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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Table of Contents
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
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
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.
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[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.
[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.
[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/.
[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/.
[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).
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[70] Dragon, SpaceX, available at https://www.spacex.com/dragon (last visited Feb. 3, 2020).
[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.
[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.
[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.
[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).
[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/.
[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.
[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/.
[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.
[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.
[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/.
[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.
[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/.
[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.
[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.
[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
Mitri J. Najjar (+44 (0)20 7071 4262, [email protected])
Paris
Ahmed Baladi (+33 (0)1 56 43 13 00, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
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 and Washington, D.C. of counsel Linda Noonan are the authors of “USA,” [PDF] Chapter 30 of Anti-Money Laundering 2020, 3rd Edition, published by International Comparative Legal Guides in May 2020.
Washington, D.C. partners M. Kendall Day and Stephanie Brooker are the authors of “The International Reach of the U.S. Money Laundering Statutes,” [PDF] Chapter 1 of Anti-Money Laundering 2020, 3rd Edition, published by International Comparative Legal Guides in May 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.
GLOBAL OVERVIEW
Small Business Administration Publishes Loan Forgiveness Application
On May 15, 2020, the U.S. Small Business Administration (“SBA”) released the much anticipated loan forgiveness application (“Application”) for loans issued under the Paycheck Protection Program (the “Program” or “PPP”), available here. The Application and related instructions provide additional guidance regarding the amount of a PPP loan that may be forgiven and the amount such forgiveness may be reduced. The SBA has said it will soon issue regulations and guidance to further assist borrowers with the Application and provide lenders with direction on their duties. Following is a summary of the SBA Application and its instructions.
Read more
U.K. Employment Law Considerations for Companies Responding to COVID-19 and Planning for a Return to the Workplace
On May 10, 2020, the UK 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 UK 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 recent client alerts, we have considered in detail the law regarding: (i) the options for reducing the risk of employee exposure to COVID-19, including (a) instituting work-from-home/telecommuting policies and (b) instructing employees not to work; (ii) what to do if an employee tests positive or needs to care for an ill family member and (iii) the Coronavirus Job Retention Scheme (“CJRS”). In the following, 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 CJRS.
Read more
On 10 May 2020, the UK 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 UK 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 recent client alerts, we have considered in detail the law regarding: (i) the options for reducing the risk of employee exposure to COVID-19, including (a) instituting work-from-home/telecommuting policies and (b) instructing employees not to work; (ii) what to do if an employee tests positive or needs to care for an ill family member and (iii) the Coronavirus Job Retention Scheme (“CJRS”). Below, 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 CJRS.
The UK government response to the outbreak continues to evolve daily, and we encourage employers in the UK to monitor UK government and National Health Service guidance and legislative developments over the coming weeks.
Return-To-Work, Screening, and Safety
New Government Guidance and Return to Work Plans
On 11 May 2020, the UK government published both new and updated guidance to reflect the focus on getting workers back to work where possible. The guidance has been produced with the aim of helping employers ensure employees work safely during coronavirus, and includes measures to assist employers in making the workplace “COVID-19 secure”. The UK government has produced general guidance comprising of five key points, which we detail below, and eight workplace-specific guidance notes, formulated with the objective of meeting these five key points. We are available to guide clients through the specific guidance applying to their industry.
Five Key Points in the COVID-19 Secure Guidance
- Work from home, if you can
Individuals should work from home if they can, and “all reasonable steps” should be taken by employers to enable individuals to work from home. However, the guidance now clearly states that those who cannot work from home and whose workplaces are permitted to operate, should go to work.
To ensure readiness for staff returning to work, employers must devise a return to work plan with employees and those who represent them.
When devising a return to work plan, employers should consult employees, listen to their concerns and be mindful of their personal circumstances including childcare responsibilities. Employers should also think about identifying vulnerable employees and how they will be treated when the workplace reopens. If an employer requires certain roles or numbers of people to return, they should be mindful of how selection will be carried out to avoid any discrimination or other issues of unfairness which could lead to claims.
- Carry out a COVID-19 risk assessment, in consultation with workers or trade unions
Employers must carry out COVID-19 risk assessments in consultation with their trade unions or workers in order to establish what guidelines should be put in place, and identify sensible measures to control the risks in the workplace. Employers with over 50 employees should publish their workplace risk assessments on their website, with smaller employers being advised to do so. Employers should share the results of risk assessments with their workforce.
Once a risk assessment has been carried out, an employer should update appropriate policies and procedures accordingly.
Employers should also consider providing appropriate training for managers and employees and deliver this training before or upon their return to the workplace. Communications should be displayed around the workplace in prominent places such as handwashing points, entrances and exits. A downloadable notice is provided in each of the workplace-specific guidance documents. Employers should monitor the effectiveness of their policies and review their plans regularly, ideally each time the government updates its guidance.
- Maintain two metres social distancing, wherever possible
Employers may need to consider changing the layout of workspaces to maintain a two metre distance between individuals in compliance with social distancing advice. Employers should consider designating a one way system for entry and exit into the building; limiting the number of people allowed in confined spaces at any one time (e.g. lifts, meeting rooms, toilets); reducing face to face interactions, for example by introducing delivered desk-based lunch orders and restricting or prohibiting the use of communal areas such as kitchens and lunchrooms; encouraging non-public means of getting to work (e.g. bicycles or walking); and reducing non-essential work travel.
- Where people cannot be 2 metres apart, manage transmission risk
Employers are also encouraged to change the way work is organised in order to reduce the number of people with whom each employee interacts face to face as well as minimizing those interactions. Employers should consider limiting the number people in the workplace at any one time, by adjusting working hours or dividing employees into groups and rotating their attendance in the office, introducing protective screens into the workplace and encouraging video-conference meetings.
- Reinforcing cleaning processes
Workplaces should be cleaned more frequently than usual, focusing on high touch points like door handles or keyboards, ensuring access to hygiene facilities such as hand sanitizer, providing anti-bacterial wipes for equipment and disposing of waste frequently.
