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.[1] 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,[2] 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.[3] 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.

Summary of Issues

Financial Accounting Standards Board (“FASB”) accounting standards and PCAOB auditing standards both require an assessment of whether there is substantial doubt about the issuer’s ability to continue as a going concern, including evaluating concrete management plans to address the circumstances giving rise to the reasonable doubt. The auditor is required to make an independent assessment, not simply evaluate management’s process.
Important differences between the accounting and auditing standards include that the management assessment occurs quarterly and looks forward one year from the date the financial statements are issued, whereas the auditor annually considers the period one year from the balance sheet date, with different quarterly review procedures.
Both auditors and issuers should anticipate potential exposure to regulatory and private litigation should their forecasts of the effects of the COVID-19 pandemic prove inaccurate.

Background

American Institute of Certified Public Accountants (“AICPA”) and, later, PCAOB auditing standards have for decades required auditors to evaluate on an annual basis whether there is substantial doubt about the ability of the audited entity to continue as a going concern.[4] Under current PCAOB standard AS 2415, an auditor assesses, based on the relevant information obtained during the audit,[5] whether substantial doubt exists about the entity’s ability to meet its obligations as they come due over a reasonable period of time after the balance sheet date (not to exceed one year in the future) without the entity’s having to resort to measures such as disposing of significant assets or restructuring its debt.[6] The relevant information could include evidence such as negative operating trends, loan defaults, loss of key customers or patents, or even natural disasters.[7] If the auditor concludes that substantial doubt does exist, then as a second step it is required to consider management’s plans to address the circumstances giving rise to the substantial doubt, such as selling assets, restructuring debt, or raising capital. Under AS 2415, the auditor’s focus is on whether those plans are feasible and whether the assumptions underlying them are reasonable, such that they represent an adequate plan to address the circumstances.[8] If the auditor concludes even after assessing management’s plans that substantial doubt about the entity’s ability to meet its obligations over the coming year still exists, then the auditor must, among other steps, include an explanatory paragraph to that effect in the audit report.[9]

In addition, if an auditor, during an interim review of an entity’s quarterly financial statements, becomes aware of “the entity’s possible inability to continue as a going concern,” the auditor is required to make certain inquiries of management and assess whether management’s disclosures are adequate.[10]

On top of this established framework, the FASB in 2014 adopted a requirement that companies make their own assessments on a quarterly basis of their ability to continue as a going concern, a requirement codified as ASC Subtopic 205-40.[11] Subtopic 205-40 differs from the PCAOB’s AS 2415 in some important ways. For example, unlike the PCAOB, the FASB defined the concept of “substantial doubt” in connection with its standard: specifically, it stated that substantial doubt exists as to an entity’s ability to continue as a going concern “when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued.”[12] In other respects, Subtopic 205-40 bears close similarities to AS 2415, including in the circumstances that can indicate that substantial doubt exists and in the requirement to assess management plans to alleviate the substantial doubt.[13]

Even apart from the considerations specific to the COVID-19 crisis, there are two differences between Subtopic 205-40 and AS 2415 that are important to bear in mind:

First, management’s disclosure obligations differ from those of the auditor. While the auditor’s disclosure consists of an explanatory paragraph in the audit report,[14] management’s disclosure of substantial doubt about its ability to continue as a going concern is found in the notes to the financial statements and management typically also includes disclosure of the issue in the liquidity section of management’s discussion and analysis (“MD&A”), as well as in the issuer’s risk factors.[15] Additionally, under Subtopic 205-40, where an issuer that concludes that management’s plans have alleviated the substantial doubt about its ability to meet its obligations, the issuer still must disclose in the notes to the financial statements that substantial doubt existed in the absence of those plans.[16] AS 2415, on the other hand, does not require disclosure by the auditor in situations where management’s plans have alleviated the substantial doubt.
Second, while management’s obligation to evaluate its going-concern status is identical at the annual and quarterly stages,[17] the auditor’s obligations vary considerably between year-end and quarter-end. Unlike many audit procedures, in which the auditor evaluates the reasonableness of management’s accounting or disclosures, the annual going-concern analysis represents a standalone process for the auditor to arrive at a conclusion regarding the entity’s status.[18] In an interim review, by contrast, the procedures are both more limited and more tied to management’s assessment.[19]

Although global pandemics were not included on the list of adverse conditions in either AS 2415 or Subtopic 205-40, the economic shock that COVID-19 has created will provide a basis for many companies and auditors to conduct a more searching going-concern analysis than usual in the months to come. As we address in the next section, this analysis will be especially difficult in a crisis such as COVID-19 whose duration and economic effects are so unpredictable. We will then address some other key considerations for issuers and auditors as they assess the potential for substantial doubt to exist concerning management’s ability to meet upcoming obligations.

Addressing the Significant Uncertainty of the COVID-19 Crisis

The list of adverse events set out in AS 2415 and Subtopic 205-40 that could potentially call a company’s viability into question includes items such as negative operating trends, work stoppages, and loan defaults.[20] In some cases, the ultimate outcome of those events or circumstances will be uncertain at the time of management’s or the auditor’s assessment. The COVID-19 pandemic, however, raises a set of global uncertainties—concerning areas from public health to financial markets—whose complexity is an order of magnitude greater than that of the circumstances that may drive an entity’s going-concern analysis in normal times.

While Subtopic 205-40 requires only that an entity assess its ability to meet its obligations based on “relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued,”[21] and AS 2415 similarly requires only that the auditor consider “his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report,”[22] both issuers and auditors should be aware that regulators and private plaintiffs will later assess their actions with twenty-twenty hindsight. Plaintiffs, in particular, will have an incentive to ignore that the auditor “is not responsible for predicting future conditions or events,”[23] and likely will seek to claim that the events of the next year were clearly on the horizon at the time that companies and auditors issued their financial statements and reports, based on the progression of the COVID-19 crisis as of that time. In assessing the risk that an entity will be unable to meet its obligations in the coming months, both issuers and auditors should anticipate that they will face potential legal exposure for failing to accurately predict the future.

In the current environment, both management and auditors are likely best served by: (i) making, documenting, and disclosing a good-faith attempt to identify the operational, financial, and economic factors that will affect the company’s ability to meet its obligations in the coming year, including those that are likely to indicate a worse outcome for the company; (ii) comprehensively documenting what they believe is known and reasonably knowable, as of their assessment date, about the implications of each factor for the company’s ability to meet its obligations in the coming months—including, as appropriate, based on consultation with third-party experts such as outside counsel or valuation experts; and (iii) making, and documenting, a good-faith assessment, based on that forecast, of how likely it will be that a point arrives within the relevant timeframe at which, individually or in the aggregate, one or more of those factors causes the company to be unable to meet its obligations as they come due.

Other Key Considerations

In addition to the problem of uncertainty in the progression of the COVID-19 crisis, there are other considerations that issuers and auditors should bear in mind as they conduct their going-concern assessments.

First, if an entity’s management concludes that substantial doubt exists concerning its ability to meet its obligations absent management plans to address the situation, then management should keep in mind the requirements that apply to the plans that it develops. Subtopic 205-40 makes clear that substantial doubt about an entity’s ability to continue as a going concern is alleviated only if two conditions are met: (i) “It is probable that management’s plans will be effectively implemented within one year after the date that the financial statements are issued,” and (ii) “It is probable that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.”[24]

Concerning the first condition, the standard states that for management’s plans to be considered probable for implementation, they generally must already have been approved by management at the time the financial statements are issued.[25] That is, they should generally not be merely theoretical or even under active consideration. This means that, if management anticipates that its quarter-end analysis may lead to an initial conclusion that substantial doubt exists concerning its ability to continue as a going concern, it should take anticipatory steps during the quarter to plan its response, to help ensure that it has time to approve any alleviating plans that may become necessary.

Concerning the second condition, Subtopic 205-40 states that the magnitude and timing of management’s plans must be measured against “the magnitude and timing of the relevant conditions or events that those plans intend to mitigate.”[26] If, for example, management adopts a plan to address its liquidity needs that will not become effective until after the principal period of its liquidity shortfall has passed, then it may be difficult for it to conclude that the plan is effectively timed to alleviate the substantial doubt concerning its ability to meet its obligations. Issuers should try to ensure, therefore, that they develop plans that will realistically meet their expected liquidity and related needs in terms of both timing and magnitude.

Management should remain aware as to both of these conditions that the probability of execution or success that it assigns to its plans may differ from the probability that its auditor assigns to those same plans; thus, if it hopes to avoid a going-concern explanatory paragraph in the audit report, it will need to communicate early and often with the auditor to understand the auditor’s views as to how it anticipates evaluating management’s plans.

Second, PCAOB standards similarly prescribe particular considerations should an auditor initially conclude that substantial doubt about the entity’s ability to continue as a going concern does exist such that management’s plans become relevant. AS 2415 directs the auditor to focus especially on two points: (i) “those elements that are particularly significant to overcoming the adverse effects of the conditions and events,” and (ii) any “prospective financial information [that] is particularly significant to management’s plans.”[27] The standard requires the auditor to obtain audit evidence specifically to address the most significant aspects of management’s plan, including the evidence that supports management’s assumptions about the prospective financial effects of its plans. This information should be considered with appropriate professional skepticism, and the auditor should keep in mind that the PCAOB would likely conclude that the provisions of auditing standards that require an auditor to consider contrary audit evidence would apply to this exercise.[28]

Third, complications may arise even after the annual audit if the issuer intends to incorporate by reference its financial statements with the Securities and Exchange Commission (“SEC”) as part of a registered offering conducted pursuant to the Securities Act of 1933, as amended. If the issuer does incorporate its financial statements by reference, the issuer is required to obtain the auditor’s consent to include the audit report as part of the registered offering. PCAOB standards require auditors to conduct certain procedures in that situation,[29] and if as a result of those procedures the auditor determines that its audit report would be misleading in the absence of a going-concern explanatory paragraph (even though the conditions giving rise to the substantial doubt occurred after the issuance of the report), then the auditor might re-issue its audit report to include a going-concern explanatory paragraph and require that the issuer update its financial statements to reflected this added disclosure. Depending on the timing, this re-issuance may or may not occur in conjunction with the issuer’s conducting its own quarterly evaluation of its ability to continue as a going concern.

Fourth, there is a slight discrepancy between the time period applicable to an issuer’s going-concern analysis and that applicable to the auditor, but the period during which both parties obtain the evidence that is relevant to their analysis is the same.

AS 2415 states that the auditor’s going-concern evaluation is conducted with reference to the balance-sheet date; meanwhile, Subtopic 205-40 states that management’s evaluation should occur as of the date the financial statements are issued.[30] FASB noted in adopting Subtopic 205-40 that it had received input “from many auditors indicating that, in practice, they already assess over a period of one year from the audit report date instead of one year from the balance sheet date.”[31] More importantly, however, AS 2415 makes clear that the auditor’s consideration of the going-concern question must be “based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report.”[32] The fact that the auditor’s balance-sheet date is used as a reference date, then, does not provide the auditor with an excuse to ignore subsequent events that occur prior to the audit report.

A recent SEC case addressing an auditor’s going-concern analysis demonstrated this fact in practice. In the Matter of the Application of Cynthia C. Reinhart, CPA was an appeal to the SEC from sanctions that the PCAOB had ordered be imposed on the engagement partner for an audit of a mortgage lender, Thornburg Mortgage, Inc. (“Thornburg”).[33] The PCAOB charged that Ms. Reinhart had, among other things, failed to properly assess whether there was substantial doubt about Thornburg’s ability to continue as a going concern. Although the SEC recognized that Ms. Reinhart and her team had, consistent with AS 2415, assessed the question of substantial doubt over a period lasting until the following fiscal year end, the SEC’s discussion of the sufficiency of her assessment concentrated in large part on events that occurred between the balance-sheet date and the report date, such as fluctuations in Thornburg’s ability to meet margin calls leading up to the filing of its Form 10-K.[34] The Reinhart case is a useful reminder that the difference between management’s and the auditor’s reference date does not create any distinction between them in terms of the available evidence that may affect their assessment.

Fifth, it has been discussed that auditors may be concerned about issuing going-concern opinions in part because doing so could accelerate the financial decline of the entity being audited, such that the going-concern paragraph becomes a self-fulfilling prophecy.[35] Given the widespread economic dislocations that the COVID-19 crisis has caused, there may be reason to think that the stigma of a going-concern opinion is not as acute as it has been under normal circumstances. In either case, however, audit engagement teams should keep in mind that protecting their own, and their firms’, interests depends on the team ensuring that it considers the relevant evidence with appropriate skepticism and documents that its process was thorough and appropriate.

Sixth, issuers should seek counsel sooner rather than later about their fiduciary obligations when potential going-concern issues exist because it is critical that officers and directors fully understand their fiduciary obligations and how best to comply with them and make reasoned, disinterested, good faith decisions that receive the benefit of the business judgment rule. Members of the Firm’s Business Restructuring and Reorganization Group can assist officers and directors to understand and comply with these obligations.

Conclusion

Hopefully, the period when going-concern analyses occupy a heightened level of attention will pass in the coming months as the COVID-19 health crisis wanes and the U.S. and world economies rebound. Until that time comes, issuers and auditors should ensure that they are approaching the going-concern analysis with the care that it will now warrant.

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[1] This alert focuses on the considerations applicable to issuers who report their financial statements on the basis of U.S. Generally Accepted Accounting Principles and to audits of those issuers performed pursuant to Public Company Accounting Oversight Board (“PCAOB”) auditing standards. We note, however, that International Financial Reporting Standards (“IFRS”) also contain a requirement that an entity assess its status as a going concern. See IAS 1.25, Presentation of Financial Statements. As a result, many of the observations contained herein may also be relevant to issuers who report using IFRS.

[2] See, e.g., Hertz Global Holdings, Inc., Form 8-K filed May 26, 2020; J. C. Penney Co., Inc., Form 8-K filed May 18, 2020; J.Crew Group, Inc., Form 8-K filed May 4, 2020.

[3] Among the companies that have recently issued going-concern notices are: Chesapeake Energy Corp., see Form 10-Q filed May 11, 2020; and Dave & Buster’s Entertainment, Inc., see Form 10-K filed Apr. 3, 2020. See also SandRidge Energy, Inc., Form 10-Q filed May 19, 2020 (disclosing substantial doubt concerning ability to continue as a going concern alleviated by management plans to sell headquarters).

[4] See AU § 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern. AU Section 341 was adopted as an interim standard by the PCAOB pursuant to PCAOB Rule 3200T, see PCAOB Rel. No. 2003-006 (Apr. 18, 2003), and is now codified in PCAOB auditing standards as AS 2415, Consideration of an Entity’s Ability to Continue as a Going Concern.

[5] AS 2415 does not require any procedures to be performed solely for purposes of the going-concern evaluation. Instead, it contemplates that “[t]he results of auditing procedures designed and performed to achieve other audit objectives should be sufficient for that purpose.” AS 2415.05.

[6] AS 2415.01-.03.

[7] AS 2415.06.

[8] AS 2415.07-.09.

[9] AS 2415.12.

[10] AS 4105.21, Reviews of Interim Financial Information.

[11] See Accounting Standards Update No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (Aug. 2014) (“ASU 2014-15”).

[12] ASU 2014-15, Glossary (emphasis in original, other emphasis removed). FASB made clear that the term “probable” as used here has the same meaning as it does in the context of assessing loss contingencies under ASC Topic 450. See id. In the relevant contingencies standard, FASB defined “probable” to mean that “[t]he future event or events are likely to occur.” See Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, ¶ 3(a). Although the standard does not assign percentages to this term, practitioners generally note that “probable” represents approximately a seventy percent chance or greater of occurrence. See, e.g., A Roadmap to Accounting for Contingencies and Loss Recoveries, at 21 (Deloitte 2019).

[13] See ASC 205-40-55-2 (using same list of adverse conditions as that used by PCAOB); ASC 205-40-50-6 (consideration of management plans).

[14] See AS 2415.12.

[15] See ASC 205-40-50-13 (requiring both footnote disclosure and “information that enables users of the financial statements to understand” three points: (i) the “[p]rincipal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern”; (ii) “[m]anagement’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations”; and (iii) “[m]anagement’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern”).

[16] Specifically, management’s disclosures must include (i) the “[p]rincipal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)”; (ii) “[m]anagement’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations”; and (iii) “[m]anagement’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.” ASC 205-40-50-12.

[17] In adopting ASU 2014-15, FASB explicitly stated that it considered limiting the going-concern analysis to an annual exercise but elected to adopt a quarterly requirement instead, “to ensure that uncertainties about an entity’s ability to continue as a going concern were being evaluated comprehensively for each reporting period, and being reported timely in the financial statement footnotes.” ASU 2014-15, ¶ BC23.

[18] In the wake of FASB’s adoption of Subtopic 205-40, the PCAOB staff issued a release emphasizing that an issuer’s “determination that no disclosure is required under [applicable accounting principles] is not conclusive as to whether an explanatory paragraph is required” under PCAOB standards. PCAOB Staff Audit Practice Alert No. 13, Matters Related to the Auditor’s Consideration of a Company’s Ability to Continue as a Going Concern (Sept. 22, 2014). The exception to the principle in AS 2415 that the auditor is in a proactive rather than reactive position in conducting its annual assessment is that, should the entity determine that substantial doubt exists, then the auditor is required to assess the reasonableness of management’s disclosures on that point. See AS 2415.10-.11.

[19] See AS 4105.21.

[20] See ASC 205-40-55-2; AS 2415.06.

[21] ASC 205-40-50-3.

[22] AS 2415.02.

[23] AS 2415.04.

[24] ASC 205-40-50-7.

[25] See ASC 205-40-50-8.

[26] ASC 205-40-50-10.

[27] AS 2415.08-.09.

[28] See AS 1105.29, Audit Evidence (requiring auditor to perform procedures to address any inconsistency or lack of reliability in the audit evidence it obtains). As an example, the SEC in the Reinhart matter (see infra note 33) considered in connection with Ms. Reinhart’s going-concern analysis the predecessor standard to AS 1105, which likewise directs an auditor to “consider relevant evidential matter regardless of whether it appears to corroborate or to contradict the assertions in the financial statements.” AU 326.25, Evidential Matter. In its order, the SEC appeared to assume that Ms. Reinhart was required to consider inconsistent audit evidence as well as confirmatory evidence when assessing the issuer’s ability to continue as a going concern. See, e.g., In the Matter of the Application of Cynthia C. Reinhart, CPA, SEC Rel. No. 85964 at 19 n.38 (May 29, 2019).

[29] See AS 4101, Responsibilities Regarding Filings Under Federal Securities Statutes.

[30] Compare AS 2415.02 (“date of the financial statements being audited”) to ASC 205-40-50-1 (“date that the financial statements are issued”).

[31] ASU 2014-15, ¶ BC28.

[32] AS 2415.02 (emphasis added).

[33] See generally SEC Rel. No. 85964.

[34] See id. at 8 (use of subsequent balance-sheet date for analysis); 8-11 (evidence concerning liquidity arising during subsequent period after balance-sheet date).

[35] See, e.g., John H. Eickemeyer, “The Concerns with Going Concern,” The CPA Journal (Jan. 2016).

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 pandemic. For additional information, please contact any member of the firm’s Securities Regulation and Corporate Governance or Business Restructuring and Reorganization practice groups, the Gibson Dunn lawyer with whom you usually work, or the following authors:

Authors: Brian Lane, Michael Scanlon, Michael Rosenthal, Jeffrey Krause, David Ware, and David Korvin

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

On May 20, 2020, the German government has adopted an amendment (the “Amendment”) to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung or “AWV”) further increasing the scrutiny of foreign direct investments (the “FDIs”). The Amendment focuses on the health sector, addressing apparent pitfalls exposed by the COVID-19 crisis. The tightening of FDI screening rules was also encouraged by the European Commission which called upon the EU member states to take protective measures in response to the COVID-19 outbreak, in particular “to be vigilant and use all tools available at Union and national level to avoid that the current crisis leads to a loss of critical assets and technology” (see Communication from the Commission of March 13, 2020).

Further, the Amendment precedes a contemplated amendment of the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz or “AWG”) which is currently discussed in the German parliament and expected to be approved – possibly in a slightly revised version – within the next few weeks (the “Draft AWG Amendment”). While the AWV codifies the detailed procedural rules of the German review process, the AWG provides the overall framework of the FDI screening mechanism. The Draft AWG Amendment would further tighten the rules of German foreign investment control and align the German screening mechanism with the EU Screening Regulation, which will apply from October 11, 2020 onward.

In general, the German Federal Ministry for Economic Affairs and Energy (the “German Ministry”) has the competence to review and prohibit or restrict investments in domestic companies by a foreign investor on the grounds of public order or security (cross-sector review), or to ensure the protection of essential security interests of the Federal Republic of Germany (sector-specific review). “Sector-specific reviews”, which cover the defense industry and certain parts of the IT security industry, apply to all (EU and non-EU) foreign investors while “cross-sector reviews” (covering all other industry sectors) only apply to non-EU/non-EFTA foreign investors. The general threshold for screening is the direct or indirect acquisition by a foreign investor of at least 25% of the voting rights in a German company. This threshold is lowered to 10% of the voting rights for FDIs that fall under sector-specific review or fit one of the select industry categories listed as part of the cross-sector review (i.e., critical infrastructure etc.); all FDIs falling in either of these two buckets – sector-specific or listed category of cross-sector – need to be notified to the German Ministry. With the Amendment expanding the list of categories of cross-sector review, more FDIs will become notifiable and subject to screening at already 10% of the voting rights.

Key Amendments to the AWV

Aside from heightened scrutiny in the health-care sector, the Amendment introduces investor-related screening factors as set out in Regulation (EU) 2019/452 of March 19, 2019 establishing a framework for screening of FDIs into the EU (the “EU Screening Regulation”) and provides for minor clarifications.

The Amendment provides for the following key changes to the AWV:

Catalog of Select Industries Subject to Cross-Sector Review. The Amendment provides for five new categories to be added to the catalog of cross-sector review.Health-Care Related Additions
- Development or production of personal protective equipment;
- Development, production, or marketing of material pharmaceuticals (wesentliche Arzneimittel), including holders of respective statutory permits;
- Development or production of medical products designed for diagnosis, prevention, monitoring, prediction, prognosis, treatment or easement of life-threatening and highly contagious infectious diseases;
- Development or production of in-vitro-diagnostics used in connection with life-threatening and highly contagious infectious diseases.

In individual cases, these new categories – except for the development/production of personal protective equipment – may overlap with the category of critical infrastructures. As per the German Ministry, it does not matter, however, if the security-relevant nature of the target company can be derived from one or two categories as the legal consequences do not vary.

Other Addition

- Providing services which ensure the interference-free operation and functioning of governmental communication infrastructure operated by the Federal Agency for Public Safety Digital Radio (Bundesanstalt für den Digitalfunk der Behörden und Organisationen mit Sicherheitsaufgaben).

Companies falling in this category for instance provide facility management services, maintenance and fault elimination (Entstörung) services, install technical equipment at office locations of the Federal Agency for Public Safety Digital Radio or provide security-related consulting services to the latter.

Applicability to Share and Asset Deals. The Amendment codifies that German FDI control is not limited to the acquisition of shares but equally applies to asset deals.
Notification Modalities. The Amendment clarifies that FDIs triggering a notification obligation are to be notified immediately after signing of the acquisition agreement. The notification generally has to be submitted by the direct acquirer (even if the acquisition vehicle itself is not “foreign”) but may also be made by the indirect acquirer instead.
Investor-Related Screening Factors. In line with the EU Screening Regulation, the Amendment formally introduces screening factors that focus on the background and activities of the individual investor. According to the German Ministry, these changes are of clarifying nature only, as investor-related factors have previously been considered as well. Pursuant to the Amendment, the German Ministry may now take into account whether the foreign investor
- is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or more than insignificant funding,
- has already been involved in activities affecting the public order or security of the Federal Republic of Germany or of a fellow EU member state, or
- whether there is a serious risk that the foreign investor, or persons acting for it, were or are engaged in activities that, in Germany, would be punishable as a certain criminal or administrative offence, such as terrorist financing, money laundering, fraud, corruption, or violations of the foreign trade or war weapon control rules.

Contemplated Changes to the German Foreign Trade and Payments Act

To some extent, the Draft AWG Amendment introduces changes that were necessary to comply with the EU Screening Regulation which establishes a common framework for screening and an EU-coordinated cooperation among EU member states through the exchange of information and the possibility to issue comments (or, in case of the European Commission, an opinion) to fellow EU member states on a particular FDI (see Client Alert of March 5, 2019).

The Draft AWG Amendment, which may still be altered in the course of the legislative procedure, proposes the following key amendments to the AWG:

Expanding the Grounds for Screening. In line with the EU Screening Regulation, grounds for screening shall be expanded to include public order or security of a fellow EU member state as well as effects on projects or programs of EU interest.

