whose PPP loans are forgiven to also defer payroll taxes.

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[i] For additional details about the PPP please refer to Gibson Dunn’s Frequently Asked Questions to Assist Small Businesses and Nonprofits in Navigating the COVID-19 Pandemic and prior Client Alerts about the Program: SBA “Paycheck Protection” Loan Program Under the CARES Act; Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed; Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program; Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement, and FAQs for Paycheck Protection Program; Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program; Small Business Administration Publishes Additional Interim Final Rules and New Guidance Related to PPP Loan Eligibility and Accessibility; and Small Business Administration Publishes Loan Forgiveness Application.

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

Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, [email protected])
Alisa Babitz – Washington, D.C. (+1 202-887-3720, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Alexander Orr – Washington, D.C. (+1 202-887-3565, [email protected])
William Lawrence – Washington, D.C. (+1 202-887-3654, [email protected])
Samantha Ostrom – Washington, D.C. (+1 202-955-8249, [email protected])

* Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.

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

GLOBAL OVERVIEW

What To Know About Short-Seller Risks During Pandemic

As the world struggles to cope with the COVID-19 pandemic, and volatile markets are rattled by the latest virus and economic news, publicly traded companies are increasingly susceptible to fraudulent short-seller attacks. While legitimate short selling plays an important and well-recognized role in the public markets, there are a few who have abused and misused short selling to manipulate the price of public company stock.

Particularly in this volatile, skittish stock market, a lone tweet, press release or blog post from a recognized short seller can result in large stock-price declines. While those abusive short sellers often claim the mantle of the First Amendment to protect their public and lobbying activities, no amount of free speech permits short sellers to adopt abusive, deceptive and manipulative practices, such as “short and distort” schemes. And some abusive short sellers will also engage in protracted, public battles, actively seeking to drive down a company’s share price by instigating regulatory investigations, lobbying government officials, generating negative press coverage, and putting pressure on external auditors and other key stakeholders.

When fraudulent short sellers adopt such sophisticated manipulative schemes, public companies need to adopt an equally sophisticated and coordinated strategy to protect their shareholders and defend their reputations.

This article briefly describes the regulatory regime applicable to short sellers, as well as examples of enforcement actions brought against short sellers for running afoul of these rules. The article then describes strategies that public companies can deploy to defend themselves against sustained predatory short-seller attacks. Originally published by Law360 on June 3, 2020.
Read more

COVID-19 United Kingdom Weekly Bulletin – June 3, 2020

This weekly bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in the following key areas: Competition and Consumers; Corporate Governance (including accounts, disclosure and reporting obligations); Cybersecurity and Data Protection; Disputes; Employment; Energy; Finance; Financial Services Regulatory; Force Majeure; Government Support Schemes; Insolvency; International Trade Agreements (private and public); Lockdown and Public Law issues; M&A and Private Equity; Real Estate; and UK Tax.
Read more

New York partners Avi Weitzman and Barry Goldsmith and associate Jonathan Seibald are the authors of “What To Know About Short-Seller Risks During Pandemic,” [PDF] published by Law360 on June 3, 2020.

The world has been turned upside down in recent months. The COVID-19 pandemic is causing unprecedented turmoil and economic dislocation, including millions of employees losing their jobs over a brief period of time. This instability and economic uncertainty, combined with a new patchwork of federal and state programs and laws, sets the stage for a deluge of misconduct allegations by current and former employees. In this regard, it will almost surely be similar to prior economic downturns which touched off enormous increases in whistleblower activity. In this one-hour program, Lee Dunst and Jessica Brown of Gibson Dunn, and Rob Biskup of Deloitte, will discuss the coming surge in whistleblower activity and how to properly address it. The panel will outline some of the challenges and opportunities facing companies with respect to whistleblowers; discuss factors that may drive whistleblower enforcement activities by state and federal regulators; offer practical advice on how companies can develop, update and implement compliance plans; and provide best practices for investigating and litigating whistleblower claims.

View Slides (PDF)

PANELISTS:

Lee G. Dunst is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the firm’s White Collar Defense and Investigations Practice Group. His practice covers a wide range of government investigations and white collar criminal and regulatory matters, including numerous whistleblower complaints, on behalf of numerous clients across the globe, including Fortune 500 companies, accounting firms, corporate executives, and special board committees. He has been recognized publicly for his successful work on behalf of his clients. Most recently, in March 2020, The Am Law Litigation Daily named Mr. Dunst as “Litigator of the Week” for obtaining a successful jury verdict on behalf of a Fortune 250 company. He also has been recognized in The Legal 500 US, with the publication describing Mr. Dunst as “knowledgeable and responsive,” and noting that he “provides a broad range of expertise and regularly advises clients accused of corporate fraud and alleged accounting irregularities.” Additionally, he has been named a “Litigation Star” and “Local Litigation Star” by Benchmark Litigation in its 2017-2020 editions.

Jessica Brown is a partner in the Denver office of Gibson, Dunn & Crutcher and a member of the firm’s Labor and Employment, White Collar Defense and Investigations, and Class Actions Practice Groups. Ms. Brown has substantial experience conducting and managing workplace investigations and working with clients to address whistleblower complaints on a wide range of topics. She also represents clients in connection with government investigations, including white collar criminal investigations conducted by regulators in the U.S. and across the globe. In addition, Ms. Brown has defended nation-wide and state-wide class action 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 is currently ranked by Chambers for Labor & Employment in Colorado in Band 1.

Robert T. Biskup serves as Managing Director, Regulatory, Forensics & Compliance at Deloitte with over 25 years of experience in the corporate sector and private professional settings. Rob is a former global chief compliance officer at a Fortune 10 multinational corporation and is among Deloitte’s global leaders in the design and operation of effective corporate compliance programs. He also has deep international experience handling forensic accounting investigations on behalf of management and boards of directors, including matters involving financial statement fraud, accounting irregularities, asset misappropriation, fraud and corruption. Rob also has served as a federal monitor, and has extensive experience working with companies operating under government monitors and oversight in regulatory remediation situations, including the enhancement of business process, regulatory, financial and accounting controls.

On Monday, June 1, 2020, the U.S. Department of Justice (“DOJ”) Criminal Division issued, without fanfare, updated guidance on the “Evaluation of Corporate Compliance Programs” (the “Compliance Program Update” or “Update”), which sets out considerations for DOJ prosecutors to take into account when assessing corporate compliance programs, making charging decisions, and negotiating resolutions. Previous iterations of the document (covered in our 2017 Mid-Year FCPA Update and May 3, 2019 Client Alert) have been a valuable resource for companies as they design, maintain, and evaluate their corporate compliance programs, and the Update provides welcome insight into how DOJ’s thinking is evolving, particularly with respect to risk assessments, monitoring, and resources. Assistant Attorney General Brian Benczkowski noted that the Update “reflects additions based on [DOJ’s] own experience and important feedback from the business and compliance communities.”