Risks of Failing to Implement the COVID-19 Secure Guidance
Employers who fail to comply with the COVID-19 secure guidance may find themselves in breach of health and safety obligations towards workers and visitors to their premises. Such breaches may attract criminal penalties and/or enforcement notices. To encourage compliance with the COVID-19 secure guidance, the Prime Minister has asked employees to report their employers’ failures to implement the guidance to the Health and Safety Executive (“HSE”), the organisation responsible for enforcing health and safety laws in the UK, and the UK government has made available up to an extra £14 million for the HSE for additional compliance-monitoring resources.
Screening Employees for COVID-19
Employers who wish to carry out COVID-19 screening, such as temperature checks, on their employees, workers or visitors will need their consent to do so. The results of any screening would need to be handled appropriately in accordance with the GDPR and Data Protection Act 2018 to the extent that it is stored or processed: a data protection impact assessment is likely to be required and employers will need to ensure any individuals it screens are provided an appropriate privacy notice detailing what personal data will be required, how their personal data will be used, who it will be shared with, the implications of the results and how long it will be kept for. Employers should also ensure any screening is applied consistently across their workforce to mitigate any risk of discrimination claims, which could arise upon the screening of a specific group of employees perceived to be at a higher risk of having contracted the virus. Finally, employers should seek to adopt the least intrusive means of protecting the health and safety of their employees and making the workplace safe.
If Employees Become Ill
Employers must follow government guidelines in respect of COVID-19 related illness. If anyone becomes unwell with a new, continuous cough or a high temperature, they should be advised to follow the stay at home guidance. If these symptoms develop whilst at work, the employee should be sent home immediately and advised not to use public transport if possible. Government policy currently states that it is not necessary to close the business or workplace or send any staff home in these circumstances. Please refer to our alert of 17 March 2020 for sick pay implications.
Employees who require shielding and those at high risk
Employees who have been informed by their GP or an NHS letter that they are clinically extremely vulnerable, because for example they suffer from severe respiratory conditions or are undergoing immunosuppression therapies sufficient to significantly increase risk of infection, are required to shield i.e. stay at home at all times and avoid all non-essential face to face contact. Employers should support members of staff who are clinically extremely vulnerable, as well as individuals with whom they live, as they follow the recommendations set out in the shielding guidance. In particular, they should be supported to stay at home, until UK government guidance suggests otherwise.
Employees who are not clinically extremely vulnerable but have medical conditions which place them at an increased risk of severe illness from COVID-19, such as pregnant women and those with diabetes, have been advised to take particular care to minimise contact with others outside their households, but do not need to be shielded. Employers should listen to such employees’ concerns and be flexible to their needs where practicable.
Employees who are unable to return to the workplace due to childcare commitments
The UK government’s plan for a phased reopening of nurseries and schools is not due to begin until 1 June at the earliest, with only certain year groups eligible to return in the early stages. As such, some employees may be unable to return to the workplace due to childcare commitments. The Prime Minister has encouraged employers to regard childcare commitments as an obvious barrier to an employee’s ability to return to the workplace. Employers should encourage open communication with employees with childcare commitments and endeavour to reach an agreement on flexible working arrangements where possible.
If Employees Hesitate or Refuse to Return to Work
Employees may also be reluctant to return to the workplace if they have to take public transport to get to work, if they do not feel the measures their employer has taken go far enough to ensure their health and safety, or if they live with a vulnerable person who requires shielding. Employers will have the best chance of identifying these issues at an early stage if they are able to engage in early consultation and ongoing communication with their employees.
If employees refuse to return to work, employers will need to consider whether they can be more flexible in the arrangements they have put in place taking into account the employees’ circumstances, or whether ultimately they wish to take further steps to require their employees to comply with the instruction to return to work, or treat a refusal to return to work as an unauthorised absence and consider disciplinary action.
Employers will need to ensure any such steps are taken in a fair, rational and non-discriminatory way to avoid potential liability in this area. It would also be advisable for employers to record their decisions and steps they take to be flexible to the needs of their employees where appropriate or necessary.
Update: Coronavirus Job Retention Scheme
General: We reported on the CJRS when it was first introduced in March 2020. On 12 May 2020, the Chancellor announced that the CJRS will be extended by a further four months until the end of October 2020, with no changes until the end of July 2020. From August 2020: (i) employees will be able to return to work on a part-time basis; (ii) employers will be required to pay a percentage towards the salaries of their furloughed employees and (iii) the employer’s payments will substitute at least part of the government’s contribution under the CJRS, ensuring that any furloughed workers continue to receive 80% of their salary (up to the maximum of £2,500 a month). From August 2020 employers will have to start sharing, with the UK government, the cost of paying people’s furloughed salaries. The UK government has committed to provide further details before the end of May 2020.
Holiday: On 13 May 2020, the UK government published guidance on workers’ entitlement to holiday, holiday pay and the right to carry over of holiday during coronavirus. The guidance confirms that furloughed workers continue to accrue holiday, including any contractual holiday they receive above the statutory minimum of 5.6 weeks (subject to any furlough agreement to the contrary), and may take holiday without it interrupting their period of furlough. It also confirms that a furloughed worker’s entitlement to holiday pay remains unchanged and is to be calculated in the normal way. This means that where the calculated holiday pay rate is above the pay the worker receives whilst on furlough, the employer may continue to claim the 80% CJRS grant, but must pay the worker the difference unless they have agreed that the employee’s pay is to be reduced to the furlough limit for the period of furlough. This applies to bank holidays where they fall within a worker’s furlough period.
As reported in our alert of 27 March 2020, the UK government previously introduced the Working Time (Coronavirus) (Amendment) Regulations 2020 (the “Regulations”) which allow up to 4 weeks of unused holiday to be carried over into the next two leave years if it has not all been taken due to COVID-19. The latest guidance advises that when determining whether it was not reasonably practicable for a worker to take holiday, employers should consider various factors, including: (i) increased demand for the business’ services due to COVID-19 that require the worker to continue working; (ii) the extent to which the business’ workforce is disrupted by COVID-19 and the ability to provide temporary cover of essential activities including the availability of the remaining workforce to cover the worker whilst they are on holiday; (iii) the worker’s health and the speed at which they need a period of rest and relaxation; (iv) the length of time left in the worker’s holiday year to enable them to take holiday later in the year; and (v) the impact of the worker’s holiday on society’s response and recovery from COVID-19.
