Publications Archives

The UK government announces 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 (“CJRS”) 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.

Closure of CJRS to new entrants

A key takeaway from the Chancellor’s announcement is that, from 1 July onwards, employers will only be able to furlough employees that they have previously furloughed for a full three-week period prior to 30 June. Accordingly, any employer who has not already done so but wishes to place an employee on the CJRS must do so by 10 June 2020. Employers will have until 31 July to make any claims in respect of the period to 30 June.

Further, from 1 July claim periods will no longer be able to overlap months: employers who previously had submitted claims which had periods which overlapped calendar months will no longer be able to do this going forwards.

Employer costs going forwards

The level of grant available to employers under CJRS will be slowly tapered to reflect that the fact that people will be returning to work from August 2020.

	July	August	September	October
*Responsibility for Employer NICs and pensions contributions*	Government	Employer	Employer	Employer
*Responsibility for wages[1]*	Government (80% up to £2,500) Employer – N/A	Government (80% up to £2,500) Employer – N/A	Government (70% up to £2,187.50) Employer (10% up to £312.50)	Government (60% up to £1,875) Employer (20% up to £625)
*Employee Receives[2]*	80% up to £2,500 per month	80% up to £2,500 per month	80% up to £2,500 per month	80% up to £2,500 per month

Flexible Furlough in practice

What does ‘flexible furlough’ mean?

At present, employees on furlough are not permitted to do any work for their employer’s business. However, from 1 July 2020 businesses will be given the flexibility to bring furloughed employees back to work part-time. Employers can agree with their employees the hours and shifts their employees will work on their return.

Employers can still claim under the CJRS for the hours the employee is not working. Employees can still continue on full furlough and there is no requirement to provide employees with work, if the employer is not in a position to do so.

What should an employer pay an employee on flexible furlough for the hours they are working?

Employers will be responsible for paying full wages in respect of those hours when the employee is working but will be able to claim under the scheme in respect of that part of their normal working hours on which the employee is not working. Employers will need to submit information on the usual versus actual hours worked by an employee in a claim period. The cap will be proportional to the hours not worked.

Further detailed guidance on how to calculate claims following the introduction of flexible furlough will be released on 12 June.

How should flexible furlough be agreed?

Employers will have to agree any new flexible furloughing arrangement with their employees and confirm that agreement in writing.

A well drafted furlough agreement should currently prohibit employees from carrying out any work for the employer during their furlough period. Hence, it may be necessary for any furlough agreement to be amended by a side letter, or for a fresh furlough agreement to be entered into, which permits an employee to work during the furlough period commencing 1 July.

Amendments to the Self-Employment Income Support Scheme

The self-employed grant, which we reported on previously, is being extended, with applications opening in August for a second and final grant. There will be parity with the reducing furlough scheme, paying 70% (and not 80%) of average earnings in a single instalment covering three months’ worth of profit, and capped at £6,570 in total. The eligibility criteria remains the same for the second grant, as it did for the first with individuals needing to confirm that their business has been adversely affected by COVID-19.

________________________

[1] Capped at 80% of wages, or employers are able to choose to top up employee wages above the CJRS grant at their own expense if they wish.

[2] As above.

Gibson Dunn attorneys regularly counsel clients on the compliance issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please contact the Gibson Dunn attorney with whom you work in the Employment Group, or the following members of the UK employment team:

James Cox – London (+44 (0)20 7071 4250, [email protected])
Sarika Rabheru – London (+44 (0) 20 7071 4267, [email protected])
Heather Gibbons – London (+44 (0)20 7071 4127, [email protected])
Georgia Derbyshire – London (+44 (0)20 7071 4013, [email protected])
Charlotte Fuscone – London (+44 (0)20 7071 4036, [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.

Federal Reserve Releases Application Materials and Guidance for the Main Street Lending Programs

On May 27, 2020, the Federal Reserve Bank of Boston released additional information on 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,” together with the MSNLF and MSELF, the “Main Street Programs”).

The Federal Reserve Bank of Boston released both application documents and high-level guidance. The release of these documents comes on the heels of Secretary Mnuchin’s recent testimony before the Senate Banking Committee in which he said the Main Street Programs will launch by the end of May and money will start flowing to applicants soon thereafter. Most recently, Federal Reserve Chairman Powell said he expects that Main Street Program loans will be issued in the coming days.

This client alert first discusses the key new guidance on the Main Street Programs. It then provides a high-level summary of the new documents released.
Read more

Decided June 1, 2020

GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, No. 18-1048

Today, the Supreme Court unanimously held that the New York Convention permits the use of state-law equitable estoppel doctrines to compel arbitration between parties that did not sign the arbitration agreement.

Background:
ThyssenKrupp entered into a series of contracts with F.L. Industries to buy three cold rolling mills for use in the manufacture of steel products. Each contract contained a clause calling for arbitration of all “disputes arising between both parties” to be arbitrated in Germany. The contracts defined “Parties” to include the “Buyer” (ThyssenKrupp) and “Seller” (F.L. Industries). They further defined “Seller” and “Parties” to include subcontractors.

F.L. Industries subcontracted with GE Energy to supply motors for the mills. The motors allegedly failed, and Outokumpu (who purchased the manufacturing plant from ThyssenKrupp) sued GE Energy in Alabama state court. After removing the case to federal court, GE Energy moved to compel arbitration in Germany under the arbitration agreement in the ThyssenKrupp-F.L. Industries contracts and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). The district court compelled arbitration, ruling that the contracts were signed, written agreements between ThyssenKrupp and F.L. Industries and that GE Energy, as a subcontractor, was not excluded from the arbitration provision.

The Eleventh Circuit reversed, holding that because the New York Convention applied only to parties that actually sign the arbitration agreement the Convention precluded the use of equitable estoppel doctrines to compel arbitration among parties that did not sign the arbitration agreement.

Issue:
Whether the New York Convention permits the use of equitable estoppel to compel arbitration between parties that did not actually sign the arbitration agreement.

Court’s Holding:
Yes. The New York Convention does not preclude parties who did not sign an arbitration agreement from seeking to compel arbitration under state-law equitable estoppel doctrines.

“[T]he Convention requires courts to rely on domestic law to fill the gaps; it does not set out a comprehensive regime that displaces domestic law.”

Justice Thomas, writing for the unanimous Court

What It Means:

The Court’s analysis focused on the text of the New York Convention, a 1958 treaty designed to facilitate the recognition and enforcement of international arbitration agreements. Because the New York Convention is silent on whether parties who did not sign an arbitration agreement can compel arbitration, the Court concluded that nothing in the Convention’s text prohibits the application of equitable estoppel. The Court’s decision therefore aligned the enforcement of international arbitration agreements under the New York Convention with the enforcement of domestic arbitration agreements under the Federal Arbitration Act, which permits parties to use equitable estoppel and other state-law doctrines when seeking to enforce arbitration agreements.
The Court’s decision is consistent with the Court’s broader trend of favoring the resolution of disputes through arbitration. The Court also noted that its decision is consistent with the weight of authority from other countries that have signed the New York Convention and that permit enforcement of arbitration agreements by nonsignatories.
The Court did not elaborate on the conditions that must be satisfied to compel arbitration under equitable estoppel, or the body of law governing those conditions. Instead, the Court remanded the case for the lower courts to determine those issues.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho
+1 214.698.3233
[email protected]

Mark A. Perry
+1 202.887.3667
[email protected]

Matthew D. McGill
+1 202.887.3680
[email protected]

Related Practices: International Arbitration and Enforcement

Robert L. Weigel
+1 212.351.3845
[email protected]

Rahim Moloo
+1 212.351.2413
[email protected]

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

Decided June 1, 2020

Financial Oversight and Management Board for Puerto Rico v. Aurelius Investment, LLC, Nos. 18-1334, 18-1475, 18-1496, 18-1514, 18-1521

Today, the Supreme Court held that the appointments of the members of the Financial Oversight and Management Board for Puerto Rico did not violate the Appointments Clause of the United States Constitution.

Background:
The Appointments Clause of the United States Constitution enables the president to appoint principal “Officers of the United States” only with the “Advice and Consent of the Senate.” U.S. Const. art. II, § 2, cl. 2. But in the Puerto Rico Oversight, Management, and Economic Stability Act, Congress allowed the President to appoint members of the Financial Oversight and Management Board for Puerto Rico without Senate confirmation. The statute, enacted in 2016 to address Puerto Rico’s fiscal emergency, empowered Board members to initiate and oversee a massive restructuring of Puerto Rico’s public debt. The statute created the Board within the government of Puerto Rico pursuant to Congress’s Article IV power to “make all needful Rules and Regulations respecting the Territory … belonging to the United States,” U.S. Const. art. IV, § 3, cl. 2, and provided that the Board was not part of the federal government.

Creditors moved to dismiss certain restructuring proceedings on the ground that the Board’s members were unconstitutionally appointed. The district court denied the motions, but the First Circuit reversed, holding that Board members are Officers of the United States because they exercise significant authority traced exclusively to federal law.

Issue:
Did the appointments of the members of the Financial Oversight and Management Board for Puerto Rico violate the Appointments Clause?

Court’s Holding:
No. Because the Board members’ statutory duties are primarily local in nature and exercised under the Territories Clause, they are not “Officers of the United States.”

The Appointments Clause “has never been understood to cover those whose powers and duties are primarily local in nature and derive from the [Territories Clause].”

Justice Breyer, writing for the Court

Gibson Dunn Represented Respondents/Cross-Petitioners: Aurelius Investment, LLC and Assured Guaranty Corp.

What It Means:

The Court first concluded that the Appointments Clause applies to all Officers of the United States, including those who exercise power in or related to Puerto Rico. The Appointments Clause, the Court observed, contains “no Article IV exception.”
The Court ultimately determined, however, that Board members are not Officers of the United States because they exercise “primarily local powers and duties” under Article IV. The Court emphasized the long history of territorial officials with primarily local responsibilities being selected via methods that would not satisfy the Appointments Clause’s requirements.
The Court acknowledged that the Board has “broad investigatory powers,” but determined that these powers are backed by Puerto Rican law, not federal law. The Court also acknowledged that some Board actions “may have nationwide consequences,” but reasoned that the same is true of many actions taken by Governors or other local officials. In short, the Court summarized, the Board possesses “considerable power,” but that power primarily concerns local matters.
The decision leaves many questions unanswered about the degree and kind of federal responsibility necessary to make a nominally “territorial” official an Officer of the United States. It also is uncertain how courts will determine whether the duties exercised by an official with both federal and local responsibilities are “primarily local.”

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho
+1 214.698.3233
[email protected]

Mark A. Perry
+1 202.887.3667
[email protected]

Theodore B. Olson
+1 202.955.8668
[email protected]

Matthew D. McGill
+1 202.887.3680
[email protected]

Helgi C. Walker
+1 202.887.3599
[email protected]

Lucas C. Townsend
+1 202.887.3731
[email protected]

Decided June 1, 2020

Thole v. U.S. Bank, N.A., No. 17-1712

Today, the Supreme Court held 5-4 that participants in defined-benefit pension plans lack Article III standing to sue under ERISA for alleged breach of fiduciary duties because, whether or not they prevail in the action, they will receive the same payments for the rest of their lives.