The Compliance Program Update emphasizes DOJ’s commitment to a flexible approach when evaluating corporate compliance programs that takes individual companies’ circumstances into account within the framework of existing guidance. Specifically, the Update calls for “a reasonable, individualized determination in each case” (emphasis added) of the effectiveness of a company’s compliance program, including its “size, industry, geographic footprint, and regulatory landscape,” with a dual focus on the program in effect at the time of the underlying conduct and the program in effect at the time of resolution. The Update also reflects the ongoing evolution and increasing sophistication of DOJ’s compliance program expectations, with an emphasis on allocating adequate resources to the compliance function, an increased focus on using ongoing, data-driven monitoring of risks to guide the design and implementation of the compliance program, and the inclusion of more granular guidance regarding DOJ’s expectations.

Building on DOJ’s previous guidance and consistent with the Justice Manual, which sets forth the principles guiding prosecution of companies, the Compliance Program Update instructs prosecutors to ask three “fundamental questions” when evaluating a corporate compliance program. Together, the questions seek to evaluate whether companies combine a thoughtfully designed program with the resources and culture necessary to create a program that works effectively in practice:

“Is the corporation’s compliance program well designed?” (unchanged from previous guidance)
“Is the program being applied earnestly and in good faith?” In other words, is the program adequately resourced and empowered to function effectively? (updated to include the words “adequately resourced and empowered to function,” placing a more explicit emphasis on companies’ demonstrated commitment to compliance)
“Does the corporation’s compliance program work” in practice? (unchanged from previous guidance)

See JM 9-28.800.

Under each of the questions noted above, and consistent with prior guidance, the Update provides 12 compliance topics related to the core elements of effective compliance programs: effective policies and procedures, training, reporting mechanisms and investigations, third-party due diligence, tone from the top, compliance independence and resources, incentives and disciplinary measures, and periodic testing and review. The Update clarifies that prosecutors will consider these topics “both at the time of the offense and at the time of the charging decision and resolution.”

KEY TAKEAWAYS OF THE COMPLIANCE PROGRAM UPDATE

Confirming our philosophy that there is no “one size fits all” approach to compliance and that an effective compliance program is tailored to a company’s unique characteristics and risks, the Compliance Program Update demonstrates an evolving understanding of how companies’ compliance programs operate and a willingness to engage with the specific circumstances that influence the design of a company’s compliance program. For example, the Update now instructs prosecutors to consider why a company has “chosen to set up the compliance program the way that it has, and why and how the company’s compliance program has evolved over time,” and to consider “the reasons for the structural choices the company has made.” Other revisions include:

Importance of Ongoing Risk Assessments: The Update asks prosecutors to consider whether risk assessments are based on “continuous access to operational data and information across functions” rather than a “snapshot” in time. The Compliance Program Update also now asks prosecutors to specifically consider how companies implement any learnings from their periodic reviews in policies, procedures, and controls, and increases the emphasis on lessons learned. For example, the Compliance Program Update asks prosecutors to consider whether the company tracks and incorporates any of these lessons into its periodic risk assessments. Moreover, the Update takes a broad view of “lessons learned,” suggesting that companies not only draw from their own experiences, but also learn from issues that have beset other companies operating in the same industry and/or geographic region. This approach is something many companies already do to remain familiar with relevant industry trends, enforcement actions, and good practices.
Importance of Adequate Resources and Accessibility: Not surprisingly, the Compliance Program Update continues to focus heavily on assessing whether compliance programs are adequately resourced and accessible to employees. For example, it instructs prosecutors to identify how companies publish their policies and procedures, track how their policies and procedures are accessed to determine which policies attract more attention than others, and ensure that employees have the tools needed to ensure compliance. This requirement reflects DOJ’s emphasis on ensuring that compliance program requirements are followed in practice. Notably, the Update also adds a new set of questions related to the compliance function’s “access to relevant sources of data to allow for timely and effective monitoring and/or testing.”
Testing the Design of the Program: The Update suggests additional ways companies can test the design of their compliance programs. For example, while recognizing that companies may choose to invest in targeted compliance training programs that equip employees with sufficient knowledge for identifying and raising compliance issues to appropriate company functions, the Compliance Program Update also asks whether there is a process for employees to ask questions arising from training sessions and whether the company has evaluated how training has impacted employee behavior or operations. When evaluating the effectiveness of confidential reporting structures, such as hotlines, companies also are expected to take measures to test whether employees are aware of the hotline and feel comfortable using it, as well as to track reports from start to finish.
Continued Focus on Third Parties: The Compliance Program Update reflects DOJ’s continued real-world focus on third-party risks and the corresponding expectation that companies carefully manage third parties “throughout the lifespan of the relationship,” and not just during the onboarding process. Although DOJ recognizes that “the need for, and degree of, appropriate due diligence may vary” based on different factors, the revisions make clear that DOJ expects companies to take a thoughtful approach to their third-party relationships and that simply conducting cookie-cutter due diligence at the outset of a relationship will be insufficient to meet DOJ’s expectations. Accordingly, the Update suggests, companies should document the business rationale for utilizing a third party; conduct appropriate due diligence based on the third party’s particular risk profile; incorporate relevant anti-corruption compliance provisions in third-party contracts; and “engage in risk management of third parties throughout the lifespan of the relationship,” with ongoing monitoring and training. Clearly, the overwhelming number of DOJ resolutions in which third party agents, intermediaries, and distributors are the conduit for corrupt payments inform this Update. Practically, companies should review third parties annually and obtain from them a certification of compliance.
M&A Due Diligence: The Update recognizes that pre-acquisition due diligence may not always be possible (and, if so, expects companies to be able to explain why it was not possible), but emphasizes that companies will be expected to justify their approach if they conduct less than typical pre-acquisition due diligence. The Compliance Program Update reiterates DOJ’s expectation that companies integrate newly acquired entities into their existing compliance program structures and internal controls in a timely and orderly fashion and particularly highlights the importance of post-acquisition audits.

The Update enhances the corporate understanding of DOJ’s evolving views on what good practices DOJ considers to be components of an effective corporate compliance program. For example, it reinforces the need for companies to “foster a culture of ethics and compliance with the law at all levels of the company” (emphasis added). This revised language continues a shift previously reported in our May 3, 2019 Client Alert, as DOJ broadens its compliance culture focus on the “tone at the top” to encompass the “tone at the middle,” and elsewhere.