The guidance states that employers should do everything reasonably practicable to ensure workers take as much of their holiday in the year to which it relates and notes that furloughed workers will be unlikely to need to carry forward their holiday as they can take it during furlough.
As reported in our alert of 27 March 2020, employers have the right to require workers to take or cancel holiday subject to providing a certain amount of notice, a right which continues to apply to furloughed workers under the latest guidance. This tool should assist employers in ensuring holiday is taken within the applicable year and also prevent employers facing unmanageable holiday requests from workers later in the year when restrictions are lifted However, if an employer is unable to fund the difference between furlough pay and holiday pay, this may result it in not being reasonably practicable for the worker to take holiday whilst on furlough and enable them to carry their entitlement forward under the Regulations. Employers should also consider whether a worker’s individual circumstances allow them to enjoy holiday whilst on furlough in the fundamental sense, taking into account any social distance or self-isolation restrictions they may be under which would prevent them from resting and relaxing, before requiring them to take holiday.
_______________________
Gibson Dunn attorneys regularly counsel clients on the compliance issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please contact the Gibson Dunn attorney with whom you work in the Employment Group, or the following authors:
James Cox – London (+44 (0)20 7071 4250, [email protected])
Sarika Rabheru – London (+44 (0) 20 7071 4267, s[email protected])
Heather Gibbons – London (+44 (0)20 7071 4127, [email protected])
Georgia Derbyshire – London (+44 (0)20 7071 4013, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On May 15, 2020, the U.S. Small Business Administration (“SBA”) released the much anticipated loan forgiveness application (“Application”) for loans issued under the Paycheck Protection Program (the “Program” or “PPP”), available here.[i] The Application and related instructions provide additional guidance regarding the amount of a PPP loan that may be forgiven and the amount such forgiveness may be reduced. The SBA has said it will soon issue regulations and guidance to further assist borrowers with the Application and provide lenders with direction on their duties. Below is a summary of the SBA Application and its instructions.
Covered Period
The Application provides borrowers with two paths to ascertain payroll costs eligible for forgiveness.
The Application confirms, consistent with the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) requirement, that only certain expenses paid or incurred during the 8-week period beginning on the date of the origination of a PPP loan may be forgiven. The Application provides that the first day of this 56-day “Covered Period” must be the same as the “PPP Loan Disbursement Date,” which is defined as the date that the borrower received the PPP loan proceeds from the lender or, if PPP loan proceeds were received on more than one date, the first date on which the borrower received PPP loan proceeds.
The Application also allows borrowers flexibility to choose an 8-week period specific to their own payroll schedule. If a borrower has a biweekly (or more frequent) payroll schedule, then the Application provides that the borrower may use an alternative 56-day period to calculate the amount of payroll costs paid or incurred that may be forgiven. This 56-day period, known as the “Alternative Payroll Covered Period,” begins on the first day of the borrower’s first pay period following the PPP Loan Disbursement Date. The Alternative Payroll Covered Period may only be used in lieu of the Covered Period to determine the amount of payroll costs eligible for forgiveness, and may not be used to determine the amount of nonpayroll costs eligible for forgiveness.
Costs Eligible for Forgiveness
The Application provides some detail on the amount eligible for forgiveness:
- Payroll Costs. Payroll costs paid and incurred during the Covered Period or Alternative Payroll Covered Period, as applicable, are generally eligible for forgiveness. Payroll costs are paid on the day that paychecks are distributed or an ACH credit transaction is originated; they are incurred on the day that an employee’s pay is earned. To be eligible for forgiveness, payroll costs must be paid during the Covered Period or Alternative Payroll Covered Period, except that payroll costs incurred during the last pay period of the Covered Period or Alternative Payroll Covered Period, as applicable, may be paid on or before the borrower’s next regular payroll date. As provided by the CARES Act, the total amount of cash compensation of any individual employee that is eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. The Application does not provide further guidance as to what costs constitute “payroll costs,” but refers readers to the Interim Final Rule on Paycheck Protection Program posted on April 2, 2020 (85 FR 20811).
- Nonpayroll Costs. As previously announced by the SBA, the Application provides that nonpayroll costs cannot exceed 25% of the total forgiveness amount. The Application further provides that to be eligible for forgiveness, nonpayroll costs must be either (1) paid during the Covered Period or (2) incurred during the Covered Period and paid on or before the next regular billing date, even if after the Covered Period ends.
The categories of nonpayroll costs eligible for forgiveness are:
- Covered mortgage obligations: payments of interest on any business mortgage obligation on real or personal property incurred before February 15, 2020, but excluding any prepayment or payment of principal.
- Covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020.
- Covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Reduction of Loan Forgiveness Amount
The forgiveness application includes “PPP Schedule A,” “PPP Schedule A Worksheet” and related instructions. These materials are used to determine whether and to what extent the loan forgiveness amount will be reduced. The Worksheet requires the borrower to list every employee employed during the Covered Period and, for each employee: his or her compensation, the average full-time equivalency of hours paid per week, and―if applicable―the amount of any salary or hourly wage reduction that exceeds 25%.
As required by the CARES Act, the amount of loan forgiveness may be reduced if there are reductions in the number of the borrower’s full-time equivalent employees (“FTEs”) per month during the covered period and/or the total salary or wages of any employee during the covered period, in each case, as compared to a prior period. For purposes of these determinations, borrowers must only include employees who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount over $100,000.
However, the loan forgiveness amount will not be reduced if, during the period beginning on February 15, 2020, and ending on April 26, 2020, there is a reduction in the number of FTEs or total salary or wages, and the reduction is eliminated no later than June 30, 2020. In addition, the loan forgiveness amount will not be reduced because of a reduction in the number of FTEs due to (1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned or (c) voluntarily requested and received a reduction of their hours.
- Reduction in Number of Full-Time Employees. The loan forgiveness amount will be reduced by multiplying (a) the forgivable costs by (b) the quotient obtained by dividing (a) the average number of FTEs per month during the Covered Period or Alternative Payroll Covered Period, as applicable, by (b) at the election of the borrower, (i) the average number of FTEs per month from February 15, 2019 to June 20, 2019 or (ii) the average number of FTEs per month from January 1, 2020 to February 29, 2020. If the borrower is a seasonal employer, the denominator is either of the periods in clauses (i) or (ii), or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.