Background:
Section 502(a)(2) and (a)(3) of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1132(a)(2) and (a)(3), authorize civil actions for breach of fiduciary duty with respect to employee pension benefit plans. Petitioners are participants in U.S. Bank’s defined-benefit pension plan, which guarantees lifetime fixed periodic payments. Although petitioners have received all payments to which they are entitled, they sued U.S. Bank for breach of fiduciary duty, alleging that plan fiduciaries did not appropriately manage the plan’s assets, causing the assets to fall below the minimum funding level that ERISA requires, and that investment of plan assets in mutual funds offered by a U.S. Bank subsidiary caused the plan to pay higher investment fees than it would have paid for other, similar mutual funds. U.S. Bank moved to dismiss, arguing that petitioners lacked Article III standing because they did not suffer an injury-in-fact. The district court granted the motion. The Eighth Circuit affirmed, but not on Article III grounds. The Court held that ERISA does not permit defined-benefit plan participants to sue for alleged breach of fiduciary duty when they have received all benefits to which they are entitled under the plan.

Issues:
Whether an ERISA defined-benefit plan participant or beneficiary can demonstrate Article III standing to bring claims alleging breach of fiduciary duty under ERISA Section 502(a)(2) or (a)(3) when the participants and beneficiaries have received all benefits to which they are contractually entitled.

Court’s Holding:
No. A participant or beneficiary in a defined-benefit ERISA plan who has received all vested benefits—and who has not shown a “substantially increased risk that the plan and employer would both fail”—cannot show the requisite injury-in-fact for Article III standing to sue for alleged breach of fiduciary duty.

“If [petitioners] were to win this lawsuit, they would still receive the exact same monthly benefits that they are already slated to receive, not a penny more. The [petitioners] therefore have no concrete stake in this lawsuit.”

Justice Kavanaugh, writing for the majority

What It Means:

Explaining that “[t]here is no ERISA exception to Article III,” a majority of the Court—the Chief Justice and Justices Thomas, Alito, Gorsuch, and Kavanaugh—held that petitioners lacked Article III standing “for a simple, commonsense reason: They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives.” Petitioners also did not plausibly allege that “plan underfunding” created a “substantially increased risk” that the plan or employer “would both fail,” thereby jeopardizing future pension benefits.
The Court rejected petitioners’ argument, based on trust-law principles, that they have an equitable or property interest in the plan’s assets, or the “financial integrity” of the plan. The benefits of trust beneficiaries depend on how well the trust is managed. By contrast, “a defined-benefit plan is more in the nature of a contract,” and “[t]he plan participants’ benefits are fixed and will not change, regardless of how well or poorly the plan is managed.”
The Court also held that petitioners lacked standing to sue “as representatives of the plan itself” because they had not been “legally or contractually appointed to represent the plan.” Going forward, fiduciary breach claims concerning defined-benefit plans likely will need to be brought by the Department of Labor or co-fiduciaries.
The Court’s ruling means that beneficiaries of ERISA defined-benefit pension plans generally will not be able to sue for breach of fiduciary duty unless the plan has failed to make required benefits payments, or it is likely that the alleged misconduct will render the plan insolvent.
Although the Court was careful to distinguish defined-contribution plans, today’s opinion could impact other types of ERISA claims. For example, in cases challenging the administration of health benefits, the Court’s ruling may cast doubt on plaintiffs’ attempts to evade the limits on class certification by claiming class-wide breaches of fiduciary duty without tying those allegations to a class-wide deprivation of benefits.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho
+1 214.698.3233
[email protected]

Mark A. Perry
+1 202.887.3667
[email protected]

Related Practice: Class Actions and Employee Benefits

Richard J. Doren
+1 213.229.7038
[email protected]

Heather L. Richardson
+1 213.229.7409
[email protected]

Geoffrey Sigler
+1 202.887.3752
[email protected]

Daniel J. Thomasch
+1 212.351.3800
[email protected]

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

This client alert first discusses the key new guidance on the Main Street Programs. It then provides a high-level summary of the new documents released.

Key Guidance

Credit Certification: To participate in the Main Street Programs, a borrower must certify that “it is unable to secure adequate credit accommodations from other banking institutions.”
- Guidance clarifies that “[b]eing unable to secure adequate credit accommodations does not mean that no credit from other sources is available to the borrower.” Rather, the requirement is satisfied if “the amount, price, or terms of credit available from other sources are inadequate for the borrower’s needs during the current unusual and exigent circumstances.” Accordingly, borrowers need not demonstrate that “applications for credit ha[ve] been denied by other lenders or otherwise document that the amount, price, or terms of credit available elsewhere are inadequate.”
Criminal and Civil Liability: If an application includes “knowing material misrepresentation,” the lender or borrower may be referred to law enforcement authorities for investigation and possible action under applicable criminal and civil law.
- The application documents cite 8 U.S.C. § 1001, which criminalizes false statements made “knowingly and willfully” and is punishable by up to 5 years of imprisonment, and 31 U.S.C. § 3729, the False Claims Act, which carries heavy fines.
Additional Guidance on “Significant Operations in United States”: To determine if a borrower has “significant operations in the United States,” a business will be evaluated on a consolidated basis with its subsidiaries, but not with its parent companies or sister affiliates. As a non-exhaustive example, the guidance notes that a borrower would have significant operations in the United States if greater than 50% of the borrower’s:
- Assets are located in the United States;
- Annual net income is generated in the United States;
- Annual net operating revenues are generated in the United States; or
- Annual consolidated operating expenses (excluding interest expense and any other expenses associated with debt service) are generated in the United States.

This guidance is helpful to many businesses that are based in the United States yet have a majority of employees overseas.

Subsidiaries of Non-U.S. Borrowers Can Participate: The guidance clarifies that a subsidiary of a non-U.S. company can participate in the Main Street Programs, so long as the borrower itself (1) is created or organized in, or under the laws of, the United States and (2) on a consolidated basis has significant operations in, and a majority of its employees based in, the United States.
- But borrowers must only use loan proceeds to benefit the borrower, its consolidated United States subsidiaries, or the borrower’s affiliates that are United States businesses. The loan may not be used to benefit non-U.S. parents, affiliates, or subsidiaries.
Loans to “New Customers”: Under the MSNLF and MSPLF, lenders may originate loans to new customers—e., a business that has not previously worked with the lender.
MSPLF Loans Can Refinance Existing Loans: Guidance clarifies that, when a MSPLF loan is originated, a borrower may use the proceeds of that loan to refinance existing loans owed to other lenders.
- After origination and until the MSPLF loan is repaid in full, however, the borrower must refrain from repaying the principal balance of, or paying any interest on, any debt other than the MSPLF loan, unless the debt or interest payment is mandatory and due.
MSELF Does Not Require Use of Original Lender: Under the MSELF, the lender for the upsized tranche need not be the lender that originally extended the underlying loan.
- The MSELF lender must, however, have acquired the interest in the underlying loan as of December 31, 2019. The lender also must have assigned an internal risk rating to the underlying loan equivalent to a “pass” in the FFIEC’s supervisory rating system as of that date.
Program Restrictions Apply to Affiliates: A borrower can only participate in one Main Street Program, and a borrower cannot participate in both a Main Street Program and the Primary Market Corporate Credit Facility. This restriction applies to a borrower’s affiliates.
Clarification on EBITDA Calculations: A borrower must adjust its 2019 EBITDA by using either: (1) the methodology that the lender has previously required for EBITDA adjustments when extending credit to the borrower; or (2) if the borrower is a new customer, the methodology employed for similarly situated borrowers on or before April 24, 2020. The guidance notes that “similarly situated borrowers” are borrowers in similar industries with comparable risk and size characteristics.
- If a lender has used multiple EBITDA adjustment methods for the borrower or similarly situated borrowers, the lender should choose the most conservative method it has employed.
- Lenders must select a single EBITDA adjustment method that it used at a point in time in the recent past and before April 24, 2020. The guidance forbids “cherry pick[ing]” different methodologies and applying adjustments used at different points in time or for a range of purposes.
Additional Guidance on MSELF Maximum Loan Size: Under the MSELF, the maximum size of the upsized tranche cannot exceed 35% of the borrower’s existing outstanding and undrawn available debt that is (i) pari passu in priority with the upsized tranche and (ii) equivalent in secured status (e., secured or unsecured) to the upsized tranche.
- Secured Loans: If the upsized tranche is part of a secured loan, then all secured debt for borrowed money of the borrower that has not been made junior in priority through contractual subordination should be included in the calculation, regardless of the value or type of collateral.
- Unsecured Loans: If the upsized tranche is part of an unsecured loan, then all unsecured debt for borrowed money of the borrower that has not been made junior in priority through contractual subordination should be included in the calculation.
Additional Guidance on MSPLF Loan Priority and Security: Under the MSPLF, loans must be senior to or pari passu with, in terms of priority and security, the borrower’s “Loan or Debt Instruments” and “Mortgage Debt.”
- The guidance defines both terms:
  - “Loan or Debt Instruments” means debt for borrowed money and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, and all guarantees of the foregoing.
  - “Mortgage Debt” means debt secured by real property at the time of the MSPLF loan’s origination.
- The MSPLF loan must be secured if, at the time of origination, the borrower has any other secured Loans or Debt Instruments, other than Mortgage Debt.
- If the MSPLF loan is secured, then the “Collateral Coverage Ratio” for the MSPLF Loan at the time of its origination must be either (i) at least 200% or (ii) not less than the aggregate Collateral Coverage Ratio for all of the borrower’s other secured Loans or Debt Instruments (other than Mortgage Debt).
  - “Collateral Coverage Ratio” means (i) the aggregate value of any relevant collateral security, including the pro rata value of any shared collateral, divided by (ii) the outstanding aggregate principal amount of the relevant debt.
- If the MSPLF loan is secured by the same collateral as the borrower’s other Loans or Debt Instruments (other than Mortgage Debt), the lien upon such collateral securing the loan must be and remain senior to or pari passu with the lien(s) of the other creditor(s) upon such collateral. The loan need not share in all of the collateral that secures the borrower’s other Loans or Debt Instruments.
- The MSPLF loan can be unsecured only if the borrower does not have, as of the date of origination, any secured Loans or Debt Instruments (other than Mortgage Debt).
  - The unsecured loan must not be contractually subordinated in terms of priority to any of the borrower’s other unsecured Loans or Debt Instruments.
- Additional Guidance on MSELF Loan Priority and Security Requirements: The MSELF’s security and priority requirements are largely the same as the requirements described above that apply to the MSPLF. The major difference is for secured loans: under the MSELF, the upsized tranche must be secured by the collateral securing any other tranche of the underlying credit facility on a pari passu Lenders and borrowers may add new collateral to secure the loan (including the upsized tranche on a pari passu basis) at the time of upsizing.
  - If the underlying credit facility includes both term loan tranche(s) and revolver tranche(s), the upsized tranche needs to share collateral on a pari passu basis with the term loan tranche(s) only. Secured upsized tranches must not be contractually subordinated in terms of priority to any of the borrowers’ other Loans or Debt Instruments.