Although not a game-changer, the Update amplifies DOJ’s core themes: tailored, company-specific compliance programs enhanced by continuous inputs from the company’s real business experiences, which DOJ characterizes as “lessons learned.” In the future, it might be prudent for DOJ to address financial and accounting system structures and approaches, as money is the lifeblood of all corruption. As with prior guidance, companies can use the Update as a benchmark to evaluate their existing compliance programs. Companies also should expect to see complementary revisions in DOJ’s template for “Attachment C,” which is appended to DOJ’s corporate resolutions and sets forth DOJ’s minimum expectations for corporate compliance programs in that context. Finally, companies also should consider complementary guidance from other U.S. agencies and international organizations—particularly the resources linked at the end of the Update, which in many instances reflect growing consensus regarding governmental expectations for corporate compliance programs.

The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Patrick Stokes, Michael Diamant, Laura Sturges, Chris Sullivan, Oleh Vretsona, Courtney Brown, Lora MacDonald, Caroline Ziser Smith and Patricia Herold.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the firm’s White Collar Defense and Investigations practice group:

Washington, D.C.
F. Joseph Warin (+1 202-887-3609, [email protected])
Richard W. Grime (+1 202-955-8219, [email protected])
Patrick F. Stokes (+1 202-955-8504, [email protected])
Judith A. Lee (+1 202-887-3591, [email protected])
David Debold (+1 202-955-8551, [email protected])
Michael S. Diamant (+1 202-887-3604, [email protected])
John W.F. Chesley (+1 202-887-3788, [email protected])
Daniel P. Chung (+1 202-887-3729, [email protected])
Stephanie Brooker (+1 202-887-3502, [email protected])
M. Kendall Day (+1 202-955-8220, [email protected])
Stuart F. Delery (+1 202-887-3650, [email protected])
Adam M. Smith (+1 202-887-3547, [email protected])
Christopher W.H. Sullivan (+1 202-887-3625, [email protected])
Oleh Vretsona (+1 202-887-3779, [email protected])
Courtney M. Brown (+1 202-955-8685, [email protected])
Jason H. Smith (+1 202-887-3576, [email protected])
Ella Alves Capone (+1 202-887-3511, [email protected])
Pedro G. Soto (+1 202-955-8661, [email protected])
Lora MacDonald (+1 202-887-3738, [email protected])
Caroline Ziser Smith (+1 202-887-3709, [email protected])

New York
Reed Brodsky (+1 212-351-5334, [email protected])
Joel M. Cohen (+1 212-351-2664, [email protected])
Lee G. Dunst (+1 212-351-3824, [email protected])
Mark A. Kirsch (+1 212-351-2662, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])
Daniel P. Harris (+1 212-351-2632, [email protected])

Denver
Robert C. Blume (+1 303-298-5758, [email protected])
John D.W. Partridge (+1 303-298-5931, [email protected])
Ryan T. Bergsieker (+1 303-298-5774, [email protected])
Laura M. Sturges (+1 303-298-5929, [email protected])
Patricia Mercedes Herold (+1 303-298-5727, [email protected])

Los Angeles
Debra Wong Yang (+1 213-229-7472, [email protected])
Marcellus McRae (+1 213-229-7675, [email protected])
Michael M. Farhang (+1 213-229-7005, [email protected])
Douglas Fuchs (+1 213-229-7605, [email protected])

San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Thad A. Davis (+1 415-393-8251, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Michael Li-Ming Wong (+1 415-393-8333, [email protected])

Palo Alto
Benjamin Wagner (+1 650-849-5395, [email protected])

London
Patrick Doris (+44 20 7071 4276, [email protected])
Charlie Falconer (+44 20 7071 4270, [email protected])
Sacha Harber-Kelly (+44 20 7071 4205, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Steve Melrose (+44 (0)20 7071 4219, [email protected])

Paris
Benoît Fleury (+33 1 56 43 13 00, [email protected])
Bernard Grinspan (+33 1 56 43 13 00, [email protected])
Jean-Philippe Robé (+33 1 56 43 13 00, [email protected])

Munich
Benno Schwarz (+49 89 189 33-110, [email protected])
Michael Walther (+49 89 189 33-180, [email protected])
Mark Zimmer (+49 89 189 33-130, [email protected])

Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
Oliver D. Welch (+852 2214 3716, [email protected])

Singapore
Brad Roach (+65 6507.3685, [email protected])

São Paulo
Lisa A. Alfaro (+5511 3521-7160, [email protected])
Fernando Almeida (+5511 3521-7093, [email protected])

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

This bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in the following key areas:

1. Competition and Consumers
2. Corporate Governance (including accounts, disclosure and reporting obligations)
3. Cybersecurity and Data Protection
4. Disputes
5. Employment
6. Energy
7. Finance
8. Financial Services Regulatory
9. Force Majeure
10. Government Support Schemes
11. Insolvency
12. International Trade Agreements (private and public)
13. Lockdown and Public Law issues
14. M&A and Private Equity
15. Real Estate
16. UK Tax

Links to various English law alerts prepared by Gibson Dunn during this period are also included in the relevant sections.

As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the UK COVID-19 Taskforce (listed at the end of this bulletin), or one of the taskforce co-leads:

Charles Falconer – London (+44 (0)20 7071 4270, [email protected])
Anna Howell – London (+44 (0)20 7071 4241, [email protected])

1. Competition and Consumers

Mergers and antitrust

Coronavirus has had minimal impact on merger and antitrust decisions in recent weeks. On 19 May 2020, a former director contesting his disqualification by the CMA in relation to price-fixing unsuccessfully argued that the High Court should postpone his trial due to the impact of the COVID-19 outbreak. At the case management conference, the former director’s legal representatives argued that the former director and his witness could not be fairly cross-examined by the CMA via a remote link. It was argued that the witness had an unreliable internet connection and could not travel as her husband was medically vulnerable to the coronavirus. Judge Clive Jones concluded that the trial could be conducted by remote link “without unfairness” and that there was insufficient evidence to authorise a delay.

On 25 May 2020, the European Commission (EC) opened a Phase II investigation in the Air Canada/Transat deal, noting that mergers have long-term structural effects on competition which need to be considered even in times of severe shocks affecting the economy. Executive Vice-President Margrethe Vestager commented that “a return to normal and healthy market conditions must be based on markets that remain competitive”. The airline sector has been significantly impacted by the coronavirus outbreak and the EC was not able to determine whether the parties would continue to compete on every route on which they competed before the crisis. The EC took the preliminary position that Air Canada and Transat will remain the closest actual or potential competitors on the EEA-Canada routes, and this will be considered further in the Phase II investigation.