The Application provides two alternative methods for calculating a borrower’s number of FTEs:
-
- For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0.
- Assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours per week.
- Reduction in Total Salary or Wages. The amount of loan forgiveness will also be reduced by the amount of any reduction in total salary or wages of any employee during the Covered Period or Alternative Payroll Covered Period, as applicable, that is in excess of 25 percent of the total salary or wages during the period from January 1, 2020 through March 31, 2020.
Certifications
The person signing the loan forgiveness application is required to make various certifications, including, among others, that:
- The forgiveness amount requested, including all applicable reductions, does not include nonpayroll costs in excess of 25% of the amount requested and does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
- The Borrower understands that if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges.
- The Borrower has accurately verified the payments for which the Borrower is requesting forgiveness.
- The Borrower has submitted required documentation verifying payroll costs, the existence of obligations and service (as applicable) prior to February 15, 2020, and eligible nonpayroll costs payments.
- The information provided in the forgiveness application and supporting documents and forms is true and correct in all material respects, and they understand that knowingly making a false statement to obtain forgiveness of the PPP loan is punishable by imprisonment and/or fines.
- The tax documents submitted to the Lender are consistent with those submitted to the IRS and/or state tax or workforce agency.
- The Borrower understands the SBA may request additional information to evaluate the Borrower’s eligibility for, and loan forgiveness of, the PPP loan, and that failure to provide such information may result in a determination that the borrower was ineligible for the PPP loan or a denial of the loan forgiveness application.
Documentation Requirements
The Application lists documents to be submitted with the Application, including:
- PPP Schedule A;
- documentation verifying payroll costs eligible for forgiveness, such as bank account statements or third-party payroll service provider reports, tax forms and cancelled checks;
- documentation showing the average number of FTE employees on payroll per month employed by the borrower for the relevant time periods; and
- documentation relating to nonpayroll costs eligible for forgiveness verifying existence of the obligations/services prior to February 15, 2020, and eligible payments from the Covered Period, such as copies of lender amortization schedule and receipts or cancelled checks, current lease agreement and receipts or cancelled checks and invoices for business utilities from February 2020 and those paid during the Covered Period and receipts or cancelled checks.
The Application also lists documents that borrowers must retain but are not required to be submitted with the Application. This includes the PPP Schedule A Worksheet and supporting documentation, and documentation regarding employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
The Application provides that borrowers must retain certain information in their files for six years after the date the PPP loan is forgiven or repaid in full, and permit authorized SBA representatives, including representatives of SBA’s Office of Inspector General, to access such files upon request. This information includes all records relating to the PPP loan, including documentation submitted with the PPP loan application, documentation supporting the certifications as to the necessity of the PPP loan request and eligibility for a PPP loan, documentation necessary to support the loan forgiveness application, and documentation demonstrating material compliance with PPP requirements.
_____________________
[i] For additional details about the PPP please refer to Gibson Dunn’s Frequently Asked Questions to Assist Small Businesses and Nonprofits in Navigating the COVID-19 Pandemic and prior Client Alerts about the Program: SBA “Paycheck Protection” Loan Program Under the CARES Act; Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed; Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program; Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement, and FAQs for Paycheck Protection Program, Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program and Small Business Administration Publishes Additional Interim Final Rules and New Guidance Related to PPP Loan Eligibility and Accessibility.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, [email protected])
Alisa Babitz – Washington, D.C. (+1 202-887-3720, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Alexander Orr – Washington, D.C. (+1 202-887-3565, [email protected])
William Lawrence – Washington, D.C. (+1 202-887-3654, [email protected])
Samantha Ostrom – Washington, D.C. (+1 202-955-8249, [email protected])
* Not admitted to practice in Washington, D.C.; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Decided May 18, 2020
Opati v. Republic of Sudan, No. 17-1268
Today, the Supreme Court held 8-0 that the Foreign Sovereign Immunities Act (“FSIA”) amendments of 2008 authorize punitive damages in suits against foreign states based on conduct predating the amendments.
Background:
In 1998, al Qaeda set off truck bombs outside the United States embassies in Kenya and Tanzania, killing or injuring thousands. Victims sued Sudan under the FSIA’s “terrorism exception” to sovereign immunity, claiming that the nation materially supported the bombings by sheltering al Qaeda. As originally enacted in 1996, the terrorism exception did not create a cause of action against foreign states, leaving these claims to proceed under state-law causes of action. But in 2008, Congress amended the exception to (1) create a private cause of action against foreign states for punitive damages and other remedies, 28 U.S.C. § 1605A(c); and (2) allow claims based on pre-amendment conduct to proceed under this cause of action, 2008 National Defense Authorization Act § 1083(c). The district court ultimately awarded the plaintiffs billions of dollars in damages, including $4.3 billion in punitive damages. But the D.C. Circuit held that the 2008 FSIA amendments did not authorize punitive damages for pre-amendment conduct with sufficient clarity to overcome the presumption against retroactive legislation. Because the claims against Sudan arose out of pre-amendment conduct, the court vacated the punitive damages award. The United States supported the plaintiffs as amicus curiae.
Issue:
Does the Foreign Sovereign Immunities Act permit recovery of punitive damages from foreign states for terrorist acts occurring prior to the passage of the current version of the statute in 2008?
Court’s Holding:
Yes. The plain text of the 2008 amendments permits plaintiffs proceeding under § 1605A(c)’s federal cause of action to seek and win punitive damages for past conduct.
“Even if we assume . . . that Sudan may claim the benefit of Landgraf’s presumption of prospectivity, Congress was as clear as it could have been when it authorized plaintiffs to seek and win punitive damages for past conduct using § 1605A(c)’s new federal cause of action.”
Justice Gorsuch, writing for the Court
Gibson Dunn represented the winning parties: Monicah Okoba Opati, et al.
What It Means:
- Under Landgraf v. USI Film Products, 511 U.S. 244 (1994), courts generally presume that legislation operates only prospectively unless Congress clearly states that the law applies retroactively. In Republic of Austria v. Altmann, 541 U.S. 677 (2004), the Supreme Court limited the reach of that presumption in litigation against foreign states under the FSIA, holding that the presumption did not apply to the original FSIA’s codification of “restrictive” sovereign immunity. But today, the Court held that the 2008 FSIA amendments authorize punitive damages for past conduct with sufficient clarity to satisfy the presumption even assuming it applied.