In this context, we note that the European Commission, in response to the COVID-19 crisis, issued guidance concerning FDI from third countries stating that acquisitions of healthcare-related assets would have an impact on the European Union as a whole (see Communication from the Commission of March 25, 2020).

Tightening the Standards. In line with the EU Screening Regulation, the standards under which an FDI is prohibited or restrictive measures are imposed will be changed from whether the FDI constitutes an “actual and duly serious threat” (tatsächliche und hinreichend schwere Gefährdung) to whether the FDI is “likely to affect” (voraussichtliche Beeinträchtigung) the public order or security of the Federal Republic of Germany, of a fellow EU member state, or projects or programs of EU interest. This would give the German Ministry more discretion and room to maneuver as it could prohibit a transaction in order to prevent an impairment that has not yet materialized but that is likely to occur as a result of the contemplated FDI.
Expanding Sector-Specific Screening. Currently, FDI in companies producing or developing war weapons, armaments or related IT products certified by the German Federal Office for Information Security (Bundesamt für Sicherheit in der Informationstechnik) are subject to sector-specific review if at least 10% of the voting rights are acquired. Pursuant to the Draft AWG Amendment, not only the production and development of such goods would qualify for a sector-specific control, but also expressly the modification or use of such goods. The same shall apply if the respective company no longer produces, develops, modifies or uses but still has the relevant knowledge (e.g., because of knowledge of individual employees) or otherwise has access to the security-sensitive technology (e.g., through documents or storage media, if the respective employee already left).
Effects on Consummating Transactions. Currently, FDIs subject to cross-sector review (i.e., all industry sectors except for defense/certain IT security) de facto may be consummated at any time – even during an ongoing screening process. The underlying acquisition agreement is deemed valid from the beginning and will only become invalid if the German Ministry prohibits the FDI subsequently (condition subsequent), in which case the transaction must be rewound. On the contrary, transactions subject to sector-specific review (i.e., the defense industry and certain parts of the IT security industry) may only be consummated upon conclusion of the screening process (condition precedent). In the past, investors have closed transactions falling under cross-sector review while the review process was still ongoing and thereby confronted the German Ministry with accomplished facts. Therefore, the Amendment now proposes that transactions falling under cross-sector review that are notifiable may only be consummated upon conclusion of the screening process (condition precedent). We expect this to have a tangible impact on the transaction practice given the broad range of notifiable FDIs in the cross-sector category, which would be affected by this change. Foreign investors will need to carefully assess if the target company operates in one of the listed industry categories. From a drafting perspective, acquisition agreements regarding notifiable FDIs should include (A) a closing condition that the FDI is (deemed) cleared by the German Ministry, and (B) a mechanism allowing for the amendment or termination of the acquisition agreement in case the German Ministry imposes (comprehensive) restrictive measures.
Penalizing the Disclosure of Security-Relevant Information and Certain Consummation Actions Pending Screening. The Draft AWG Amendment provides for punishment of certain willful infringements of the AWG – and attempted infringements – by way of imprisonment of up to five years or fine or, in case of negligence, with a fine of up to EUR 500,000. The following actions shall be penalized:
- Enabling the investor to, directly or indirectly, exercise voting rights;
- Granting the investor dividends or any economic equivalent;
- Providing or otherwise disclosing to the investor information on the German target company with respect to company objects and divisions that are subject to screening on grounds of essential security interests of the Federal Republic of Germany, or of particular importance when screening for effects on public order and security of the Federal Republic of Germany, or that have been declared as ‘significant’ by the German Ministry;
- Non-compliance with enforceable restrictive measures (vollziehbare Anordnungen) imposed by the German Ministry.

Currently, only the non-compliance with enforceable restrictive measures is punishable with a fine of up to EUR 500,000. The introduction of criminal liability will lead to even more focus on whether or not the transaction requires FDI clearing. The seller de facto will be forced to include the clearing by the German Ministry as a closing condition to avoid exposure to criminal liability.

According to the explanatory notes (Gesetzesbegründung) to the Draft AWG Amendment, the prohibition to disclose security-sensitive information as described above would usually not apply to purely or other company-related commercial information that is exchanged in the course of a transaction in order to allow the investor to conduct a sound evaluation of the economic opportunities and risks of the FDI. Nonetheless, the seller would need to be cautious when preparing the due diligence process, in particular when populating the virtual data room. Typically, security-sensitive information as described above would not be shared with potential buyers prior to closing of the transaction anyway. Should the need arise, however, the use of a red data room and special disclosure and confidentiality obligations based on a clean team agreement may be required.

More Effective Monitoring of Compliance with Measures. Investors and target companies are to expect more monitoring activity by the German Ministry as the Draft AWG Amendment, once enacted, will provide the German Ministry with a right of information as well as a right to carry out examinations (including access to stored data, respective data processing systems, and business premises, in each case also by use of third-party representatives (Beauftragte)) in order to better monitor the investor’s and/or target company’s compliance with contractually agreed or imposed measures.
Imposing Restrictive Measures without Consent of the German Government. Currently, restrictive measures regarding FDIs subject to cross-sector review can only be imposed with the consent of the German government. The Draft AWG Amendment proposes that restrictive measures may be imposed in agreement with and/or consultation of certain federal ministries instead. For the sake of clarity, the German Ministry would still require the consent of the German government if it wanted to prohibit an FDI that is subject to cross-sector review. This would not change.

Further Changes to the AWV to Follow

Further amendments to the AWV are scheduled to follow over the summer. These further changes have been announced already in 2019 but were delayed due to recent events. Initially, i.e. before the COVID-19 crisis had reached Europe, the German Ministry had contemplated to expand the catalog of select industries within the cross-sector review to include, inter alia, the following critical technologies: artificial intelligence, robotics, semiconductors, biotechnology and quantum technology. Also, the procedure and time frames of German FDI control have arguably yet to be adjusted to ensure that the new EU consultation process is completed before the German Ministry has to render its screening decision. Moreover, the (soon to be adopted) changes to the AWG will need to be implemented in the AWV.

In conclusion, while the German Ministry emphasizes that Germany welcomes foreign direct investments, the trend towards more protectionism continues, greatly intensified by the ramifications of the COVID-19 crisis. For non-EU and non-EFTA investors seeking to invest in German companies, a potential review pursuant to German FDI control will become increasingly important.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the team in Frankfurt or Munich, or the following authors:

Markus Nauheim – Munich (+49 89 189 33 122, [email protected])
Wilhelm Reinhardt – Frankfurt (+49 69 247 411 502, [email protected])
Stefanie Zirkel – Frankfurt (+49 69 247 411 513, [email protected])

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

Like several other major economies, the Indian economy has been adversely affected by the lockdowns and market disruptions caused by the COVID-19 pandemic. In these circumstances, valuations and stock prices of Indian companies have witnessed precipitous declines.[1] The government of India (the “Government”) has revised Indian investment laws to check “opportunistic takeovers/acquisitions” of Indian companies. These revisions are discussed below.

Evolution of the Foreign Direct Investment Regime

There are two routes through which foreign investors may invest in India. One is the “automatic route”, where no government approval is required under Indian foreign exchange laws to make an investment as long as it is within prescribed thresholds for the relevant sector. The other route is the “government route”, where an approval is required under foreign exchange laws from the relevant industry regulator, prior to the investment.

Over the last several years, the rules relating to foreign direct investment (“FDI”) in India have been progressively liberalised. Companies and entities in most sectors can be 100% foreign owned and investments in several sectors can be made through the “automatic route”. Historically, investors from only two of India’s neighbouring countries – Pakistan and Bangladesh – have been subject to stricter investment rules (requiring all investments to be approved by the Government).[2] Notably, investors from the People’s Republic of China (“PRC”) have not been subject to such strict scrutiny other than in sensitive sectors such as telecom, defence and railway infrastructure. Based on Government data for the period between April 2000 and December 2019, PRC originated investments account for more than 99% of all foreign direct investments made by investors from countries sharing a land border with India.[3] This does not include investments by PRC-based investors that are routed through investment gateways such as Mauritius and Singapore.

Given the generally liberal investment regime in India, widespread concerns have arisen that investors from countries sharing a land border with India (especially the PRC) could acquire stakes in Indian companies at significantly low valuations, in the current economic downturn, becoming a significant player in India’s economy.

Recent Restrictions Imposed under India’s Investment Regime

In order to curb such ‘opportunistic’ investments, the Government has issued a notification amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“Revised Rules”).[4] Based on the Revised Rules, any investing entity:

(i) that belongs to/is incorporated in; or

(ii) that is beneficially owned by a citizen of or a person situated in,

a country sharing a land border with India (an “Affected Investor”),[5] must obtain the Government’s approval prior to making its investment. The Revised Rules came into effect on April 22, 2020.

Under the Revised Rules, the following transactions will require prior Government approval (even if the sector is an “automatic route” sector):

Direct Acquisitions: any acquisition of a stake in an Indian entity by an Affected Investor, or
Indirect Acquisitions: any transaction that will result in an Affected Investor becoming a beneficial owner of an Indian entity.

Prior Government approval must also be obtained for any transfers of existing foreign investment, which would result in an Affected Investor securing beneficial ownership of an Indian company.

The Revised Rules will impact cross-border/multi-jurisdictional acquisitions by an Affected Investor that has an India component, even where the transaction does not result in a transfer of shares of an Indian entity. For example, an Affected Investor will need prior Government approval for any acquisition outside India, if such acquisition leads to a change in beneficial ownership of the Indian entity.

Uncertainties Regarding the Restrictions

The Revised Rules contain language that is not entirely clear. The following are some of the key issues that are yet to be clarified by the Government:

Will prior Government approval need to be obtained for all transactions resulting in any beneficial ownership of an Indian entity being held by an Affected Investor (an extreme interpretation)? In practice, would the Government utilise de minimis thresholds regarding the significance or quantum of the beneficial ownership?
The status of investors from the Special Administrative Regions of Hong Kong and Macau is unclear, given that these regions form a part of the PRC. Given that Hong Kong is a significant investor into India (and is accounted for separately by the Government in investment statistics), will investors from Hong Kong be subject to the same scrutiny as those entities from the PRC?
The Revised Rules currently apply to additional investments made by Affected Investors already holding interests in Indian entities. For example, a PRC entity that has a wholly- owned subsidiary in India will need to seek the prior approval of the Government in order to make additional investment into its wholly-owned subsidiary. It is unclear as to why such an approval is required given that the PRC entity already owns all of the shares of its wholly owned Indian subsidiary.

Further, the timelines for processing approval applications from Affected Investors is unclear. This could introduce significant uncertainties for indirect acquisitions and cross-border/multi-jurisdictional transactions in which India is only one component of a larger transaction.[6]

The Government is expected to provide more clarity regarding the Revised Rules over the next few weeks. This is necessary in order to ensure that Indian businesses continue to be able to access foreign investment sources expeditiously, both to tide over the recent economic downturn and for long-term growth.

_____________________

[1] For example, more than sixty percent of stocks on the benchmark Sensex of the BSE fell by more than 30% since the start of the pandemic. See “Tightened FDI norms: No love for thy neighbor”, Financial Express dated April 21, 2020, available at https://www.financialexpress.com/opinion/tightened-fdi-norms-no-love-for-thy-neighbour/1934683/.

[2] Rule 6, Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and Paragraph 3.1.1 of India’s Foreign Direct Investment (FDI) policy.

[3] Department for Promotion of Industry and Internal Trade, “Fact Sheet on Foreign Direct Investment (FDI) From April, 2000 To December, 2019”, https://dipp.gov.in/sites/default/files/FDI_Factsheet_December-19_5March2020.pdf.

[4] Department of Economic Affairs Notification No. S.O. 1278 (E) dated April 22, 2020, available at http://egazette.nic.in/WriteReadData/2020/219107.pdf.

[5] The following are countries that share a land border with India: (1) Afghanistan, (2) Bangladesh, (3) Bhutan, (4) China, (5) Myanmar, (6) Nepal and (7) Pakistan.

[6] There are some unconfirmed news reports that the Government will expedite the vetting process for foreign investment by PRC investors in non-sensitive sectors. See “Fast vet option for China FDI”, The Telegraph dated April 25, 2020, available at https://www.telegraphindia.com/business/coronavirus-concerns-fast-vet-option-for-china-fdi/cid/1768042.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Singapore office:

India Team:
Jai S. Pathak (+65 6507 3683, [email protected])
Karthik Ashwin Thiagarajan (+65 6507 3636, [email protected])
Prachi Jhunjhunwala (+65.6507.3645, [email protected])

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

The California Consumer Privacy Act (CCPA) is in effect, and we are already seeing the first class action lawsuits. The Attorney General will also have enforcement power starting July 1, 2020, which is quickly approaching. Given the multitude of health and economic concerns facing all of us in the current environment, CCPA compliance may have fallen to the back burner. To introduce some topics you may not be thinking about, and help you prioritize your next steps in preparation for the AG enforcement date and the expected onslaught of private lawsuits, please join us for a two-hour webinar featuring two programs:

For our first hour, Mark Lyon and Cassandra Gaedt-Sheckter, from our Palo Alto office, will present CCPA and the Dawn of Enforcement: Regulations, Global Privacy for the Future, and Where We Are Today, where they will discuss:

the latest round of the California Attorney General’s draft regulations;
other states’ proposals, and how to implement a global privacy policy in light of conflicting, and rapidly changing laws;
looking forward to compliance in 2021, what you should begin to think about now; and,
CCPA compliance in light of the COVID-19 pandemic.

For the second hour, Eric Vandevelde and Jeremy Smith, from our Los Angeles office, will present Cybersecurity and the CCPA: Litigation, “Reasonable” Security, and Crisis Planning, where they will discuss:

the first data breach class actions seeking statutory damages of $750 per person that have already been filed and will present novel legal questions;
what the statute means by “reasonable” security and what steps can be proactively taken to prove that your organization is in compliance;
the role of the Attorney General in non-data breach cases; and
how CCPA and the threat of private and government lawsuits should inform crisis planning and communications with the public.

View Slides (PDF)

PANELISTS:

Mark Lyon
Partner, Gibson Dunn

Eric Vandevelde
Partner, Gibson Dunn

Cassandra Gaedt-Sheckter
Associate, Gibson Dunn

Jeremy Smith
Associate, Gibson Dunn

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 2.0 credit hours, of which 2.0 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact 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 2.0 hours.

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

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:

Legal considerations of the UK Government’s roadmap for easing lockdown measures
Return to work?: A discussion of some of the issues employers will have to navigate
The impact of COVID-19 on warranty and indemnity insurance policy terms and process

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. Experience in a wide range of disputes, including commercial litigation, international arbitration and investigations.

Harriet Codd: A trainee in the Labour and Employment practice group.

Heather Gibbons: An associate in the Labour and Employment practice group. Specialising in all aspects of UK employment law, Heather has a broad range of experience in contentious, transactional and general advisory employment law.

Patrick Hennessy: An of counsel in the Corporate Transactional, Mergers and Acquisitions, Private Equity and Real Estate practice groups. Mr. Hennessy has extensive experience advising clients in the U.K., across Europe and Asia on a wide range of corporate matters, including cross-border mergers and acquisitions, disposals, leveraged buy-outs and joint ventures.

On May 21, 2020, the U.S. Copyright Office (the “Office”) released a nearly 200-page report (the “Report”)[1] suggesting changes to the Digital Millennium Copyright Act (17 U.S.C. § 512) (“DMCA”), which governs how online service providers (OSPs) police potential online copyright infringement. The report was the result of a multi-year study of the DMCA—the first comprehensive study by the Office on the DMCA’s operation—and was prepared to analyze whether the DMCA’s safe harbor provisions are successfully balancing the needs of OSPs and copyright holders, “particularly in light of the enormous changes that the internet has undergone in the last twenty-plus years.”[2]

The report concludes that the DMCA does not need “wholesale changes,” but may benefit from fine-tuning to better “balance the rights and responsibilities of OSPs and rightsholders in the creative industries.”[3] In particular, the Office “concluded that Congress’ original intended balance has been tilted askew” and “the scale of online copyright infringement and the lack of effectiveness of section 512 notices to address that situation remain significant problems.”[4]

Among other things, the Office suggested that Congress consider legislation regarding:

What qualifies as “temporary” for 512(c) safe harbor and what activities are appropriately shielded from liability for being “related to” storage;[5]
Whether technology services beyond those providing internet infrastructure should be eligible for the safe harbor provisions;[6]
Whether unwritten policies regarding the account termination of “repeat infringers” serve the intended deterrent purpose and what constitutes “appropriate circumstances” for a user’s termination for repeated infringement;[7]
The distinction between “actual” and “red flag knowledge” and the intended scope of the “willful blindness” doctrine;[8]
Whether rightsholders must submit a unique, file-specific URL for every instance of infringing material on an OSP’s service to properly provide “information reasonably sufficient . . . to locate [infringing material]”:[9]
The impact of the Ninth Circuit’s decision in Lenz v. Universal Music Corp.,[10] which held that copyright holders must consider fair use in good faith before issuing a takedown notice for content posted on the Internet. In particular, the Office recommended that Congress consider the “knowing misrepresentation” requirement for a lawsuit seeking redress for an improper infringement notification, and whether the Lenz decision reflects Congressional intent on this issue;[11]
Appropriate changes to section 512(c)’s notice requirements, given new web-based submission forms and the possibility that some of 512(c)’s current notification standards may become obsolete;[12]
Potential avenues to resolve disputes over whether material should be removed and reinstated that do not require a rightsholder to prepare and file a federal lawsuit in the current statutory timeframe of 10–14 days;[13]
The parameters of a rightsholder’s ability to subpoena an OSP to identify an alleged infringer under section 512(h);[14] and
The possibility and range of injunctive relief available to rightsholders after a takedown;[15]

At present, these remain just proposals for legislative action. And in its report, the Office does not provide non-statutory approaches to alter DMCA provisions or developments involving online intermediary liability in other countries, finding that both issues require further exploration. The Office expressed its intent to explore additional voluntary initiatives to address online infringement and help identify standard technical measures that can be adopted in certain sectors.[16] Additionally, the Senate Judiciary intellectual property subcommittee has announced plans to draft changes to the DMCA by the end of 2020.[17] Whether and to what extend the subcommittee follows the recommendations of this report bears watching for both OSPs and rightsholders.

____________________

[1] United States Copyright Office, Section 512 of Title 17: A Report on the Register of Copyrights (May 2020), https://www.copyright.gov/policy/section512/section-512-full-report.pdf (the “Report”).

[2] Copyright Office Releases Report on Section 512, Issue No. 824, May 21, 2020, https://www.copyright.gov/newsnet/2020/824.html.

[3] Report at 7.

[4] Id. at 197.

[5] Id. at 84–99.

[6] Id.

[7] Id. at 95–110.

[8] Id. at 110–28.

[9] Id. at 138–44.

[10] 801 F.3d 1126, 1154 (9th Cir. 2015).

[11] Section 512 of Title 17 at 145–49.

[12] Id. at 152–59.

[13] Id. at 159–62.

[14] Id. at 163–66

[15] Id. at 167–170.

[16] Id. at 6.

[17] Margaret Harding McGill, Copyright Office: System for pulling content offline isn’t working, Axios (May 21, 2020), https://www.axios.com/copyright-office-system-for-pulling-content-offline-isnt-working-ed78fe62-eec4-44dc-bcdd-1c593e888fb8.html.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work in the firm’s Intellectual Property or Media, Entertainment and Technology practice groups, or the following authors:

Howard S. Hogan – Washington, D.C. (+1 202.887.3640,[email protected])
Nathaniel L. Bach – Los Angeles (+1 213-229-7241,[email protected])
Ciara M. Davis – Washington, D.C. (+1 202-887-3783, [email protected])

Please also feel free to contact the following practice leaders:

Intellectual Property Group:
Wayne Barsky – Los Angeles (+1 310-552-8500, [email protected])
Josh Krevitt – New York (+1 212-351-4000, [email protected])
Mark Reiter – Dallas (+1 214-698-3100,[email protected])

Media, Entertainment and Technology Group:
Scott A. Edelman – Los Angeles (+1 310-557-8061, [email protected])
Kevin Masuda – Los Angeles (+1 213-229-7872, [email protected])
Orin Snyder – New York (+1 212-351-2400, [email protected])

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

Houston partner James Chenoweth, New York partner Brian Kniesly, and Los Angeles partner Lorna Wilson are the authors of “Covid-19, the CARES Act and Tax Planning for Real Estate and Passthrough Businesses–Part II,” [PDF] published by Bloomberg Tax on May 20, 2020.

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.

Pending California Landlord-Tenant Legislation Could Have Significant Impacts on Property Owners

Since California’s state and local governments began substantively responding to the novel coronavirus (COVID-19) pandemic in mid-March, a complex patchwork of overlapping and sometimes conflicting new regulations, executive orders, and judicial declarations has evolved. For example, on March 27, 2020 Governor Gavin Newsom issued Executive Order N-37-20, which offered several forms of eviction protection for certain residential tenants during the state of emergency, but left it within the discretion of local governments to decide whether to extend the same types of protections to commercial tenants. Some cities and counties, like San Francisco and Los Angeles, immediately enacted ordinances offering similar protections for commercial tenants in their jurisdictions, whereas others like Orange County have generally abstained from imposing new restrictions.

In response, several bills have been introduced before the state legislature that seek to homogenize the complicated legal landscape in California from the top down. These pending measures are summarized in the following update. Certain elements of these legislative proposals could have a significant and adverse impact on landlords’ revenue streams, particularly from multi-family investments, including the ability to fully recover delinquent rents. This update outlines the current state of these measures as they stand in the legislative process, but these bills are constantly changing and will likely continue to evolve in the days and weeks ahead.
Read more

On May 15, 2020, the United States Department of Commerce, Bureau of Industry and Security (“BIS”) announced a new rule to further restrict Huawei’s access to U.S. technology. The rule amends the “Direct Product Rule” and the BIS Entity List to restrict Huawei’s ability to share its semiconductor designs or rely on foreign foundries to manufacture semiconductors using U.S. software and technology.

In 2019, BIS designated Huawei and 114 of its affiliates to the Entity List, which effectively cut off Huawei’s access to exports of U.S.-origin products and technology. BIS has claimed that Huawei has responded to the designations by moving more of its supply chain outside the United States. Huawei and many of the foreign chip manufacturers that Huawei uses, however, still depend on U.S. equipment, software, and technology to design and produce Huawei chipsets.

The rule announced last week has been long anticipated both in the U.S. and China, and comes after a period of interagency back-and-forth regarding the precise scope of the rule. In response to the news of a pending change, Chinese antitrust regulators warned U.S. semiconductor companies last month to expect unspecified retaliation by China if the rule went into effect. In response to last week’s announcement, the Chinese Ministry of Commerce said it will take all necessary measures to safeguard Chinese firms’ rights and interests. Reports in the Chinese media have suggested the Chinese government will put U.S. companies on an Unreliable Entity List, but exactly what Chinese response there will be is not yet clear.

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

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

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

Items, such as chip designs, that Huawei and its affiliates on the Entity List produce by using certain software or technology that is subject to the EAR; and[1]
Items, such as chipsets made by manufacturers from Huawei-provided design specifications, if those manufacturers are using semiconductor manufacturing equipment that itself is a direct product of certain software or technology subject to the EAR.

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

The new rule grandfathers certain semiconductor production already occurring. Where production had already begun by May 15, 2020 on foreign-produced items based on Huawei design specifications in foreign factories utilizing U.S. semiconductor manufacturing equipment, these product will not be subject to the new licensing requirements if they are exported, reexported, or transferred by 120 days from the effective date.

BIS is accepting comments to the interim final rule for 30 days, companies impacted by the new rule should consider providing comments to BIS. Gibson Dunn has extensive experience helping companies in this area, and can assist in drafting comments.

____________________

[1] Interestingly, the new rule appears to restrict only the transfer of these items between Huawei entities. This appears to be inconsistent with the description of the restriction offered in the interim final rule and the Department of Commerce press release announcing the change, both of which suggest that the restriction is broader—limiting the provision of covered items to any person. The broader formulation of the rule would effectively prohibit Huawei from providing its semiconductor designs to any foundries—not just those that it owns, such as HiSilicon.

The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Chris Timura, R.L. Pratt and Allison Lewis.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group:

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, [email protected])
Jose W. Fernandez – New York (+1 212-351-2376, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Ben K. Belair – Washington, D.C. (+1 202-887-3743, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Laura R. Cole – Washington, D.C. (+1 202-887-3787, [email protected])
R.L. Pratt – Washington, D.C. (+1 202-887-3785, [email protected])
Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, [email protected])
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, [email protected])

Europe:
Peter Alexiadis – Brussels (+32 2 554 72 00, [email protected])
Nicolas Autet – Paris (+33 1 56 43 13 00, [email protected])
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Patrick Doris – London (+44 (0)207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 20 7071 4205, [email protected])
Penny Madden – London (+44 (0)20 7071 4226, [email protected])
Steve Melrose – London (+44 (0)20 7071 4219, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Richard W. Roeder – Munich (+49 89 189 33-160, [email protected])

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

In response, several bills have been introduced before the state legislature that seek to homogenize the complicated legal landscape in California from the top down. These pending measures are summarized below. Certain elements of these legislative proposals could have a significant and adverse impact on landlords’ revenue streams, particularly from multi-family investments, including the ability to fully recover delinquent rents. This update outlines the current state of these measures as they stand in the legislative process, but these bills are constantly changing and will likely continue to evolve in the days and weeks ahead.