Consumer protection

On 21 May 2020, the CMA published a second update from its COVID-19 Taskforce, which monitors and responds to consumer issues arising from the pandemic. Since early April 2020, the number of complaints about price rises has fallen. The majority of recent complaints have been about unfair practices in relation to cancellations and refunds, of which three-quarters relate to holidays and airlines.

The CMA previously launched a programme of work to investigate whether companies are breaking the law, prioritising holiday accommodation, weddings and events, and nurseries. The CMA has now opened cases in respect of certain companies in these sectors and further details will be announced in due course. The CMA has added package-holiday providers to the scope of its investigation due to a rising number of consumer complaints.

The EC is also working to protect consumers, and recently coordinated a “sweep” of websites by the Consumer Protection Cooperation Network to identify where EU consumers are subject to content promoting false claims or scam products in the context of the coronavirus. The sweep involved a high-level screening of online platforms and an in-depth analysis of specific advertisements and websites linked to products in high demand because of the coronavirus. Particular attention was focused on offers linked to protective masks and caps, sanitiser gels, testing kits and products with alleged healing effects in relation to the coronavirus. As a result, platforms have removed or blocked millions of misleading advertisements and product listings. Of the 268 websites covered by the in-depth sweep, 206 were flagged for further investigation for potential breaches of EU consumer law.

2. Corporate Governance (including accounts, disclosure and reporting obligations)

Government publishes draft Corporate Insolvency and Governance Bill

The Government has published a draft bill (Bill), which proposes to relax various statutory obligations in relation to wrongful trading, company filings, AGMs and general meetings (amongst other things) to provide companies and other corporate bodies with greater flexibility in the midst of the current crisis. The Bill follows a series of announcements made by the Department for Business, as discussed in our COVID-19 UK Bulletin – 20 May 2020. Key highlights of the Bill are as follows:

Introduction of a company moratorium. Directors of insolvent companies or companies likely to become insolvent can obtain a 20 business day moratorium period which will be overseen by an insolvency practitioner or “monitor”. The moratorium is initiated through filing prescribed papers in court including certain confirmations by directors and the monitor. Directors will retain responsibility for running the business and this period will offer viable businesses a period during which they can restructure or seek new investment free from creditor action.
Restructuring plan. Companies (both solvent and insolvent) will be able to propose a restructuring plan to bind all creditors similar to the existing English law creditor “schemes of arrangement” including requiring approval of creditors and sanction of the court. The plan if approved will allow a company to bind all classes of creditors through a cross-class cram down provision (provided any dissenting class would be no worse off than they would be in an applicable alternative scenario). The approval threshold for a class is 75% of a class by value and more than 50% in number.
Wrongful trading. The Bill also seeks to codify the Government’s proposal to suspend wrongful trading liability with effect from 1 March to 30 June 2020 (or, if later, one month after the measure comes into force). Suspension of the wrongful trading offence should give directors greater comfort to use their best endeavours to continue to trade during the pandemic without the threat of personal liability.
Termination clauses in supply contracts. The Bill introduces a permanent change to the use of termination clauses in supply contracts in order to alleviate the strain cause on companies by suppliers stopping or threatening to stop supplies essential to continued trading. Pursuant to this change, where a company has entered an insolvency or restructuring procedure or obtains a moratorium, the company’s suppliers will not be able to rely on any existing contractual terms to cease supply or adversely vary the contract terms. The customer will be required to pay for any supplies made once the insolvency process has commenced, but will not be required to pay outstanding amounts due for past supplies while it is implementing its restructuring plan. Small company suppliers and suppliers whose businesses would themselves suffer hardship pursuant to the operation of this change, will be exempt from these requirements.
Extensions for public companies filing accounts. The Bill temporarily extends the filing deadlines for public companies to file their annual accounts and reports at Companies House. Where a public company was required to file such accounts between 25 March 2020 and 30 September 2020, the deadline will be extended to the earlier of 30 September 2020 and the date which is 12 months following the end of the relevant accounting reference period.
Filings at Companies House. The Bill empowers the Secretary of State to make regulations to extend the deadlines for certain company filings, including the periods specified in the Companies Act 2006 for filing company accounts, annual confirmation statements, notices of changes of directors, secretaries or PSCs and for registering charges.
Annual General Meetings (AGMs) and General Meetings. Companies (and certain charitable incorporated organisations) which are required to hold AGMs (either by law or as a result of their own constitution) between 26 March and 30 September 2020, may postpone holding that meeting up to 30 September 2020. In addition, any such AGMs or other general meetings held during this period do not need to be held in a particular place and can be held by electronic means, irrespective of whether this is permitted by the company’s constitution. The Secretary of State is also empowered to provide, by regulations, for further temporary extensions of any deadlines for holding an AGM beyond 30 September (and up to 5 April 2021) if circumstances require.

The current Bill is draft legislation and is progressing through parliament, with its second reading tabled for 3 June 2020. The explanatory notes accompanying the Bill indicate that the Government intends to ask Parliament to expedite the parliamentary progress of the Bill. If the Bill has a straightforward journey through Parliament, this could mean that the new restructuring mechanisms outlined above may be available from the start of July 2020.

European Securities and Markets Authority (ESMA) statement in relation to half-yearly financial reporting

ESMA has published a statement in relation to the preparation of half-yearly financial reports during the COVID-19 pandemic. The statement is relevant to listed companies and also pertains to financial reporting in other interim periods where IAS 34 Interim Financial Reporting is ap-plied. According to the statement, issuers should:

Extending publication date for half-yearly financial reports – use with care. Choose whether to make use of additional time allowed by national law to publish half-yearly financial reports, provided that such publication is not unduly delayed. Issuers must continue to comply with their ongoing obligations under the Market Abuse Regulation.
Annual Reports to include appropriate COVID-19 impact risk disclosures. Update information included in their latest annual accounts to ensure that stakeholders are adequately informed of the impacts of COVID-19, in particular in relation to significant uncertainties and risks, going concern, impairment of non-financial assets and presentation in the statement of profit or loss.
General obligation to consider impact of COVID-19 on strategy and operations. Continue to consider the need for entity-specific information on the past and expected future impact of COVID-19 on their strategic orientation and targets, operations and performance as well as any mitigating actions put in place to address the effects of the pandemic.

Management, administrative and supervisory bodies, including audit committees, of issuers and, where applicable, their auditors, should take due consideration of the recommendations included within the statement. ESMA and National Competent Authorities will monitor and supervise the application of the relevant IFRS requirements and other provisions highlighted in the statement.