Documents Released

Lender Registration Certifications and Covenants: This document, which includes the certifications and covenants that lenders must make to participate in the Main Street Programs, must be signed and submitted by the lender at the time of its registration with the Main Street Special Purpose Vehicle (“SPV”). The document must be signed by the lender’s CEO and CFO or officers performing similar functions.
Transaction Specific Lender Certifications and Covenants: Each Main Street Program has its own document regarding the lender certifications and covenants that apply to the program. The document must be signed by an authorized officer of the lender.
- MSNLF Lender Transaction Specific Certifications and Covenants
- MSELF Lender Transaction Specific Certifications and Covenants
- MSPLF Lender Transaction Specific Certifications and Covenants
Borrower Certifications and Covenants: Each Main Street Program has its own document regarding the borrower certifications and covenants that apply to the program. The borrower’s CEO or CFO (or officers performing similar functions) must sign the document. The lender must submit this document at the time a loan participation in the borrower’s loan is sold to the SPV.
- MSNLF Borrower Certifications and Covenants
- MSELF Borrower Certifications and Covenants
- MSPLF Borrower Certifications and Covenants
- The certifications and covenants include the following:
  - The borrower is an entity that is organized for profit as one of the following:
    - Partnership;
    - Limited liability company;
    - Corporation;
    - Association;
    - Trust;
    - Cooperative;
    - Joint venture with no more than 49 percent participation by foreign business entities;
    - Tribal business concern that is (i) wholly owned by one or more Indian tribal governments, or by a corporation that is wholly owned by one or more Indian tribal governments, or (ii) owned in part by one or more Indian tribal governments, or by a corporation that is wholly owned by one or more Indian tribal governments, if all other owners are either U.S. citizens or Businesses;
    - Any other form of organization that has been publicly designated by the Federal Reserve as a “Business.”
  - The borrower is not an “Ineligible Business.”
    - An “Ineligible Business” is a business of any of the types listed in 13 CFR 120.110(b)-(j), (m)-(s), as modified and clarified by Small Business Administration regulations for purposes of the Paycheck Protection Program on or before April 24, 2020.
  - The borrower was established prior to March 13, 2020.
  - The borrower meets at least one of the following conditions:
    - Has 15,000 employees or fewer; or
    - 2019 annual revenues of $5 billion or less.
  - The borrower has identified its affiliates, in accordance with the principles set forth in 13 CFR 121.301(f).
  - Neither the borrower nor the borrower’s affiliates have participated in, or will attempt to participate in, another Main Street Program or the Primary Market Corporate Credit Facility.
  - The borrower has not received “specific support” under the CARES Act, which is limited to support under Section 4003(b)(1)–(3).
  - The borrower is a business created or organized in the United States that has significant operations in, and a majority of its employees based in, the United States.
  - The borrower complies with the CARES Act’s conflicts of interest requirements in Section 4019(c).
  - The borrower will comply with the compensation, stock repurchase, and capital distributions restrictions in Section 4003(c)(3)(A)(ii).
  - The borrower is unable to secure adequate credit accommodations from other banking institutions.
  - The borrower is not insolvent.
    - A borrower is insolvent if it is in bankruptcy, resolution under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or any other Federal or State insolvency proceeding (as defined in paragraph B(ii) of section 13(3) of the Federal Reserve Act), or if it was generally failing to pay undisputed debts as they become due during the 90 days preceding the date of borrowing.
  - The borrower has provided financial records to the lender and a calculation of borrower’s adjusted 2019 EBITDA, and these records fairly present borrower’s financial condition.
  - The borrower will adhere to the priority, security, and repayment restrictions under the respective Main Street Program.
  - The borrower has a reasonable basis to believe that, as of the date of the loan origination or upsizing, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
  - If the borrower is a subsidiary of a foreign company, the borrower will use loan proceeds only for the benefit of the borrower, its consolidated U.S. subsidiaries, and other affiliates of the borrower that are U.S. businesses.
  - The borrower told the lender whether it previously received, or applied for, funds under another Main Street Program.
  - If the borrower is a company, all or substantially all of the assets of which comprise equity interests in other entities, then the borrower must certify that the loan is fully guaranteed on a joint and several basis by its selected subsidiaries.
  - The borrower will indemnify the beneficiaries of such certifications and covenants for any liability, claim, cost, loss, judgment, damage or expense that a beneficiary incurs or suffers as a result of or arising out of a material breach of any of the borrower’s certifications or covenants.
- Loan Participation Agreement: This agreement has two parts:
  - Loan Participation Agreement Standard Terms and Conditions: This document sets forth the terms and conditions for all participations in the Main Street Programs. It is incorporated in the Transaction Specific Terms and will be publicly available on the Federal Reserve Bank of Boston’s webpage.
  - Loan Participation Agreement Transaction Specific Terms: To effectuate the sale of a loan participation to the SPV, lenders must sign and submit this form.
- Servicing Agreement: Lenders must submit the Servicing Agreement at the time a loan participation is sold to the SPV.
- Assignment-in-Blank: Lenders must submit this to the SPV at the time a loan participation is sold to the SPV. Borrowers also must sign the document.
- Co-Lender Agreement: This agreement has two parts, and neither is required for existing multi-lender facilities.
  - Co-Lender Agreement Standard Terms and Conditions: This document sets out the terms and conditions for the Co-Lender Agreement. It is incorporated into the Transaction Specific Terms and will be publicly available on the Federal Reserve Bank of Boston’s webpage.
  - Co-Lender Agreement Transaction Specific Terms: Lenders must sign and submit this document at the time a loan participation is sold to the SPV. Borrowers are also required to sign the document.
- Lender Wire Instructions: This document provides wire instructions for the bank account into which the SPV will transfer the purchase amount, servicing fees, and other payments related to the transaction under the specific Main Street Program.
- Updated FAQs on Main Street Programs: This revised version of the FAQs published on April 30 provides additional guidance on the Main Street Programs.

__________________________

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.

Dallas partner Robert Little and associate Louis Matthews are the authors of “Chancery Holds Buyout Provision in LLC Agreement to Be a ‘Call Option’ and Irrevocable Following Exercise,” [PDF] published by Delaware Business Court Insider on May 29, 2020.

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.

In this webinar we will cover:

the pandemic’s impact on Brexit and the ongoing negotiations between the UK and the EU, and a brief consideration of Brexit’s impact on the UK M&A market
the rules relating to childcare during lockdown, including what constitutes “reasonable excuse” for leaving home under the emergency legislation

We want to hear from you about the impacts the current measures and conditions are having on your business and the legal issues you are facing. We therefore welcome suggested topics, as well as questions in advance of each webinar, to ensure that we can address issues relevant to your business.

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.

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.

Tamas Lorinczy: A senior associate in the Corporate Transactional practice group. He has a wide range of corporate transactional and general advisory experience, with a primary focus on cross-border mergers and acquisitions.

Charlotte Brown: A senior associate in the Disputes Resolution practice group. She specialises in commercial litigation and arbitration, and has significant trial and appellate experience and has practised in a broad range of fields, including financial services, oil and gas, telecoms, insurance, and human rights law.

On May 20, 2020, in Rubenstein v. International Value Advisers, LLC[1] and Rubenstein v. Rofam Inv. LLC,[2] Judges Kearse, Parker and Sullivan of the Second Circuit issued a pair of opinions clarifying when a group of investors may be considered insiders for purposes of securities laws requiring the disgorgement of profits earned through short-term investments by dint of relationships with their investment advisors. While the issue has arisen elsewhere in lower courts,[3] International Value and Rofam are the first appellate decisions in this novel area of securities litigation. Accordingly, their determination that group liability for short-swing profits does not arise where investors grant their advisors discretionary authority over their accounts provides important and persuasive authority in support of investment managers facing related claims.

The Short-Swing Profit Rule

In order to curb the risk that corporate insiders might trade based on material non-public information, the Securities Exchange Act of 1934 applies strict liability in requiring insiders to disgorge to the issuer any profits from certain “short-swing” trades in which an issuer’s equity is purchased and then sold, or sold and then purchased, within a period of six months or less.[4] This rule applies to issuers’ directors, officers, and any “person who is directly or indirectly the beneficial owner of more than 10 percent of any class of any equity security of the issuer.”[5]

In this context, however, the term “person” refers not only to individuals but rather to groups as well. Specifically, the Exchange Act and rules under it provide that whenever multiple people “act as a . . . group for the purpose of acquiring, holding, or disposing of securities of an issuer,” they are considered a single “person” for purposes of the short-swing profit rule.[6] SEC rules further clarify that when individuals “agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer,” they are considered a single person for purposes of short-swing profits liability and each such individual is “deemed” to be the beneficial owner of equity securities owned by any other group member.[7] Stated otherwise, if members of such a group collectively own more than 10% of a company’s equity, each member of that group becomes subject to strict liability disgorgement of their short-swing profits from investments in that issuer’s equity securities.[8]

An investor, Aaron Rubenstein, claimed to rely on these rules in bringing two similar suits. He first sued clients of investment advisor Fairholme Investment Management based upon the ownership of more than 10% of Sears common stock by Fairholme and its clients and, subsequently, he sued both investment advisor International Value Advisers and a “John Doe” client in light of the advisory firm’s holding more than 10% of the common stock of Adtalem Global Education Services (formerly and better-known as the DeVry Education Group). Rubenstein advanced the same theory in each case: the investment advisors’ clients were part of a “group” for purposes of the short-swing profit rule in light of the investment advisors’ undisputed insider status. Accordingly, Rubenstein argued that the clients of each investment advisor were liable for short-swing profits earned through investments in Sears and DeVry, respectively.

Investment Advisors’ Insider Status Is Not Imputed To Their Clients

In a matter of first impression, the Second Circuit rejected Rubenstein’s theory, explaining that an investor does not automatically “become a member of a group solely because his or her advisor caused other (or all) of its clients to invest in securities of the same issuer,” and an “investment advisory client does not form a group with its investment advisor by merely entering into an investment advisory relationship.”[9] Rather, in light of the short-swing profit rule’s use of the singular phrase “an issuer,” the Second Circuit held that the short-swing profit rule imposes liability only when individuals agree to act as a group for purposes of investing in “the securities of a particular issuer.”[10] Because Rubenstein alleged that the clients had entered agreements delegating discretionary investment authority to their investment advisors without reference to any specific securities, he failed to state a claim in either case. Since the investment management agreements were not “issuer-specific,”[11] they did not “constitute[] an ‘agreement’ to trade in DeVry [and Sears] securities”[12] giving rise to group liability.