SB 939 – Prohibition on Evictions For All Commercial Tenants; Certain Commercial Tenants’ Right to Impose Modification Negotiations

Last Amended: May 13, 2020 (proposed amendments to be introduced by Senator Wiener on May 22, 2020 are discussed below)

Status: From committee with author’s amendments. Read second time and amended. Re-referred to the Senate Judiciary Committee on May 13, 2020. The bill has been set for hearing before the Judiciary Committee on Friday, May 22, 2020.

Introduced by Senators Scott Wiener and Lena Gonzalez, SB 939 would prohibit the eviction of tenants of commercial real property, including businesses and nonprofit organizations, during the pendency of the state of emergency related to COVID-19 proclaimed by the Governor on March 4, 2020. A proposed amendment to be introduced by Senator Weiner on May 22 would extend the duration of this moratorium by another 90 days after the state of emergency is lifted. Additionally, SB 939 would authorize certain qualifying commercial tenants to engage in negotiations with their landlords to modify rent or other economic requirements.

As currently drafted, SB 939 would make it unlawful to (i) terminate a tenancy, (ii) serve notice to terminate a tenancy, (iii) use lockout or utility shutoff actions to terminate a tenancy, or (iv) otherwise endeavor to evict a tenant of commercial real property, including a business or nonprofit organization, during the pendency of the COVID-19 state of emergency, unless the tenant has been found to pose a threat to the property, other tenants, or a person, business, or other entity. By including a prohibition on landlords serving a “notice to terminate,” SB 939 could be read to potentially prevent a landlord from serving a tenant with any notice that would otherwise precede or be a prerequisite to an eviction proceeding, including a three-day notice to quit.[1] The bill further states that if a commercial tenant does not pay rent during the COVID-19 state of emergency, the tenant has a period of twelve (12) months following the date in which the COVID-19 state of emergency ends to repay such amounts. As currently drafted, SB 939 would appear to apply to all commercial tenants, regardless of whether they would qualify for potential lease modification, as more particularly described below, or whether the tenant demonstrates an inability to pay rent due to COVID-19. SB 939 would prohibit Landlords from charging or collecting late fees for rent that became due during the pendency of the COVID-19 state of emergency.[2]

Senator Weiner’s proposed May 22 amendment would invert the structure of the commercial eviction moratorium. Instead of banning all commercial evictions except for those relating to public health and safety, the amended bill would allow all commercial evictions, except those based upon non-payment of rent that accrued during the state of emergency and only where the tenant meets specified criteria indicating that COVID-19 has or will have significant financial impact on the tenant. Relatedly, under the amended bill the only commercial tenants eligible for the twelve-month repayment grace period would be those meeting specified criteria indicating that COVID-19 has or will have significant financial impact on them.

SB 939’s prohibition on evictions would retroactively apply to any eviction or termination of a tenancy that occurs after the COVID-19 state of emergency was first proclaimed on March 4, 2020, but before the effective date of SB 939, by deeming the conduct void, against public policy, and unenforceable. SB 939 also imposes a fine of up to two thousand dollars ($2,000) for any harassment, mistreatment, or retaliation against a tenant aimed at forcing abrogation of the lease. Finally, any eviction or termination of a tenancy in violation of SB 939 is considered an unlawful business practice and an act of unfair competition under the California Business and Professions Code (Cal. Bus. Code § 17200 et seq.)

SB 939 expressly states that it would not “preempt any local ordinance prohibiting the same or similar conduct or imposing a more severe penalty for the same conduct.” It appears that this section intends to set a statewide floor for available tenant protections and establish the minimum punishment for violation of those protections, while allowing localities to set their own standards that are more protective of tenants. However, the current text of SB 939 does not differentiate between more restrictive and less restrictive local eviction moratoria. Thus, it is possible that this provision could actually prevent SB 939 from preempting a local ordinance that offers tenants less protection than the statewide bill itself.

Affirmative Notice Requirement

Landlords are required to provide commercial tenants with written notice of the protections afforded by SB 939 within thirty (30) days of the effective date of the legislation. The required form and content of this required notice is not addressed in the proposed statute as currently drafted.

Lease Modifications for Certain Commercial Tenants

SB 939 authorizes certain commercial tenants to initiate lease modification negotiations with their landlords, which, if unsuccessful, may allow such tenants to terminate their leases under more favorable terms than the law would ordinarily allow.

To qualify for the protections of the lease modification provisions of SB 939, a tenant (“Qualifying Commercial Tenant”) must be (a) a “small business” or an eating or drinking establishment, place of entertainment, or performance venue[3] that is (b) not a publicly traded company or any company owned by or affiliated with a publicly traded company, and which (c) operates primarily in California. Further, the Qualifying Commercial Tenant’s primary business must have (d) experienced a decline of forty percent (40%) or more of monthly revenue, and, if an eating or drinking establishment, place of entertainment, or performance venue, a decline of twenty-five percent (25%) or more in capacity due to a social or physical distancing order or safety concerns. Finally, SB 939 requires that a Qualifying Commercial Tenant be (e) “subject to regulations to prevent the spread of COVID-19 that will financially impair the business when compared to the period before the shelter-in-place order took effect” (requirements (a)-(e), collectively, “Financial Criteria”).

A Qualifying Commercial Tenant would be permitted to take advantage of the lease modification provisions of SB 939 by serving written notice on the premises affirming, under the penalty of perjury, that the commercial tenant meets the Financial Criteria outlined above and stating the modifications the commercial tenant desires to obtain (“Negotiation Notice”). If the tenant and landlord do not reach a mutually satisfactory agreement within thirty (30) days of the date the landlord receives the Negotiation Notice, then within ten (10) days thereafter, the tenant is permitted to terminate the lease without any future liability for future rent, fees, or costs that otherwise may have been due under the lease by providing written notification to the landlord (a “Termination Notice”). Upon service of the Termination Notice, the lease and any third-party guaranties associated with the lease are also terminated and no longer enforceable.

Under this scenario, a landlord’s subsequent ability to collect damages would be limited to the sum of three months’ worth of the past due rent incurred and unpaid during the period of COVID-19 regulations, and all rent incurred and unpaid during a time unrelated to COVID-19 through the date of the termination notice. Even for these limited damages, the tenant has a twelve (12) month grace period to repay the sum owed.

As currently drafted, and including the proposed May 22 amendments, SB 939 raises a number of significant questions, including those highlighted below:

Qualifying Commercial Tenant Criteria:
- SB 939 and its proposed amendment do not establish criteria for defining “eating or drinking establishment, place of entertainment, or performance venue” or categorizing tenants with mixed-use businesses (e.g., tenants with business operations that blend retail and food and beverage services).
- The Financial Criteria do not contemplate whether or not that small business, on a relative basis, has other factors that dictate its revenue (such as seasonality) which are totally unrelated to COVID-19.
- The 25% reduction in capacity may be proven not only by an actual social distancing order, but also by undefined “safety concerns.”
- The Financial Criteria do not contemplate whether the receipt of other forms of aid, such as under the CARES Act or another federal or state stimulus bills, could otherwise disqualify a tenant from the protections of SB 939.
- SB 939 generally does not acknowledge any landlord’s possible mortgage obligations, including, without limitation, whether the landlords have the right to enter into negotiations to modify tenant leases without lender consent, and the economic impact of any such modification on the landlord’s debt service obligations.
Lease Modification Process:
- A Qualifying Commercial Tenant may engage in “good faith” negotiations with its landlord to modify any rent or economic requirement of its lease regardless of the remaining term. This could be read broadly enough to include things like rent escalation or extension that may not be relevant until well after COVID-19 and its impacts are largely resolved.
Landlord Remedies:
- Although a tenant is required to affirm under penalty of perjury that it meets the qualifying criteria outlined above, there is no duty on the tenant to produce any type of corroborating documentation to the landlord. Thus, while a tenant may be incentivized not to falsify this affirmation under the threat of criminal prosecution, there is no statutory remedy for the landlord if post-termination the tenant’s affirmation is ultimately found to be false.
- SB 939 requires a tenant to vacate the premises within fourteen (14) days of delivering a Termination Notice under this statute. However, if the tenant fails to comply with this term, the landlord may lack the judicial remedies to enforce it due to general court closures as well as the provisions of statute.
- The limit on damages that the landlord is permitted to recover under this statute does not specify whether expenses not constituting traditional “rent” would be included, such as reimbursements, expenses, and default interest.
Guarantors: The bill critically leaves out significant details regarding the status of guarantors after the mutual renegotiation of a lease or the issuance of a Termination Notice under its provisions:
- Upon termination, is the payment of outstanding amounts under the grace period of twelve (12) months no longer guaranteed?
- What would happen to a claim under such a guaranty that was already pending before the period affected by COVID-19 regulation?
- What defenses might become available to lease guarantors where a lease modification is imposed, but has not been consented to by such guarantor, and where guarantor is not required under this legislation to consent to it?

Comments on SB 939 can be submitted to Senator Wiener online at https://sd11.senate.ca.gov/contact or by calling (916) 651-4011 and to Senator Gonzalez online at https://sd33.senate.ca.gov/contact/send-e-mail or by calling (916) 651-4033.

AB 828 – Temporary Moratorium on Residential Foreclosures and Unlawful Detainers

Last Amended: May 18, 2020

Status: Re-referred to Rules Committee May 11, 2020.

Introduced by Assembly Members Ting, Gipson, and Kalra, AB 828 would prohibit any action to foreclose on a residential real property, including without limitation, the following:

(a) Causing or conducting the sale of real property pursuant to a power of sale.
(b) Causing recordation of notice of default pursuant to Section 2924.
(c) Causing recordation, posting, or publication of a notice of sale pursuant to Section 2924f.
(d) Recording a trustee’s deed upon sale pursuant to Section 2924h.
(e) Initiating or prosecuting an action to foreclose, including, but not limited to, actions pursuant to Section 725a of the Code of Civil Procedure.
(f) Enforcing a judgment by sale of real property pursuant to Section 680.010.

The foreclosure prohibition of AB 828 would remain in effect during the pendency and for fifteen (15) days after the expiration of the state or local COVID-19 emergency period in the jurisdiction in which the residential real property is located. The bill as currently written does not discuss any potential impact on UCC foreclosures.

Eviction Moratorium

AB 828 would prohibit any state court, county sheriff, or party to an unlawful detainer action from proceeding with any unlawful detainer action, unless on the basis of nuisance or waste under paragraph (3) or (4) of Section 1161 of the Code of Civil Procedure. Actions under these sections may still result in an entry of judgment in favor of the plaintiff; however, rather than proceeding under default for a defendant that does not timely answer the complaint, subsection (b) directs the court to “proceed as though all named defendants had filed an answer denying each and every allegation in the complaint.” To the extent that any defendant otherwise does answer or would have answered timely by denying all allegations, there are no practical differences to the landlord.

The residential eviction prohibition of AB 828 would remain in effect during the pendency and for fifteen (15) days after the expiration of the state or local COVID-19 emergency period in the jurisdiction in which the residential real property is located.

Eviction for Nonpayment of Rent

For any residential eviction based on nonpayment of rent, a residential tenant may, at any time between the filing of the complaint and entry of judgment, notify the court of that defendant’s desire to stipulate to the entry of an order pursuant to this section. Upon receiving notice from the defendant, the court must notify the plaintiff and convene a hearing to determine whether to issue an order (“Order”) under the following guidelines:

(a) At the hearing, the court will determine whether the tenant’s inability to pay resulted from the COVID-19 pandemic. A court will infer a rebuttable presumption of causation for an increased cost or decreased earnings that occurred between March 4 and May 4, 2020. If the causation prong is established, then the landlord may present evidence that rent reduction would cause material economic hardship (not defined by the text of the statute), where if the landlord owns over ten (10) rental units, lack of hardship is presumed, but where a landlord’s ownership interest in just one or two rental units would be sufficient to establish hardship. If the court finds both causation for the tenant and lack of hardship for the landlord, it will issue an Order and dismiss the case with the court retaining jurisdiction to enforce the terms of the Order.

(b) The Order will provide that the tenant retains possession and the tenant shall make monthly payments to the landlord beginning in the next calendar month, in strict compliance with all of the following terms: (i) The payment shall be in the amount of the monthly rent, plus ten percent (10%) of the unpaid rent owing at the time of the Order,[4] excluding late fees, court costs, attorneys’ fees, and any other charge other than rent; (ii) the payment shall be delivered by a fixed day and time to a location that is mutually acceptable to the parties or, in the absence of an agreement between the parties, by no later than 11:59 pm on the fifth (5th) day of each month; and (iii) the payment shall be made in a form that is mutually acceptable to the parties or, in the absence of agreement between the parties, in the form of a cashier’s check or money order made out to the landlord.

(c) If the tenant fails to make a payment in full compliance with the terms of the Order, the landlord may, after forty-eight (48) hours’ notice to the tenant by telephone, text message, or electronic mail, as stipulated by the tenant, file with the court a declaration under penalty of perjury containing all of the following: (i) a recitation of the facts constituting the failure; (ii) a recitation of the actions taken to provide the forty-eight (48) hours’ notice required by this paragraph; (iii) a request for the immediate issuance of a writ of possession in favor of the landlord; and (iv) a request for the issuance of a money judgment in favor of the landlord in the amount of any unpaid balance plus court costs and attorneys’ fees.

Mortgage Notice of Default

For the duration of the state or locally declared emergency and for fifteen (15) days thereafter, a county recorder shall not accept for recordation any instrument, paper, or notice that constitutes a notice of default pursuant to Section 2924 of the Civil Code, a notice of sale pursuant to Section 2924f of the Civil Code, or a trustee’s deed upon sale pursuant to Section 2924h of the Civil Code for any residential real property located in a jurisdiction in which a state or locally declared state of emergency relating to the COVID-19 virus is in effect.

Sale of Tax-Defaulted Residential Real Property

For the duration of the state or locally declared emergency and for fifteen (15) days thereafter, a tax collector shall suspend the sale of tax-defaulted residential real property.

Comments on AB 828 can be submitted to Assemblymember Ting online at https://a19.asmdc.org/ or by calling (916) 319-2019, to Assemblymember Gipson online at https://a64.asmdc.org/2019-2020 or by calling (916) 319-2064, and to Assemblymember Kalra online at https://a27.asmdc.org/ or by calling (916) 319-2027.

SB 1410 – COVID-19 Emergency Rental Assistance Program

Last Amended: May 18, 2020

Status: Set for hearing May 26–27 as of May 14, 2020. Re-referred to Housing Committee May 18, 2020.

Introduced by Senator Lena Gonzalez, SB 1410 would create a “COVID-19 Emergency Rental Assistance Fund” to provide rental assistance payments on behalf of any residential tenants who demonstrate an inability to pay all or any part of the household’s rent due between April 1 and December 31, 2020, as a result of the COVID-19 pandemic, provided that the landlord consents to participation in the program.

Tenants can demonstrate an inability to pay rent by showing any of the following: (a) loss of income due to a COVID-19 related workplace closure; (b) childcare expenditures due to a COVID-19 related school closure; (c) health care expenses related to being ill with COVID-19 or to caring for a member of the household who is ill with COVID-19; and (d) reasonable expenditures that stem from government-ordered emergency measures related to COVID-19. In assessing whether a tenant has the ability to pay rent, any assistance received from unemployment insurance, disability insurance, and federal relief or stimulus payments may be considered.

Landlords who participate in the program receive rental assistance payments covering at least eighty percent (80%) of the amount of unpaid rent owed by a tenant for not more than seven (7) months of a household’s missed or insufficient rent payments. In exchange, the landlord would be required to agree to: (a) not increase rent until after December 31, 2020; (b) not charge or attempt to collect any late fee for any unpaid rent due between April 1 and December 31, 2020; and (c) accept the rental assistance payment as full satisfaction of late or insufficient rent payments covered by the program.

Comments on SB 1410 can be submitted to Senator Gonzalez online at https://sd33.senate.ca.gov/contact/send-e-mail or by calling (916) 651-4033.

AB 2501 – COVID-19 Homeowner, Tenant, and Consumer Relief Law of 2020

Last Amended: May 11, 2020

Status: Re-referred to Committee on Banking and Finance May 11, 2020.

Introduced by Assembly Member Limón, AB 2501 is a comprehensive bill that would provide relief to residential mortgage borrowers, multifamily mortgage borrowers, and vehicle owners by prohibiting creditors and loan servicers from initiating foreclosures during the period of the COVID-19 pandemic and for a one hundred eighty (180)-day period following the end of the COVID-19 state of emergency. As currently drafted, AB 2501 provides different protections for residential mortgage borrowers and multifamily mortgage borrowers which largely mirrors the protections provided to residential and multifamily borrowers of federally backed mortgages under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The bill defines a “multifamily mortgage borrower” as a borrower of a residential mortgage loan that is secured by a lien against a property comprising five (5) or more dwelling units.

Multifamily Mortgage Loans

AB 2501 requires multifamily mortgage loan servicers and creditors to grant multifamily borrowers a loan forbearance of one hundred eighty (180) days. Multifamily borrowers have the ability to extend the forbearance period for an additional one hundred eighty (180) day period upon request at least thirty (30) days prior to the end of the initial forbearance period. As currently drafted, AB 2501 seemingly purports to regulate lenders and loan servicers solely through jurisdiction over the California-based property, regardless of whether the lender or servicer which originated the loan is principally based in another state, or merely services a pool of mortgages across multiple states. To qualify, a multifamily mortgage borrower need only submit a request for forbearance to the borrower’s mortgage servicer, either orally or in writing, affirming that the multifamily mortgage borrower is experiencing hardship during the COVID-19 emergency. While mortgage servicers are required to request documentation of a multifamily mortgage borrower’s financial hardship, AB 2501 does not specify what documentation is required to be submitted.

During the term of the forbearance period, the multifamily mortgage borrower would be required to grant rent relief to the residential tenants of the borrower’s property and would be prohibited from evicting a tenant for nonpayment of rent. Additionally, the multifamily mortgage borrower would be prohibited from imposing any late fees or penalties for unpaid rent. As currently drafted, AB 2501 does not expressly define the extent of the rent relief that a multifamily mortgage borrower is required to provided. Further, AB 2501 seemingly prevents a multifamily mortgage borrower from evicting a tenant for unpaid rent or collecting late fees on unpaid rent during the forbearance period regardless of whether the nonpayment first occurs after the end of the COVID-19 emergency period.

Multifamily mortgage borrowers are required to bring a loan placed in forbearance current within the earlier of: (a) twelve (12) months after the conclusion of the forbearance period, effectively allowing a total forbearance period of two (2) years; or (b) within ten (10) days of the receipt by the of multifamily mortgage borrower any business interruption insurance proceeds. As currently drafted, a multifamily mortgage borrower would be required to bring a loan current upon receipt of any business interruption insurance proceeds, regardless of whether such funds would be sufficient to fully satisfy the total amount of delinquent debt service.

Comments on AB 2501 can be submitted to Assemblymember Limón online at https://a37.asmdc.org/ or by calling (916) 319-2037.

AB 2406 – Homeless Accountability and Prevention Act

Last Amended: May 11, 2020

Status: Re-referred to Committee on Housing & Community Development May 12, 2020.

Introduced by Assemblymember Wicks, AB 2406 is aimed at preventing homelessness by providing the public access to information relating to residential rental units within California. In pursuit of this goal, AB 2406 would require any multifamily residential landlord that accepts rental assistance payments from federal or state funds provided in response to the COVID-19 state of emergency to annually submit a rental registry form for any residential dwelling unit as required by Section 50468 of the Health and Safety Code. Until the rental registry form is submitted, landlords would be prohibited from: (a) increasing rents; (b) issuing a notice to terminate a periodic tenancy pursuant to California Civil Code Section 1946.1; or (c) issuing any notice or initiating any unlawful detainer action.

Upon submitting the rental registry form, multifamily residential landlords are further required to annually report comprehensive information pertaining to each residential rental unit. Notably, as currently drafted, multifamily residential landlords would be required to annually report such information as: (i) the legal name of the owner or ownership entity and all limited partners, general partners, limited liability company members, and shareholders with ten percent (10%) or more ownership of the entity; (ii) the occupancy status of each rental unit; (iii) the total number of days each rental unit was vacant; (iv) the effective date of the most recent rent increase for each rental unit and the amount of the increase; and (v) the number of tenants in which the landlord terminated a tenancy and the reason underlying each lease termination.

Comments on AB 2406 can be submitted to Assemblymember Wicks online at https://a15.asmdc.org/letstalk or by calling (916) 319-2015.

California Senate Democratic Caucus’ Budget and Tax Credit Proposal

On May 12, 2020, Senate President Pro Tempore Atkins unveiled the Senate Democratic Caucus’ proposal for the state budget and California’s economic recovery. Part of the proposal includes the creation of a Renter/Landlord Stabilization program that would enable tri-party agreements between renters, landlords, and the State of California to resolve unpaid rents.

Although a draft bill has yet to be introduced, the preliminary proposal indicates that a tri-party agreement would grant a renter immediate rent relief for the full amount of unpaid rent and provide protection against eviction based on the unpaid rent. In exchange, the renter simply provides a commitment to repay past due rents, without interest, to the state over a ten (10)-year period, beginning in 2024. Additionally, the preliminary proposal indicates that a tenant’s obligation to repay past due rents will be based solely on the tenant’s ability to pay and that cases of hardship could lead to full forgiveness of unpaid rent.

As a party to the tri-party agreement, a landlord agrees to relieve the tenant of the obligation to pay past due rent and waives the right to evict the tenant based on the unpaid rent. In exchange, the landlord will receive tax credits from the state equal to the value of the forgiven rent, spread equally over tax years 2024-2033. The tax credits would be fully transferable such that landlords would be permitted to sell the tax credits for immediate cash value.

The preliminary proposal leaves open a number of questions about the program. First, the proposal does not indicate to which tax obligations the credits would apply, nor does the proposal indicate whether the calculation of the value of lost rent will include late fees or interest that would otherwise have accrued on unpaid rent. Second, the proposal requires landlords to wait a four (4) year period before utilizing the value of the tax credit. While a landlord is permitted to immediately sell the tax credit, the delay in the ability of the purchaser to utilize the tax credit will likely require the landlord to sell the tax credit at a discount against the value of the credit, eroding the effectiveness of the tax credit to offset the landlord’s losses. Finally, the proposal seemingly fails to include a mechanism the state can invoke as a remedy should a tenant default on the obligation to repay past due rents to the state. Without a properly crafted remedy, tenant defaults on such decade-long obligations could further deplete the state’s coffers.

Comments on Senator Atkins’ proposal can be submitted online at https://sd39.senate.ca.gov/contact or by calling (916) 651-4939.

____________________

[1] By its terms, SB 939 retroactively renders evictions that would otherwise be disallowed under SB 939, and which occurred after the proclamation of the state of emergency but before the effective date of SB 939, “void” against public policy and unenforceable. Because such “violations” of the section may include improper notices, arguably certain events as simple as a notice of a default, which had previously been issued with the intent of starting the clock for other remedies that were permissible at the time, could be unwound if that action is itself now voided. This distinction between eviction and other available remedies is particularly significant in the commercial context, where it may effectively limit landlord’s other remedies (i.e., limiting tenant improvement allowance draws or draws on letters of credit).

[2] The bill is silent as to the effect it would have on default interest.

[3] The May 22 amendment adjusts this criteria to require that the small business be an eating or drinking establishment, place of entertainment, or performance venue, rather than extending the protections to both small businesses and such venues. Additionally, the amendment adds a definition of “small business” as “a business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which has 500 or fewer employees.”

[4] An earlier version of this bill would have reduced the amount of rent owed by a tenant by twenty-five percent (25%) for a year following the issuance of an Order under this section, but this provision has been removed in its most recent amendment.

Gibson Dunn’s lawyers are continually monitoring the evolving situation and are available to assist with any questions you may have regarding these developments. For additional information, please contact any member of the firm’s Real Estate or Land Use Group, or the following authors:

Doug Champion – Los Angeles (+1213-229-7128, [email protected]) (Real Estate)
Danielle Katzir – Los Angeles (+1213-229-7630, [email protected]) (Real Estate)
Alayna Monroe – Los Angeles (+1213-229-7969, [email protected]) (Litigation)
Ben Saltsman – Los Angeles (+1213-229-7480, [email protected]) (Real Estate)
Matthew Saria – Los Angeles (+1213-229-7988, [email protected]) (Real Estate)

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

Gibson, Dunn & Crutcher LLP is pleased to announce with Global Legal Group the release of the International Comparative Legal Guide to: Anti-Money Laundering 2020. Gibson Dunn partners Stephanie L. Brooker and Joel M. Cohen were again contributing editors to the publication which covers issues including criminal enforcement, regulatory and administrative enforcement and requirements for financial institutions and other designated businesses. The Guide, comprised of 4 expert analysis chapters and 26 jurisdictions, is live and FREE to access HERE.