The Financial Conduct Authority (FCA) publishes its 28th Primary Market Bulletin

The FCA has published its 28th Primary Markets Bulletin (Bulletin). The Bulletin provides guidance for London listed companies in the context of the COVID-19 pandemic, confirms temporary relief to listed companies for half-yearly financial reports, includes a statement on going concern assessments in financial statements and encourages shareholder engagement and the delivery of soft pre-emption rights. Salient points are as follows:

Forbearance on enforcement action – Financial reporting. The FCA will not pursue enforcement action for a technical breach of DTR 4.2.2R, if listed companies publish their half-yearly financial reports one month late, but within four months of the relevant reporting period. This is a policy of forbearance by the FCA as opposed to a rule change and is line with previous guidance issued by the FCA, the Financial Reporting Council (FRC) and the Prudential Regulation Authority (PRA) and ESMA’s public statement on financial reporting deadlines (see our COVID-19 UK Bulletin – 8 April 2020 for summaries of the previous guidance). The FCA will review the application of this forbearance during the pandemic and will announce how the policy will end in a fair, orderly and transparent way at the appropriate time.
Going concern assessments. Auditors and listed companies are urged to continue to be clear and transparent about the impacts of the current pandemic in their financial statements, particularly with regard to “going concern” assessments and any remarks that auditors may need to include in their opinion when reviewing the going concern assessment. Market participants, including intermediaries, should not draw unduly adverse inferences from these disclosures, nor from listed companies changing their financial calendars to make use of the extra time allowed by the FCA to publish annual and half-yearly financial reports.
Shareholder engagement and virtual general meetings. Listed companies are encouraged to continue to engage with shareholders and to be as “open as possible” with shareholders about the implications of COVID-19 on their business. This may include formal disclosures to the market through financial reports and trading updates and, in the absence of physical general meetings, allowing shareholders to pose questions to management and exercise their voting rights effectively. Further, the FCA supports listed companies holding virtual general meetings as a means of gaining shareholder approval where the company’s articles of association authorise it to do so.
Capital raising. Further to the FCA’s previous statement on 8 April 2020 (see our COVID-19 UK Bulletin – 16 April 2020 for a summary), the FCA continues to encourage issuers to contribute to the delivery of “soft pre-emption rights” by exercising their right to be consulted on, and to direct, bookrunners’ allocation policies.

The Bulletin also provides a link to the FCA’s latest Market Watch newsletter, Market Watch 63. This contains commentary on market conduct and discipline in the context of COVID-19, including, among other matters, the appropriate treatment of inside information, information on short selling and identifying and managing conflicts of interest by market participants that may arise in capital raisings. For a full summary of Market Watch 63 please refer to the Financial Services Regulatory section of this Bulletin. A copy of Market Watch 63 can be accessed here.

Financial Reporting Council (FRC) issues updated guidance on corporate governance and reporting to include considerations relating to exceptional items and alternative performance measures (APMs)

The FRC has updated its guidance for companies on corporate governance and reporting during the COVID-19 pandemic to explain how they should report APMs.

Exceptional items. In relation to exceptional items, companies will need to consider whether additional items of income and expenditure arising from the COVID-19 crisis should be separately disclosed in accordance with their existing policies for ‘exceptional’ or similar items. The materiality of items such as restructuring costs, impairment charges, incremental health and safety costs, and the costs of onerous contracts will need to be considered by each company. The nature and amounts should be presented in a way helpful to readers; for example, by giving them all in a single note or linking them with cross-references.

Companies should be even-handed in identifying gains as well as losses; not describe amounts as non-recurring or one-off if they are also expected to arise in future periods; not disclose costs as exceptional solely because of a reduction in, or elimination of, the related revenue streams due to the COVID-19 crisis; and not identify incremental costs as exceptional if they result in incremental revenue not also described as exceptional. In circumstances where the effects of COVID-19 are pervasive and hard to quantify, it is helpful for companies to provide narrative disclosures explaining the nature of the items and uncertainties around them. However, splitting discrete items on an arbitrary basis in an attempt to quantify the portion relating to COVID-19 is unlikely to provide reliable information. The FRC discourages companies from disclosing these in their accounts.

Changes to APMs. In relation to APMs, the FRC observes that APMs should be presented consistently year-on-year, but that there may be circumstances where the COVID-19 crisis has, for instance, resulted in a company’s making changes to its operations or business model which may result in changes to the APMs used to run and monitor the business. In these circumstances, readers should be informed of any such changes and provided with an explanation of why they provide reliable and more relevant information.

APMs which attempt to provide a measure of normalised or pro-forma results, excluding the estimated effect of the COVID-19 crisis, are likely to be highly subjective and potentially unreliable. In addition to the subjectivity arising around which costs to exclude, in most cases COVID-19 is likely to have resulted in reductions in revenues. Any adjustment for lost revenues would be hypothetical and not reflected reliably in an APM. The FRC does not expect companies to provide these measures (e.g. by including them in a “third-column” income statement presentation).

The FRC previously updated its guidance for companies in early May, please see our COVID-19 UK Bulletin – 20 May 2020 for a summary of this. The updated guidance is available here.

3. Cybersecurity and Data Protection

No update to our COVID-19 UK Bulletin – 20 May 2020.

4. Disputes

Operation of the courts – general update

The courts are continuing to avoid physical hearings where possible, having acted swiftly when the pandemic broke to improve IT systems and increase capacity for the operation of telephonic and video hearings, and issuing detailed guidance on their use. HMCTS has issued an indicative rollout plan to accompany the introduction of the secure Kinly Cloud Video Platform (CVP) to the Crown Courts and magistrates’ courts as well as to the civil and family courts, which will assist with the greater use of video hearings.

On 26 May 2020 it was announced that the Rolls Building will offer physical hearings from 1 June 2020, albeit at reduced capacity of around one third of the usual number of courtroom hearings, with a total limit of 13 courts able to operate across the Chancery, Admiralty and Commercial Court and Technology and Construction Court. The update sets out the following four types that will be held, noting that will be for the judge to decide which sort of hearing or combination of forms of hearing is required in each case: (i) fully remote hearings with the judge at home; (ii) partly remote hearings with the judge based in an office or court in the Rolls Building; (iii) hybrid hearings with some participants based remotely and the judge and other participants in court; and (iv) normal physical hearings with all participants attending court in person. Whilst the majority of hearings should continue to take place remotely, parties are encouraged to agree the proposed form of hearing in order to enquire with the court whether it is possible and necessary to accommodate such a hearing.