The Second Circuit also rejected Rubenstein’s implied agreement theory in which he argued that the client-defendants had agreed to invest in DeVry and Sears in light of the investment advisors’ public disclosures concerning their beneficial ownership of significant holdings in those companies. That theory was based entirely on “unconstrained speculation about the knowledge and intent of [the] clients,” however, and risked imposing liability on clients who were unaware of the advisors’ disclosure statements or what securities were held in other clients’ accounts.[13] As Judge Parker memorably wrote, the Second Circuit would not “hold a retiree on the beach in Florida liable when he fails to conduct an ongoing analysis of his IRA manager’s trading in other clients’ accounts.”[14] Nor would it impose liability on the theory that the clients became members of an insider group by dint of the investment advisors’ appointing directors to the boards of Sears and DeVry because most clients were likely also unaware of that fact and, “even if some clients were so aware, there is no indication that they agreed” to such appointments.[15]

In addition to its textual analysis, the Second Circuit analyzed the purpose of the group designation, which was “designed to ‘prevent a group of persons who seek to pool their . . . interests in the securities of an issuer from evading the provisions of the [short-swing profit rule] because no one individual owns more than 10 percent of the securities.”[16] In rejecting several policy arguments advanced by Rubenstein, the Second Circuit held that the short-swing profit rule’s strict liability provisions required the exercise of “caution[] against exceeding [its] ‘narrowly drawn limits’” while noting it was not offering “a safe harbor to investment managers engaged in insider trading” that would otherwise give rise to liability under the Exchange Act’s general anti-fraud provisions.[17] Nor was the Second Circuit concerned that its holding would undermine the requirement that the beneficial owners of more than 5% of a company’s shares file disclosure statements with the SEC[18] because investment advisors can still qualify as the beneficial owner of shares in their clients’ accounts regardless of whether or not their clients have formed a group for purposes of the short-swing profit rule. Accordingly, firms that “purchase a sufficient quantity of a security in their clients’ managed accounts will become subject to [the] disclosure requirement even if they do not form an insider group with their clients.”[19]

Conclusion

It is fitting that the novel group theory of liability advanced in Rofam and International Advisers would first be addressed by the Second Circuit. In light of its jurisdiction over Wall Street and its long-recognized role as the “‘Mother Court’ of securities law,”[20] the Second Circuit’s determination that clients of an investment advisor are not necessarily a “group” for purposes of the short-swing profit rule will likely be given significant weight by other courts who will inevitably face similar arguments in the future. We will continue to monitor this developing area of the law, however, as only time will tell whether other jurisdictions will find the Second Circuit’s reasoning persuasive.

_____________________

[1] No. 19-560, — F.3d — (2d Cir. May 20, 2020) (hereinafter “Int’l Value”).

[2] No. 19-796, — F. App’x — (2d Cir. May 20, 2020) (hereinafter “Rofam”).

[3] See, e.g., Greenfield v. Criterion Capital Mgmt. LLC, No. 15 Civ. 3583, 2017 WL 2720208 (N.D. Cal. June 23, 2017); Brian B. Sand & Zachary B. Sand Joint Trust v. Biotechnology Value Fund, L.P., No. 16 Civ. 1313, 2017 WL 3142110 (N.D. Cal. July 25, 2017).

[4] 15 U.S.C. § 78p(b).

[5] Int’l Value, 2020 WL 2549507 at *1; see also id. at *1 n.1 (explaining the “somewhat involved” statutory definition of beneficial ownership).

[6] 15 U.S.C. § 78m(d)(3).

[7] 17 C.F.R. § 240.13d-5(b)(1).

[8] See 17 C.F.R. § 240.16a-1(a)(3).

[9] Int’l Value, 2020 WL 2549507 at *4.

[10] Id. at *3 (emphasis added).

[11] Rofam, 2020 WL 2551039 at *1.

[12] Int’l Value, 2020 WL 2549507 at *4

[13] Rofam, 2020 WL 2551039 at *2.

[14] Int’l Value, 2020 WL 2549507 at *7

[15] Id.

[16] Id. at *4 (quoting H.R. Rep. No. 90-1711 (1968)).

[17] Id. (quoting Gollust v. Mendell, 501 U.S. 115, 122 (1991)).

[18] See 15 U.S.C. § 78m(d).

[19] Id. at *5.

[20] Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 276 (2010) (Stevens, J., concurring) (quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 762 (1975)).

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

Reed Brodsky – New York (+1 212-351-5334, [email protected])
Akiva Shapiro – New York (+1 212-351-3830, [email protected])
Michael Nadler – New York (+1 212-351-2306, [email protected])

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

GLOBAL OVERVIEW

UK Financial Conduct Authority Outlines Expectations for Managing Enhanced Market Conduct Risks in the Context of the Pandemic

On 27 May 2020, the UK Financial Conduct Authority (the “FCA”) published Market Watch 63 (“MW63”). MW63 highlights that market participants (including issuers, their advisers and all other market participants) may be subject to new and emerging market conduct risks as a result of the current increase in primary market activity and working from home arrangements widely mandated as a result of public policy to deal with the COVID-19 pandemic. It then sets out the FCA’s expectations on market participants in terms of identifying and mitigating those risks in the current environment.

It is clear that while we have seen some limited regulatory forbearance from the FCA in certain areas in order to alleviate operational burden on market participants and the markets, there is no room for reducing risk appetites or anything other than strict adherence to rules and regulatory expectations in the context of market conduct. The FCA acknowledges the current challenges faced by market participants during the crisis, however the expectation remains that all continue to act in a manner that supports the integrity and orderly functioning of financial markets. As a warning, the FCA also stressed that it will continue to use the tools at its disposal to monitor, investigate and (as necessary) take enforcement action to ensure that requirements relating to market conduct are complied with.

This bulletin outlines the messages of MW63 and provides some practical guidance on the steps that market participants might take in order to ensure they meet the FCA’s expectations in the current environment.
Read more

This Alert reports on recent intellectual property law developments relating to the COVID-19 pandemic. First, we describe a new pilot program of the United States Patent and Trademark Office (“USPTO”), intended to help small businesses obtain expedited review of patent applications on products and processes related to the battle against COVID-19, and the agency’s new platform listing COVID-19 related patents that are available for licensing. Second, we discuss the World Health Assembly’s COVID-19 resolution calling on countries to rely on patent pooling mechanisms to help develop new technologies to fight the pandemic, and the response by the United States to sections of the resolution.
Read more

COVID-19 UK Weekly Webinar – June 1, 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 pandemic’s impact on Brexit and the ongoing negotiations between the UK and the EU, and a brief consideration of Brexit’s impact on the UK M&A market; and the rules relating to childcare during lockdown, including what constitutes “reasonable excuse” for leaving home under the emergency legislation.
Read more

(1) Two USPTO Initiatives Relating to the Fight Against COVID-19

The COVID-19 Prioritized Examination Pilot Program: On May 14, 2020, the USPTO published a notice in the Federal Register setting forth the eligibility requirements for its previously announced “COVID-19 Prioritized Examination Pilot Program.” That Pilot Program seeks to expedite the examination of patent applications that cover products or processes related to the fight against COVID-19. The program, which is restricted to applicants that qualify for either “small entity” or “micro entity” status (pursuant to 37 C.F.R. §§ 1.27 and 1.29), permits such entities to request prioritized examination of patent applications without paying the fees typically associated with such a request. (Notably, the “small entity” definition includes, among other things, “[a] university or other institution of higher education located in any country” and any Section 501(c)(3) organization that is exempt from taxation under Section 501(a) of the Internal Revenue Code). While the goal of the prioritized examination under the program “is to provide a final disposition within 12 months, on average, from the date prioritized status has been granted,” the USPTO has stated that it will “endeavor to reduce” that timeframe to six months, if applicants respond within 30 days to “notices and actions” from the agency, once the applicant’s initial request to have its patent applications be considered for prioritized examination has been approved.[1]

The pilot program will begin accepting requests for prioritized examination on July 13, 2020, and will continue “until such time as the USPTO has accepted a total of 500 requests.”[2] To be eligible for the program, qualifying patent applicants must certify that at least one of the pending claims in the patent application(s) for which they seek expedited review is a product or process “subject to an applicable FDA approval for COVID-19 use.” In addition, in what appears to be an effort to help ensure that the pilot program is limited to applicants seeking patents on more recent inventions, patent applications that claim the benefit of an earlier filing date of two or more U.S. non-provisional applications (or certain international applications) are ineligible for the program.

As early commentators have noted, small businesses that qualify for the program will need to carefully weigh its potential benefits against the potential risks of seeking prioritized examination of patent applications within what could be a very short timeframe, given that the program is currently limited to 500 requests. Although the program’s offer of a cheaper and faster process to apply for patents on inventions like COVID-19 vaccines may be enticing to smaller businesses—especially since patents can help attract further capital—the pressure to get one of the program’s limited slots could potentially lead to the filing of premature applications that require further experimental data and research in order to meet the requirements for patentability. Small businesses will therefore need to consider whether their inventions are ripe enough to mitigate the possibility that applying for a patent too early will create an unfavorable prosecution record that could impede subsequent renewed efforts to patent those inventions.

Patents 4 Partnerships: Earlier this month, the USPTO created the “Patents 4 Partnerships” program, which is 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. The public can search the platform, including by keyword, issue date, and inventor name. As described by Andrei Inacu, Undersecretary of Commerce for Intellectual Property and Director of the USPTO, Patent 4 Partnerships “is a meeting place that enables patent owners who want to license their IP rights to connect with the individuals and businesses who can turn those rights into solutions for our health and wellbeing.”

Patent holders may list their patents on the platform using the Platform Submission Page. As of May 26, 2020, the platform includes over 200 patents and published patent applications.

(2) The World Health Assembly’s COVID-19 Resolution Calls for Voluntary Patent Pooling

During a virtual meeting last week, the World Health Assembly (“WHA”) passed a resolution pressing for intensified efforts to control the pandemic and seeking equitable distribution of the technologies and products necessary to do so.[3] The resolution calls on international organizations “to work collaboratively at all levels to develop, test, and scale-up production” of “affordable diagnostics” and “vaccines for the COVID-19 response,” referencing “existing mechanisms for voluntary pooling and licensing of patents in order to facilitate . . . affordable access to them, consistent with the provisions of relevant international treaties[.]” Existing mechanisms that can facilitate voluntary pooling and licensing of patents include the work of the U.N.-backed nonprofit “The Medicines Patent Pool.” As reported in a prior alert, that Patent Pool gathers COVID-19 related patent information—such as on products that are tested in clinical trials to treat the virus—and makes that information accessible in a publicly available repository of patent data. The World Health Organization reports that the WHA resolution is co-sponsored by more than 130 countries.

The Resolution cautions that the cooperative efforts it advocates must all “respect” and “be consistent with” the provisions of the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”) and the Doha Declaration on the TRIPS Agreement and Public Health (“Doha Declaration”).[4] See Resolution at ¶¶ 4, 8.2, 9.8. In a written statement, the United States Department of State “endorse[d] the call in the resolution for all Member States to provide the WHO with timely, accurate, and sufficiently-detailed public health information related to the COVID-19 pandemic,” but “disassociate[d]” itself from a number of paragraphs in the resolution, including some relating to intellectual property. For example, the United States objected to paragraphs 4, 8.2, and 9.8 of the resolution. The United States “disassociates” from those paragraphs because the language in those paragraphs referencing the TRIPS Agreement and the Doha Declaration “does not adequately capture all of the carefully negotiated, and balanced, language” in the TRIPS Agreement and Doha Declaration. Likewise, the United States objected that those paragraphs “present[] an unbalanced and incomplete picture of that language at a time where all actors need to come together to produce vaccines and other critical health products.” Finally, the United States emphasized that “[i]t is critical” that the “existing mechanisms for voluntary pooling” of patents referenced in the resolution “be narrowly tailored in scope and duration to the medical needs of the current crisis[.]”

We are continuing to monitor developments that may be of interest to businesses who hold, or seek to use, intellectual property rights.

____________________

[1] COVID–19 Prioritized Examination Pilot Program, 85 Fed. Reg. at 28933 (May 14, 2020).

[2] Id.

[3] The WHA, which is comprised of delegations from all WHO Member States, acts as the WHO’s decision-making body, principally determining the WHO’s policies, and appointing the Director-General.