- The Court rejected Sudan’s suggestion that special constitutional concerns raised by retroactive punitive damages support a “super-clear statement” requirement beyond the normal presumption against retroactivity. The Court explained that when litigants believe the retroactive application of a statute raises constitutional questions, “the better course is . . . to challenge the law’s constitutionality, not ask a court to ignore the law’s manifest direction.”
- The Court remanded for the lower courts to address, in the first instance, the availability of retroactive punitive damages under state-law causes of action against foreign sovereigns. This question remains important for non-American plaintiffs, who are ineligible for the federal cause of action under the current terrorism exception.
- The Court’s decision continues Gibson Dunn’s record of successfully representing victims of international terrorism before the Supreme Court. In Bank Markazi v. Peterson, 136 S. Ct. 1310 (2016), Gibson Dunn successfully represented victims of terrorism against a claim by the Central Bank of Iran challenging the constitutionality of a provision of the Iran Threat Reduction and Syria Human Rights Act of 2012, 22 U.S.C. § 8772, that had made available for postjudgment execution nearly $2 billion in assets held in New York for Iran’s Central Bank.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 [email protected] | Mark A. Perry +1 202.887.3667 [email protected] | Matthew D. McGill +1 202.887.3680 [email protected] |
Related Practice: Transnational Litigation
| William E. Thomson +1 213.229.7891 [email protected] | Andrea E. Neuman +1 212.351.3883 [email protected] | Perlette Michèle Jura +1 213.229.7121 [email protected] |
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Washington, D.C. associate Virginia Blanton, Dallas associate Michael Cannon and New York associate Jennifer Fitzgerald are the authors of “Double Tax Benefits in the CARES Act,” [PDF] published by Tax Notes Federal on April 20, 2020.
On May 8, 2020, the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) again extended the Geographic Targeting Order (“GTO”) requiring title insurance companies to report non-financed purchases of residential real estate in certain major metropolitan areas.[1] Recent Congressional activity evinces an interest in money laundering through real estate, as well as an apparent satisfaction with the GTO approach. Bills introduced in both the House and Senate propose expanded use of GTOs, including application to commercial real estate, with one bill going so far as to make GTOs nationwide and permanent.[2]
Background
Law enforcement contends that money laundering through investment in real estate, often through opaque legal structures, is a major problem in the United States and other Western countries. The contention is that criminals are attracted to desirable real estate markets in which to live and to the stability of real estate as an investment.[3]
The Financial Action Task Force (“FATF”) on money laundering tackled the issue of money laundering through real estate in 2007 and 2008 with a study followed by a guidance paper for a “risk-based approach” for governments and the real estate industry.[4] The FATF recommendations provide that formal anti-money laundering (“AML”) measures, including customer due diligence (“CDD”) and suspicious activity reporting, should be imposed by governments on real estate agents, a category of Designated Non-Financial Businesses and Professions (“DNFBPs”).[5]
The United States has not squarely implemented the FATF recommendations and has chosen to address the problem since January 2016 through the temporary measure of Bank Secrecy Act (“BSA”) GTOs. Under the GTOs, the regulatory obligations are placed on title insurance companies, and the focus is only on higher-end residential real estate in designated locations. In the 2016 Mutual Evaluation of the United States, FATF commented favorably on the use of GTOs, but concluded that the United States had failed to implement the FATF recommendations with respect to the real estate sector.[6]
The GTOs
On May 8, 2020, FinCEN extended for six months (effective May 8, 2020 through November 5, 2020) the GTO requiring title insurance companies in some geographic areas to report non-financed purchases of residential real estate in named major metropolitan areas.[7] No new geographic areas were added.
The GTOs address a law enforcement concern about persons anonymously purchasing higher-end residential real estate in these areas through shell companies using illegal source funds. Under the current GTO, title insurance companies must, within 30 days of closing, report any non-financed residential real estate sales of $300,000 or more to legal entity buyers other than U.S. public companies making the purchase all or in part with currency, money instruments, wire transfers, and/or crypto currency.[8] Residential real estate includes properties with four or fewer units. The reports must include beneficial ownership information at a 25% threshold for the purchasing legal entity, and the title insurance companies must verify the identity of the beneficial owners and their representatives using documentary means. FinCEN provides a model Currency Transaction Report (“CTR”) electronic filing format instructing title insurance companies how to report the required information.[9]
Similar GTOs have been issued every six months since January 2016, beginning with only two jurisdictions (New York City and Miami). Prior to November 2018, the GTOs required reporting at different thresholds for different geographic areas, rather than the same $300,000 monetary threshold across the board. After January 2016, additional metropolitan areas were added, and the GTOs were extended several times for periods of six months (August 2016, February 2017, August 2017, August 2018, May 2019, and November 2019). There also were press reports that FinCEN extended the GTO in March 2018, but that extension was not officially confirmed.[10]
The orders originally were limited to cash and monetary instrument sales, but on August 2, 2017, an amendment to the BSA GTO statutory authority, 31 U.S.C. § 5326, was enacted allowing GTOs to cover transactions involving “funds,” not just currency and monetary instruments.[11] This allowed FinCEN to require reporting of transactions involving wire transfers (beginning with the August 2018 GTO), and to include transactions in cryptocurrency (beginning in November 2018).[12]
In a speech in June 2019, the Director of FinCEN, Kenneth Blanco, discussed the usefulness of GTOs and of adding new markets to the coverage: “GTOs have provided FinCEN with valuable insight into the ways that illicit actors move money in the U.S. residential real estate market, and help us better understand how actors in markets with relatively fewer AML protections respond to new reporting requirements.”[13]
In the National Strategy for Combating Terrorist and Other Illicit Financing 2020 issued by the Department of the Treasury on February 6, 2020, Treasury reaffirmed the utility of the GTOs, but also acknowledged that the GTOs did not address all money laundering vulnerabilities and that the GTO requirements sometimes could be evaded.[14] Notably, in the discussion of expanding the coverage of the BSA requirements to other financial institutions and professions, Treasury did not suggest that there were any near term plans to propose regulations to extend the BSA requirements to real estate professionals or implement the GTOs on a permanent basis.[15]
Should the GTOs Be a Permanent Solution?