Ms. Brooker and Gibson Dunn partner M. Kendall Day co-authored “The International Reach of the U.S. Money Laundering Statutes.” Associate Chris Jones provided invaluable assistance with the article.

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You can view these informative and comprehensive chapters via the links below:

CLICK HERE to view The International Reach of the U.S. Money Laundering Statutes

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The COVID-19 pandemic has unfolded rapidly, causing unprecedented changes in daily life, disruption to businesses and the economy, as well as dramatic market volatility. Even as companies adjust to the new business environment, they also must remain vigilant to avoid potential exposure to securities class action and derivative action liability. In this webinar, Gibson Dunn and Cornerstone Research will discuss the potential implications of the COVID-19 pandemic for securities and derivative litigation, including the following topics:

The economic and other similarities and differences between this “black swan” event and other events that caused substantial market volatility, such as the 2008 financial crisis
Issues for companies to consider in preparing risk disclosures and discussing forward looking projections
Best practices for Board of Directors oversight
Financial reporting considerations
Economic analyses that are particularly relevant for COVID-19 related securities actions

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PANELISTS:

Lori Benson is a Senior Vice President and heads Cornerstone Research’s New York office. Over the course of her more than twenty years with the firm, she has prepared strategy and expert testimony in all aspects of complex commercial litigation, including trials, arbitrations, settlements, and regulatory inquiries. Ms. Benson has consulted on a wide range of cases including securities class actions, market manipulation, valuation, asset management and fixed income securities disputes.

Yan Cao is a Vice President at Cornerstone Research’s New York office. Dr. Cao specializes in issues related to financial economics and financial reporting across a range of complex litigation and regulatory proceedings. Her experience covers securities, market manipulation, M&A, risk management, and bankruptcy matters. Dr. Cao has fifteen years of experience consulting on securities class actions that cover a wide variety of industries, with a focus on financial institutions. She has also worked on regulatory investigation and enforcement matters led by the SEC, the CFTC, the DOJ, the NY Fed, and state AGs. Dr. Cao is a Chartered Financial Analyst (CFA) and a Certified Public Accountant.

Jennifer L. Conn is a partner in the New York office of Gibson, Dunn & Crutcher. She is a member of Gibson Dunn’s Litigation, Securities Litigation, Securities Enforcement, Appellate, and Privacy, Cybersecurity and Consumer Protection Practice Groups. Ms. Conn has extensive experience in a wide range of complex commercial litigation matters, including those involving securities, financial services, accounting, business restructuring and reorganization, antitrust, contracts, and information technology. In addition, Ms. Conn is an Adjunct Professor of Law at Columbia Law School, lecturing on securities litigation.

Elaine Harwood is a Vice President at Cornerstone Research’s Los Angeles office and heads the firm’s accounting practice. She consults to clients and works with experts on securities litigation, complex enforcement matters brought by the SEC and PCAOB, and corporate investigations. She is an expert on financial accounting, financial reporting, and auditing. Dr. Harwood has served for more than twenty years as a consultant and expert on a wide range of liability and damages issues. She is a Certified Public Accountant (CPA) and is Certified in Financial Forensics (CFF) by the AICPA. Who’s Who Legal recognizes Dr. Harwood as a leading forensic accountant in the legal investigations space.

Avi Weitzman is a litigation partner in the New York office of Gibson, Dunn & Crutcher. He is a member of the White Collar Defense and Investigations, Crisis Management, Securities Enforcement and Litigation, and Media, Entertainment and Technology Practice Groups. Mr. Weitzman is a nationally recognized trial and appellate attorney, with experience handling complex commercial disputes in diverse areas of law, white-collar and regulatory enforcement defense, internal investigations, and securities litigations. Prior to joining Gibson Dunn, Mr. Weitzman served for seven years as an Assistant United States Attorney in the Southern District of New York, primarily in the Securities and Commodities Fraud Task Force and Organized Crime Unit.

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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.

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.

GLOBAL OVERVIEW

On May 19, 2020, President Trump signed an executive order entitled “Regulatory Relief to Support Economic Recovery.” The Order seeks “to combat the economic consequences of COVID-19” by giving “businesses, especially small businesses, the confidence they need to re-open.” Order § 1. In particular, the Order instructs agencies to “rescind[], modify[], waiv[e], or provid[e] exemptions from regulations and other requirements that may inhibit economic recovery.” Id. § 1.

The Order comprises five specific directives to executive branch departments, executive agencies, and independent agencies. Order § 2(b) (defining a covered “agency” as per 44 U.S.C. § 3502(1)). First, the Order mandates that agencies “use, to the fullest extent possible and consistent with applicable law” their emergency authorities “to support the economic response to the COVID-19 outbreak.” Order § 3. Relatedly, the Order “encourage[s]” agencies “to promote economic recovery through non-regulatory actions.” Id.
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COVID-19 United Kingdom Bulletin – May 20, 2020

This weekly bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in the following key areas: Competition and Consumers; Corporate Governance (including accounts, disclosure and reporting obligations); Cybersecurity and Data Protection; Disputes; Employment; Energy; Finance; Financial Services Regulatory; Force Majeure; Government Support Schemes; Insolvency; International Trade Agreements (private and public); Lockdown and Public Law issues; M&A and Private Equity; Real Estate; and UK Tax.
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On May 19, 2020, President Trump signed an executive order entitled “Regulatory Relief to Support Economic Recovery.”[1] The Order seeks “to combat the economic consequences of COVID-19” by giving “businesses, especially small businesses, the confidence they need to re-open.” Order § 1. In particular, the Order instructs agencies to “rescind[], modify[], waiv[e], or provid[e] exemptions from regulations and other requirements that may inhibit economic recovery.” Id. § 1.

Second, the Order requires agencies to “identify regulatory standards that may inhibit economic recovery.” Order § 4. Once agencies have identified those standards, they must then “consider” a variety of responses “for the purpose of promoting job creation and economic growth.” Id. These include: (1) “taking appropriate action . . . to temporarily or permanently rescind, modify, waive, or exempt persons or entities from those requirements”; (2) “exercising appropriate temporary enforcement discretion”; and (3) providing “appropriate temporary extensions of time” for compliance. Id.

Third, the Order instructs agencies to provide regulated entities with “[c]ompliance assistance”—namely, guidance regarding what constitutes compliance and relaxed enforcement against those who attempt to comply in good faith. Order § 5. For example, the order requires agencies, other than the Department of Justice, to “accelerate procedures” for issuing “a pre-enforcement ruling” regarding “whether proposed conduct in response to the COVID-19 outbreak . . . is consistent with statutes and regulations administered by the agency.” Id. § 5(a). The Order further encourages agencies “to formulate, and make public, policies of enforcement discretion that . . . decline enforcement against persons and entities that have attempted in reasonable good faith to comply with applicable statutory and regulatory standards.” Id. § 5(b).

Fourth, the Order mandates that agencies “revise their procedures and practices” to reflect certain “principles of fairness in administrative enforcement.” Order § 6. The principles included largely reflect basic notions of due process, such as the proposition that “[l]iability should be imposed only for violations of statutes or duly issued regulations, after notice and an opportunity to respond,” and “[a]dministrative enforcement should be free of unfair surprise.” Id. § 6(h), (i).

Fifth, the Order requires agencies to review any temporary regulatory or enforcement measures they adopted in response to COVID-19 and “determine which, if any, would promote economic recover if made permanent.” Order § 7. Agencies must then report the results of their determination to the Director of the Office of Management and Budget, the Assistant to the President for Domestic Policy, and the Assistant to the President for Economic Policy, id., who will monitor compliance with the Order, Order § 8.

* * *

The President’s Order has the potential to transform the regulatory landscape across a wide array of industries. Going beyond previous executive orders that have placed constraints on agencies’ ability to propose new regulations,[2] the Order imposes an affirmative mandate on agencies to root out unnecessary or unduly cumbersome regulations that inhibit economic growth for both temporary and even permanent repeal, and to improve their enforcement and adjudication procedures. Although it remains to be seen how aggressively agencies will deregulate in response to the Order, it is possible that agencies will look to regulated entities and other interested parties to assist them in identifying regulations that should be rescinded or modified and revising their procedures, perhaps by commencing rulemakings to seek comment on the issues. Regulated entities could also file petitions for rulemaking to initiate the process. The Order thus provides regulated entities with a promising opportunity to work cooperatively with agencies in reducing or eliminating unnecessary regulatory burdens.

In addition, the Order’s provisions for “pre-enforcement rulings” could be extremely useful in a variety of circumstances. For example, companies seeking to restart or alter operations might want to check with federal agencies beforehand in order to ensure that they are complying with workplace safety and other regulations. Similarly, companies and other entities applying for or that have received federal assistance may seek rulings as to eligibility or compliance with the use of federal assistance.

_______________________

[1] See Executive Order on Regulatory Relief to Support Relief to Support Economic Recovery (“Order”), WhiteHouse.gov (May 19, 2020), https://www.whitehouse.gov/presidential-actions/executive-order-regulatory-relief-support-economic-recovery.

[2] See Gibson Dunn Client Alert, President Trump Issues Executive Order on Reducing Regulation and Controlling Regulatory Costs (Jan. 31, 2017), https://www.gibsondunn.com/president-trump-issues-executive-order-on-reducing-regulation-and-controlling-regulatory-costs.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s Administrative Law and Regulatory Practice Group or Public Policy Practice Group:

Helgi C. Walker – Chair, Administrative Law and Regulatory Practice Group, Washington, D.C. (+1 202-887-3599, [email protected])

Michael D. Bopp – Co-Chair, Public Policy Practice Group, Washington, D.C. (+1 202-955-8256, [email protected])

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

New York partner Joel Cohen, Los Angeles partner Robert Klyman and Palo Alto associate Emma Strong are the authors of “Bankruptcy Fraud Prosecutions May Increase Post-Pandemic,” [PDF] published by Law360 on May 19, 2020.

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

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

Links to various English law alerts prepared by Gibson Dunn during this period are also included in the relevant sections. Please note that due to the Bank Holiday our next bulletin will be issued on the 3rd June, and our weekly webinar will return on Monday 1 June 2020.

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

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

1. Competition and Consumers

State aid

On 11 May 2020, the European Commission announced that it has approved a £9 billion UK aid scheme under the Temporary Framework to support self-employed individuals and members of partnerships. The scheme supports lower-end income self-employed individuals who have been severely affected by the economic impact of the coronavirus outbreak. Self-employed people are able to apply for a grant worth 80% of their average monthly profits over the last three years, up to £2,500 a month. Unlike the employee furlough scheme, the self-employed can continue to work as they receive support.

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

Government extends temporary suspension of wrongful trading

The Department for Business, Energy and Industrial Strategy (BEIS) has announced that the temporary suspension of wrongful trading liability will continue until 30 June 2020. The measure was initially set to expire on 1 June 2020. Current insolvency rules stipulate that a company director can be personally liable for a company’s losses if the director knew or ought to have concluded that there was no reasonable prospect of the company avoiding an insolvent administration or insolvent liquidation and where that director failed to take every step with a view to minimising potential losses to creditors. The suspension was introduced to enable directors to keep running their businesses during the COVID-19 pandemic without the threat of personal liability. However, other penalties do remain for directors who continue to trade to the detriment of creditors. Directors should be alive to this and should seek appropriate advice. Specific statutory language to implement these changes will be included in the upcoming Corporate Insolvency and Governance Bill which is yet to be published. The BEIS announcement can be accessed here.

Joint Q&A issued by the Financial Reporting Council (FRC) and BEIS

The FRC and BEIS have published a joint Q&A document on how company filings, AGMs and general meetings should be conducted whilst temporary measures to give companies and other bodies flexibility around such matters are implemented. The Q&A notes that legislation to implement these changes will be introduced as soon as the Parliamentary timetable allows and it is intended that such legislation will apply retrospectively from 26 March 2020 (although this can-not be guaranteed and companies and other bodies should take this into account when deciding how to proceed). The Q&A covers questions relating to calling meetings, virtual meetings and postponing meetings and considerations for directors in relation to safeguarding the interests of shareholders.

FRC issues updated guidance on corporate governance and reporting to include considerations relating to interim reports

The FRC has updated its COVID-19 guidance for companies to include considerations for those preparing interim reports. The updated guidance indicates that directors will need to exercise judgment about the nature and extent of the procedures they apply to assess the going concern assumption at the half‐yearly date. The FRC indicates that this might include disclosure of (i) any material uncertainties to going concern; (ii) assumptions made about the future path of COVID-19 and the public health responses; (iii) the projected impact on business activities; (iv) use of Government support measures; and (v) access to bank and other financing. The guidance provides a number of scenarios which may trigger a need to re‐examine the going concern assumption and going concern and liquidity risk disclosures. If going concern has become a significant issue since the previous annual financial statements, the guidance indicates that directors should undertake procedures similar to those that they would have carried out for annual financial statements to ensure that all relevant issues have been identified and considered.

The FRC previously issued guidance for companies in March 2020, please see our COVID-19 UK Bulletin – 8 April 2020 for a summary of this. The updated guidance is available here.

3. Cybersecurity and Data Protection

No update to our COVID-19 UK Bulletin – 13 May 2020.

4. Disputes

Jury trials

Jury trials in England and Wales were suspended on 23 March 2020. Recently, the Lord Chief Justice, Lord Burnett of Maldon, announced that new jury trials can commence in some courts from 18 May 2020. Trials will be conducted with the usual twelve jurors participating, with special arrangements in place to ensure their safety and the safety of others in Court. The decision follows work by the Jury Trials Working Group and guidance from Public Heath England and Public Health Wales. A small number of pilot jury trials are starting in London, Cardiff, Bristol and Manchester, each with reconfigured and additional video or audio-linked courtrooms to ensure distancing measures can be followed. One of the first trials to have resumed is the corruption case brought by the SFO against Unaoil executives. It is taking place in one of the largest courtrooms at the London Central Criminal Court, to facilitate distancing measures, with adjoining courtrooms provided for deliberations and an audio-linked court for the press and public. Further courts are being assessed against criteria developed by the Jury Trials Working Group to identify whether they can be used for trials with appropriate distancing measures in place (including additional courtrooms linked by CCTV to allow observation of proceedings by reporters and others, a separate room for jury deliberations, careful supervision of entrances and exits and cleaning services).

Lord Chief Justice gives evidence before the House of Lords

On 13 May 2020, the Lord Chief Justice appeared before the Constitution Committee of the House of Lords to give evidence on a number of issues arising out of the implications of COVID-19.

Lord Burnett praised the innovation and cooperation of all those involved in ensuring the justice system continues to operate. Lord Burnett suggested that digitisation of the courts and use of remote hearings will continue to assist the civil and criminal justice systems beyond the pandemic, and made clear that “there will be no going back to where we were”, but stressed that to ensure any new future arrangements to work effectively there is an urgent need for greater investment. He also stated that the criminal justice system is experiencing a backlog of trials. For every month in which the courts do not sit, there will be around 1000 further trials adding to the backlog, which must be addressed if current restrictions continue longer term.

Operation of the Courts – general update

The Courts are continuing to avoid physical hearings where possible. The High Court is still following its High Court Contingency Plan, prioritising urgent business that would usually warrant out of hours application during normal times, whilst continuing to deal with “business as usual” matters as far as possible under the contingency plans. Lord Burnett, in his appearance before the constitutional committee of the House of Lords, stated that in the High Court around 80% of its normal work has continued since lockdown measures were put in place. In the Court of Appeal, the Civil Appeals Office is dealing only with urgent applications which require substantive decisions within 7 days, whilst non urgent applications will be dealt with once capacity begins to increase. The Court of Appeal Criminal Division will focus on urgent cases, but will continue with other cases where possible.

5. Employment

Employment law considerations for companies responding to COVID-19 and planning for a return to the workplace

On 10 May 2020, the Government announced a provisional roadmap for the phased relaxation of the current COVID-19 lockdown restrictions, including those restrictions which have impacted businesses across the UK. While the Government continues to require those who can work from home to do so, employees who are not able to work from home are now being actively encouraged to return to the workplace provided that their workplace is permitted to open and can be operated within Government guidelines. In our recent client alert we identify some of the key considerations for UK-based businesses when taking steps to comply with their health and safety obligations once certain groups of employees return to the workplace. We also outline key amendments to the Coronavirus Job Retention Scheme (CJRS).

6. Energy

Oil price update

This week saw Saudi Arabia announce a further oil production supply cut of 1 million barrels a day, with the International Energy Agency expecting to see a nine-year low this month, and prices continuing to stabilise as Brent crossed USD$30 per barrel on Thursday 14 May. Brent and WTI are both currently above USD$30 per barrel.

Energy transition

In the UK, renewable energy producers have reported record production and sales, with good weather and low pollution allowing solar farms in April 2020 to power up to almost 30% of the national grid at times. Coal had not been used to power the national grid for 34 days as of 14 May 2020, longer than ever before. These changes have been facilitated by a 14% drop in the UK’s demand for electricity in April 2020. The longer term effects of the COVID-19 crisis on the energy transition remain to be seen, but environmental groups as well as energy companies globally have called for a continued push into renewables during this time of market turmoil.

Impact of COVID-19 on projects

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

Brazil’s Petrobras reports entering the “worst crisis in 100 years”, announcing a net loss of 48.5 billion reals (around USD$8.35 billion) which is a drop of nearly 700% from Q4 of last year.
Kurdistan-focused Genel Energy will cut CapEx to just over USD$100 million for 2020, approximately a 50% cut, and aims to cut operating fees by 10%.
Igor Sechin, CEO of Russia’s Rosneft, has met with President Putin to ask for measures to aid the energy industry, including “transferring tax payments” for future investigative work and increasing credit availability. These proposals are reportedly under consideration by the Kremlin.
Singapore-based contractor Sembcorp Marine warned of further losses, also announcing that only 850 workers of its normally 20,000 strong force were working during the current crisis.
Japanese E&P company Inpex has also warned of lower profits in future, as it works to cut CapEx.
Gabon has shut its Energy Ministry for sanitisation as confirmed cases rise amongst civil servants in that country.

7. Finance

No update to our COVID-19 UK Bulletin – 13 May 2020.

8. Financial Services Regulatory

On 13 May 2020, the FCA published a statement on how firms should handle post and paper documents during the pandemic.

The FCA expects firms to comply with the requirements for post and paper-based processes (incoming and outgoing), but acknowledges that, in the current circumstances, some firms may not be able to fully comply with them. In such cases, firms must notify the FCA as soon as possible. Additionally, firms should (amongst other things):

try to ensure that all customers are not disadvantaged because of delays and make particular efforts to contact customers who do not use online services. In particular, vulnerable customers must be protected;
demonstrate any steps taken to mitigate the impact of non-compliance with postal and paper processes and return to full compliance as soon as practical; and
as face-to-face assessments are not currently possible, use other methods to conduct a suitability assessment, such as phone calls and relevant due diligence checks online. Firms should then send out the assessment without delay, whether online or by post.

9. Force Majeure

No update to our COVID-19 UK Bulletin – 13 May 2020.

10. Government Support Schemes

Coronavirus loans schemes

UK Finance, the trade and industry body for the banking and finance sector in the UK, announced that as of 17 May 2020, approximately £22 billion had been lent to over 505,000 businesses in the UK through the Coronavirus Business Interruption Loan Scheme, the Coronavirus Large Business Interruption Loan Scheme and the Bounce Back Loans Scheme, from over 663,000 applications.

Coronavirus Large Business Interruption Loan Scheme and Covid Corporate Finance Facility

The maximum loan size available under the Coronavirus Large Business Interruption Loan Scheme (CLBILS) has increased from £50 million to £200 million with effect from 26 May 2020 for those companies with annual revenues in excess of £250 million. Under the enlarged scheme, the amount companies are able to borrow will be capped at 25% of annual revenues, up to a maximum of £200 million. Companies borrowing more than £50 million through CLBILS will be subject to restrictions on dividend payments, senior pay and share buy-backs during the period of the loan, including a ban on dividend payments and cash bonuses, except where they were (i) declared before the CLBILS loan was taken out, (ii) is in keeping with similar payments made in the preceding 12 months, and (iii) does not have a material negative impact on the company’s ability to repay the loan. These restrictions will also apply to participants in the Covid Corporate Finance Facility (CCFF) that wish to borrow money beyond 12 months from 19 May 2020. The Government also intends to publish list of companies who are benefitting under CCFF on 4 June 2020.

Coronavirus Job Retention Scheme (CJRS)

The Government announced on 12 May 2020 that the CJRS will continue until the end of October 2020, during which time furloughed workers across the UK will continue to receive 80% of their current salary, up to £2,500 per month. New flexibility to the scheme will be introduced from August 2020 to get employees back to work with employers sharing the cost of the scheme. For more details, see the Employment section above.

Self-Employment Income Support Scheme

Applications for the Self-Employment Income Support Scheme opened on 13 May 2020 ahead of schedule for self-employed workers. The scheme allows self-employed workers to claim a taxable grant of 80% of their average monthly trading profits, paid out in a single instalment covering 3 months, and capped at £7,500. For more details, see the Competition and Consumers section above.

11. Insolvency

No update to our COVID-19 UK Bulletin – 13 May 2020.

12. International Trade Agreements (private and public)

No update to our COVID-19 UK Bulletin – 13 May 2020.

13. Lockdown and Public Law Issues

Recovery strategy

To implement parts of the Government’s stepwise plan for exiting the lockdown, Our Plan to Rebuild: The UK Government’s COVID-19 recovery strategy, regulations were announced to amend the existing lockdown restrictions in place since 26 March 2020. The amendment, The Health Protection (Coronavirus, Restrictions) (England) (Amendment) (No. 2) Regulations 2020, came into force on 13 March 2020 and makes provisions for: easing restrictions on movement (for work, exercise, visiting a public open space, buying or selling real estate, or using a waste or recycling centre), re-opening certain premises (holiday accommodations for guests who are traveling for work or key workers, outdoor playgrounds, outdoor sports courts, and garden centres), and increasing fixed penalty notice fines.

Virtual Parliament

The House of Commons has held its first ever remote votes by MPs, including a vote to progress the Agriculture Bill.

Government plan to rebuild the economy

Prime Minister Boris Johnson has reportedly started work on a major speech to be delivered mid-June 2020 to lay out a plan to rebuild the economy. He is expected to focus on “three pillars” of education, technology and infrastructure to set out his vision.

14. M&A and Private Equity

No update to our COVID-19 UK Bulletin – 13 May 2020.

15. Real Estate

Commercial outlook

Britain’s largest pub landlord, Ei Group, is waiving rents from April to June 2020 for 350 tenants, specifically those who are not able to avail themselves of the Government support scheme. The move follows a letter from 60 MPs to the landlord requesting that it assist tenants. In the latest in the very public Travelodge saga, previously reported on here, Travelodge has warned that it will be required to seek a CVA if landlords do not agree to up to 80% cuts to rents.

Landsec’s CEO Mark Allan has commented that whilst he remains optimistic about the prime office space market in London, secondary office stock will take a significant hit. COVID-19 has accelerated the “existing structural trends”, compressing developments which might have taken five years into one. His comments come as Landsec announces that it will not be paying a final dividend.

Deloitte Crane Survey has just released a report finding that the London office market had seen 45 new starts in the six months preceding lockdown, a 42% increase on the same six months the year before, and a record high. These levels have, of course, not lasted into lockdown, and Deloitte warned of delays to projects as 60% of those under construction have been suspended, and the likelihood of some smaller companies abandoning plans to move.

However, the market is not all doom and gloom. Grainger, a residential landlord, reported collecting 94% of its rents in April; Sirius Real Estate, a commercial property landlord focusing in German business parks, collected 98% of rent. They will both be paying a dividend, with Grainger announcing an increased payment.

Government guidance

The Government released guidance on the implementation of social distancing measures in urban centres, including high streets, shopping centres and green spaces. Canary Wharf has already started preparing the site to bring workers back, creating one way systems to guide workers safely around it and installing hand-sanitising points.

16. UK Tax

Country-by-country, DAC6, CRS and FATCA reporting

HMRC has issued an update regarding the deadline for Country by Country, DAC6, CRS and FATCA reporting. The normal annual deadline for both FATCA and CRS is 31 May. The Country by Country report filing deadline will depend on the financial year end of the filing entity. Under the DAC 6 regulations the first reports are due to be sent to HMRC from 1 July 2020, and by 31 August 2020 for pre-existing arrangements. HMRC did not change reporting deadlines but expressed its understanding that stakeholders may not be able to file timely because of the pandemic. Accordingly, HMRC stated that it accepts that any stakeholder that files a Country by Country, DAC6, CRS or FATCA report late because of Covid-19 difficulties will have a reasonable excuse (and so will not be liable to any penalties for that delay) provided the report is made without unreasonable delay after they are resolved. With regards to DAC6, the European Commission has now proposed amendments to change the time limits in the EU directive (2011/16/EU). As and when the EU Directive amendment is final, HMRC will confirm how this will apply to UK’s domestic rules. See here for further details.