Commercial dispute resolution

The British Institute of International and Comparative Law (BIICL) published a second Concept Note (see previous Concept Note 1) on the effect of the 2020 pandemic on commercial contracts at the private law level, following its recent promotion of its “breathing space” project. The Concept Note focuses on the need to mitigate large scale damage caused by parties to contractual disputes triggering default clauses and excusing themselves from performance as a result of the pandemic—in order to limit the risk of “a deluge of litigation and arbitration placing a strain on the system of international dispute resolution”. Concept Note 2 focuses on two aspects: (i) the use of a wide range of dispute resolution mechanisms to encourage parties to negotiate solutions, alongside fair and expeditious handling by the courts of disputes that cannot be settled, to evade cumbersome backlogs; and (ii) the application of existing legal principles, whilst recognising that these will be applied in unique circumstances dependent on specific facts. The premise behind the “breathing space” project is to encourage commercial, equitable solutions to disputes arising out of or facing obstacles as a result of the pandemic, “and to avoid a deluge of disputes impeding [global] recovery”.

Arbitration

For the second time, the UNCITRAL tribunal have refused a request for suspension of proceedings by Bolivia based on global circumstances resulting from the COVID-19 pandemic; in this instance, in the Glencore v. Bolivia case. An extension of a filing deadline was granted instead. A similar request had been rejected by the tribunal in April 2020 in the case of Orlandini and Compania Minera Orlandini v. Bolivia. The tribunal noted its duty to avoid unnecessary delay and expense and to promote fairness and efficiency in proceedings, whilst nonetheless being understanding of the effects of the pandemic on the parties and proceedings.

5. Employment

No update to our COVID-19 UK Bulletin – 20 May 2020.

6. Energy

Impact of COVID-19 on transactions and projects

The effects of COVID-19 continue to take their toll on transactions, sites and projects globally. Some specific examples of note include:-

Carlyle- and CVC-backed Neptune Energy has walked away from buying US$250 million worth of UK and North Sea assets from Italy’s Edison (who is in turn being acquired by Mediterranean-focused player Energean Oil and Gas). Neptune will pay a US$5 million break fee. Energean and Edison are in the process of restructuring their deal with a view towards Energean acquiring the UK assets but potentially excluding the Norwegian assets.
BP continues its discussions with Golar LNG, after BP called a force majeure event in April 2020 under the two parties’ FLNG contract for the Greater Tortue Ahmeyim LNG project offshore Senegal and Mauritania.
The South Korean refiner SK Energy has warned of diminishing capacity in their storage facilities which are used both by SK Energy and by Middle Eastern NOCs.
Some US LNG projects are being put on hold and plant use has fallen by a third as the price of gas in Asia, the biggest market for LNG, is now only around 40 cents higher than the price in the US, rendering many sales no longer profitable given transportation costs and other overheads.
Subsea 7, an engineering firm operating in the North Sea, announced it would be letting go of a quarter of its 12,000 strong global workforce, with hundreds of redundancies believed to be planned for the UK.
The Chevron-operated Tengiz field in Kazakhstan has almost 950 confirmed COVID-19 cases, 13% of the cases in the country as a whole, and local authorities are threatening closure of the plant if additional measures are not brought in to prevent the spread.
The Ghana Health Service has confirmed that over a quarter of the 200 employees on a vessel in the Tullow-operated Jubilee field offshore Ghana have contracted COVID-19.

7. Finance

No update to our COVID-19 UK Bulletin – 20 May 2020.

8. Financial Services Regulatory

Financial services regulatory client alert

Financial Conduct Authority outlines expectations for managing enhanced market conduct risks in the context of the pandemic

9. Force Majeure

No update to our COVID-19 UK Bulletin – 20 May 2020.

10. Government Support Schemes

Coronavirus loans schemes

The Government announced that as of 24 May 2020:

Approximately £8.15 billion had been approved for lending to 43,045 businesses under the Coronavirus Business Interruption Loan Scheme from 84,607 applications.
Approximately £800 million had been approved for lending to 154 businesses under the Coronavirus Large Business Interruption Loan Scheme from 502 applications.
Approximately £18.5 billion had been approved for lending to 608,069 businesses under the Bounce Back Loan Scheme from 769,137 applications.

The Government also announced that, as at 27 May 2020, approximately 419 applications had been made to access funding through the Future Fund for innovative small high-growth companies.

Coronavirus Job Retention Scheme (CJRS)

The Government announced changes to the CJRS on 29 May 2020 such that, from 1 July 2020, employers can bring back to work employees that have previously been furloughed for any amount of time and any shift pattern, while still being able to claim a CJRS grant for their normal hours not worked. The scheme is intended to close to new entrants from 30 June 2020 and so employees will need to be placed on furlough on or prior to 10 June 2020 to be eligible. From August 2020, the level of Government grant provided through the CJRS will be slowly tapered to reflect that people will be returning to work, with businesses then being asked to contribute more.

Self-Employment Income Support Scheme

The Self-Employment Income Support Scheme for self-employed workers opened on 13 May 2020 ahead of schedule but, on 29 May 2020, the Government announced that the scheme would extended to August 2020. The scheme allows self-employed workers to claim a taxable grant of 80% of their average monthly trading profits, paid out in a single instalment covering 3 months, and capped at £6,750 for the second and final grant (the first grant was capped at £7,500).

Discretionary Grant Fund

The Government has announced the launch of the Discretionary Grant Fund to support small and micro businesses that are not eligible for other grant schemes. Grants of £25,000, £10,000 or any amount under £10,000 available to small and micro businesses based in England with fewer than 50 employees, with fixed building costs and that have been adversely impacted by the coronavirus pandemic. Local authorities in England are administering the fund and applications are to be made directly to those local authorities.

11. Insolvency

No update to our COVID-19 UK Bulletin – 20 May 2020.

12. International Trade Agreements (private and public)

No update to our COVID-19 UK Bulletin – 20 May 2020.

13. Lockdown and Public Law Issues

Lockdown easing

Following an announcement by Boris Johnson on 28 May 2020, regulations were announced to amend the existing lockdown restrictions in place since 26 March 2020 even further. The amendment, The Health Protection (Coronavirus, Restrictions) (England) (Amendment) (No. 3) Regulations 2020, came into force on 1 June 2020 and makes provisions for: replacing the prohibition on movement outside one’s home without a reasonable excuse with a prohibition on staying overnight in a place other than where a person lives; permitting gatherings of up to six people outdoors; re-opening outdoor markets, vehicle showrooms, and certain outdoor sports amenities such as water sports, golf courses, and stables; and permitting elite athletes to return to training and re-opening related facilities with an eye towards restarting live televised sport. The amendment also extends the Government’s mandatory review of lockdown measures to once every 28 days, with the next review due by 25 June 2020. The Prime Minister separately made provision for some pupils to return to schools starting 1 June 2020 and signalled the Government’s intention to reopen other non-essential retail on 15 June 2020.