Under the BSA, the Secretary of the Treasury, on his own initiative or at the request of law enforcement, may authorize special BSA reporting and recordkeeping for a set period of time, not to exceed six months, for some or all categories of financial institution or trades or businesses in a designated geographic area. If the law enforcement need continues, GTOs may be extended for another six months. There is no explicit statutory limitation on the number of extensions. The renewal period was extended to six months by a BSA amendment in 2001 in the USA PATRIOT Act. Originally, GTOs could only be issued for 60 days subject to extension.
The authority to issue GTOs was enacted in 1988. While there may have been other GTOs that did not become public, it appears that authority was not used extensively for many years. FinCEN began publicly issuing a series of GTOs in 2014 to address various law enforcement concerns.[16] The residential real estate GTOs have been the longest standing GTOs based on public information.
After four years, the continued use of the GTOs appears to be FinCEN’s answer to applying the BSA to the real estate industry, at least in the near future. There is a legal question whether Treasury is authorized to use what was clearly intended to be a temporary tool under the statute on a permanent basis and whether at some point, there would be a requirement for formal notice and comment on the reporting requirements because they have become in effect a permanent regulation. This is largely a theoretical concern – a challenge after all this time by the title insurance industry appears unlikely. Except for possible future criticism by the FATF, there is no discernable pressure on FinCEN to use the authority of the BSA more widely or the GTO authority on a permanent basis.
The Real Estate Industry – The BSA History
There is additional authority under the BSA statute, 31 U.S.C. § 5312(a)(1)(U), for FinCEN to take further measures with respect to the real estate industry and to meet the FATF recommendations. The BSA was amended in 1988 to include the very broad category “persons involved in real estate closings and settlements” in the definition of financial institutions potentially subject to BSA requirements by regulation. Under a 2001 BSA amendment in the USA PATRIOT Act, Treasury has been required to implement regulations requiring AML programs for all the businesses listed in the BSA statutory definition of financial institution unless exempted by Treasury.[17] In 2003, FinCEN issued an Advance Notice of Proposed Rulemaking relating to potential implementation of BSA requirements for the real estate industry, but there has been no further action towards permanent BSA regulatory requirements for the industry.[18]
On August 22, 2017, FinCEN issued an Advisory on the money laundering risks of real estate transactions, including purchases of luxury property with shell companies and all cash real estate transactions, and affirmed the utility of the initial GTOs.[19] The Advisory stated that as of May 2, 2017, over 30% of the real estate transactions reported under the GTOs involved either a beneficial owner or purchaser representative that had been the subject of Suspicious Activity Reports (“SARs”). FinCEN advised that real estate transactions could mask the origins of the proceeds of public corruption, drug trafficking or fraud. The guidance reiterated earlier FinCEN statements that real estate brokers, escrow agents, title insurance companies, and other real estate professionals are encouraged to file SARs voluntarily if certain red flags for money laundering were present. Such voluntary reporting is consistent with the AML guidance of the National Association of Realtors.[20]
Congressional Interest and Pending Legislation to Extend GTOs to Commercial Real Estate
There is Congressional interest in money laundering through real estate and apparent satisfaction with the GTO approach.
On May 4, 2019, the House passed H. Res. 206, a statement by Congresswoman Maxine Waters (D-CA), the Chairman of the House Committee on Financial Services, about the “loopholes” in addressing the problem of money laundering, including with respect to the real estate industry. The pending BSA improvements bill titled the Corporate Transparency Act of 2019, H.R. 2513, put forward by the Committee on Financial Services and passed by the House on October 22, 2019, however, would only expand the use of the GTOs. Section 212 directs the Secretary of the Treasury to issue a GTO similar to the residential real estate GTO covering commercial real estate with a different threshold for reporting. In the markup, Congresswoman Carolyn Maloney (D-NY) spoke of the need to address commercial real estate, noting that criminals were using commercial real estate in her Manhattan district like a “bank account,” often leaving the office buildings they purchased vacant.[21]
The parallel BSA improvements bill, S. 2563, the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity and Shell Holding Act or the ILLICIT CASH Act, introduced on September 29, 2019, in the Senate, has an identical provision (Section 402). While there is widespread bipartisan support for the BSA improvements legislation, its path forward in this session of Congress is uncertain.
Another pending bill would make the GTOs nationwide and permanent, while leaving the reporting threshold to be set by FinCEN. This provision is included in Section 702 of S. 482, the Defending American Security From Kremlin Aggression Act of 2019 (“DASKAA”). DASKAA, a bill aimed to increase economic and political pressure on Russia for election interference, was introduced by Senator Lindsay Graham (R-SC) and others on February 13, 2019. Section 702 is included in a title called “Other Matter Relating to the Russian Federation” and apparently responds to the prevalence of Russian kleptocrats investing in U.S. real estate through shell companies.
Likewise, in a letter dated October 3, 2018, Senators Chris Van Hollen (D-MD) and Sheldon Whitehouse (D-RI) requested a Government Accountability Office report about money laundering through U.S. real estate to include assessing the effectiveness of the GTOs and whether BSA requirements should be applied to the real estate industry permanently.[22]
Conclusion
The GTOs and the FinCEN Advisory have raised the profile of money laundering issues in the real estate industry and highlighted the importance of filing voluntary SARs if it is suspected that a purchaser (or seller) may be involved in money laundering.
Nevertheless, beyond the likely deterrent impact in the designated geographic locations, there are questions about the long term utility of the GTOs as a solution to address money laundering through real estate. After four years, will bad actors risk government attention by purchasing real estate through a shell company in one of the designated areas?[23] Will persons with illegal-source funds move to one of the many geographic areas not covered or avoid real estate investments? Would mandatory suspicious activity reporting and compliance programs for real estate agents be useful? If there is continued law enforcement utility for the GTOs, should there be permanent BSA requirements on the real estate industry nationwide, at least with respect to non-financed sales?
At this point, it appears FinCEN has confidence in the GTOs’ continued utility and has no immediate plans to take further regulatory action based on the existing authority to permanently apply the AML program, CDD, and SAR requirements to the real estate industry.