VAT – Amendments made to notifying options to tax land and buildings

HMRC have announced temporary changes to the process for notifying an option to tax land and buildings during the COVID-19 pandemic. The time limit for notifying HMRC of a decision to opt to tax land and buildings, decided between 15 February 2020 and 31 May 2020, has been extended to 90 days from the date the decision to opt was made, as opposed to the usual limit of 30 days. Notifications should be emailed to [email protected]. See here for further details.

New exemption for COVID-19 related reimbursed home office expenses

A temporary exemption for tax and National Insurance Contributions has been announced for expenses reimbursed by employers for home office equipment. This temporary exemption will ensure that (subject to certain conditions being fulfilled) no tax liability arises where employers reimburse employees’ personal expenditure on home office equipment arising from arrangements to work from home during the COVID-19 pandemic. The relevant Regulations are to have effect from 16 March 2020 until the end of the tax year 2020/21. See here for further details.

Reasonable excuse and more time to appeal

HMRC has confirmed that, where a taxpayer is unable to meet an obligation (such as a payment or filing deadline) due to COVID-19, that will be accepted as a reasonable excuse, provided they manage to remedy the failure as soon as they are able to do so. Taxpayers affected by coronavirus will also be given further time to seek a review of, or appeal against, an HMRC decision. In addition to this, if an application is made to the tribunal to hear a late appeal due to the COVID-19 pandemic, HMRC will not object, provided that the review decision is dated February 2020 or later, and the application is made within three months of the normal deadline. HMRC has updated its guidance to reflect these changes. See here and here for further details.

COVID-19 UK Taskforce Leaders

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

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

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

GLOBAL OVERVIEW

Closed for COVID-19: Class Action Refund Lawsuits, Practical Considerations, & Potential Defenses

The COVID-19 global pandemic has changed the face of the world for businesses and customers as we know it. Public health mandates and local, state, and national shelter-in-place orders have required events to be canceled, plans to be postponed indefinitely, and facilities closed until further notice. In the wake of these closures and cancellations, consumer frustration has mounted, and scores of class action lawsuits have followed. This article examines the industries facing these lawsuits, describes the theories that plaintiffs are asserting, and provides some practical considerations and potential defenses for these lawsuits.
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Recent Constitutional Litigation Challenging Governmental Responses to the COVID-19 Pandemic

In previous alerts, we discussed the constitutional limitations on governmental responses to COVID-19 under the Takings, Contracts, Due Process, and Equal Protection Clauses of the U.S. Constitution, and have also considered how the constitutional right to travel and the Dormant Commerce Clause limits governmental actors.

A number of businesses and others subject to COVID-19 regulations have now filed suit challenging governmental actions as unconstitutional, including under some of the same theories we identified in these prior alerts. Some plaintiffs have alleged that state and local responses to the COVID-19 pandemic, particularly shut-down orders, have effected unconstitutional takings without just compensation, are arbitrary and irrational and deprive them of fair notice and equal protection, and violate their right to travel. Other plaintiffs have brought Freedom of Assembly, Association, and Petition claims under the First Amendment, while others have raised Dormant Commerce Clause objections or challenges under the Republican Guarantee Clause.
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The COVID-19 global pandemic has changed the face of the world for businesses and customers as we know it. Public health mandates and local, state, and national shelter-in-place orders have required events to be canceled, plans to be postponed indefinitely, and facilities closed until further notice. In the wake of these closures and cancellations, consumer frustration has mounted, and scores of class action lawsuits have followed. This Article examines the industries facing these lawsuits, describes the theories that plaintiffs are asserting, and provides some practical considerations and potential defenses for these lawsuits.

Industries Facing COVID-19 Related Refund Class Actions

Plaintiffs’ lawyers have seized on the COVID-19 pandemic to bring class action lawsuits involving the following businesses:

Student Tuition and Fees

As schools have been forced to close their campuses and shift to online learning, students and parents have filed class actions seeking reimbursement of tuition, room and board, and other expenses. The student-plaintiffs allege that the value of their degrees, the quality of their education, and their enjoyment of on-campus facilities have been diminished by switching to online classes. As such, the students allege that they are entitled to refunds on the theory that schools are not fulfilling their alleged contractual obligations to provide an on-campus education. Scores of these lawsuits have been filed against private and public universities.[1] Multiple class actions have been brought that seek not only reimbursement of room and board fees, but also tuition.

Concerts and Sporting Events

Shelter-in-place orders have left no choice but to cancel or postpone concerts and sporting events. In response, ticketholders to these events have filed refund class actions against event sponsors, as well as the websites that facilitate ticket sales, seeking refunds. For example, season ticket holders have sued Major League Baseball for “unfairly” financially burdening customers by withholding refunds after MLB postponed the season.[2] Other class action complaints brought against ticket sellers allege that companies changed their refund policies after consumers had already purchased their tickets.

Season Passes and Memberships

Companies that offer memberships and season passes for access to physical facilities, such as fitness centers, yoga studios, and ski resorts, also find themselves facing class actions seeking refunds following long-term and seasonal closures resulting from COVID-19. For example, one plaintiff claims her gym is not refunding her monthly membership fee while the gym is closed.[3]

Travel Deposits

Consumers have filed a number of class actions against travel companies seeking refunds for canceled flights or cruises. While many travel companies have offered no-fee cancellations and provided a credit for future travel, plaintiffs allege that they should be entitled to refunds of the funds paid, rather than a credit for future travel.[4]

Defenses and Practical Considerations

Businesses that are facing class action lawsuits based on mandatory closures have several defenses that warrant consideration as part of any legal strategy.

Arbitration Agreements and Class Action Waivers

Arbitration agreements are included in many contracts that accompany consumer transactions. Since the Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion,[5] these types of agreements are enforceable subject to any generally applicable contract defenses that do not interfere with the fundamental attributes of arbitration (e.g., fraud, duress, and unconscionability).

As a result, one of the first steps a company should take in defending a consumer class action is determining whether the parties have agreed to resolve the dispute outside of court and outside of a class action setting. This also includes looking at whether there are arbitration provisions in third-party contracts, such as contracts between plaintiffs and ticket resellers.

If the case is one in which California law applies, then recent caselaw confirms that a company must also evaluate whether any of plaintiffs’ claims that are the subject of an arbitration agreement seek a public injunction.

Other Contract-Based Defenses

Once a company has determined whether the case should proceed in court or before an arbitrator, it should consider other contract-based defenses, especially those that may excuse a company’s performance or otherwise limit a company’s liability.

A frequently invoked contract defense in the wake of COVID-19 is force majeure. These clauses vary from contract to contract, but as a general matter, the purpose of these clauses is to set forth when a party may terminate or fail to perform without liability due to an unforeseen event. We anticipate that these clauses will be a particular focus of COVID-19 related litigation, especially those based on forced closures and cancellations.

Another possible defense is that there has been no actual breach of contract. If a company is complying with its contractual obligations, there is arguably no liability. For example, a contract may contemplate that an event or season may be cut short due to unforeseen circumstances, and it may assign that risk to the purchaser. Similarly, a purchaser’s entitlement to a refund may turn on his compliance with the contractual procedures for receiving a refund.

Impossibility and frustration of purpose also may excuse performance. “Impossibility” applies where performance is objectively impossible, and “frustration of purpose” is triggered if circumstances make the required performance worthless to the receiving party. Companies may be subject to government orders that make it impossible to host an event or open facilities, and courts have held that impossibility during disasters, based on intervening government restrictions, can excuse performance.[6]

Causation and Reliance-Based Defenses

Depending on a plaintiff’s theory, intervening factors may preclude, or mitigate, a company’s liability. These factors could include state and local orders limiting large gatherings or evidence of a plaintiff’s unwillingness to attend an event even if it were to proceed as scheduled.

A purchaser’s conduct may also defeat his claim. If a purchaser does not mitigate his or her damages, recovery may be limited. For example, a purchaser who fails to accept a voucher may be subject to an offset, and a purchaser who fails to accept a refund offer may not have standing to bring a claim, depending on the circumstances. A purchaser may also waive or negate any claim based on subsequent conduct, such as continuing a membership or using a voucher.

Defenses based on COVID-19 may also exist on bad faith and unjust enrichment claims. Evidence that a company is thoughtfully considering different options for responding to COVID-19 may negate a finding of bad faith. Similarly, companies are still incurring substantial costs due to government orders and closures, even with events canceled and facilities closed. Thus, a company may respond to an unjust enrichment claim by arguing that it is not unjustly retaining benefits due to the excessive costs it is incurring as a result of forced closures.

Class Certification Defenses

As this discussion suggests, putative class members are not going to be similarly situated and/or affected by the pandemic. For example, entitlement to a refund could turn on individualized issues, such as the specific representations to each consumer, and the steps taken to secure a refund. Individualized inquiries may also exist based on customer expectations. A frequent traveler may understand that flights are subject to unforeseen cancellation, but not a less-experienced traveler. In addition, damages may vary and be incapable of a method that allows them to be determined across the class. For example, a class member who uses a gym pass 50 times per year is differently situated than a consumer who historically uses it more infrequently. The presence of arbitration clauses and class action waivers in contracts with at least some of the putative class members can also make a class action lawsuit an inappropriate forum.

Conclusion

Companies that have canceled or postponed events or closed their facilities face many difficult choices based on COVID-19, and the specter of class action lawsuits further complicates these decisions. Regardless of a company’s approach, and even if a company is already subject to a class action lawsuit, there are important considerations that companies should weigh with counsel in order to determine the best path forward.

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[1] See, e.g., Rickenbaker v. Drexel Univ., No. 2:20-cv-1358 (D.S.C. Apr. 8, 2020); Dixon v. Univ. of Miami, No. 2:20-cv-1348 (D.S.C. Apr. 8, 2020); Rosenkrantz v. Ariz. Bd. of Regents, No. 2:20-cv-00613 (D. Ariz. Mar. 27, 2020).

[2] Ajzenman v. Office of the Comm’r of Baseball, No. 2:20-cv-03643 (C.D. Cal. Apr. 20, 2020).

[3] Labib v. 24 Hour Fitness USA Inc., No. 4:20-cv-02134 (N.D. Cal. Mar. 27, 2020); see also Weiler v. Corepower Yoga LLC, No. 2:20-cv-03496 (C.D. Cal. Apr. 15, 2020); Kramer v. Alterra Mountain Co., No. 1:20-cv-01057 (D. Colo. Apr. 14, 2020).

[4] See, e.g., Manchur v. Spirit Airlines Inc., No. 1:20-cv-10771 (D. Mass. Apr. 21, 2020); Alvarez v. Hawaiian Airlines Inc., No. 1:20-cv-00175 (D. Haw. Apr. 20, 2020); Roman v. JetBlue Airways Corp., No. 1:20-cv-01829 (E.D.N.Y. Apr. 16, 2020); Herr v. Allegiant Air LLC, No. 2:20-cv-10938 (E.D. Mich. Apr. 15, 2020); Bombin v. Sw. Airlines Co., No. 5:20-cv-01883 (E.D. Pa. Apr. 13, 2020).

[5] AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

[6] See, e.g., Bush v. ProTravel Int’l, 192 Misc. 2d 743, 752–53 (N.Y. Civ. Ct. 2002) (recognizing impossibility of performance due to state of emergency following September 11 terrorist attacks).

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

AUTHORS: Christopher Chorba, Timothy W. Loose, Daniel Weiss, Jeremy S. Smith, Emily Riff, and Andrew Kasabian.

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

I. Overview

So far, while all courts have recognized that constitutional restrictions bind governmental actors even during emergencies, plaintiffs’ challenges have had mixed success. Some courts have struck down governmental orders, finding that the particular action constituted governmental overreach. And in other instances, governments have elected to resolve litigation by rescinding the challenged action before any final ruling. Other courts have deferred to governmental actions taken in the midst of a pandemic, declining to enjoin the action or strike it down. This is a fast-moving environment, and many of the cases discussed below were decided on preliminary motions, so we should continue to see a development in the jurisprudence as the cases progress. And because the majority of the constitutional challenges are still pending, there remains much opportunity for the development of additional caselaw in these complex areas of constitutional law.

Below is a description of some of the recent cases challenging COVID-19-related governmental actions on constitutional grounds.[2]

II. Recent Constitutional Challenges To COVID-19-Related Governmental Acts

1. Some plaintiffs have met with success in challenging COVID-19-related orders. On May 6, 2020, a Massachusetts federal court entered a temporary restraining order enjoining the Massachusetts Attorney General from enforcing a COVID-19-related regulation that had banned debt collectors from telephonic communications and from initiating enforcement actions. ACA Int’l v. Healey, No. CV 20-10767-RGS, 2020 WL 2198366 (D. Mass. May 6, 2020). The court held that the regulation “impose[d] a flat ban on a particular medium of speech (telephone communications) involving a particular subject matter (the solicitation of payment of a debt) by a particular subset of those persons (debt collectors) who engage in that type of speech,” and that the regulation did not add anything to existing consumer protections “other than an unconstitutional ban on one form of communication.” Id. at *5, *8. In addition, the regulation’s prohibition against initiating lawsuits violated the constitutional guarantee of access to the courts embedded in the First Amendment’s right to petition the government for redress of grievances. Id. *8–*9.

Another case preliminarily enjoined a stay-at-home order because it violated the right to travel. By executive order in March 2020, the Governor of Kentucky had banned Kentucky residents from traveling out of state with only a few exceptions. Roberts v. Neace, No. 2:20-CV-054 (WOB-CJS), 2020 WL 2115358, at *1 (E.D. Ky. May 4, 2020). The district court held that “[t]he restrictions infringe on the basic right of citizens to engage in interstate travel.” Id. at *4. The court noted that the constitutional right to travel from one state to another “is ‘virtually unconditional.’” Id. (quoting Shapiro v. Thompson, 394 U.S. 618, 643 (1969)). And the order’s restrictions, the court concluded, were not narrowly tailored, given that the order restricted even minimal travel to a neighbouring state, while allowing otherwise identical travel within the state. Id. Moreover, individuals who lived close to the border would be prohibited from their normal travel across state lines. Id. Finally, the court noted that check-points would have to be set up at all entrances to the state, with quarantine facilities to accommodate the thousands of individuals crossing the border. Id. In response to the ruling, the Governor rescinded the Executive Order and issued a new one that “replaced the mandatory language related to travel and self-quarantining with more permissive language.” W.O. v. Beshear, No. 3:20-CV-00023-GFVT, 2020 WL 2314880, at *1 (E.D. Ky. May 9, 2020).

Other courts have struck down COVID-19 regulations based on claims of executive overreach rooted in state constitutional law and related principles. For example, on May 13, 2020, the Wisconsin Supreme Court struck down an order issued by the Secretary of the Wisconsin Department of Health Services requiring all people to remain in their homes, prohibiting all non-essential travel, and closing all non-essential businesses. The court ruled that the order was unenforceable because the Secretary did not follow the statutory rulemaking procedures, and exceeded her statutory authority. Wis. Legislature v. Palm, No. 2020-AP-765-OA, 2020 WL 2465677 (Wis. May 13, 2020). Several Justices also noted that allowing the Secretary to make rules and enforce them without going through the rulemaking process would violate the Wisconsin Constitution’s separation of powers. See id. at *14 (R.G. Bradley, J., concurring); id. at *31 (Kelly, J., concurring).

In other cases, the governmental entity has chosen to avoid litigation by rescinding its restriction after plaintiffs brought their challenge and prior to a final ruling from the court. For example, after the Michigan Governor’s office prohibited the use of motorized boating, a conservation group brought suit, arguing that the ban violated the Equal Protection Clause by irrationally singling out motorized boating, that it arbitrarily infringed on the right to travel, and that it ran afoul of the Dormant Commerce Clause by burdening interstate commerce and the navigation of interstate waterways. After the lawsuit was filed, the Governor rescinded the motorboat ban, and the plaintiff voluntarily dismissed its suit. See Mich. United Conservation Clubs v. Whitmer, No. 1:20-cv-00335 (W.D. Mich.).

Similarly, an association of landscapers and garden-supply retailers filed suit to enjoin the Michigan Governor’s Order prohibiting the operation of businesses that require workers to leave their homes or places of residence. The association argued that the order unduly burdened interstate commerce in violation of the Dormant Commerce Clause, violated the right to travel, and amounted to an uncompensated taking. Although the court declined to issue a temporary restraining order, it set the case for full briefing, noting that it “has concerns about the application of the Executive Order to landscaping services,” and acknowledging that “Plaintiffs have a point that lawn care can largely be performed alone or while maintaining an appropriate social distance.” Order, Mich. Nursery & Landscape Ass’n v. Whitmer, No. 1:20-cv-331, ECF No. 19 (W.D. Mich., Apr. 22, 2020). Two days later, the Governor modified her order and allowed gardeners and landscapers to resume their work.

In one recently filed high-profile challenge, Tesla sued Alameda County, arguing that the County’s local orders halting all business activities conflict with state orders allowing all businesses involving federal critical infrastructure—including Tesla—to continue operating. The local order, Tesla argued, deprives regulated parties of fair notice in violation of due process, given its conflict with state orders; violates equal protection by subjecting Tesla’s Alameda factory to different standards than the Tesla factories in neighbouring counties; and is pre-empted by the state-wide order. Tesla, Inc. v. Alameda Cty., 4:20-cv-03186 (N.D. Cal.). Only a few days later, Alameda County allowed Tesla’s assembly plant to reopen with enhanced safety precautions. See Chase DiFeliciantonio, Alameda County Agrees to Let Tesla Reopen If Certain Conditions Are Met, S.F. Chron. (May 12, 2020), available at https://www.sfchronicle.com/business/article/Alameda-County-orders-Tesla-s-Fremont-plant-to-15264761.php.

These cases confirm that, as we noted in our prior alerts, courts will continue to scrutinize governmental actions in light of constitutional limits even during a pandemic. When those regulations violate constitutional requirements, restrict activity in an irrational manner, or go well beyond restrictions necessary to address the problem at hand, courts will step in. And at a certain point courts may start to feel COVID-19 “fatigue,” in which they look on further or continued governmental restrictions with increasing skepticism. Additionally, the very act of initiating a lawsuit can have the beneficial effect of forcing the governmental actor to reconsider the challenged regulation, and either narrow its scope or even rescind it altogether.

2. Other plaintiffs have been less successful. For example, inFriends of DeVito v. Wolf, No. 68 MM 2020, 2020 WL 1847100 (Pa. Apr. 13, 2020), several businesses challenged the Pennsylvania Governor’s Order closing the physical operations of all non-life-sustaining businesses. The Plaintiffs argued that the Order constituted a taking without just compensation, and that it violated the Constitution’s guarantee of procedural due process and the freedom of assembly. The court rejected these arguments, reasoning that the Order results in only a temporary loss of the use of the plaintiff’s business premises, that petitioners were entitled only to the post-deprivation process that they received, and that the order does not restrict plaintiffs’ ability to assemble telephonically or online. The Plaintiffs applied for a stay with the United States Supreme Court, which was denied; their petition for a writ of certiorari remains pending. See Friends of Devito v. Wolf, No. 19-1265 (U.S.).

In Hartman v. Acton, a federal court in Columbus, Ohio declined a bridal shop owner’s request for a temporary restraining order against the Ohio Department of Health’s stay-at-home order. No. 2:20-CV-1952, 2020 WL 1932896 (S.D. Ohio Apr. 21, 2020). The court first held that the order did not violate procedural due process because “[a] person adversely affected by a law of general applicability has no due process right to a hearing since the law’s generality provides a safeguard that is a substitute for procedural protections.” Id. at *8 (internal quotation marks omitted). The court distinguished those recent cases that had issued temporary restraining orders against governmental actions closing abortion clinics (see, e.g., Preterm-Cleveland v. Att’y Gen. of Ohio, No. 1:19-CV-00360, 2020 WL 1932851 (S.D. Ohio Mar. 30, 2020)) or church services (see, e.g., On Fire Christian Ctr., Inc. v. Fischer, No. 3:20-CV-264-JRW, 2020 WL 1820249 (W.D. Ky. Apr. 11, 2020)) because those orders “implicat[ed] a fundamental right,” and also were not generally applicable, Hartman, 2020 WL 1932896, at *9.

Another recent case outlined the basis for deferring to governmental action during a pandemic. In SH3 Health Consulting, LLC v. Page, an antique store and a gym sought to enjoin COVID-19 stay-at-home orders issued by city and county officials that required “all businesses, other than essential businesses, to cease virtually all activities,” arguing that those orders violated their right to assemble and associate, and their due process rights. No. 4:20-cv-00605-SRC, 2020 WL 2308444, at *2–*3 (E.D. Mo., May 8, 2020). The court first noted the Supreme Court’s ruling in the context of the smallpox epidemic at the beginning of the twentieth century that, “in a public health crisis, a state may implement emergency measures that curtail constitutional rights so long as the measures have at least some ‘real or substantial relation’ to the public health crisis and are not ‘beyond all question, a plain, palpable invasion of rights secured by the fundamental law.’” Id. at *6 (quoting Jacobson v. Massachusetts, 197 U.S. 11, 31, 38 (1905)) (some internal quotation marks omitted). Applying this standard, the court held that there was no violation of the right to assemble, because the orders did not prevent plaintiffs from assembling “through a video call or group chat over the internet.” Id. at *8. Similarly, Plaintiffs may still associate with their customers “[t]hrough social media, email, blogs, and telephones,” and “Plaintiffs can discuss whatever they would like with whomever they would like.” Id. As for Plaintiffs’ Due Process argument, the court held that, “within the broad limits of the Jacobson test,” the state may “order businesses to curtail activities to protect the public health and welfare.” Id. at *10.

3. Still other challenges are waiting on a ruling. For example, a New York law firm has sued the Governor and Attorney General of New York, alleging that, although it was designated as an “essential business,” state officials had been investigating it and issuing cease-and-desist letters, calling for the firm to stop employees from coming to the office. The firm has brought a wide range of claims, alleging that the actions of state officials have violated the Dormant Commerce Clause by burdening the law firm’s ability to engage in interstate commerce, the Contracts Clause by impeding the law firm’s ability to carry out its contracts, and the Due Process, Equal Protection, and Takings Clauses. See Hoganwillig, PLLC v. James, No. 20-cv-00577 (W.D.N.Y.).

Businesses in Pennsylvania have brought a class action challenging the Governor’s closure orders as violative of the Takings Clause, as well as their substantive due process—because the order arbitrarily deprives plaintiffs of their property rights—and procedural due process rights. Schulmerich Bells, LLC v. Wolf, 2:20-cv-01637 (E.D. Penn.). And one recently filed case brought as a class action by a stone-working business that was deemed nonessential challenges the Governor of New York’s shutdown orders as violating the Contracts Clause because they impair the classes’ ability to fulfill obligations under contracts entered into prior to the order. Omnistone Corp. v. Cuomo, 2:20-cv-02153 (E.D.N.Y.). The court denied plaintiffs’ request for a temporary restraining order, and set their preliminary-injunction motion for briefing. Order, Omnistone Corp. v. Cuomo, 2:20-cv-02153-GRB-SIL, ECF No. 18 (E.D.N.Y. May 15, 2020).

In Maryland, in another pending case, a collection of businesses and individuals have challenged the Governor’s COVID-19 orders that individuals stay at home and not enter any businesses other than those deemed “essential,” arguing that the order infringes on their First Amendment rights to free speech and peaceable assembly, violates equal protection by arbitrarily treating them differently from others who are similarly situated, takes their property without just compensation by shuttering their businesses, and unlawfully interferes with interstate commerce in violation of the Dormant Commerce Clause. Additionally, plaintiffs argue that the order violates the Republican Guarantee Clause because the executive is adopting and enforcing regulations that were not enacted by democratically elected legislators. Antietam Battlefield KOA, v. Hogan, 1:20-cv-01130 (D. Md.).

These are just some of the many recently filed cases challenging business-shutdown and stay-at-home orders. Others include pending lawsuits brought by beauty salons, Professional Beauty Federation of California v. Newsom, 2:20-cv-04275 (C.D. Cal., filed May 12, 2020), landlords, Behar v. Murphy, 3:20-cv-05206-FLW-DEA (D.N.J., filed Apr. 28, 2020), lounge restaurants, Amato v. Elicker, 3:20-cv-00464 (D. Conn., filed Apr. 3, 2020), and other businesses, see, e.g., Gondola Adventures, Inc. v. Newsom, 2:20-cv-03789 (C.D. Cal., filed Apr. 24, 2020).