[4] At the risk of oversimplification, the TRIPS Agreement, which became effective on January 1, 1995, is a multilateral agreement that principally sets forth minimum standards of protection to be provided by Member countries to various types of intellectual property. The Doha Declaration of 2001 was adopted in response to growing concerns that patent-related terms under TRIPS Agreement could restrict access to affordable medicines in developing countries. The Declaration endeavored to allay those concerns by, for example, giving each Member the right to grant compulsory licenses (i.e., without the consent of patent holders) to the use of their patented inventions.

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: Joe Evall ([email protected]), Richard Mark ([email protected]), Doran Satanove ([email protected]), and Amanda First ([email protected])

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

General Court Judgment of 28 May 2020 – Case T-399/16, Case CK Telecoms UK Investments Ltd. v. Commission

The General Court earlier today called into serious question the tough approach taken by the European Commission (the ‘Commission’) in its review of mergers in the mobile communications sector. In doing so, the General Court has subjected the Commission’s analysis to an unprecedented level of scrutiny on a range of important substantive issues, rather than seeking to catch out the Commission on more procedural technicalities.

As noted by the General Court itself, this was the first time it had been called upon to rule on the conditions for the application of the EU Merger Regulation to a merger in an oligopolistic market which did not involve the creation or strengthening of an individual or collective dominant position, but giving rise to so-called “non-coordinated effects”.[1] Since its initial 2006 Decision in T-Mobile Austria/Tele-ring,[2] the Commission has focused on a series of “gap” cases[3] in mobile communications markets, rather than on traditional theories of harm based on unilateral effects.

The overturning of a Commission merger veto Decision is rare,[4] and it is even more rare for a General Court Ruling to annul a Commission Decision in such a comprehensive manner.

The Decision

The appeal arose in relation to the Commission’s 2016 Decision[5] to block the proposed acquisition by UK mobile network operator (‘MNO’) Three of O2, thereby limiting the number of MNOs on the UK market from 4 to 3. The acquisition would have created the UK’s largest MNO, with a market share of 40%. In the eyes of the Commission, the loss of a fourth MNO in the circumstances was incompatible with the Common Market. It was generally understood at the time that the Commission’s Decision was fully endorsed by the UK authorities, which had earlier requested that the merger be reviewed by them under the ‘referral’ powers available under the EU Merger Regulation.[6]

The key findings of the Commission’s Decision were that the proposed transaction would result in the following:

A lessening of competition due to the removal of an important competitor, leaving only two other MNOs (namely, Vodafone and Everything Everywhere, or ‘EE’) to compete against the merged entity. This would have lowered existing incentives on the merged entity to compete, in turn leading to higher prices and reduced quality and choice for consumers.
The hampering of mobile network infrastructure investment in the UK, primarily because the merged entity would have been participating with two other sets of infrastructure sharing agreements with the other MNOs on the market. The level of market transparency gained by participation in such agreements was likely to lead to less competition in the roll-out of next generation (5G) technology.
A reduction in the number of MNOs that would be willing to host mobile virtual network operators (“MVNOs”) through wholesale access relationships, thereby weakening the negotiating position of MVNOs to obtain favourable access terms from MNOs.

With a view to overcoming the Commission’s competition concerns reflected in its three theories of harm, the notifying parties submitted a series of proposed behavioural commitments to the Commission concerning the grant of MVNO access and access to its network sharing relationships. These commitments were rejected by the Commission because they were too complex to implement and to monitor effectively, and because they would have been commercially unattractive to MVNOs.

Grounds of the Appeal

The appeal before the General Court was based on a number of grounds, including the Commission’s alleged errors of assessment when concluding that the merging parties were “close competitors” and when concluding that Three was an “important competitive force” in the mobile wholesale access market. In addition, it was argued that the Commission had misunderstood important aspects of Three’s network capacity capabilities relative to its competitors.

It was also argued that the Commission had misunderstood the workings of the UK mobile market when concluding that the MNOs were likely to align their market behaviour post-merger. Finally, it was alleged that the Commission had erred in concluding that the commitments offered by the notifying parties were not capable of sustaining effective competitors in the marketplace.

The Judgment

In what might be seen to be a landmark Judgment, the General Court annulled the Commission’s Decision in its entirety, concluding that the Commission had failed to substantiate its three separate theories of harm laid out in its Decision. According to the General Court, the Commission had failed to satisfy the requisite legal standard regarding the negative effects of the proposed merger on prices and quality, the competitive impediments raised by the network sharing agreements, and the concerns about wholesale access bargaining.

More specifically, the Court subjected each of the Commission’s theories of harm to forensic analysis. Thus, in connection with the first theory of harm, the Court was not convinced that a relatively low degree of product differentiation was likely to eliminate competitive constraints being exercised in the mobile retail market. Moreover, the Commission’s quantitative analysis had little probative value, as it fell far short of proving how “significant” the upward pressure on retail prices would be. To add insult to injury, the Court felt that the Commission had wrongly conflated the ideas of “significant impediment to effective competition”, “elimination of an important competitive constraint” and “elimination of an important competitive force”. In doing so, it rendered its decision-making on the first theory of harm fatally flawed.

As regards the second theory of harm, the Court expressed its surprise at the “novelty” of that theory, insofar as the Court found it difficult to comprehend how the Commission could draw a causal link between potential increases in fixed and incremental costs with a tendency of MNOs to engage in fewer network investments, deteriorate quality or lower competitive pressure. Moreover, in asserting that new levels of transparency between operators would induce aligned behaviour, the Commission had failed to conduct a sufficiently dynamic analysis of current and emerging competitive conditions. Most importantly, the Commission had failed to give due weight to the fact that, at some time post-merger, the merging parties would be operating only one network, which would by definition weaken any tendency towards greater transparency in the market.

Finally, the Court also dismissed the Commission’s third theory of harm. According to the Court, the Commission had over-emphasised the extent to which the competitive dynamic might change as a result of 4 access options being diminished to 3. Moreover, the Commission had over-estimated the relative importance of Three in the wholesale market, where it accounted for only a relatively small market share. As such, its disappearance as a wholesale access option was unlikely to change the competing environment in any significant way post-merger.

The views of the General Court will no doubt make unpleasant reading for the Commission, yet it is difficult to find fault with the approach adopted by the Court. Given the number of methodological errors made by the Commission, it would be wrong to conclude that the General Court has gone beyond its review mandate and superimposed its views for those of the Commission on matters of complex economic assessment. There now seems to be a clear current of thinking in the General Court that the Commission is under a significant responsibility to explain it’s sometimes complex economic analyses. This is most obvious when it comes to likely competitive effects, but has also recently been seen in relation to other issues like fine calculations.

Likely Aftermath

It is undeniable that the Commission has suffered a significant blow to its tough policy on “gap” mergers in the mobile communications sector. The mobile industry will no doubt be heartened that the General Court has dealt a blow to that policy, as the industry continues to explore the possibilities of consolidation in the face of tough margins and competition from “over the top” providers of communications services. The mobile industry will be particularly pleased by the fact that the General Court has, on a number of occasions in its Judgment, pointed out that there is no competitive magic associated with the existence of 4 mobile operators in any given national market. Despite numerous denials to the contrary by Commission spokespeople,[7] the overwhelming feeling has been for some time that the Commission has operated under the mantra that the existence of 4 mobile operators in each Member State is the preferred market structure that will deliver optimal competitive outcomes. The industry will also be well disposed to the views expressed by the Court about the motivations on the industry to invest as an outcome of consolidation, rather than using consolidation to engage in less ambitious expansion plans. In this sense, it must also provide a spur to the industry that its members now have the prospect of achieving scale at a pan-European level on the cusp of next generation 5G investments being made that will provide the bedrock for Europe’s digital transformation in the age of the “Internet of Things”.[8]

Having said all that, a 4-to-3 mobile deal will still pose great challenges for the notifying parties. With one notable exception,[9] the Court has focused fundamentally on the faulty methodology relied upon by the Commission, rather than on the analytical basis of the theories of harm adopted by it.[10] Moreover, the Court has not needed to take a view on the Commission’s tough line on remedies, as this question was rendered moot in the circumstances. Armed with the ability to extract comprehensive commitments from the notifying parties to a merger, it is arguable that the Ruling of the Court has merely clipped the Commission’s wings, rather than having dealt it a bodyblow. The next merger in the mobile sector may therefore be a tough test case in the wake of the Court’s Ruling, as the Commission re-assesses its position and the depths of its fact-finding.

Finally, the net beneficiaries of this Judgment are likely to be the parties negotiating the proposed Virgin Media/O2 deal, which will be facing merger review bodies across the Channel bearing deep scar tissue from their recent mauling before the General Court in the Three/O2 Case.[11]

_________________________

[1] Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ C 31, 5.2.2004, pp. 5-18, paragraphs 24-38.

[2] Case No. COMP/M.3916.

[3] In complex oligopoly situations, theories of harm are developed to address theories of harm in the analytical “gap” that exists between unilateral effects and coordinated effects theories.

[4] Since the adoption of the EU Merger Regulation in January 2004, the Commission has blocked only twelve mergers following a “Phase II” investigation on the basis of Article 8(3) of the Regulation. Among these, eight appeals were brought before the General Court, and three are still pending.

[5] Case No. COMP/M.7612.

[6] Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentration between undertakings, OJ L 24, 29.1.2004, pp. 1-22, Article 9(2)(a).

[7] See, for example, most recently, Olivier Guersent’s statement according to which Telecoms mergers that leave just three players do not face a pre-cooked veto from Brussels (April 2020), available at: https://www.mlex.com/GlobalAntitrust/DetailView.aspx?cid=1182698&siteid=190&rdir=1.

[8] The Internet of things (“IoT”) is a system of interrelated computing devices that are provided with unique identifiers and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction.

[9] Namely, the Commission’s conclusion that low levels of investments would be the necessary by-product of network sharing agreements.

[10] Even as regards the application of the third theory of harm, there is nothing to suggest that the Commission’s views about the likely negative impact on bargaining power for mobile network access agreements would not have been upheld had Three enjoyed a more significant wholesale market share.

[11] https://www.theguardian.com/business/2020/may/07/virgin-media-and-o2-owners-confirm-31bn-mega-merger-in-uk.

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 Antitrust and Competition Practice Group, or the following authors in Brussels:

Peter Alexiadis (+32 2 554 7200, [email protected])
David Wood (+32 2 554 7210, [email protected])
Iseult Derème (+32 2 554 72 29, [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 Howard Hogan, Los Angeles partner Ilissa Samplin and Washington, D.C. associate Megan McGlynn are the authors of “Navigating TM Profits Remedy After High Court Decision,” [PDF] published by Law360 on May 27, 2020.

Considerations for all market participants

The market conditions created by COVID-19 are giving rise to new challenges and considerations for all market participants attempting to manage their risks around identifying, handling and disclosing inside information for the purposes of Regulation 596/2014/EU on market abuse (“MAR”). This is a result of several factors, including (i) an increased number of capital raising events leading to greater flows of inside information; and (ii) existing systems and controls to restrict flows of inside information may not address working from home arrangements.

In previous Market Watch newsletters[1], the FCA highlighted the importance of relevant firms undertaking a comprehensive risk assessment to identify the market abuse risks to which they are or may be exposed and the controls necessary to mitigate those risks. Firms are strongly advised to revisit those risk assessments in response to the Coronavirus pandemic and update them to reflect new and emerging risks, and to modify or enhance their systems and controls, including surveillance techniques, to ensure they remain adequate and effective, especially in light of the working from home environment and the heightened risk environment.