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[1] Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury (“FinCEN”), Geographic Targeting Order Covering Title Insurance Company (May 8, 2020), https://www.fincen.gov/sites/default/files/shared/ Generic%20Real%20Estate%20GTO%20Order%20FINAL%20508_2.pdf.
[3] For example, in May 2019, the government of British Columbia released a study which concluded that money laundering through real estate is so widespread in British Columbia that it was fueling the rise in home prices. It was estimated that five percent of real estate purchases involved money laundering and that 72% of all money laundering in British Columbia involved real estate. The study was released to the public on May 9, 2019. Maureen Maloney, et al., Combatting Money Laundering in BC Real Estate (Mar. 31, 2019), https://www2. gov.bc.ca/assets/gov/housing-and-tenancy/real-estate-in-bc/combatting-money-laundering-report.pdf.
[4] Fin. Action Task Force, Money Laundering & Terrorist Financing Through The Real Estate Sector (June 29, 2007), https://www.fatf-gafi.org/media/fatf/documents/reports/ML%20and%20TF%20through%20the%20 Real%20Estate%20Sector.pdf; Fin. Action Task Force, RBA Guidance for Real Estate Agents (June 17, 2008), https://www.fatf-gafi.org/media/fatf/documents/reports/RBA%20Guidance%20for%20Real%20Estate %20Agents.pdf.
[5] FATF Recommendation 22 provides that the CDD recommendation applies to real estate agents with respect to the buying and selling of real estate, and Recommendation 23 provides that the recommendations relating to suspicious activity reporting also apply. Fin. Action Task Force, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, The FATF Recommendations, 17-19 (Updated June 2019), http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations %202012.pdf.
The European Parliamentary Research Service issued a briefing paper in February 2019 on the problem. Cécile Remeur, Understanding Money Laundering Through Real Estate Transactions (Feb. 2019), https:// www.europarl.europa.eu/cmsdata/161094/7%20-%2001%20EPRS_Understanding%20money%20laundering %20through%20real%20estate%20transactions.pdf.
In a 2017 report, Transparency International was critical of the U.S. (and Canada, the UK and Australia) for not taking more comprehensive measures to address the problem of public corruption proceeds being invested in real estate and for failing to implement their FATF commitments. Maíra Martini, Doors Wide Open: Corruption and Real Estate in Four Key Markets (Mar. 29, 2017), http://files.transparency.org/content/ download/2121/13496/file/2017_DoorsWideOpen_EN.pdf.
[6] Fin. Action Task Force, Anti-Money Laundering and Counter-Terrorist Financing Measures – United States, Mutual Evaluation Report (Dec. 2016), https://www.fatf-gafi.org/media/fatf/documents/reports/mer4/MER-United-States-2016.pdf. The FATF also issued a 3rd Enhanced Follow-Up Report & Technical Compliance Re-Rating on the United States in March 2020. Fin. Action Task Force, Anti-Money Laundering and Counter-Terrorist Financing Measures – United States, 3rd Enhanced Follow-Up Report & Technical Compliance Re-Rating (Mar. 2020), http://www.fatf-gafi.org/media/fatf/documents/reports/fur/Follow-Up-Report-United-States-March-2020.pdf. That report was limited and did not discuss compliance with all the recommendations, including Recommendation 22.
[7] The areas covered are (1) Bexar (San Antonio), Tarrant (Fort Worth), and Dallas counties, Texas; (2) Miami-Dade, Broward, and Palm Beach counties, Florida; (3) New York City; (4) San Diego, Los Angeles, San Francisco, San Mateo, and Santa Clara counties, California; (5) the City and County of Honolulu, Hawaii; (6) Clark County, Nevada (Las Vegas); (7) King County, Washington (Seattle); (8) Suffolk and Middlesex counties, Massachusetts (Boston); and (9) Cook County, Illinois (Chicago). See FinCEN, supra n.1.
[8] Public companies are excepted. Id. at 4 (“[A] corporation , limited liability company, partnership, or other similar business entity . . . other than a business whose common stock or analogous equity interests are listed on a securities exchange regulated by the Securities Exchange Commission (‘SEC’) or a self-regulatory organization registered with the SEC, or an entity solely owned by such a business.”) (emphasis added).
[9] FinCEN Form 49342G, https://bsaefiling.fincen.treas.gov/docs/GTO/RealEstate_GTO%20Template.pdf; see also https://www.fincen.gov/sites/default/files/shared/ctrfaq_ex2.pdf.
[10] See, e.g., Nicholas Nehamas & Kevin G. Hall, The Hunt for Dirty Money in Miami Real Estate Is Working — and Will Continue, Feds Say (March 21, 2018), https://www.miamiherald.com/news/business/real-estate-news/article206232819.html.
[11] Countering America’s Adversaries Through Sanctions Act, PL 115-44, § 275, 131 Stat 886, 938 (2017).
[12] The BSA GTO regulations, 31 C.F.R. § 1010.370, have not been updated to reflect this change.
[13] Kenneth Blanco, Prepared Remarks of FinCEN Director Blanco at the NYU Law Program on Corporate Compliance and Enforcement (June 12, 2019), https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-blanco-nyu-law-program-corporate-compliance-and.
[14] U.S. Dep’t of the Treasury, National Strategy for Combating Terrorist and Other Illicit Financing 2020, 16-18 (Feb. 6, 2020), https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.
[16] See, e.g., Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, FinCEN Issues Geographic Targeting Order Covering the Los Angeles Fashion District as Part of Crackdown on Money Laundering for Drug Cartels, (Oct. 2, 2014), https://www.fincen.gov/news/news-releases/fincen-issues-geographic-targeting-order-covering-los-angeles-fashion-district; see also Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, FinCEN Targets Money Laundering Infrastructure with Geographic Targeting Order in Miami, (Apr. 21, 2015), https://www.fincen.gov/news/news-releases/fincen-targets-money-laundering-infrastructure-geographic-targeting-order-miami.