III. Conclusion

The broad range of outcomes in the constitutional challenges to COVID-19-related governmental actions that have already been resolved reinforces that the relevant constitutional analysis is highly fact-specific. But the successful lawsuits listed above demonstrate that even during a pandemic, governmental action is not immune from constitutional scrutiny. As governmental actors at the local, state, and federal levels continue to take actions in response to COVID-19, private parties, businesses and others subject to COVID-19 regulations should be aware of the possible relief that constitutional litigation may offer.

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[1] See Gibson Dunn’s May 1, 2020 Client Alert, The Constitutional Consequences of Governmental Responses to COVID-19: The Right to Travel and the Dormant Commerce Clause, https://www.gibsondunn.com/the-constitutional-consequences-of-governmental-responses-to-covid-19-the-right-to-travel-and-the-dormant-commerce-clause; Gibson Dunn’s April 15, 2020 Client Alert, Constitutional Implications of Rent- and Mortgage-Relief Legislation Enacted in Response to the COVID-19 Pandemic, https://www.gibsondunn.com/constitutional-implications-of-rent-and-mortgage-relief-legislation-enacted-in-response-to-the-covid-19-pandemic; Gibson Dunn’s March 27, 2020 Client Alert, Constitutional Implications of Government Regulations and Actions in Response to the COVID-19 Pandemic, https://www.gibsondunn.com/constitutional-implications-of-government-regulations-and-actions-in-response-to-the-covid-19-pandemic.

[2] This Alert focuses on constitutional litigation brought by businesses and therefore does not discuss the COVID-19-related cases involving issues such as prison conditions, voting rights, abortion access, and church attendance.

The following Gibson Dunn lawyers prepared this client update: Avi Weitzman, Mark A. Perry, Akiva Shapiro, Lochlan Shelfer, Andrew V. Kuntz, Andrew D. Ferguson, and Marjorie G. McLean.

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

Avi Weitzman – New York (+1 212-351-2465, [email protected])
Mark A. Perry – Washington, D.C. (+1 202-887-3667, [email protected])
Akiva Shapiro – New York (+1 212.351.3830 , [email protected])

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

This May 2020 edition of Gibson Dunn’s Aerospace and Related Technologies Update discusses newsworthy developments, trends, and key decisions from 2019 and early 2020, including the impact of COVID-19, that are of interest to companies in the aerospace, defense, satellite, and drone sectors as well as the financial, technological, and other institutions that support them.

This update addresses the following subjects: (1) commercial unmanned aircraft systems (“UAS”), or drones; (2) the commercial space sector; and (3) recent government contracts decisions involving companies in the aerospace and defense industry.

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I. Unmanned Aircraft Systems

A. Expanding Drone Applications During a Global Pandemic
B. UAS Integration Pilot Program (IPP) and Advancements in Drone Delivery
C. FAA Proposes Remote Identification Requirement for Drones
D. Continued Uncertainty Surrounding Low-Altitude Airspace
E. Proposed Rules for Operations at Night and Over People
F. New Regulations for Hobbyists

II. Space

A. Space Agencies Around the World Seek Major Milestones
B. NASA Embraces Partnerships with the Commercial Market
C. Creation of Space Force
D. Internet Satellites
E. A Year of Serious Investment in Space

III. Government Contracts

A. Armed Services Board of Contract Appeals Cases
B. Civilian Board of Contract Appeals Cases
C. Court of Federal Claims Cases
D. Federal Circuit Court of Appeals Cases

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I. Unmanned Aircraft Systems

A. Expanding Drone Applications During a Global Pandemic

As discussed below, and in prior yearly updates, many corporations have been exploring the use of drones to perform delivery services. The global COVID-19 pandemic, however, may result in an explosion of demand for drone delivery and other drone applications.

With people across the country quarantined, the concept of drone delivery of essential supplies has never been more appealing. For many, a trip to the grocery store, pharmacy, or doctor’s office can be life threatening due to the risk of contracting or spreading COVID-19. Under these circumstances, having medications delivered by drone or medical tests flown to a lab—all without the need for social interaction—could be lifesaving.

To date, however, government rules and regulations in the United States have prohibited the majority of drone deliveries other than in experimental programs. Although government approval of drone delivery progressed in 2019, the steps were incremental. We expect that the pandemic will provide new context for lawmakers and regulators to consider policy that permits and even promotes commercial drone delivery, and prompt the adoption of policies that will allow drone delivery to become an essential function.

Governments around the world are using drones amid the COVID-19 crisis in a variety of novel ways to reduce risk to their constituents and government employees. Within a quarantined society, drones are able to go places, see things, and carry items without violating a shelter-in-place order. And drones can also provide safe ways for governments to monitor citizens’ compliance with quarantine rules. COVID-19 has ushered in a new era of drone applications.

In China, drones have become an important tool in managing the pandemic. Drone mapping software and thermal sensors have been adapted to address disease detection and assist with crowd management.[1] Drones used for spraying crops have been repurposed to spray disinfectant across large areas, which allows for much faster spraying, less human risk, and coverage in locations beyond human reach. Drones have also been modified to carry loudspeakers and flood lights to enforce quarantines without putting government employees at risk. In addition, drones have transported medical equipment when traditional transportation was not practical.[2] Beyond China, other countries, including Spain, Kuwait, and the UAE, have used drones to help impose quarantines.[3]

In the United States, although drones have not yet been widely adopted in response to COVID-19 as noted above, there are several reports of their limited use. For example, the city of Elizabeth, New Jersey has been using drones equipped with sirens and speakers as a tool to enforce social distancing.[4] Unofficial drones from a self-proclaimed “Anti-COVID-19 Volunteer Drone Task Force” have been spotted in Manhattan making announcements for people to maintain proper social distancing.[5] And in Connecticut, Draganfly and the Westport Police Department are conducting “pandemic drone” test flights with technologies reportedly capable of detecting temperature, heart and respiratory rates, as well as detecting sneezing and coughing in crowds from a distance of 190 feet.[6] Due to potential privacy concerns, the Westport Police Department said that the drones will not go into private yards and do not employ facial recognition technology.[7]

As the COVID-19 consequences extend, United States localities may increase their drone usage for managing various aspects of the crisis in line with other countries. The continued use of drones in innovative ways during the COVID-19 crisis will likely increase public support for commercial drones and may lead to more favorable regulations. In a few short years we expect that this technology will have transformed from a novelty into an essential tool for responding to pandemics and similar crises.

B. UAS Integration Pilot Program (IPP) and Advancements in Drone Delivery

The Unmanned Aircraft Systems Integration Pilot Program (“IPP”) was created in 2017 to form the basis of a new regulatory framework to safely integrate drones into the national airspace.[8] The IPP seeks to balance the “benefits of innovation” against “the need to protect national security, public safety, critical infrastructure and the [National Airspace System].”[9] The IPP operates through unique private/public partnerships at a local level, and in 2018, the Federal Aviation Administration (“FAA”) selected 10 localities to be part of the pilot program.[10]

These 10 localities achieved multiple firsts during 2019, several of which are highlighted below, leading to advancements in police use of drones as well as drone delivery.

In March 2019, the FAA granted the Chula Vista, California Police Department a Certificate of Authorization (“COA”) which allows the operation of drones beyond visual line of sight up to three miles in any direction from the launch site.[11] This was the first time that the FAA issued a COA with a “beyond visual line of sight” provision for public safety. The Chula Vista Police Department plans to use the COA as a means for enabling drones to arrive on emergency scenes to gather information prior to putting first responders in harm’s way.[12]

In addition to the IPP-enhancing applications for public safety, test data from the Virginia, North Carolina, and San Diego IPPs resulted in the FAA opening the door for certain companies to begin commercial drone deliveries.

In April 2019, Wing, the drone-delivery unit of Alphabet, secured the first Part 135 Air Carrier Certification ever issued to a drone company.[13] In reliance upon test data from its involvement in the Virginia IPP, Wing was granted approval to carry and deliver packages commercially in parts of southwest Virginia, and obtained limited approval to fly drones over people and beyond the visual line of sight. Customer deliveries in Christiansburg, Virginia began in October 2019.[14]

In June 2019, the FAA issued a Special Airworthiness Certificate to Amazon Prime Air, which allows it to research and test one of its unmanned platforms for delivery. Amazon is waiting to obtain a Part 135 certificate. Further, Uber also recently confirmed that it applied for a Part 135 Certificate for drone delivery, and it made several test deliveries to San Diego State University as part of the San Diego IPP.[15] In October 2019, UPS, based on data from the North Carolina IPP, obtained for its subsidiary, Flight Forward, a full Part 135 Standard certification to operate a drone airline, including beyond visual line of sight.[16] UPS’s first flight transported medical samples to testing labs—an application particularly useful during a global pandemic—and UPS Flight Forward is now routinely using drones to deliver medical lab material across a large medical complex.[17]

C. FAA Proposes Remote Identification Requirement for Drones

On December 31, 2019, the FAA published its long-awaited proposed rule that would create a system to track and manage every UAS flight by requiring remote identification of UAS within United States airspace.[18] The proposed rule would tie the existing registration requirements[19] to the new remote identification requirements by requiring nearly all UAS to connect to a “remote ID service” network to be managed by private companies.[20] Among the chief benefits cited by the FAA are improved situational awareness for other aircraft in the vicinity and the potential for UAS operations over people, at night, and beyond the operators’ visual line of sight—operations that are not currently allowed without an exception, and for which the FAA has made clear that remote identification would be a prerequisite.[21]

Under the proposed rule, UAS operating in domestic airspace would be divided into three classifications:

Standard remote identification – UAS capable of both connecting to the internet and broadcasting directly from the UAS.[22]
Limited remote identification – UAS capable of connecting to the internet but not broadcasting directly from the UAS. These UAS will be limited to operations within the operators’ visual line of sight.[23]
No remote identification – UAS without remote identification equipment will be permitted to operate only in FAA-recognized identification areas and within visual line of sight of the operator. The first of these areas to be approved will likely be in locations where traditional radio-controlled model aircraft are regularly flown.[24]

The FAA envisions that the “vast majority” of UAS will be either standard or limited remote identification UAS, while the residual category will apply to amateur-built aircraft and UAS manufactured prior to the effective date of the proposed rule.[25]

Public reaction to the proposed rule has been decidedly negative, with many commenters voicing concerns about privacy and financial costs.[26] More than 52,000 public comments were submitted by the March 2, 2020 deadline.[27] One critic notes that private suppliers would be able to charge annual subscription fees and decries the fact that the proposed rule would ground thousands of UAS that are incapable of connecting to the internet.[28] As an alternative, this critic suggests that UAS utilize existing broadcast technologies for remote identification such as Wi-Fi and Bluetooth, which would arguably be just as effective, free, and cut out the need for any middlemen.[29] Another commenter notes the proposed rule would likely end his UAS mapping business.[30]

The National Business Aviation Association (“NBAA”) welcomed the proposed rule and commended the FAA for taking the initiative to require remote UAS identification.[31] NBAA’s Doug Carr characterized the proposed rule as “a foundational document for moving forward with integrating not just UAS, but other emerging technologies, in a way that addresses our industry’s collective safety, security and other objectives.” The NBAA thanked the FAA for issuing its proposed rule and stated that it “look[s] forward to working with the FAA and other stakeholders to secure its adoption.”[32] The Aircraft Owners and Pilots Association has withheld judgment and indicated that its analysis is ongoing and a statement of position will be forthcoming.[33]

For its part, the FAA believes its proposal, though more costly, is also “more complete” than broadcast-only alternatives.[34]

D. Continued Uncertainty Surrounding Low-Altitude Airspace

It has been almost four years since comprehensive regulations for drones weighing 55 pounds or less became law under Part 107 of Title 14 of the Code of Federal Regulations. Although Part 107 created a federal regulatory framework for commercial drone operations, there is still significant confusion as to what constitutes a legal flight under evolving state and local laws. Although the industry has continued to advance, little progress has been made in clarifying who controls low-altitude airspace. It remains unclear as to how much, if any, airspace is owned by private landowners and whether states and municipalities have any jurisdiction over low-altitude airspace.

The confusion stems from the FAA-deemed “myth” that the FAA does not control airspace below 400 feet in light of its position that it controls the airspace “from the ground up.”[35] However, many state and local governments, as well as property owners, do not agree with the FAA’s interpretation. The starting point of federal airspace has many implications, and the question ultimately will be settled in the federal courts. To date, this boundary has not been directly addressed by a court in the context of drones. The closest that federal courts have come to addressing this issue was in July 2016 when U.S. District Judge Jeffrey Meyer, of the District of Connecticut, provided dicta in one opinion. In that case, Judge Meyer questioned the FAA’s position: “[T]he FAA believes it has regulatory sovereignty over every cubic inch of outdoor air in the United States . . . . [T]hat ambition may be difficult to reconcile with the terms of the FAA’s statute that refer to ‘navigable airspace.’”[36] The dicta addressed the question of where the FAA’s authority begins, but noted that the “case does not yet require an answer to that question.”[37] In time, a case will require such an answer. Without clarification, legal compliance and enforcement will be uncertain in most areas and may be impossible within some localities. This legal uncertainty remains one of the most significant barriers to large-scale commercial operations.

While the federal courts provide little guidance on this issue, a Michigan state court has begun to address conflicting state and local drone laws. In February 2020, the court issued an injunction that prevents a Michigan county from enforcing an ordinance restricting drone operations. The injunction stemmed from a lawsuit challenging, on grounds of state law preemption, a local law prohibiting drone use in county parks. The lawsuit, MCDO v. Genesee County, stems from an incident in which county officials arrested a drone operator for allegedly violating the park rules, which the county interpreted to prohibit drone operations.[38] The county later updated the rules to specifically prohibit drone flights. Michigan’s Unmanned Aircraft Systems Act, however, states: “Except as expressly authorized by statute, a political subdivision shall not enact or enforce an ordinance or resolution that regulates the ownership or operation of unmanned aircraft or otherwise engage in the regulation of the ownership or operation of unmanned aircraft.”[39] Contrary to the county’s rules, Michigan’s Act expressly permits FAA-authorized drone pilots to operate within the state.

The plaintiff in MCDO v. Genesee County sought, in part, a declaratory judgment that the park rule is void and unenforceable as preempted by state law. After reviewing written submissions and hearing oral arguments, the court issued an interim order on November 26, 2019 in which it ordered the parties to supplement their positions and temporarily enjoined the county from enforcing any ordinance involving drones.[40] In February 2020, the Court found that the county’s rule was improper and issued an injunction prohibiting the county from enforcing any ban on the possession, use, or operation of drones. Although this lawsuit may bring some clarity surrounding state law preemption of local laws, it does not address the issue of federal preemption or ownership of low-altitude airspace.

Similar cases will likely arise throughout various states as the drone industry continues to move forward. Beyond state law preemption issues, the courts will eventually be required to address issues concerning federal preemption of state and local airspace laws and the boundaries of low-altitude airspace over private land.

Legal clarity is essential for large-scale commercial operations. Resolution of these issues is not only relevant for many states with similar laws, but it is also vital for an industry facing many legal uncertainties.

E. Proposed Rules for Operations at Night and Over People

Part 107 of the FAA regulations covers a broad spectrum of uses for small UAS weighing less than 55 pounds.[41] Currently, operations occurring at night and operations occurring over people each require a waiver. In an effort to mitigate safety risks while not inhibiting commercial and technological advancements, in early 2019, the FAA and the Department of Transportation shared a Notice of Proposed Rule Making (“NPRM”) proposing alterations to Part 107 to make operation of small unmanned aircrafts over people and at night legal, under certain circumstances, without a waiver.[42] The NPRM states that this proposed rule is part of the FAA’s “incremental approach to integrat[e] [small unmanned aircraft] into the national airspace system.”[43] Comments on the NPRM were due April 15, 2019.[44]

The proposed rule regarding operation of drones over people separates operations into three categories.[45] Category 1 is the most lenient category and covers UAS under 0.55 pounds. Category 1 operations can occur over people due to the fact that such light UAS “pose a low risk of injury.” Because Category 1 only covers extremely light UAS, usages in this Category will most likely be limited to photography and videography.

Categories 2 and 3 cover UAS greater than 0.55 pounds. These categories allow UAS to be flown over people only if the manufacturer has proven that a resulting injury to a person would be under a specified severity threshold. Category 2 aircraft will need to demonstrate a certain injury threshold, and Category 3 aircraft will have a higher injury threshold with additional operating limitations.[46] To compensate for the higher potential injury of a Category 3 flight, operations falling into Category 3 cannot occur over open-air assemblies of people, operations must take place over closed or restricted access sites, and the UAS may not hover over people. For both Category 2 and Category 3, the UAS may not have any exposed rotating parts that could result in skin laceration. The rule has not yet gone into effect, but the FAA predicts a number of operations taking place within Categories 2 and 3 will occur. These operations could include rescue and emergency response efforts, newsgathering, wildlife tracking, and filming large events.

Regarding drone operations at night, the proposed rule would allow remote pilots, with certain qualifications, to fly at night without a waiver. Specifically, pilots must take and pass an updated knowledge test or participate in a training on night operations, and pilots must equip their UAS with anti-collision lights visible for a minimum of three miles.[47]

As noted, the new rules have not been enacted. In the interim, the FAA issued its first Part 107 waiver to the Hensel Phelps Construction Company of Greeley, Colorado, which allows the company to operate a parachute-equipped drone over people.[48] The FAA stated this marked “the first time the FAA has collaborated with industry in developing a publicly available standard, worked with an applicant to ensure the testing and data collected acceptably met the standard, and issued a waiver using an industry standard as a basis to determine that a proposed [small unmanned aircraft] operation can be safely conducted under the terms and conditions of a waiver under Part 107.”[49] The FAA confirmed that this same process is “available to other applicants who propose to use the same drone and parachute combination.”[50]

F. New Regulations for Hobbyists

This past year also brought new rules for recreational “hobbyist” drone pilots. The FAA published new rules to the Federal Register in May 2019, which included two significant changes.

First, recreational pilots are now required to pass a knowledge test and carry proof of passage while flying. The test is still in development, and the details of its contents have not yet been publicly shared. Second, the previously applicable “five-mile rule” regarding hobbyist operations near airports is no longer in effect. Whereas the old rule simply required hobbyist operators to “[p]rovide prior notification to the airport and air traffic control tower, if one is present, when flying within 5 miles of an airport” (no paperwork or approval was required), the new rules require hobbyists to actually obtain airspace authorization from the FAA prior to any operations within five miles of an airport.[51]

II. Space

A. Space Agencies Around the World Seek Major Milestones

The United States is once again looking toward the Moon. As 2019 marked the 50th anniversary of the Apollo 11 moon landing, NASA announced its new Moon program: Artemis.[52] Artemis will proceed under a two-phase program: Phase 1 will land astronauts on the Moon by 2024, and Phase 2 will establish a sustained human presence on the Moon by 2028.[53]

In addition to announcing its lunar ambitions, NASA astronauts Christina Koch and Jessica Meir performed the first all-female spacewalk on October 18, 2019, and Koch also completed the longest ever spaceflight by a woman after spending nearly 11 months in orbit.[54] Koch’s record-setting spaceflight provides researchers the opportunity to study the effects of long-duration spaceflight on a woman in support of NASA’s plans to send astronauts to the moon and Mars.[55]

2019 also saw China successfully execute a soft landing on the far side of the Moon. China’s fourth moon probe, Chang’e-4, landed on the far side of the Moon at the Von Kármán crater on January 3, 2019.[56] Landing on the far side of the Moon is a historically difficult mission: the relative positioning of the probe, Moon, and Earth results in the Moon blocking signals between the craft and the Earth. China mitigated this challenge by first launching a relay satellite into lunar orbit which enabled the craft to maintain communications from any point on the lunar surface.[57]

Israel and India were less successful in seeking their respective 2019 milestones. In April 2019, Israel’s Beresheet spacecraft—built by SpaceIL and Israel Aerospace in a privately funded mission—crashed into the lunar surface after an apparent failure of its main engine.[58] In September 2019, India’s Vikram moon lander crashed into the lunar surface after experiencing issues with its braking rockets.[59] India, however, still made space history in 2019 when it fired a ground-based anti-satellite missile and struck an unidentified Indian satellite in low Earth Orbit.[60] India’s March 27, 2019 test, dubbed “Mission Shakti,” made India the fourth country (after the United States, Russia, and China) to test anti-satellite missile capability.[61]

Japan ventured into new territory as well when its asteroid-sampling Hayabusa-2 spacecraft fired a bullet into the Ryugu asteroid’s surface and “bombed” the asteroid with a plastic explosive in order to collect samples from below the surface.[62] After spending more than a year on the asteroid, Hayabusa-2 began its long journey home in November 2019.[63]

Most recently, Iran’s Islamic Revolutionary Guard Corps claimed it put a military satellite into orbit for the first time this April.[64] According to the Revolutionary Guard, the “Noor” satellite reached an orbit of 265 miles (425 kilometers) above the Earth’s surface. The launch of Iran’s “Noor” satellite has not been independently confirmed at the time of publication.[65] If confirmed, the news will be concerning to nations that worry such space launches would enable Iran to develop intercontinental ballistic missiles.[66]

B. NASA Embraces Partnerships with the Commercial Market

The past year marked an expansion in NASA’s embrace of the commercial space industry. In 2019, NASA announced its first partnerships with commercial businesses to provide payload services in connection with the agency’s Artemis lunar program.[67] Fourteen companies have now been selected to provide these services.[68] These companies will fly NASA’s payloads, primarily scientific instruments, to designated locations on the Moon.[69]

The first commercial transport of NASA astronauts to the International Space Station is expected this year after significant milestones were achieved in 2019. In March 2019, Elon Musk’s Space Exploration Technologies Corp. (“SpaceX”) launched its first unmanned demonstration flight of its Dragon spacecraft, which will carry out the mission.[70] The Dragon autonomously docked with the International Space Station, becoming the first American spacecraft to successfully do so.[71] The Dragon flight is scheduled to transport its first NASA astronauts to the Space Station on May 27.[72] NASA and SpaceX have not yet announced any change in schedule due to the COVID-19 pandemic. If all goes as planned, the May flight will mark the first time that a private commercial spacecraft will transport NASA astronauts to the Space Station and additionally marks the end of NASA’s nearly decade-long reliance on Russia’s Soyuz spacecraft for transport. The process of building commercial craft for crew transport has been in the works since 2014 when NASA selected SpaceX and Boeing for the project.[73]

One of 2019’s biggest announcements in the space tourism sector also came from NASA: the agency will now allow private citizens to use the Space Station.[74] Bigelow Space Operations, the service subsidiary of Bigelow Aerospace, and Axiom Space are two companies already arranging trips for passengers.[75] These companies will have to pay NASA approximately $35,000 a night per passenger to use the Space Station’s amenities.[76] Consumers, however, can expect to pay significantly more—seats are currently running for upwards of $50 million.[77] While Axiom Space officials expect that a flight could take off as soon as the second half of 2021, the effect of closures and layoffs due to COVID-19 may impact these companies’ ambitions.[78]

NASA’s opening of the Space Station to private tourism is just one of several new policies designed to bring business to space. Last year, NASA began seeking proposals from private companies interested in providing a habitable commercial module to be attached to the Space Station.[79] The project was awarded to Axiom Space in February.[80] The next steps will involve Axiom Space and NASA negotiating a contract with the goal of completing the project by 2024.[81]

Other companies are also likely to take advantage of NASA’s new initiatives. Virgin Galactic and Blue Origin, LLC are two such companies that have made serious progress toward orbital and suborbital commercial flight in the past year. Last February, Virgin Galactic conducted its second successful manned space flight.[82] Company officials are optimistic that commercial flights will begin in the near future.[83] In December, Blue Origin completed its 12th unmanned test flight of its suborbital New Shepard spacecraft, but has not yet put any people aboard.[84] It has not yet announced when it would start flying passengers.[85]

C. Creation of Space Force

The United States Space Force was established on December 20, 2019 with the enactment of the National Defense Authorization Act for Fiscal Year 2020 (“NDAA”). The Space Force is now the sixth branch of the United States military, and the first new military service in more than 70 years.[86] Its duties are to “(1) protect the interests of the United States in space; (2) deter aggression in, from, and to space; and (3) conduct space operations.”[87]

The NDAA redesignated the Air Force Space Command (“AFSPC”), established in 1982, as the Space Force in an initial step to establish this new service.[88] AFSPC had a core mission of space operations focused on “missile warning, launch operations, satellite control, space surveillance and command and control.”[89] The Space Force will continue this mission and is additionally charged with safeguarding United States space systems, such as satellites.[90]

Structurally, the Space Force is organized within the Department of the Air Force, in an arrangement similar to that of the Marine Corps within the Department of the Navy.[91] Accordingly, the Secretary of the Air Force, currently Barbara M. Barrett, has overall responsibility for the Space Force.[92] The Space Force’s highest-ranking military leader, Chief of Space Operations, is General John W. Raymond.[93] Pursuant to the NDAA, in December 2020, one year after the enactment of the NDAA, the Chief of Space Operations shall become a member of the Joint Chiefs of Staff, further elevating this new position.[94]

Congress approved $40 million for Space Force operations and maintenance in fiscal year 2020 appropriations, about $32 million less than the amount requested by the Trump administration.[95] However, this diminutive amount, representing just 0.0054% of the total defense budget authorized in the NDAA, is likely far from the true cost of implementing the Space Force and not indicative of its budget at full capacity. Previously, in May 2019, the Congressional Budget Office estimated that a new space service within the Department of the Air Force would cost about $1.3 billion annually and approximately $1.1 billion to $3 billion in one-time set up costs.[96] Thus, the actual costs for the Space Force should become clearer in the coming years as the Department of Defense requests appropriations.