The new types of risk which market participants may be exposed to include unlawful disclosure of inside information, as well as manipulative behaviour stemming from short selling activities. The FCA specifically addresses risks arising from short selling activity and makes it clear that the FCA will focus monitoring efforts on short selling activities in the secondary markets as part of its market monitoring. While the FCA does not specifically say so, it is clear when reading between the lines that the FCA is concerned that there is some evidence of abusive behaviour. The FCA will not shy away from bringing appropriate criminal or regulatory action where this is justified.

Some firms are experiencing increased numbers of surveillance alerts as a result of increased market volume and volatility. It is key that firms address this operational challenge by tailoring their response to the risks they are exposed to and ensuring that the response does not diminish the appropriateness and effectiveness of surveillance techniques. Firms may need to consider conducting retrospective reviews concentrating on areas of heightened risk.

Some specific issues raised

Short selling

In terms of compliance by market participants with their obligations under Regulation 236/2012/EU on short selling and certain aspects of credit default swaps (“SSR”), the FCA reminds market participants that they must, at all times, comply with:

the prohibition on “naked” short sales; and
the net short position reporting requirements.

Where market participants engage in short selling activity, it would be prudent for them to confirm that their cover arrangements remain appropriate and that they have adequate documentary evidence of their compliance with the cover requirements.

Market soundings

The MAR market soundings regime was introduced to provide a framework for controlling inside information when market participants undertake wall-crossings. The intent of the regime is to provide protection from allegations of unlawful disclosure of inside information. However, in order for market participants to have the benefit of this protection, the framework set out under MAR must be correctly followed. It is possible that in the current working from home environment firms may find it harder to adhere to the framework rules. It would be prudent for market participants to review their market sounding procedures to ensure they remain adequate and effective in the current environment. In particular, market participants should consider the following:

disclosing market participants should ensure that they are maintaining appropriate records of their interactions, for example, through the use of recorded lines or written minutes (and that those written minutes are approved by the receiving market participant);
receiving market participants should be aware that the purpose of the sounding is for issuers to gauge interest in and views on the proposed transaction. The information relating to the proposed transaction should only be shared internally on a strict need-to-know basis to enable relevant individuals to provide the necessary input to the issuer and for no other purpose; and
the FCA has previously recognised the benefit of the gatekeeper model[2]; receiving market participants should consider whether their chosen method of receiving soundings remains adequate in the current environment and whether instructions to sell-side market participants need to be updated.

Personal account dealing

Given the FCA’s concern around the heightened risks relating to inside information in light of the current market environment, it would be prudent for all firms to revisit their arrangements for personal account dealing to ensure they adequately address the enhanced risks of most staff currently working from home. Market participants should remind their employees of relevant policies and address in particular how the policies apply in the current environment. This is particularly advisable as a result of the concerns expressed by the FCA in its preceding Market Watch newsletter[3] in relation to firms’ controls relating to personal account dealing, as it is highly likely that the FCA will conduct further thematic work in this area in the future. To the extent that firms have not reviewed and enhanced their policies and procedures in this area in response to Market Watch 62, now would be an opportune time to do so.

Considerations for issuers

In the context of increased capital raising activities, the FCA has specifically addressed some of the risks faced by issuers. We have set out a summary of the risks and some of the practical steps that issuers should take in order to mitigate those risks in the current environment.

Types of heightened risks

Practical steps to take

Primary markets activity increases the amount of inside information
Nature of the information that is material to a business’s prospects may have been altered in the context of the pandemic, e.g.:
- ability to resume business, changes in strategy, return-to-work plans, supply chains;
- future financial performance, such as access to finance and funding, including through government schemes, changes to dividends and buy-back schemes
New information may be materially different from previous forecasts, etc. which have previously been publicly announced and may now be misleading to the market, e.g. missing previous forecast earnings, revenue or related KPIs and, if so, announcement of that information is unlikely to be able to be delayed
Working from home may give rise to new risks of unlawful disclosure of inside information
Working from home may give rise to new risks for ensuring confidentiality of inside information when delaying disclosure

Ensure that existing procedures, systems and controls remain adequate to identify items of inside information and enhance them if necessary
Consider whether new information is inside information and whether disclosure is required
Consider refresher training and compliance bulletins for relevant staff on the appropriate handling of inside information, their duties in relation to insider dealing and unlawful disclosure and risk mitigants in the context of working from home
Consider how inside information is securely accessed, stored and communicated especially where disclosure is being delayed
Where financial reporting deadlines are extended, consider whether any additional information needs to be published in the interim to ensure compliance with MAR
Consult with advisers and keep contemporaneous and complete records of decisions taken regarding the disclosure of inside information
Ensure insider lists are maintained and that inside information is only disclosed on a “need to know” basis in accordance with MAR
Only delay disclosure when all the conditions in MAR are met, and only selectively disclose information where disclosure is necessary in the normal exercise of employment, a profession, or duties and is on a confidential basis
When permitted to delay disclosure, ensure a leak announcement is prepared
Be especially vigilant about the possibility of leaks and rumours
Ensure announcements are verified as being complete and accurate and do not contain false or misleading information

________________________

[1] Market Watch 56 and Market Watch 58

[2] Market Watch 58 and Market Watch 51

[3] Market Watch 62

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact your usual Gibson Dunn contacts or the following authors:

Authors: Michelle Kirschner, Martin Coombes, Chris Hickey, Patrick Doris, Steve Melrose and Chris Haynes

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

Century City partner Scott Edelman, Los Angeles associate Nathaniel Bach and summer associate Hannah Yim are the authors of “Game On: How the Right of Publicity, Legalised Gambling and Fair Pay to Play Laws Are Changing US Professional and Amateur Sports,” [PDF] published by Business Law International in May 2020.

Gaps in the EPA’s COVID-19 Temporary Enforcement Policy: What Regulated Entities Should Consider as Compliance Issues Arise Due to the Pandemic

Since the U.S Environmental Protection Agency (EPA) issued its “Temporary COVID-19 Enforcement Policy” (“temporary enforcement policy”) on March 26th, many regulated entities have successfully obtained extensions of consent decrees and other deadlines. While federal and state enforcement discretion is welcome during this uncertain time, regulated entities should nonetheless proceed with some caution and not rely exclusively on the EPA’s temporary enforcement policy. Indeed, some state regulators and many environmental organizations have expressed their displeasure with the temporary enforcement policy.

This client alert explores aspects of enforcement liability unaffected by the EPA’s temporary enforcement policy that regulated entities should consider as they pursue relief as compliance issues arise as the result of pandemic-related issues.
Read more

Key Considerations for Issuers and Auditors Regarding Going-Concern Analysis

Issuers in the United States and their auditors have related, but distinct, obligations to evaluate on a periodic basis whether there is substantial doubt about the issuer’s ability to continue as a going concern. In normal times, this evaluation, conducted with an appropriate level of diligence, results as to almost all major public companies in the conclusion that there is no substantial doubt about the entity’s ability to meet its obligations in the months to come.

But these are not normal times. As the COVID-19 crisis takes an ever-greater toll on the American economy, and as multiple well-known companies declare bankruptcy, the going-concern assessment has taken on new relevance for issuers, auditors, and others in the financial-reporting community. As a result, the number of issuer filings that contain a going-concern disclosure appears to have substantially increased. In this piece, we review some of the significant considerations that apply to the going-concern analysis from both the issuer’s and the auditor’s perspectives.
Read more

Join our panelists as they discuss recent trends in arbitration and worker classification. 2020 ushered in several new labor-and-employment laws, particularly for California companies. Specifically, California’s Assembly Bill 5 (“AB 5”) altered the employee/independent-contractor test for some types of workers while exempting others. Further, companies that have tried to avoid costly litigation through arbitration agreements face additional challenges. The California Legislature recently passed laws criminalizing arbitration agreements in certain employment agreements and imposing steep penalties on companies that fail to timely pay arbitration fees and costs. And some plaintiffs’ firms have attempted to use arbitration agreements against companies by filing “mass arbitrations,” which have the potential of imposing millions of dollars in arbitration filing fees on companies. Further, plaintiffs continue to try to use Private Attorneys General Act (“PAGA”) claims to circumvent arbitration agreements. This presentation will focus on these recent trends in arbitration and worker classification and discuss successful strategies by companies and employers to manage potential liability.

View Slides (PDF)

PANELISTS:

Dhananjay Manthripragada is a partner in the Los Angeles office of Gibson, Dunn & Crutcher and was formerly with the firm’s Washington, D.C. office, resulting in a broad complex litigation practice that is truly national in scope. He is a member of the firm’s Litigation, Class Actions, Government Contracts, and Aerospace and Related Technologies Practice Groups. Mr. Manthripragada has extensive experience defending companies in complex litigation in state and federal courts throughout the country, from pre-trial demands through trial, arbitration, or settlement, and on appeal. Mr. Manthripragada has served as counsel in a range of employment, consumer, wage-and-hour, antitrust, unfair competition, and environmental class action and derivative lawsuits, including many involving complex arbitration issues.

Michael Holecek is a litigation partner in the Los Angeles office of Gibson, Dunn & Crutcher, where his practice focuses on complex commercial litigation, class actions, labor and employment law, and data privacy—both in the trial court and on appeal. Mr. Holecek has first-chair trial experience and has successfully tried to verdict both jury and bench trials, he has served as lead arbitration counsel, and he has presented oral argument in numerous appeals. Mr. Holecek has also authored articles on appellate procedure, civil discovery, corporate appraisal actions, data privacy, and bad-faith insurance litigation.

R. Keith Chapman is an Associate General Counsel for Postmates Inc. He manages legal teams that oversee litigation, public policy, employment, trust & safety, insurance, and risk. Working at the forefront of future-of-work topics, Chapman helps Postmates lead legislative and labor outreach across the country and at the national level. Prior to joining Postmates in 2016, Chapman counseled and defended employers as an attorney with Littler Mendleson, P.C., in San Francisco, with practice areas focused on the gig-economy, wage & hour class action defense, and anti-discrimination. Chapman has also served as a managing attorney with the New York City Commission on Human Rights and clerked for the United Nations International Criminal Tribunal for Rwanda at the Trial Chambers, in Arusha, Tanzania, and Appellate Chamber, in the Hague, Netherlands. Chapman received his J.D., with Honors, from Rutgers University in 2005.

MCLE INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Victoria Chan (Attorney Training Manager) at [email protected] to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.

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

Los Angeles partner Maurice Suh, Washington, D.C. partner Andrew Tulumello and Los Angeles associate Zathrina Perez are the authors of “Ruling in NCAA case has the potential to remake the amateurism system,” [PDF] published by the Daily Journal on May 26, 2020.

On May 15, 2020, the Texas Supreme Court held that a broad “anti-washout” provision extending overriding royalty interests to a new lease for the same assets was invalid under Texas’s “rule against perpetuities,” though such a provision is subject to judicial reformation under Texas property laws.