Virtual Parliament

The House of Commons has been recalled on 2 June 2020 as the temporary Standing Orders on hybrid proceedings, including remote voting, have lapsed. The Speaker has deemed the traditional in-person voting method to not meet social distancing standards and the House must decide on a new method if parliamentary business is to proceed.

14. M&A and Private Equity

Reports have emerged that many private equity backed companies operating in the EU continue to struggle to access state-backed financial support schemes, such as the coronavirus business interruption loans scheme in the UK. This is due to EU state aid rules that prevent member states from providing support to any entity which is considered to be an “undertaking in difficulty” (i.e. businesses whose accumulated losses exceed 50 per cent of its share capital). Due to the funding structures utilised by private equity firms when acquiring companies, which leverage shareholder and third party debt and minimise share capital, many operating companies fail the “undertaking in difficulty” test on a technical basis despite having been considered to be highly creditworthy prior to the COVID-19 crisis. In addition to private equity and venture backed companies, high-growth businesses, which typically operate at a loss in order to drive growth, have been unable to access governmental support in the EU for the same reason. Industry bodies, such as the British Private Equity and Venture Capital Association and Invest Europe, have called on the EU Commission to offer some flexibility to member states so that support can be made accessible to such struggling companies.

15. Real Estate

Government measures

The Government has announced the easing of lockdown, with outdoor markets and car showrooms opening on 1 June and the rest of non-essential shops opening on 15 June. The easing is, however, “contingent on progress in the fight against coronavirus”, and smaller shops have warned that the cost of preparing their premises to comply with social distancing may not be financially viable in any case.

The Government has set up a working group, consisting of a mix of landlords and retail tenants, to produce a code of practice on payment of rents. The code intends to provide clarity and set out a way to cooperate, particularly important as Vivienne King, CEO of Revo, a retail landlord and member of the working group, suspects that June quarter day will see even lower rent rates paid than seen on March quarter date, reported on here. The group will produce a temporary, non-binding code to apply across the UK, and is aiming for it to be released by the June quarter date. The Government may look into making the code mandatory. Kate Nicholls, CEO of UK Hospitality, which represents many large hospitality tenants and is another member of the group, has commented that “this code could be pivotal in protecting communities and high streets from mass closures and job losses”.

The Corporate Insolvency and Governance Bill, last reported on here, was introduced to Parliament on 20 May 2020 restricting the use of certain landlord’s remedies when collecting rent. Importantly, the draft currently prohibits a creditor from presenting a winding-up petition unless the creditor has reasonable grounds to believe that (a) the business has not been financially effected by COVID-19, or (b) the business would not have been able to pay irrespective of those effects. “Financial effect” is defined as the company’s financial position worsening as a result of COVID-19 or related reasons.

Market activity

Pret A Manger is calling in consultants for an overhaul of the business, but is also planning to open over 300 stores with the lockdown easing.

UK REIT M&A is back. Market participants are taking advantage of historically low REIT share prices to acquire significant positions. Recent examples include Apollo making a recommended cash offer for Atlantic Leaf, Capco’s acquisition of a c 26% stake in Shaftesbury and Brookfield buying a c 7% stake in British Land.

16. UK Tax

Updated HMRC guidance relating to self-assessment payments on account

HMRC has published new guidance on deferring the self-assessment second payment on account for the 2019–20 tax year due to the impact of COVID-19. HMRC has confirmed that it will not charge interest or penalties on any amount of the deferred payment on account, provided it is paid on or before 31 January 2021. Those opting to defer their payment on account do not need to inform HMRC. Those who normally make payment on account by direct debit should cancel their direct debit as soon as possible to avoid the payment being taken from their account automatically. See here for further details.

HMRC publishes consultation on the taxation of COVID-19 support payments

HMRC have launched a consultation on draft legislation to introduce rules on the taxation of COVID-19 business support grants. The legislation will also give HMRC powers to recover payments to which recipients were not entitled to under the Self-Employment Income Support Scheme or the Coronavirus Job Retention Scheme (CJRS) payment or, where a CJRS payment has not been used to pay employees, make pensions contributions, pay PAYE or National Insurance contributions. HMRC will be able to do this by raising income tax assessments or requiring taxpayers to submit a self-assessment tax return. HMRC will also be able to charge a penalty in cases of deliberate non-compliance. For further details, see here.

Proposals to amend loan charge provisions

In light of COVID-19 the Government has proposed amendments to the Finance Bill 2020 which are intended (i) to enable HMRC to extend the election deadline (currently set at 1 October 2020) for a group of specified individuals, rather than on a case-by-case basis; and (ii) to enable HMRC to extend, by regulations, the interest-free period during which taxpayers liable to the loan charge may discharge their income tax and capital gains tax liabilities for the tax year 2018-19 (currently due to expire on 30 September 2020).

Scotland and Wales ban tax haven companies from COVID-10 bailouts

Schedule 4 to the Coronavirus (Scotland) (No. 2) Bill “other measures in response to coronavirus” has been amended during its passage through the Scottish Parliament to prevent coronavirus support grants being paid to companies based in tax havens. The definition of “tax haven” is based on the EU list of non-cooperative tax jurisdictions (the EU “blacklist”). The amendments require Scottish ministers, before providing a coronavirus-related grant, to “take steps to satisfy themselves” that the recipient: (i) is not based in a tax haven; (ii) is not the subsidiary of a company based in a tax haven; (iii) does not have a subsidiary based in a tax haven; (iv) is not party to an arrangement under which any of its profits are subject to the tax regime of a tax haven. The Welsh Government has also announced that “businesses owned by a company or individual living in a 100% tax haven will not be eligible for financial support from the Welsh Government’s economic resilience fund”. For further details see here.

OECD’s report on tax administration

The OECD Forum on Tax Administration, in collaboration with the Intra-European Organisation of Tax Administrations and the Inter-American Center of Tax Administrations, has published a report “Tax Administration Responses to COVID-19: Recovery Period Planning”, outlining how tax administrations can prepare for the potentially prolonged, uncertain and complex recovery period from the COVID-19 pandemic. See here for further details.