Congress directed the Secretary of the Air Force to implement the Space Force provisions by no later than 18 months after enactment of the NDAA.[97] Congress also required that no later than 60 days after the enactment of the NDAA, and every 60 days thereafter until March 31, 2023, the Secretary of the Air Force and the Chief of Space Operations jointly provide briefing on the status of implementing the Space Force to congressional defense committees.[98] In so doing, Congress seemingly recognized that the Space Force will likely take years to become fully functional.

The establishment of the Space Force represents a recognition of the value of space to the prosperity and military prowess of the United States and the broader global economy. The United States alone has 901 satellites, which support GPS, banking operations, mobile technology, meteorology, and missile detection, among other technological capabilities.[99] These crucial instruments touch upon many aspects of daily life, and their destabilization would result in severe domestic and global ramifications. Several countries, including China and India, have already demonstrated the ability to shoot down satellites, and Russia continues to test an anti-satellite weapon.[100],[101] China and Russia are also developing methods to disrupt satellite functions.[102] As these countries, and others, enhance their abilities to launch and impede space systems, the space environment is fast becoming another area of serious geopolitical and economic import. Should armed conflict erupt in space, the task of fighting adversaries is under the purview of the United States Space Command—not the Space Force (although General Raymond is currently dual-hatted as commander of Space Command).[103]

To address these strategic challenges, Space Force leadership is grappling with institutional questions regarding what field commands will be created, how to envelop existing structures such as the Space and Missile Systems Center, and how best to transition certain Air Force bases that predominantly run space operations, including Peterson Air Force Base in Colorado and Vandenberg Air Force Base in California.[104] These questions must be answered with existing human resources. Pursuant to the current legislation, only Air Force personnel are allowed to transfer to the Space Force, and the Space Force cannot add any new military billets.[105] Nonetheless, due to the redesignation of AFSPC, the Space Force has been assigned 16,000 airmen and civilian employees to start.[106] Over the next 18 months, space-related Air Force personnel will transfer to the Space Force to become Space Force service members.[107]

The creation of the Space Force will likely have effects beyond the Department of the Air Force. Though currently not permitted, the Department of Defense’s long-term vision is to authorize Army and Navy elements to transfer and join the Space Force in order to consolidate space personnel across the military branches into one service.[108] Another potential military resource that may eventually be used to support the Space Force is the Space National Guard. To fill the present gap, the Air National Guard has been asked to create four offensive space control squadrons in California, Colorado, Florida and Hawaii.[109]

Due to the congressional mandate, the next year and a half will be a particularly crucial period for defining the mission, organization, and capabilities of the Space Force as Space Force leadership determines the direction of this new military branch.

D. Internet Satellites

The United Nations Telecommunication Development Sector estimated that by the end of 2019, just 53.6% of the global population—slightly more than four billion people—were internet users.[110] The Federal Communications Commission (“FCC”) estimates that there are about 14 million rural Americans who do not have access to even the slowest mobile broadband services.[111] One idea to bring internet access to all corners of the globe is the use of thousands of internet satellites circulating at low Earth orbit.

These satellites would orbit only hundreds of miles above the Earth—as opposed to the 22,000 miles at which large geosynchronous satellites presently orbit—significantly reducing the response times for internet connections.[112] Orbiting closer to the Earth also means that the satellites travel faster, therefore requiring more satellites in the system to provide continuous internet connection to its customers.[113] These satellites grouped in one network are called a “constellation,” and a network with hundreds or thousands of satellites has been nicknamed a “megaconstellation.”

Morgan Stanley estimates the space economy, which includes the consumer broadband sector, will grow to more than $1 trillion over the next 20 years.[114] In light of this potential opportunity, several commercial entities have received permission to launch and operate constellations, including SpaceX, Amazon, Telesat, and OneWeb. These four companies have announced their intention to launch as many as 46,100 satellites combined in the near future, dwarfing the present number of satellites in orbit—about 2,000.[115]

These ventures will have to adhere to launch requirements in order to retain their full rights in space, due to regulations implemented by the United Nations International Telecommunication Union (“ITU”) in November 2019. After a seven-year window from their spectrum request, constellation operators must launch 10% of their satellites in two years, 50% in five years, and 100% in seven years.[116] Failure to launch in accordance with these milestones will subject the operators to proportional limits on their spectrum rights.[117]

SpaceX is one such venture that plans to operate a megaconstellation. SpaceX’s initial Starlink plan called for a constellation of 12,000.[118] SpaceX has since filed for permission from the ITU to launch another 30,000 satellites.[119] Elon Musk, SpaceX’s founder and chief executive, estimates that Starlink would be economically viable at 1,000 satellites, and that the annual internet revenue from the Starlink system, if successful, would be $30 billion.[120]

In its first Starlink launch in May 2019, SpaceX sent 60 internet communications satellites into orbit.[121] According to Mark Juncosa, vice president for vehicle engineering at SpaceX, a further 24 launches would put enough satellites into orbit to provide internet coverage to most populated areas and 30 launches would result in satellite coverage for the entire world.[122] To date, SpaceX has launched about 350 Starlink satellites.[123]

SpaceX intends to compete directly with traditional internet service providers and plans to begin offering services for consumers in the United States in mid-2020.[124] With potentially thousands more satellites in orbit than needed for global coverage, Starlink could also serve specialized needs. For example, the U.S. Air Force is testing Starlink’s technology for encrypted military communications in military aircraft as part of a SpaceX contract with the Pentagon.[125

Amazon and Telesat have not yet launched a satellite but have announced plans to move forward with their planned constellations.[126] Project Kuiper is Amazon’s internet satellite venture that aims to operate a system of 3,236 satellites.[127] Amazon has yet to announce a timetable for its launches, and it is currently seeking expedited FCC approval for the launch and operation of the Kuiper satellites.[128] Morgan Stanley believes Project Kuiper could represent a $100 billion opportunity for Amazon.[129]

Canadian corporation Telesat has partnered with the Canadian government to provide internet access across rural and remote areas of Canada.[130] Telesat envisions a smaller constellation of about 300 satellites, with a goal of providing regional coverage in 2022 and global service in 2023.[131]

Notwithstanding the considerable revenue projections, the commercial internet satellite industry still faces challenges. One of the leading competitors, OneWeb, a London-based company, filed for Chapter 11 bankruptcy in late March 2020.[132] To date, OneWeb has successfully launched 74 satellites.[133] OneWeb had intended to begin coverage in 2021, selling its services first to governments and corporate customers, then to consumer internet providers.[134]

E. A Year of Serious Investment in Space

2019 was a year of serious space investment. Increased private funding, technological advancement, and growing public interest fueled serious investment in the space industry. Market pundits estimate the industry may nearly triple its revenue generation to $1 trillion by 2040. This growth appears driven by two key trends—a broad spectrum investor pool and increased diversity in investment opportunities.

One of the biggest industry moves of the year was Virgin Galactic’s October IPO. On October 25, Virgin Galactic announced the completion of a merger with Social Capital Hedosophia, creating Virgin Galactic Holdings, Inc., the first publicly traded commercial human spaceflight company.[135] The IPO reflects a larger market trend: the space industry as a viable investment for the public.[136] Indeed, 2019 saw the pool of investors investing in the space industry expand to even the most traditionally risk averse of investors—pension funds—with the Ontario Teachers’ Pension Plan, a fund with over $190 billion in managed assets, investing an undisclosed amount in SpaceX this past June.[137]

Also contributing to the investment surge is the diversity of the current commercial opportunities in the space sector. Opportunities were traditionally limited to military contracts and large-scale communications satellites. Now, however, opportunities exist in private spaceflight, satellite broadband, and imagery and data analysis.[138] And these developing sub-industries are likely to generate work for a second tier of companies providing technology and components to these end service providers.

Recent moves by the government, the traditional investor in the domestic space industry, have also fed into this diversification. In 2019, NASA announced several initiatives that will open up the Space Station for commercial use, creating new opportunities for private businesses. These initiatives come on top of NASA’s aforementioned partnership with Boeing and SpaceX to develop commercial craft for shuttling astronauts to the Space Station. Additionally, the new U.S. Space Force is expected to generate additional investment and innovation opportunities for existing and emerging businesses in the space industry.[139]

These positive investment trends continued through the first months of 2020. In February, the Trump administration announced that it would be boosting NASA’s budget by 12%, bringing it to $25.2 billion.[140] But the COVID-19 pandemic has since cast a shadow on the industry. Furloughs, temporary closures, bankruptcies, delays, and lack of investor funding are just part of the impact felt by the space industry.[141] As discussed above, satellite company OneWeb appears to be the first casualty of the pandemic, filing for Chapter 11 relief.[142] According to OneWeb, the “financial impact and market turbulence related to the spread of COVID-19” prevented the company from obtaining the financing that it needed to fully fund its operations.[143]

Government investment remains largely consistent. The Department of Defense is taking steps to keep its contractors, including those supplying the U.S. Space Force, at work by easing cash flow to contractors and ensuring timely payment.[144] The government has also continued investing in NASA, earmarking $60 million under the Coronavirus Aid, Relief, and Economic Security Act to support the agency.[145]

III. Government Contracts

In this update, we summarize select recent government contracts decisions that involve companies in the aerospace and defense industry, as well as decisions that may be of interest to them. These cases address a wide range of issues with which government contractors in the aerospace and defense industry should be familiar.

A. Armed Services Board of Contract Appeals Cases

Aero Tech Services Associates, Inc., ASBCA No. 61682 (Mar. 30, 2020)

Aero Tech Services Associates, Inc. (“ATSA”) performed logistical maintenance services for two E-9A aircraft at Tyndall Air Force Base. As part of this contract, ATSA provided “over and above” tasks, engineering services, test and FAA certification of modifications, installation of modifications, and depot maintenance support. Under the contract, “over and above” charges were Government-directed tasks within the scope of the contract but not specifically forecasted. For the first six years of performance, the parties operated under a prior contract that fully reimbursed over and above subcontractor work; in contrast, the follow-on contract at issue in this case limited subcontractor over and above reimbursements to a fixed price.

In the course of an “over and above” task, ATSA requested that a team from another government contractor evaluate the severity of corrosion in an engine pursuant to a subcontract agreement. That contractor then charged ATSA a total price for the work. ATSA characterized the contractor as a “vendor,” claimed that the fixed hourly rate applicable to subcontractors for “over and above” tasks did not apply to “vendors,” and therefore argued that it should have been reimbursed for the contractor’s labor associated with “over and above” work as a material cost for which it was entitled to full reimbursement. The Government argued that the costs at issue are for subcontractor labor, which is only reimbursable up to a particular fixed hourly rate.

The Board rejected ATSA’s argument, holding that the plain language of the contract was unambiguous and did not support ATSA’s interpretation that the contractor did not qualify as a “subcontractor” for purposes of determining the over and above payment.

CLC Construction Company, ASBCA No. 59110 (Apr. 17, 2020)

CLC Construction Co. (“CLC”) was awarded a contract in 2011 to build a courthouse in Afghanistan. The Government initially terminated the contract for convenience, but later rescinded the termination for convenience and terminated the contract for default instead, alleging that the CLC violated the Procurement Integrity Act, (“PIA”) 41 U.S.C. §§ 2101-07. Specifically, the government alleged that CLC’s then-CEO improperly received the dollar amount of the lowest cost proposal and a copy of the Government’s independent estimate for the project before contract proposals were due. CLC appealed the contract termination, and the Government sought summary judgment. The Government argued that because CLC allegedly engaged in illegal conduct, the contract was void ab initio, and there was therefore no basis for the appeal.

The Board first rejected the government’s contention that CLC’s appeal was untimely. The contracting officer in this case had issued two final decisions—the first decided that CLC had engaged in illicit or improper activity prior to the contract’s award, and the second asserted a new legal theory based on the same facts to justify the contract’s termination. Although CLC appealed the first decision, it failed to appeal the second final decision. The Board found that CLC’s initial appeal of the first final decision was sufficient because, in that appeal, CLC denied all the facts applicable to both final decisions. The Board then denied summary judgment because the Government did not sufficiently demonstrate that CLC had violated the PIA. The Government did not show, for example, that CLC received the information in exchange for something of value, such as payment, or to gain a competitive advantage. The Board also noted the Government’s failure to show that the information CLC possessed constituted prohibited information under the PIA because the independent government estimate did not fit within the definition of “source selection information” set forth in the PIA.

B. Civilian Board of Contract Appeals Cases

Pernix Serka Joint Venture v. Dep’t of State, CBCA No. 5683 (Apr. 22, 2020)

Pernix Serka Joint Venture (“Pernix”) was performing a firm fixed price contract to construct a rainwater capture and storage system in Sierra Leone when the region was disrupted by the Ebola virus. Although Pernix sought guidance from the Department of State (“DOS”) about how to respond to the outbreak, DOS did not provide the requested guidance. Pernix took several actions, including demobilizing and remobilizing and later contracting for additional medical services for its employees. Pernix requested an equitable adjustment for these increased costs, which DOS denied. Pernix appealed under several theories, including cardinal change, constructive change, and breach of implied duty to cooperate. The Government moved for summary judgment, arguing that because Pernix had a firm fixed price contract, Pernix assumed the risks of any unexpected costs not attributable to the Government.

In granting the summary judgment, the Board rejected Pernix’s argument that there had been a “cardinal change,” because the DOS never changed the description of work expected from Pernix under the contract. The Board also rejected Pernix’s argument that a constructive change had occurred, because the Government did not direct Pernix to demobilize or remobilize its employees. Ultimately, the Board ruled that summary judgment was appropriate because Pernix did not identify any basis to shift the risk under its fixed price contract to the Government.

CSI Aviation, Inc. v. Dep’t of Homeland Security and Gen’l Svcs. Administration, CBCA Nos. 6581, 6582 (Feb. 21, 2020).

In an interesting case raising the issue of the proper Government agency respondent, the CBCA recently deferred ruling on the jurisdictional question of whether an agency’s contracting officer has the authority to deny a contractor certified claim. CSI Aviation, Inc. (“CSI”) sells air transportation services to federal agencies under a GSA Schedule contract. U.S. Immigration and Customs Enforcement (“ICE”), which placed orders under the GSA Schedule contract, failed to pay two invoices related to chartered flights, and CSI submitted a certified claim to both the ICE contracting officer and the GSA Schedule contracting officer. CSI requested that the ICE contracting officer refer the claim to the GSA Schedule contracting officer, but the ICE contracting officer did not do so and denied the claim on the basis that the schedule contract did not apply to the task orders at issue.

In response, CSI filed two appeals with the Board: CBCA 6581 appealed the ICE contracting officer’s denial, and CBCA 6582 protectively appealed the “deemed denial” of its claim by GSA. CSI moved to stay CBCA 6581, in which ICE is the respondent, and encouraged the Board to move forward with CBCA 6582, in which GSA was the respondent. GSA moved to dismiss CBCA 6582 for lack of jurisdiction. CSI then moved for the Board to consolidate the two appeals and designate GSA as the “lead respondent” because the ICE contracting officer did not have the authority to render his final decision. In short, both GSA and ICE wanted the Board to proceed only with CBCA 6581 involving DHS/ICE, whereas CSI wanted the Board to proceed with CBCA 6582 but keep CBCA 6581 on the docket until CBCA 6582 was resolved.

The Board granted CSI’s motion to consolidate because both appeals were borne from the exact same facts and raised the same question of law: whether the ICE contracting officer had the authority to issue a denial or whether the claim required an interpretation of the schedule contract and thus must be decided by GSA. The Board noted that this case was difficult because the jurisdictional question is essentially the same as the merits question, but determined that it need not immediately decide which agency should have adjudicated CSI’s claim because CSI sent the claim to both agencies and both agencies are currently before the Board.

In a separate appeal, CSI Aviation, Inc. v. General Services Administration, CBCA No. 6543 (Mar. 10, 2020), the Board denied ICE’s motion to intervene to “assert defenses against CSI’s contract claims” because “ICE’s legal and financial interests may be at variance with GSA’s interests” in this case. The Board rejected ICE’s contention that it could have interests “at variance” to GSA where “a respondent agency appears before us on behalf of and in the interests of the United States and not of the agency alone” (emphasis added). In denying ICE’s motion to intervene, the Board clarified that ICE is free to aid GSA in their case and communicate with GSA if ICE is dissatisfied with GSA’s conduct as the respondent.

C. Court of Federal Claims Cases

Raytheon Co. v. U.S., No. 19-883C (Fed. Cl. Jan. 14, 2020)

Raytheon Company (“Raytheon”) contracts with the United States Army to supply engineering services supporting the Patriot weapon system. Raytheon placed certain proprietary markings on vendor lists that Raytheon was contractually obligated to supply to the Army. The contracting officer (“CO”) directed Raytheon to remove the proprietary marks from the vendor lists and to replace them with the legend used for technical data in which the government holds “government purpose rights” under DFARS 252.227-7013.

Raytheon filed suit, arguing inter alia that the CO’s final decision directing Raytheon to affix the government purpose rights legend was invalid because Raytheon did not receive certain statutorily-required procedural protections in the CO’s decision-making process; that the Army breached the contract by failing to follow procedures for challenge restrictive markings; and that Raytheon’s vendor lists are not technical data as defined in the DFARS. The Government moved to dismiss Raytheon’s complaint for lack of subject-matter jurisdiction and failure to state a claim.

Specifically, the Government argued that the Court did not have jurisdiction to hear the claims under the Tucker Act, 18 U.S.C. § 1491(a)(1), because Raytheon sought only declaratory relief and no monetary damages. The Court agreed that it did not have jurisdiction under the Tucker Act but held that it did properly have jurisdiction under the Contract Disputes Act. The Court explained that Raytheon’s request for declaratory judgment constitutes a claim concerning any “nonmonetary dispute[] on which a decision of the contracting officer has been issued” under the CDA. A “claim” is defined by FAR 2.101 as a demand by any party seeking, among other things, “relief arising under or relating to the contract.”

The Court held that it has the power to decide whether Raytheon is compelled to comply with the CO’s decision in light of the alleged procedural deficiencies in the CO’s process and denied the government’s motion to dismiss.

D. Federal Circuit Court of Appeals Cases

Northrop Grumman Corp. v. Sec’y of Defense, Nos. 2018-1945, 2018-1990 (Fed. Cir. Nov. 15, 2019)

The FAR permits contractors such as Northrop Grumman Corporation (“NGC”) to seek reimbursement for post-retirement benefit costs (“PRB costs”), such as those related to post-retirement health care, life insurance, and disability benefits. Only “allowable” PRB costs are reimbursable. Prior to a 1995 amendment, the FAR did not require contractors to use any specific accounting standard in measuring PRB costs each year, and NGC used the “DEFRA” method, established by the Deficit Reduction Act of 1984. In 1995, the FAR was amended to require that government contractors comply with the Financial Accounting Standards (“FAS”) 106 to determine allowable PRB costs. Despite this FAR amendment, NGC continued using the DEFRA method to account for its PRB costs, even though DEFRA does not comply with FAS 106.

NGC disclosed its use of the DEFRA method, which resulted in lower costs to the government, and the government did not object. NGC switched to the FAS method in 2006 and amended its PRB plans at the same time. The amended PRB plans reduced NGC’s PRB cost obligations by $307 million, which NGC subtracted from its transition obligation as required by FAS 106. The Defense Contract Management Agency (“DCMA”) disallowed $253 million of NGC’s PRB costs after 2006 on the basis that NGC had not used the FAS 106 method from 1995–2006. NGC appealed to the ASBCA, which determined that NGC has and never will claim reimbursement for the $253 million in disputed costs because those costs were not incurred between 1995–2006.

The Court upheld the ASBCA’s determination that NGC never claimed and will never claim any of the disputed retirement benefits. The Court also upheld the ASBCA’s holding that NGC’s PRB plan amendment effectively eliminated NGC’s transition obligation, so the government’s disallowance of the disputed funds was improper.

__________________________

[1] Yujing Liu, China Adapts Surveying, Mapping, Delivery Drones to Enforce World’s Biggest Quarantine and Contain Coronavirus Outbreak, South China Morning Post (Mar. 5, 2020), available at https://www.scmp.com/business/china-business/article/3064986/china-adapts-surveying-mapping-delivery-drones-task.

[2] Id.

[3] Jed Pressgrove, Do Drones Have a Realistic Place in the COVID-19 Fight?, Gov’t Tech. (Mar. 20, 2020), available at https://www.govtech.com/products/Do-Drones-Have-a-Realistic-Place-in-the-COVID-19-Fight.html.

[4] NJ Town Resorts to Talking Drones to Enforce Social Distancing, NBC New York (Apr. 9, 2020), available at https://www.nbcnewyork.com/news/local/nj-town-resorts-to-talking-drones-to-enforce-social-distancing/2364912/.

[5] Ben Yakas, FAA Investigating “Anti-COVID-19 Volunteer Drone” Filmed Admonishing People in NYC, Gothamist (Apr. 2, 2020), available at https://gothamist.com/news/faa-investigating-anti-covid-19-volunteer-drone-filmed-admonishing-people-nyc.

[6] Draganfly, Inc., Draganfly’s ‘Pandemic Drone’ Technology Conducts Initial Flights Near New York City to Detect COVID-19 Symptoms and Identify Social Distancing, GlobeNewswire (Apr. 21, 2020), available at https://www.globenewswire.com/news-release/2020/04/21/2019221/0/en/Draganfly-s-Pandemic-Drone-technology-Conducts-Initial-Flights-Near-New-York-City-to-Detect-COVID-19-Symptoms-and-Identify-Social-Distancing.html.

[7] Westport Police Department, Public Facebook Statement (Apr. 21, 2020), available at https://www.facebook.com/westportctpolice/posts/1621495744664486.

[8] Fed. Aviation Admin., UAS Integration Pilot Program (Dec. 10, 2019), available at https://www.faa.gov/uas/programs_partnerships/integration_pilot_program/.

[9] Fed. Aviation Admin., Integration of Civil Unmanned Aircraft Systems (UAS) in the National Airspace System (NAS) Roadmap, Second Edition 32 (July 2018), available at https://www.faa.gov/uas/resources/policy_library/media/Second_Edition_Integration_of_Civil_UAS_NAS_Roadmap_July%202018.pdf.

[10] U.S. Dep’t of Transp., UAS Integration Pilot Program Selection Announcement (May 9, 2018), available at https://www.transportation.gov/briefing-room/uas-integration-pilot-program-selection-announcement.

[11] Gustavo Solis, FAA Allows Chula Vista to Expand Police Drone Program, The San Diego Union Tribune (Mar. 22, 2019), available at https://www.sandiegouniontribune.com/communities/south-county/sd-se-chula-vista-drones-20190319-story.html.

[12] Chula Vista Police Dep’t, UAS Drone Program, available at https://www.chulavistaca.gov/departments/police-department/programs/uas-drone-program (last visited Apr. 17, 2020).

[13] Mihir Zaveri, Wing, Owned by Google’s Parent Company, Gets First Approval for Drone Deliveries in U.S., N.Y. Times (Apr. 23, 2019), available at https://www.nytimes.com/2019/04/23/technology/drone-deliveries-google-wing.html.

[14] Wing Medium, Wing Unveils Plans for First-of-its-Kind Trial with FedEx and Walgreens, Medium (Sept. 19, 2019), available at https://medium.com/wing-aviation/wing-unveils-plans-for-first-of-its-kind-trial-with-fedex-and-walgreens-7f17350daa09.

[15] Brian Garrett-Glaser, FAA Releases Policy Proposal for Type Certifying Drones, Aviation Today (Feb. 5, 2019), available at https://www.aviationtoday.com/2020/02/05/faa-releases-policy-proposal-type-certifying-drones/.

[16] UPS Flight Forward Attains FAA’s First Full Approval For Drone Airline, UPS Press Release (Oct. 1, 2019), available at https://pressroom.ups.com/pressroom/ContentDetailsViewer.page?ConceptType=PressReleases&id=1569933965476-404.

[17] Fed. Aviation Admin., Fact Sheet – UAS Integration Pilot Program (Mar. 31, 2020), available at https://www.faa.gov/news/fact_sheets/news_story.cfm?newsId=23574.

[18] Fed. Aviation Admin., Notice of Proposed Rulemaking on Remote Identification of Unmanned Aircraft Systems (Dec. 31, 2019), available at https://www.federalregister.gov/documents/2019/12/31/2019-28100/remote-identification-of-unmanned-aircraft-systems.