As we noted in our October 24, 2019 alert when the Texas Supreme Court agreed to hear Yowell v. Granite Operating Co., No. 18-0841 (Tex. 2020), overriding royalty interests are “carved out” of an oil and gas lease. They entitle the interest holder to some portion of a leased asset’s production without subjecting the interest holder to the expense of developing, operating, or maintaining the leased asset. Absent specific language to the contrary, these interests are “limited in duration to the leasehold interest’s life” and terminate with the lease. Sunac Petroleum Corp. v. Parkes, 416 S.W.2d 798, 804 (Tex. 1967). Interest holders thus often include “anti-washout” clauses in the instrument creating the overriding royalty interest to prevent the interest from lapsing when a lease is renewed or extended, and some seek to prevent the interests from lapsing even when the lessee enters into an entirely new lease on different terms. For decades, Texas courts confirmed that these anti-washout provisions are valid and enforceable as applied to lease extensions and renewals but did not address their validity as applied to “new leases.” That changed on May 15, 2020, when the Texas Supreme Court considered and held for the first time that an anti-washout provision could not extend an existing overriding royalty interest to new leases when it was not clear that the interest would vest within a certain period of time.

In Yowell, the Court reviewed the validity of an anti-washout provision that purported to cover any “extension, renewal, or new lease” executed by the mineral interest holder for the same assets. The Court confirmed that the “extension” and “renewal” provisions were valid, but concluded that the “new lease” provision violated the Texas Constitution because, at the time of execution, there was uncertainty as to when (or whether) the purported interest in a theoretical “new lease” would vest. The Court rested its decision on a principle of property law called the “rule against perpetuities.” Under this rule, “no interest is valid unless it must vest, if at all, within twenty-one years after the death of some life or lives in being at the time of the conveyance.” BP Am. Prod. Co. v. Laddex, Ltd., 513 S.W.3d 476, 479 (Tex. 2017). The Court first concluded that the overriding royalty interest did not vest at the time of creation because it provided no “immediate, fixed right of present or future enjoyment as to new leases because those leases were not yet in existence.” The Court then noted that it was possible for the interest to vest outside the timeframe allowed by the rule against perpetuities. Specifically, the holder’s interest in a “new lease” was contingent on events that may not occur, including that (1) the existing lease must terminate, (2) the mineral interest owner must execute a new lease, and (3) the new lease must be obtained by the same lessee or its successor. In light of these contingencies, the overriding royalty interest would vest, if at all, after an indeterminate amount of time. The Supreme Court thus held that the provision was invalid as written.

Nonetheless, the Court also held that the anti-washout provision should be “reformed” under section 5.043 of the Texas Property Code to “reflect the creator’s intent.” This statute provides that “[w]ithin the limits of the rule against perpetuities, a court shall reform or construe an interest in real property that violates the rule to effect the ascertainable general intent of the creator of the interest.” Tex. Pro. Code § 5.043(a). The Court concluded that the reformation statute applied to corporate conveyances of property interests, including anti-washout provisions, and remanded the case for further proceedings related to reformation of the specific clause at issue.

After Yowell, it is unclear whether anti-washout provisions that purport to cover “new leases” are simply void pursuant to the rule against perpetuities, or whether adding time limits and specifying other contingencies can save such clauses. Similarly, it remains to be seen whether and how Texas trial and intermediate courts will reform anti-washout provisions that purport to cover “new leases” to comply with the rule. In the meantime, lessees and overriding royalty interest holders who wish to include anti-washout provisions covering “new leases” should carefully and clearly draft such provisions so that the interest vests with certainty within the limited time period proscribed by the rule, or risk that such a provision will be void or subject to judicial intervention and reformation. Gibson Dunn stands ready to advise our clients in drafting these provisions and otherwise advise our clients on the extent to which the Court’s decision may impact existing oil and gas leases.

The following Gibson Dunn lawyers assisted in preparing this client update: Mike Raiff, Mike Darden, Allyson Ho, Christine Demana and Collin Ray.

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 of the following members of the firm’s Oil and Gas or Appellate and Constitutional Law practice groups:

Michael P. Darden – Houston (+1 346-718-6789, [email protected])
Allyson N. Ho – Dallas (+1 214.698.3233, [email protected])
Tull Florey – Houston (+1 346-718-6767, [email protected])
Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Shalla Prichard – Houston (+1 346-718-6644, [email protected])
Mike Raiff – Dallas (+1 214-698-3350, [email protected])
Doug Rayburn – Dallas (+1 214-698-3442, [email protected])
Gerry Spedale – Houston (+1 346-718-6888, [email protected])

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

Since the U.S Environmental Protection Agency (EPA) issued its “Temporary COVID-19 Enforcement Policy” (“temporary enforcement policy”) on March 26th,[1] many regulated entities have successfully obtained extensions of consent decrees and other deadlines.[2] While federal and state enforcement discretion is welcome during this uncertain time, regulated entities should nonetheless proceed with some caution and not rely exclusively on the EPA’s temporary enforcement policy. Indeed, some state regulators and many environmental organizations have expressed their displeasure with the temporary enforcement policy. For example after the EPA issued its guidance, fifteen states’ attorney generals signed a letter calling on the EPA to rescind its temporary enforcement policy and vowed to “enforce [their] state[’s] environmental laws in a reasonable manner, and. . . hold regulated entities accountable under critical federal environmental laws if EPA will not.”[3] And, earlier this month attorney generals from the states of New York, California, Illinois, Maryland, Michigan, Minnesota, Oregon, Vermont, and Virginia sued the EPA for its “broad, open-ended [COVID-19 enforcement] policy” the states claim “gives regulated parties free rein to self-determine when compliance with federal laws is not practical because of COVID-19.”[4] Likewise, a “coalition of environmental justice, public health, and public interest organizations” filed suit against the EPA and two Administrators in April condemning the temporary enforcement policy and seeking an order demanding that the EPA respond to the coalition’s petition for emergency rule-making.[5]

Gaps in the EPA’s Temporary Enforcement Policy

Contrary to public perception, the EPA’s temporary enforcement policy does not eliminate or waive environmental requirements.[6] Rather, regulated entities are still “expected to make every effort to comply with all applicable requirements,” and the EPA “will not seek penalties for noncompliance with routine monitoring and reporting requirements if, on a case-by-case basis, the EPA agrees that such noncompliance was caused by the COVID-19 public health emergency.”[7] The EPA developed the temporary enforcement policy to enable it to “prioritize its resources to respond to acute risks and imminent threats, rather than mak[e] up front case-by-case determinations regarding routine monitoring and reporting” as regulators and regulated entities deal with the unprecedented situation where compliance and/or monitoring may be difficult, if not impossible, because employees cannot travel, are subject to stay-at-home orders, or are sick.[8]

Generally, under the temporary enforcement policy, the EPA does not anticipate seeking “penalties for violations of routine compliance monitoring, integrity testing, sampling, laboratory analysis, training and reporting or certification obligations” where COVID-19 caused the noncompliance and the regulated entity provides supporting documentation upon request.[9] That said, the EPA makes clear that nothing in the policy “relieves any entity from the responsibility to prevent, respond to, or report accidental releases of oil, hazardous substances, hazardous chemicals, hazardous waste, and other pollutants, as required by federal law” nor should the policy be interpreted to provide enforcement discretion in the event of such a release.[10] Moreover, the enforcement discretion described in the temporary policy does not apply to criminal violations or probation conditions in criminal sentences, activities that are carried out under Superfund and RCRA corrective action enforcement instruments, or imports.[11]

Thus, while the temporary enforcement policy shows the federal government may be willing to forgive some forms of environmental noncompliance due to COVID-19, the EPA’s enforcement discretion is not absolute. Moreover, the temporary enforcement policy does not absolve regulated entities of liability arising from private citizen suits and state enforcement actions despite the EPA’s noncompliance carve-out. Indeed, the temporary enforcement policy acknowledges as much, noting that “[a]uthorized states or tribes may take a different approach under their own authorities.”[12] Therefore, regulated entities facing potential noncompliance as a result of the pandemic must also consider enforcement risks they may face from other actors, notwithstanding the EPA’s temporary enforcement policy.

Risk of Citizen Suits

In the environmental context, citizen suits are private civil actions brought by individuals against regulated entities (and often the EPA) for failing to comply with (or in the EPA’s case enforce) certain regulations. Numerous federal environmental statutes permit enforcement via citizen suits, including the Clean Water Act, the Clean Air Act, RCRA,[13] and CERCLA. For example, the Clean Water Act provides that “any citizen may commence a civil action on his own behalf…against any person…who is alleged to be in violation of (A) an effluent standard or limitation under this chapter or (B) an order issued by the Administrator or a state with respect to such a standard or limitation.”[14] Similarly, the Clean Air Act allows any person to “commence a civil action on his own behalf…against any person…who is alleged to have violated (if there is evidence that the violation has been repeated) or to be in violation of (A) an emission standard or limitation under this chapter or (B) an order issued by the Administrator or a State with respect to such a standard or limitation” and “against any person who proposes to construct or constructs any new or modified major emitting facility without a permit…or who is alleged to have violated (if there is evidence that the alleged violation has been repeated) or to be in violation of any condition of such permit.”[15] Because the EPA’s temporary enforcement policy only governs the EPA’s enforcement discretion and does not supplant or replace any existing environmental statutes, citizen suit provisions in federal environmental statutes remain unaffected and therefore, enforcement liability for COVID-19-related noncompliance via citizen suits is still a threat.

One question, however, is whether permitting citizen suits for noncompliance resulting from a global pandemic accords with congressional intent behind citizen suits. The legislative history of the Clean Air Act, the first federal environmental statute to authorize citizen suits, indicates that Congress authorized citizen suits as an enforcement mechanism, in part because Congress recognized that the government’s limited resources could hinder adequate enforcement and private enforcement could spur the government to act when it otherwise would not.[16] Under current circumstances, however, it would seem that the EPA’s enforcement capabilities are not limited by resource constraints but rather public health guidelines. And, facilities and regulators are experiencing difficulty complying and monitoring compliance due to unprecedented circumstances where employees and contractors are ill and/or subject to stay-at-home orders and social distancing guidelines.

Additionally, there may be procedural barriers that limit the viability of citizen suits challenging regulated entities’ COVID-19 related noncompliance, especially if such noncompliance is limited in time and scope. First, some citizen suit provisions, like those in the Clean Air Act and Clean Water Act, mandate that private litigants cannot bring a citizen suit until 60 days after they have given notice to “any alleged violator.”[17] Second, some statutes limit the ability for plaintiffs to bring citizen suits when the conduct complained of has ceased. For example, the Clean Water Act does not allow citizen suits based on wholly past conduct[18] and the Clean Air Act only permits citizen suits for past violations if they are alleged to be “repeated.”[19] These requirements may make it difficult to maintain a citizen suit action based on noncompliance caused by COVID-19 that may be limited to a “one-off” violation that ends as soon as workers and contractors are healthy and/or stay-at-home orders are lifted.

Relatedly, regulated entities may also attempt to dismiss citizen suits for COVID-19 related noncompliance on grounds that a citizen suit has since become moot. Admittedly, mootness in the environmental law context has been made more difficult after the Supreme Court’s decision in Friends of the Earth, Inc. v. Laidlaw Environmental Servs., Inc., in which the Court held that “[a] defendant’s voluntary cessation of allegedly unlawful conduct ordinarily does not suffice to moot a case.”[20] However, a case may nonetheless become moot where “subsequent events made it absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur.”[21] Thus, while regulated entities may bear a “heavy burden” to satisfy the mootness standard, noncompliance caused by a global pandemic and stay-at-home orders could be sufficiently abnormal such that a court would conclude that a regulated entity’s voluntary cessation of noncompliant conduct (i.e. becoming re-complaint upon the termination of stay-at-home orders) would not “reasonably be expected to recur.”