COVID-19 UK Taskforce Leaders

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact your usual contact or any member of the Firm’s (COVID-19) UK Taskforce:

Areas	Task Force Leaders
Competition and Consumers	Ali Nikpay – [email protected]
Corporate Governance	Selina Sagayam – [email protected]
Cybersecurity and Data Protection	James Cox – [email protected]
Disputes	Charlie Falconer – [email protected]
Employment	James Cox – [email protected]
Energy	Anna Howell – [email protected]
Finance	Greg Campbell – [email protected]
Financial Regulatory	Michelle Kirschner – [email protected]
Force Majeure	Patrick Doris – [email protected]
Government Support Schemes	Amar Madhani – [email protected]
Insolvency	Greg Campbell – [email protected]
International Trade Agreements	Patrick Doris – [email protected]
Lockdown and Public Law issues	Patrick Doris – [email protected]
M&A	Jeremy Kenley – [email protected]
Private Equity	James Howe – [email protected]
Real Estate	Alan Samson – [email protected]
UK Tax	Sandy Bhogal – [email protected]

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

GLOBAL OVERVIEW

New York State Legislature Passes Relief Package for Renters and Property Owners

On Thursday, May 28, 2020, the New York State Legislature fast-tracked a set of bills providing accommodations for renters and property owners affected by COVID-19. The bills have been passed by both the Assembly and Senate. There is no news yet on when or whether Governor Cuomo plans to sign the bills.

The Assembly issued a press release announcing passage of the bills. The bills related to housing are summarized as follows. The only bills that appear to apply to commercial properties are possibly: (1) the two bills relating to property taxes, S8138B and S8122B; and (2) the bill relating to utilities, S8133A, to the extent “any residential customer” includes commercial multifamily operators who submeter utilities to residential users.
Read more

UK government announces important changes to the Coronavirus Job Retention Scheme and Self-Employment Income Support Scheme

The UK government announced the closure of the Coronavirus Job Retention Scheme from 1 July 2020 to those not previously furloughed on or before 10 June 2020, along with other updates in relation to next and final stages of the Coronavirus Job Retention Scheme and Self-Employment Income Support Scheme.

On 29 May 2020, the Chancellor announced how the Coronavirus Job Retention Scheme and Self-Employment Income Support Scheme will operate over the next five months and eventually terminate on 31 October 2020. Further guidance on the flexible furlough and how employers should calculate claims will be published on 12 June and we will accordingly publish further information.
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S.8419, Kavanagh / A.10522, Cymbrowitz: This legislation will enact the “Emergency Rent Relief Act of 2020” to establish an interim residential rent relief program for low-income tenants. The program will issue a subsidy for tenants who were rent burdened prior to the COVID-19 pandemic or are paying more than 30 percent of their income toward rent and are now experiencing an even greater rent burden due to a loss of income. The program will be administered by the commissioner for housing and community renewal, who in turn is authorized to delegate administration in part “to any state, county, city, town, or public housing agency or any non-profit organization.” The commissioner is also charged with establishing preferences to prioritize households with the greatest economic need. The bill is effective immediately and expires on July 31, 2021.
S.8192B, Hoylman / A.10290B, Dinowitz: This legislation will prohibit the eviction for nonpayment of rent of residential tenants who have suffered financial hardship and were in arrears on rent while New York on PAUSE imposed restrictions in their county. The tenant would remain liable for the rent owed. The bill does not define financial hardship. The bill is effective immediately and has no expiration date.
S.8243C, Kavanagh / A.10351B, Rozic: This bill will require New York State regulated banking institutions to grant 180 days of mortgage forbearance, with the option for an additional 180 days, on a residential mortgage on their primary residence to any mortgagor who can demonstrate financial hardship as a result of the COVID-19 pandemic. The bill applies to New York banking organizations as defined by the Banking Law, and New York mortgage servicers subject to supervision by the Department of Financial Services. The bill does not define financial hardship. The bill is effective immediately and permits forbearances to be back-dated to March 7, 2020; it has no expiration date.
S.8138B, Martinez/ A.10252A, Stern: This legislation will permit municipalities to defer certain property taxes during the COVID-19 State of Emergency and will also permit installment payments to be determined by the local legislative body. No additional interest or penalties will accrue during such deferment. The bill is effective immediately and has no expiration date.
S.8122B, Comrie / A.10241A, Hyndman: This legislation will extend the application and renewal deadline to file for real property tax exemption or abatement programs until July 15, 2020 due to the COVID-19 declared State of Emergency. The bill is effective immediately and has no expiration date.
S.8113A, Parker / A.10521, Mosley: This legislation will prohibit a utility corporation or municipality from terminating or disconnecting services to any residential customer for the nonpayment of an overdue charge for the duration of the COVID-19 State of Emergency. This moratorium will last 180 days from the expiration of the COVID-19 State of Emergency for those residential customers that have experienced a change in financial circumstances, and the utility corporation or municipality must offer such residential customers the right to enter into, or restructure, a deferred payment agreement without the requirement of a down payment, late fees or penalties. The bill is effective immediately and has no expiration date.

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Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Coronavirus (COVID-19) Response Team, or the following authors:

Mylan Denerstein – New York (+1 212-351-3850, [email protected])
James L. Hallowell – New York (+1 212-351-3804, [email protected])
Andrew A. Lance – New York (:+1 212-351-3871, [email protected])
Emil N. Nachman – New York (+1 212-351-6367, [email protected])

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

The first webinar will include:

an overview of the current state of play of the Brexit negotiations;
a conversation with Charlie Falconer QC on the general legal implications of a “no deal”and other outcomes

The second webinar will feature a conversation with Michelle Kirschner and Ali Nikpay focusing on the financial services and competition implications of a range of outcomes.

PANELISTS:

Update on Intellectual Property-Related Issues in the Response to COVID-19

COVID-19 UK Weekly Webinar – June 15, 2020

Final Statement of Reasons

Responses to Comments Submitted

Federal Reserve Modifies Main Street Lending Programs to Expand Eligibility and Attractiveness

Practical advice for company directors facing a liquidity crunch

President Signs Paycheck Protection Program Flexibility Act

The CARES Act, the Higher Education Emergency Relief Fund, and Guidance for Schools to Limit Litigation Exposure

I. The CARES Act and the Higher Education Emergency Relief Fund

II. A Fertile Opportunity for False Claims Act Lawsuits?

III. Ensuring Compliance and Avoiding False Claims Act Liability

What To Know About Short-Seller Risks During Pandemic

COVID-19 United Kingdom Weekly Bulletin – June 3, 2020

KEY TAKEAWAYS OF THE COMPLIANCE PROGRAM UPDATE

1. Competition and Consumers

2. Corporate Governance (including accounts, disclosure and reporting obligations)

3. Cybersecurity and Data Protection

4. Disputes

5. Employment

6. Energy

7. Finance

8. Financial Services Regulatory

9. Force Majeure

10. Government Support Schemes

11. Insolvency

12. International Trade Agreements (private and public)

13. Lockdown and Public Law Issues

14. M&A and Private Equity

15. Real Estate

16. UK Tax

COVID-19 UK Taskforce Leaders

New York State Legislature Passes Relief Package for Renters and Property Owners

UK government announces important changes to the Coronavirus Job Retention Scheme and Self-Employment Income Support Scheme