[19] 49 C.F.R. §§ 44101–06, 44110–13 (2019); see also Fed. Aviation Admin., FAADroneZone, available at https://faadronezone.faa.gov (last visited Apr. 17, 2020).

[20] See Brendan Schulman, We Strongly Support Drone Remote ID. But Not Like This, DJI (Jan. 14, 2020), available at https://content.dji.com/we-strongly-support-drone-remote-id-but-not-like-this/.

[21] Jim Moore, FAA Gets Early Earful on Drone ID, Aircraft Owners and Pilots Ass’n (Jan. 9, 2020), available at https://www.aopa.org/news-and-media/all-news/2020/january/09/faa-gets-early-earful-on-drone-id.

[22] Fed. Aviation Admin., supra, note 18.

[23] Id.

[24] Jim Moore, supra, note 21.

[25] Fed. Aviation Admin., supra, note 18.

[26] Jim Moore, supra, note 21; Public Submissions, Remote Identification of Unmanned Aircraft Systems, regulations.gov, available at https://www.regulations.gov/docketBrowser?rpp=50&so=DESC&sb=postedDate&po=0&dct=PS&D=FAA-2019-1100 (last visited Apr. 17, 2020).

[27] Public Submissions, Remote Identification of Unmanned Aircraft Systems, regulations.gov, available at https://www.regulations.gov/docketBrowser?rpp=50&so=DESC&sb=postedDate&po=0&dct=PS&D=FAA-2019-1100 (last visited Apr. 17, 2020).

[28] Brendan Schulman, We Strongly Support Drone Remote ID. But Not Like This, DJI (Jan. 14, 2020), available at https://content.dji.com/we-strongly-support-drone-remote-id-but-not-like-this/.

[29] Id.

[30] Ryan Hawkins, Public Comment (Mar. 5, 2020), available at https://www.regulations.gov/document?D=FAA-2019-1100-52820.

[31] Dan Hubbard, NBAA Welcomes FAA Call for Comment on Drone Identification Rule, National Business Aviation Ass’n (Dec. 27, 2019), available at https://nbaa.org/press-releases/nbaa-welcomes-faa-call-comment-drone-identification-rule/.

[32] Id.

[33] Jim Moore, supra, note 21.

[34] Fed. Aviation Admin., supra, note 18.

[35] Fed. Aviation Admin., Busting Myths about the FAA and Unmanned Aircraft (Mar. 7, 2014), available at https://www.faa.gov/news/updates/?newsId=76240.

[36] Huerta v. Haughwout, No. 3:16-cv-358, Dkt. No. 30 (D. Conn. July 18, 2016).

[37] Id.

[38] Complaint, Michigan Coalition of Drone Operators, Inc. v. Genesee County Park Commission, et al., No. 2019-113058-CZ (7th. Jud. Dist. Ct. Genesee Div., Mich. 2020).

[39] Public Act 436 of 2016, Section 259.305.

[40] Michigan Coalition of Drone Operators, Inc. v. Genesee County Park Commission, et al., No. 2019-113058-CZ (7th. Jud. Dist. Ct. Genesee Div., Mich. 2019).

[41] Fed. Aviation Admin., Press Release – DOT and FAA Finalize Rules for Small Unmanned Aircraft Systems (June 21, 2016), available at https://www.faa.gov/news/press_releases/news_story.cfm?newsId=20515.

[42] Id.

[43] Id.

[44] Fed. Aviation Admin., Recently Published Rulemaking Documents, available at https://www.faa.gov/regulations_policies/rulemaking/recently_published/ (last visited Apr. 17, 2020).

[45] Dep’t of Transp., Operation of Small Unmanned Aircraft Systems over People (June 21, 2019) https://www.faa.gov/uas/programs_partnerships/DOT_initiatives/media/2120-AK85_NPRM_Operations_of_Small_UAS_Over_People.pdf.

[46] Id.

[47] Id.

[48] Fed. Aviation Admin., FAA Issues Waiver to Fly Drones With Parachutes (June 5, 2019), available at https://www.faa.gov/news/updates/?newsId=93846.

[49] Id.

[50] Id.

[51] Fed. Aviation Admin., Recreational Flyers & Modeler Community-Based Organizations (Feb. 18, 2020), available at https://www.faa.gov/uas/recreational_fliers/.

[52] “Artemis was the twin sister of Apollo and goddess of the Moon in Greek Mythology.” What is Artemis?, NASA (July 25, 2019), available at https://www.nasa.gov/what-is-artemis.

[53] Id.

[54] Friday’s All-Woman Spacewalk: The Basics, NASA (Oct. 17, 2019), available at https://www.nasa.gov/feature/fridays-all-woman-spacewalk-the-basics.

[55] Id.; Media Invited to Speak with Record-Breaking NASA Astronaut Christina Koch, NASA (Feb. 7, 2020), available at https://www.nasa.gov/press-release/media-invited-to-speak-with-record-breaking-nasa-astronaut-christina-koch.

[56] Andrew Jones, China’s Chang’e 4 Returns First Images from Moon’s Farside Following Historic Landing, Space.com (Jan. 03, 2020), available at https://www.space.com/42884-china-change-e-4-first-images-moon-far-side.html.

[57] Adam Mann, China’s Chang’e Program: Missions to the Moon, Space.com (Feb. 1, 2020), available at https://www.space.com/43199-chang-e-program.html.

[58] Rebecca Morelle, Israel’s Beresheet Spacecraft Crashes on Moon, BBC News (Apr. 11, 2019), available at https://www.bbc.com/news/science-environment-47879538.

[59] Government of India, Department of Space, Lok Sabha Unstarred Question No. 588 (Nov. 20, 2019), available at http://164.100.24.220/loksabhaquestions/annex/172/AU588.pdf.

[60] Jeff Foust, India Tests Anti-Satellite Weapon, Space.com (Mar. 27, 2020), available at https://www.space.com/india-tests-anti-satellite-weapon.html.

[61] Id.

[62] Paul Rincon, Hayabusa-2: Japanese Probe Likely to Have ‘Bombed’ an Asteroid, BBC News (Apr. 5, 2019), available at https://www.bbc.com/news/science-environment-47818460; Hayabusa-2: Japan Spacecraft Leaves Asteroid to Head Home, BBC News (Apr. 11, 2019), available at https://www.bbc.com/news/world-asia-50403272.

[63] Meghan Bartels, Farewell, Ryugu! Japan’s Hayabusa2 Probe Leaves Asteroid for Journey Home, Space.com (Nov. 13, 2019), available at https://www.space.com/hayabusa2-spacecraft-leaves-asteroid-ryugu.html.

[64] Iran’s Revolutionary Guards ‘Successfully Launch Military Satellite’, BBC News (Apr. 22, 2020), available at https://www.bbc.com/news/world-middle-east-52380507.

[65] The Associated Press, Iran Says It Launched a Military Satellite Into Orbit, N.Y. Times (Apr. 22, 2020), available at https://www.nytimes.com/2020/04/22/world/middleeast/iran-satellite-launch.html.

[66] Id.

[67] NASA Selects First Commercial Moon Landing Services for Artemis Program, NASA (May 31, 2019), available at https://www.nasa.gov/press-release/nasa-selects-first-commercial-moon-landing-services-for-artemis-program.

[68] NASA Award Contract to Deliver Science Tech to Moon Ahead of Human Missions, NASA (Apr. 8, 2020), available at https://www.nasa.gov/press-release/nasa-awards-contract-to-deliver-science-tech-to-moon-ahead-of-human-missions.

[69] Id.

[70] Dragon, SpaceX, available at https://www.spacex.com/dragon (last visited Feb. 3, 2020).

[71] Id.

[72] Reuters, NASA Sets Launch Date for SpaceX U.S. Manned Mission to Space Station, N.Y. Times (Apr. 20, 2020), available at https://www.nytimes.com/reuters/2020/04/20/world/europe/20reuters-space-exploration-spacex-launch.html.

[73] Christian Davenport, After Botched Test Flight, Boeing Will Refly its Starliner Spacecraft for NASA, Washington Post (Apr. 6, 2020), available at https://www.washingtonpost.com/technology/2020/04/06/boeing-starliner-test-repeat/.

[74] Kenneth Chang, Want to Buy a Ticket the Space Station? NASA Says Soon You Can, N.Y. Times (June 7, 2019), available at https://www.nytimes.com/2019/06/07/science/space-station-nasa.html.

[75] Id.

[76] Id.

[77] Kenneth Chang, There Are 2 Seats Left for This Trip to the International Space Station, N.Y. Times (Mar. 5, 2020), available at https://www.nytimes.com/2020/03/05/science/axiom-space-station.html.

[78] Id.; Jonathan O’Callaghan, The Coronavirus Is Starting To Have A Serious Impact On The Space Industry, Forbes (Mar. 25, 2020), available at https://www.forbes.com/sites/jonathanocallaghan/2020/03/25/the-coronavirus-is-starting-to-have-a-serious-impact-on-the-space-industry/#7e0b851c4cba.

[79] NASA Selects First Commercial Destination Module for International Space Station, NASA (Jan. 27, 2020), available at https://www.nasa.gov/press-release/nasa-selects-first-commercial-destination-module-for-international-space-station.

[80] Id.

[81] Id.

[82] Virgin Galactic Makes Space for Second Time in Ten Weeks with Three on Board, Reaching Higher Altitudes and Faster Speeds, as Flight Test Program Continues, Virgin Galactic (Feb. 22, 2019), available at https://www.virgingalactic.com/articles/virgin-galactic-makes-space-for-second-time-in-ten-weeks-with-three-on-board/.

[83] Michael Sheetz, New Virgin Galactic Chairman Chamath Palihapitiya Says Tourism Spaceflights to Begin Within a Year, CNBC (July 9, 2019), available at https://www.cnbc.com/2019/07/09/virgin-galactic-says-space-tourism-flights-to-begin-in-a-year-company-will-be-profitable-in-2021.html.

[84] Loren Grush, Blue Origin Successfully Launches and Lands its New Shepard Rocket During 12th Overall Test Flight, The Verge (Dec. 11, 2019), available at https://www.theverge.com/2019/12/10/21003756/blue-origin-new-shepard-rocket-test-launch-science-research-watch-live.

[85] Id.

[86] Sec’y of the Air Force Public Affairs, With the Stroke of a Pen, U.S. Space Force Becomes a Reality (Dec. 20, 2019), available at https://www.spaceforce.mil/News/Article/2046055/with-the-stroke-of-a-pen-us-space-force-becomes-a-reality.

[87] National Defense Authorization Act for Fiscal Year 2020, S. 1790, 116th Cong. § 952 b(4) (as passed by Senate, June 27, 2019), available at https://www.congress.gov/116/bills/s1790/BILLS-116s1790enr.pdf.

[88] H.R. Rep. No. 116-333, at 903 (2019) (Conf. Rep.).

[89] U.S. Space Force, U.S. Space Force Fact Sheet (Mar. 31, 2020), available at https://www.spaceforce.mil/About-Us/Fact-Sheet.

[90] Merrit Kennedy, Trump Created The Space Force. Here’s What It Will Actually Do, NPR (Dec. 21, 2019), available at https://www.npr.org/2019/12/21/790492010/trump-created-the-space-force-heres-what-it-will-do.

[91] Marina Korn, The U.S. Space Force Is Not a Joke, The Atlantic (Jan. 15, 2020), available at https://www.theatlantic.com/science/archive/2020/01/space-force-trump/604951/.

[92] U.S. Space Force, U.S. Space Force Fact Sheet (Mar. 31, 2020), available at https://www.spaceforce.mil/About-Us/Fact-Sheet.

[93] Sec’y of the Air Force Public Affairs, Raymond sworn in as first Chief of Space Operations at White House event (Jan. 14, 2020), available at https://www.spaceforce.mil/News/Article/2057219/raymond-sworn-in-as-first-chief-of-space-operations-at-white-house-event.

[94] H.R. Rep. No. 116-333, at 907-908 (2019) (Conf. Rep.), available at https://docs.house.gov/billsthisweek/20191209/CRPT-116hrpt333.pdf.

[95] Sandra Erwin, Trump Signs Defense Bill Establishing U.S. Space Force: What Comes Next, Space News (Dec. 20, 2019), available at https://spacenews.com/trump-signs-defense-bill-establishing-u-s-space-force-what-comes-next/.

[96] U.S. Cong. Budget Office, The Personnel Requirements and Costs of New Military Space Organizations (May 2019), available at https://www.cbo.gov/system/files/2019-05/55178-SpaceForce.pdf.

[97] National Defense Authorization Act for Fiscal Year 2020, S. 1790, 116th Cong. § 961(a) (as passed by Senate, June 27, 2019).

[98] S. 1790, § 961(b).

[99] David Montgomery, Trump’s Excellent Space Force Adventure, The Washington Post Magazine (Dec. 3, 2019), available at https://www.washingtonpost.com/magazine/2019/12/03/trumps-proposal-space-force-was-widely-mocked-could-it-be-stroke-stable-genius-that-makes-america-safe-again/.

[100] Id.

[101] Mike Wall, Don’t panic about Russia’s recent anti-satellite test, experts say, SPACE.com (Apr. 30, 2020), available at https://www.space.com/russia-anti-satellite-weapon-fears-overblown.html.

[102] Id.

[103] Kennedy, supra, note 90.

[104] Sandra Erwin, U.S. Space Force Begins to Organize Pentagon Staff and Field Operations, Space News (Jan. 16, 2020), available at https://spacenews.com/u-s-space-force-begins-to-organize-pentagon-staff-and-field-operations/.

[105] Valerie Insinna, May The Space Force Be with You. Here’s What We Know About The US Military’s Newest Service, Defense News (Dec. 20, 2019), available at https://www.defensenews.com/breaking-news/2019/12/21/may-the-space-force-be-with-you-heres-what-we-know-about-the-us-militarys-newest-service/; National Defense Authorization Act for Fiscal Year 2020, S. 1790, 116th Cong. § 952(d)(2) (as passed by Senate, June 27, 2019).

[106] Jim Garamone, Trump Signs Law Establishing U.S. Space Force, DoD News (Dec. 20, 2019), available at https://www.defense.gov/explore/story/Article/2046035/trump-signs-law-establishing-us-space-force/.

[107] U.S. Space Force, U.S. Space Force Fact Sheet (Mar. 31, 2020), available at https://www.spaceforce.mil/About-Us/Fact-Sheet.

[108] Insinna, supra, note 105.

[109] The Associated Press, Hawaii Air National Guard to Create Space Control Squadron, Air Force Times (Jan. 12, 2020), available at https://www.airforcetimes.com/news/your-air-force/2020/01/12/hawaii-air-national-guard-to-create-space-force-squadron/.

[110] Int’l Telecomm. Union, United Nations Telecommunication Development Sector Statistics, available at https://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx (last visited Apr. 17, 2020).

[111] Michael Sheetz and Magdalena Petrova, Why in the Next Decade Companies Will Launch Thousands More Satellites Than in all of History, CNBC (Dec. 15, 2019), available at https://www.cnbc.com/2019/12/14/spacex-oneweb-and-amazon-to-launch-thousands-more-satellites-in-2020s.html.

[112] Daniel Oberhaus, SpaceX is Banking on Satellite Internet. Maybe It Shouldn’t, Wired (May 15, 2019), available at https://www.wired.com/story/spacex-starlink-satellite-internet/.

[113] Kenneth Chang, SpaceX Launches 60 Starlink Internet Satellites Into Orbit, N.Y. Times (May 23, 2019), available at https://www.nytimes.com/2019/05/23/science/spacex-launch.html.

[114] Michael Sheetz, This New Business from Amazon Represents a ‘$100 Billion Opportunity,’ Morgan Stanley Says, CNBC (July 15, 2019), available at https://www.cnbc.com/2019/07/15/morgan-stanley-amazon-project-kuiper-could-be-a-100-billion-business.html.

[115] Sheetz and Petrova, supra, note 111; Chris Baraniuk, How Internet That’s Beamed from Space Could Create New Jobs, BBC Worklife (Aug. 19, 2019), available at https://www.bbc.com/worklife/article/20190816-how-satellites-could-revolutionise-the-internet.

[116] Caleb Henry, ITU Sets Milestones for Megaconstellations, Space News (Nov. 21, 2019), available at https://spacenews.com/itu-sets-milestones-for-megaconstellations/.

[117] Id.

[118] Tariq Malik, SpaceX’s Starlink Broadband Service Will Begin in 2020: Report, Space.com (Oct. 24, 2019), available at https://www.space.com/spacex-starlink-satellite-internet-service-2020.html.

[119] Id.

[120] Caleb Henry, SpaceX Becomes Operator of World’s Largest Commercial Satellite Constellation with Starlink Launch, Space News (Jan. 6, 2020), available at https://spacenews.com/spacex-becomes-operator-of-worlds-largest-commercial-satellite-constellation-with-starlink-launch/; Malik, supra, note 118.

[121] Kenneth Chang, SpaceX Launches 60 Starlink Internet Satellites into Orbit, N.Y. Times (May 23, 2019), available at https://www.nytimes.com/2019/05/23/science/spacex-launch.html.

[122] Id.

[123] Jackie Wattles, Amid Pandemic, SpaceX Launches Another Batch of Starlink Satellites, CNN Business (Mar. 18, 2020), available at https://edition.cnn.com/2020/03/18/tech/spacex-launch-starlink-coronavirus-scn/index.html.

[124] Jackie Wattles, The Race for Space-Based Broadband: OneWeb Launches 34 More Internet Satellites, CNN Business (Feb. 7, 2020), available at https://edition.cnn.com/2020/02/06/tech/oneweb-satellite-internet-launch-scn/index.html; Sandra Erwin, SpaceX Plans to Start Offering Starlink Broadband Services in 2020, Space News (Oct. 22, 2019), available at https://spacenews.com/spacex-plans-to-start-offering-starlink-broadband-services-in-2020/.

[125] Malik, supra, note 118.

[126] Sheetz and Petrova, supra, note 111.

[127] Michael Sheetz, This New Business from Amazon Represents a ‘$100 Billion Opportunity,’ Morgan Stanley Says, CNBC (July 15, 2019), available at https://www.cnbc.com/2019/07/15/morgan-stanley-amazon-project-kuiper-could-be-a-100-billion-business.html.

[128] Alan Boyle, Amazon Asks FCC to Give Swift Approval to Project Kuiper Satellite Network Despite SpaceX Opposition, GeekWire (Jan. 27, 2020), available at https://www.geekwire.com/2020/amazon-asks-fcc-give-swift-approval-project-kuiper-satellite-network-despite-spacex-opposition/.

[129] Sheetz, supra, note 114.

[130] Telesat, The Government of Canada and Telesat Partner to Bridge Canada’s Digital Divide through Low Earth Orbit (LEO) Satellite Technology, Over $1 Billion in Revenue for Telesat Expected (July 24, 2019), available at https://www.telesat.com/news-events/government-canada-and-telesat-partner-bridge-canadas-digital-divide-through-low-earth.

[131] Sheetz and Petrova, supra, note 111.

[132] OneWeb, OneWeb Files for Chapter 11 Restructuring to Execute Sale Process (Mar. 27, 2020), available at https://www.oneweb.world/media-center/oneweb-files-for-chapter-11-restructuring-to-execute-sale-process.

[133] Id.

[134] Wattles, supra, note 124.

[135] Virgin Galactic Completes Merger with Social Capital Hedosophia, Creating the World’s First and Only Publicly Traded Commercial Human Spaceflight Company, Virgin Galactic (Oct. 25, 2019), available at https://www.virgingalactic.com/articles/virgin-galactic-completes-merger-with-social-capital-hedosophia-creating-the-worlds-first-and-only-publicly-traded-commercial-human-spaceflight-company/.

[136] Id.

[137] Victor Ferreira, From Space Tourism to Robo-Surgeries: Investors Are Betting on The Future Like There’s No Tomorrow, Financial Post (Dec. 27, 2019), available at https://business.financialpost.com/investing/investing-for-the-future.

[138] Michael Sheetz, An Investor’s Guide to Space, Wall Street’s Next Trillion-Dollar Industry, CNBC (Nov. 9, 2019), available at https://www.cnbc.com/2019/11/09/how-to-invest-in-space-companies-complete-guide-to-rockets-satellites-and-more.html; Space: Investing in the Final Frontier, Morgan Stanley (July 2, 2019), available at https://www.morganstanley.com/ideas/investing-in-space.

[139] See infra § II.A.

[140] Andy Pasztor, Trump’s NASA Budget Will Earmark 12% Boost for Agency in 2021, Wall Street Journal (Feb. 7, 2020), available at https://www.wsj.com/articles/trumps-nasa-budget-will-earmark-12-boost-for-agency-in-2021-11581071402.

[141] SmallSat Alliance COVID-19 White Paper, SmallSat Alliance (Apr. 21, 2020), available at https://cdn2.hubspot.net/hubfs/4653168/SmallSat%20Alliance%20COVID-19%20White%20Paper.pdf.

[142] OneWeb, supra, note 132.

[143] Id.

[144] Sandra Erwin, Space and Missile Systems Center Taking Action to Help Contractors During Pandemic, Space News (Mar. 25, 2020), available at https://spacenews.com/space-and-missile-systems-center-taking-action-to-help-contractors-during-pandemic/.

[145] $340 Billion Surge in Emergency Funding to Combat Coronavirus Outbreak, Senate Appropriations Committee, available at https://www.appropriations.senate.gov/imo/media/doc/Coronavirus%20Supplemental%20Appropriations%20Summary_FINAL.pdf (last visited Apr. 22, 2020).

The following Gibson Dunn lawyers assisted in preparing this client update: Karen Manos, David Wilf, Perlette Jura, Dhananjay Manthripragada, Jared Greenberg, Lindsay Paulin, Andrew Hazlett, Alisha Mahalingam, Ciara Davis, Afia Bonner, Chris Connelly, Sarah Scharf and Casper Yen.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Gibson Dunn lawyer with whom you usually work, any of the following in the Aerospace and Related Technologies practice group:

Washington, D.C.
Karen L. Manos – Co-Chair (+1 202-955-8536, [email protected])
Lindsay M. Paulin (+1 202-887-3701, [email protected])
Christopher T. Timura (+1 202-887-3690, [email protected])

Los Angeles
William J. Peters (+1 213-229-7515, [email protected])
David A. Battaglia (+1 213-229-7380, [email protected])
Perlette M. Jura (+1 213-229-7121, [email protected])
Dhananjay S. Manthripragada (+1 213-229-7366, [email protected])

Denver
Jared Greenberg (+1 303-298-5707, [email protected])

New York
David M. Wilf – Co-Chair (+1 212-351-4027, [email protected])

London
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Paris
Ahmed Baladi (+33 (0)1 56 43 13 00, [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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COVID-19 United Kingdom Bulletin – May 20, 2020

1. Competition and Consumers

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

3. Cybersecurity and Data Protection

4. Disputes

5. Employment

6. Energy

7. Finance

8. Financial Services Regulatory

9. Force Majeure

10. Government Support Schemes

11. Insolvency

12. International Trade Agreements (private and public)

13. Lockdown and Public Law Issues

14. M&A and Private Equity

15. Real Estate

16. UK Tax

COVID-19 UK Taskforce Leaders

Closed for COVID-19: Class Action Refund Lawsuits, Practical Considerations, & Potential Defenses

Recent Constitutional Litigation Challenging Governmental Responses to the COVID-19 Pandemic

Table of Contents

I. Unmanned Aircraft Systems

A. Expanding Drone Applications During a Global Pandemic

B. UAS Integration Pilot Program (IPP) and Advancements in Drone Delivery

C. FAA Proposes Remote Identification Requirement for Drones

D. Continued Uncertainty Surrounding Low-Altitude Airspace

E. Proposed Rules for Operations at Night and Over People

F. New Regulations for Hobbyists

II. Space

A. Space Agencies Around the World Seek Major Milestones

B. NASA Embraces Partnerships with the Commercial Market

C. Creation of Space Force

D. Internet Satellites

E. A Year of Serious Investment in Space

III. Government Contracts

A. Armed Services Board of Contract Appeals Cases

Aero Tech Services Associates, Inc., ASBCA No. 61682 (Mar. 30, 2020)

CLC Construction Company, ASBCA No. 59110 (Apr. 17, 2020)

B. Civilian Board of Contract Appeals Cases

Pernix Serka Joint Venture v. Dep’t of State, CBCA No. 5683 (Apr. 22, 2020)

CSI Aviation, Inc. v. Dep’t of Homeland Security and Gen’l Svcs. Administration, CBCA Nos. 6581, 6582 (Feb. 21, 2020).

C. Court of Federal Claims Cases

Raytheon Co. v. U.S., No. 19-883C (Fed. Cl. Jan. 14, 2020)

D. Federal Circuit Court of Appeals Cases

Northrop Grumman Corp. v. Sec’y of Defense, Nos. 2018-1945, 2018-1990 (Fed. Cir. Nov. 15, 2019)