Risk of State Enforcement Actions

Because the EPA and state environmental authorities retain power over public health and the environment and many environmental statutes provide for dual enforcement by the federal government and state authorities, the EPA’s temporary enforcement policy cannot and does not supplant individual states’ authority to police environmental noncompliance caused by COVID-19.[22] As such, regulated entities remain subject to state enforcement actions despite the EPA’s temporary policy. Regulated entities should, therefore, be aware of their states’ position on noncompliance stemming from the COVID-19 pandemic and determine to what extent, if any, their state’s position departs from that of the EPA.

States environmental agencies have had various reactions to the EPA’s temporary enforcement policy. Many state environmental agencies took a similar stance to the EPA’s position and reaffirmed their commitment to protect the environment and public health, while simultaneously recognizing that the COVID-19 pandemic may present compliance challenges for regulated entities. For example, in a letter to the public, the chairman of the Texas Commission on Environmental Quality (TCEQ) noted that it had not relaxed “any limits on air emissions or discharges to water” and had not “relaxed the requirement to report emissions or discharges that exceed these limits.”[23] The chairman reiterated that despite the COVID-19 pandemic, TCEQ remains “fully engaged in its mission to protect public health and the environment.”[24] However, like the EPA, TCEQ stated that it would exercise enforcement discretion in certain cases as regulated entities navigate the pandemic:

“TCEQ’s Executive Director has determined that it may be inappropriate to pursue enforcement for violations that were unavoidable due to the pandemic or where compliance would create an unreasonable risk of transmitting COVID-19 or otherwise impede an appropriate response to the pandemic. Accordingly, TCEQ will consider exercising its discretion to not bring enforcement actions for such violations on a case-by-case basis. This is not a suspension of rules. . . And this is certainly not an exemption from agency rules . . . Importantly, TCEQ is not offering enforcement forbearance where an entity fails to report its noncompliance.”[25]

Still, other states, including those that have a high number of COVID-19 cases like California and Michigan, adopted a similar tone—recognizing that regulated entities may need additional time or assistance in order to meet their compliance obligations. For example, on April 15, CalEPA issued a statement on its expectations for regulatory compliance during the COVID-19 pandemic. The agency reaffirmed its commitment to safeguarding “public health, safety, and the environment during the COVID-19 pandemic” and acknowledged that “controlling pollution in communities with high rates of respiratory disease and multiple environmental burdens” remained a priority “especially given recent studies that suggest a correlation between these factors and COVID-19 susceptibility.”[26] Nonetheless, CalEPA also recognized that “some regulated entities may need additional compliance assistance as a result of the COVID-19 pandemic.”[27] CalEPA stated that some extension of deadlines “may be warranted under clearly articulated circumstances,” but noted that regulated entities must affirmatively contact CalEPA “before falling out of compliance.”[28]

Michigan’s environmental authority, the Michigan Department of Environment, Great Lakes and Energy (EGLE), too, affirmed its commitment to protecting “public health and the environment” and stated that it “expect[s] all businesses to adhere to environmental regulations and permit requirements.”[29] Much like CalEPA’s response, the EGLE also indicated that it would make exceptions for entities who cannot safely meet certain environmental obligations while still adhering to Michigan’s social distancing guidelines:

“In cases where a regulated entity believes it cannot meet certain obligations without endangering the health and welfare of employees or others as a result of complications from the COVID-19 pandemic, the agency will make case-by-case determinations on temporary alterations to reporting or compliance requirements.

Requests for temporary deviation from regulations and permit requirements may be made. . .[and] [t]hey will be asked to answer a series of questions, providing detailed information and specific rationale on the necessity of altering their obligation, after which a determination will be made.”[30]

Based on the public statements, it seems that states may be willing to work with regulated entities who risk noncompliance caused by COVID-19 so long as such entities communicate their risks with state authorities and document the ways in which their noncompliance was caused by COVID-19. However, some states are exercising less enforcement discretion than others, as CalEPA has not indicated that it will not seek penalties for noncompliance but may grant specific time-delimited remedies.

In addition, regulated entities should check their state’s existing laws on self-reporting and auditing as they may protect against liability resulting from COVID-19 related noncompliance so long as entities self-report. For example, Texas provides immunity for certain violations uncovered through voluntary audits under the Texas Environmental Health, and Safety Audit Privilege Act.[31]

Conclusion and Best Practices

While regulated entities may view the EPA’s temporary enforcement policy as a welcome acknowledgement that the COVID-19 pandemic has made environmental compliance and monitoring difficult, if not impossible, such entities should also consider the liability risks that exist despite the EPA’s policy—like citizen suits and state enforcement actions. In accordance with the temporary enforcement policy, regulated entities should at a minimum “document decisions made to prevent or mitigate noncompliance and demonstrate how the noncompliance was caused by the COVID-19 pandemic.”[32] Any evidence showing that the noncompliance was or will be limited in duration or scope may also be helpful. To further mitigate liability for noncompliance caused by COVID-19, it may be prudent for regulated entities to inform the EPA and state environmental agencies of their potential noncompliance before it occurs and follow their recommended guidance.

In short, as regulated entities and regulators seek to navigate this public health crisis, facilities that find themselves risking noncompliance due to COVID-19 should take comfort in the EPA’s willingness to work with them as articulated in its temporary enforcement policy. However, entities should beware of other liability risks that remain unaffected by the EPA’s policy. While entities should always seek to achieve and maintain compliance with environmental regulations, now more than ever, it is imperative that they communicate the unique challenges they face to the EPA and its state corollaries early and often.

____________________

[1] See “COVID-19 Implications for EPA’s Enforcement and Compliance Assurance Program,” Environmental Protection Agency (available at https://www.epa.gov/sites/production/files/2020-03/documents/oecamemooncovid19implications.pdf).

[2] See, e.g., “TCEQ COVID-19 Enforcement Discretion Requests,” Texas Commission on Environmental Quality, (available at https://www.tceq.texas.gov/downloads/response/covid-19/enforcement-discretion-list-042420.xlsx/view).

[3] See Letter from Attorneys General of New York, Illinois, Iowa, Maryland, Massachusetts, Michigan, Minnesota, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Washington and Wisconsin to Administrator Andrew Wheeler, April 15, 2020, (available at https://www.attorneygeneral.gov/wp-content/uploads/2020/04/2020-04-16-Final-AGs-letter-on-EPA-enforcement-discretion-policy.pdf); see also Letter from California Attorney General Xavier Becerra to Assistant Administrator Susan Parker Bodine, April 9, 2020, (available at https://oag.ca.gov/system/files/attachments/press-docs/CA%20Attorney%20General%20Letter%20re%20EPA%20COVID-19%20Policy%204.9.2020.pdf).

[4] State of New York, et al., v. U.S. Env’tal Protection Agency, et al., No. 1:20-cv-03714, Dkt. 1 (S.D.N.Y. May 13, 2020).

[5] Natural Res. Def. Council, et al., v. Bodine, et al., No. 1:20-cv-03058, Dkt. 1 (S.D.N.Y. Apr. 16, 2020).

[6] See “Frequent Questions About the Temporary COVID-19 Enforcement Policy,” (available at https://www.epa.gov/enforcement/frequent-questions-about-temporary-covid-19-enforcement-policy).

[7] Id.

[8] Id.

[9] See COVID-19 Implications for EPA’s Enforcement and Compliance Assurance Program.

[10] See id.

[11] See id.

[12] See COVID-19 Implications for EPA’s Enforcement and Compliance Assurance Program; see also Frequent Questions About the Temporary COVID-19 Enforcement Policy (“The Policy acknowledges the important role played by our state, tribal and territorial partners, and specifically notes states or tribes may take a different approach under their own authorities. Some states have already issued their own guidance.”).

[13] Note, however, that activities carried out pursuant to a RCRA corrective action are not subject to the enforcement discretion provided for in the temporary enforcement policy. See COVID-19 Implications for EPA’s Enforcement and Compliance Assurance Program.

[14] 33 U.S.C.A. § 1365(a)(1).

[15] 42 U.S.C.A. § 7604(a)(1) and (3).

[16] See generally Natural Resources Defense Council v. Train, 510 F.2d 692 (D.C. Cir. 1974) (quoting the legislative history of the Clean Air Act Amendments of 1970).

[17] See 33 U.S.C.A. § 1365(b)(1); see also 42 U.S.C.A. § 7604(b)(1). Note, however, that citizen suits brought under § 7604(a)(3) of the Clean Air Act, which governs issues with permits, are not subject to the 60 day notice requirement.

[18] Gwaltney of Smithfield, Ltd. v. Chesapeake Bay Found., Inc., 484 U.S. 49, 54–62 (1987), superseded by statute on other grounds as recognized by Env’t Tex. Citizen Lobby, Inc. v. ExxonMobil Corp., 824 F.3d 507, 529 n.18 (5th Cir. 2016).

[19] See 42 U.S.C.A. § 7604(a)(1) and (3).

[20] 528 U.S. 167, 174 (2000).

[21] Id. at 189 (quoting U.S. v. Concentrated Phosphate Export Ass’n., 393 U.S. 199, 20003 (1968)).

[22] See COVID-19 Implications for EPA’s Enforcement and Compliance Assurance Program.

[23] “TCEQ message to concerned citizens, public advocates, and members of the regulated community,” Texas Comm’n on Environmental Quality, April 6, 2020 (available at https://www.tceq.texas.gov/news/tceqnews/features/tceq-message-concerning-covid-19-response).

[24] Id.

[25] Id.

[26] “CalEPA Issues Statement on Compliance with Regulatory Requirements During the COVID-19 Emergency,” California Environmental Protection Agency, April 15, 2020, (available at https://calepa.ca.gov/2020/04/15/calepa-statement-on-compliance-with-regulatory-requirements-during-the-covid-19-emergency/).

[27] Id.

[28] Id.

[29] “Is EGLE still enforcing pollution laws and the conditions of permits issued to entities that release pollutants?”, Michigan Dept. of Env’t, Great Lakes, and Energy, (available at https://www.michigan.gov/egle/0,9429,7-135-99239-525079–,00.html).

[30] “Are you making exceptions in cases where the COVID-19 crisis makes it dangerous for workers at regulated companies to adhere to their regulatory obligations?” Michigan Dept. of Env’t, Great Lakes, and Energy, (available at https://www.michigan.gov/egle/0,9429,7-135-99239-525084–,00.html).

[31] See TX HEALTH & S § 1101.151.

[32] “EPA Announces Enforcement Discretion Policy for COVID-19 Pandemic,” March 26, 2020 (available at https://www.epa.gov/newsreleases/epa-announces-enforcement-discretion-policy-covid-19-pandemic).

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Environmental Litigation and Mass Tort practice group, or the authors:

Michael K. Murphy – Washington, D.C. (+1 202-955-8238, [email protected])
Abbey Hudson – Los Angeles (+1 213-229-7954, [email protected])
Dione Garlick – Los Angeles (+1 213-229-7205, [email protected])
Nicole R. Matthews – Los Angeles (+1 213-229-7649, [email protected])

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

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