[18] U.S. Dep’t of the Treasury, Financial Crimes Enforcement Network; Anti-Money Laundering Program Requirements for “Persons Involved in Real Estate Closings and Settlements”, 68 Fed. Reg. 17569 (proposed Apr. 10, 2003), https://www.fincen.gov/sites/default/files/federal_register_notice/352_real_estate_04102003. pdf. Although no official action has been taken to date, Treasury’s proposal that attorneys representing purchasers or sellers be included in the definition of “Persons Involved in Real Estate Closings and Settlements” sparked some debate. See, e.g., Am. Bar Ass’n, Comments of the ABA Task Force on Gatekeeper Regulation and the Profession on the Financial Action Task Force Consultation (Aug. 23, 2002) (opposing the imposition of suspicious activity reporting obligations on attorneys) https://www.fincen.gov/sites/default/files/shared/ krauland.pdf; see also Andrew A. Lance et al., Do Not Pass Go, Do Not Collect $200: FinCEN Imposes Temporary Reporting Requirements on Title Insurance Companies for All Cash Luxury Real Estate Transactions in Manhattan and Miami (Feb. 11, 2016) https://www.gibsondunn.com/do-not-pass-go-do-not-collect-200-fincen-imposes-temporary-reporting-requirements-on-title-insurance-companies-for-all-cash-luxury-real-estate-transactions-in-manhattan-and-miami/.
[19] Fin. Crimes Enf’t Network, U.S. Dep’t of the Treasury, FIN-2017-A0003, Advisory to Financial Institutions and Real Estate Firms and Professionals (August 22, 2017), https://www.fincen.gov/sites/default/ files/advisory/2017-08-22/Risk%20in%20Real%20Estate%20Advisory_FINAL%20508%20Tuesday%20% 28002%29.pdf.
[20] Nat’l Ass’n of Realtors, Anti-Money Laundering Guidance to Real Estate Professionals (Nov. 15, 2012), https://www.nar.realtor/articles/anti-money-laundering-guidelines-for-real-estate-professionals.
[21] This was at the May 2019 markup of another bill that was ultimately combined into the Corporate Transparency Act, the Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform (“COUNTER”) Act, H.R. 2514, 116th Cong. (2019).
[22] Letter from Senators Chris Van Hollen and Sheldon Whitehouse to Comptroller General of the United States (Oct. 3, 2018), https://www.moneylaundering.com/wp-content/uploads/2018/10/Congress.Letter. HollenWhitehouseRealEstateLaundering.100318.pdf.
[23] According to a research study conducted by C. Sean Hundtofte, at the time of the study an economist at the New York Federal Reserve Board, and Ville Rantala, an Assistant Professor of Finance at the University of Miami, the GTOs have been effective in lowering the number of non-financed sales to legal entities in the markets targeted by the early GTOs. The authors speculate buyers behind the legal entities may be purchasing property in their individual names, or have moved into other markets or other asset classes. This study was cited in the National Strategy for Controlling Terrorist and Other Illicit Financing 2020. See supra note 11. C. Sean Hundtofte & Ville Rantala, Anonymous Capital Flows and U.S. Housing Markets (May 28, 2018), https://papers.ssrn.com/sol3/.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you would like to discuss this alert in greater detail, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s White Collar Defense and Investigations, Anti-Money Laundering, Real Estate, or Financial Institutions practice groups, or the following authors:
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887 3502, [email protected])
Joel M. Cohen – New York (+1 212-351-2664, [email protected])
Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])
Andrew A. Lance – New York (+1 212-351-3871, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Joseph Warin – Washington, D.C. (+1 202-8870-3609, [email protected])
Linda Noonan – Washington, D.C. (+1 202-887-3595, [email protected])
Diana M. Feinstein – Los Angeles (+1 213-229-7351, [email protected])
Chris Jones* – San Francisco (+1 415-393-8320, [email protected])
*Mr. Jones is admitted only in New York and Washington, D.C. He is practicing under the supervision of Principals of the Firm.
Gibson Dunn’s lawyers regularly counsel clients on issues raised by the COVID-19 pandemic, and we are working with many of our clients on their response to COVID-19. The following is a round-up of today’s client alerts on this topic prepared by the Gibson Dunn team. Our lawyers are available to assist with any questions you may have regarding developments related to the outbreak. As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s Coronavirus (COVID-19) Response Team.
GLOBAL OVERVIEW
Mitigating Class Action Exposure From COVID-19 Disruptions
As businesses of all kinds have been affected by the COVID-19 pandemic, many that have canceled events or suspended services have been forced to make difficult decisions relating to refunds or other remedies for clients and customers. The decisions made by businesses today could have lasting significance in class action litigation, particularly as they relate to potential mitigation of damages.
However, the challenges presented by the COVID-19 pandemic are unprecedented, and many mitigation measures, such as offering online services, would not have been possible even 15 years ago. As a result, history cannot provide clear guidance about how companies can prevent or lessen liability given the unique challenges of the pandemic and the revolutionary technology that has become a part of our daily lives. Nevertheless, prior cases do provide important insights into considerations companies should weigh as they navigate novel issues relating to liability and damages stemming from canceled events or suspended services as a result of COVID-19.
Read more
COVID-19 UK Weekly Webinar – May 18, 2020
The COVID-19 pandemic is undoubtedly the biggest public health crisis of our times. Like many other countries, the UK Government has exercised broad powers and passed new laws that impact how we do business and interact as a society. To address the pandemic, the Government announced several sweeping regulations and ushered through the Coronavirus Act 2020. These actions have a broad impact on law, public policy and daily life, impacting areas including health, social welfare, commerce, trade, competition, employment and the free movement of people.
Join our team of Gibson Dunn London lawyers, led by partner and former Lord Chancellor Charlie Falconer QC, for a discussion of these changes and to answer your questions on how they will affect British businesses and community, including the impact on new and ongoing business relationships. In this webinar we will cover: 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; and The impact of COVID-19 on warranty and indemnity insurance policy terms and process.
Read more
In a case brought under federal trademark law, the Supreme Court held 9-0 that preclusion does not bar a defendant from raising new defenses in response to new claims.
Background:
The doctrine of claim preclusion prevents parties from raising an issue that could have been raised in a prior action between the parties. Claim preclusion typically applies to offensive accusations, and applies only when the later action advances the same claim as the earlier action. This case concerned whether claim preclusion can bar a defense not raised in a prior action.
In 2001, Marcel Fashions Group (“Marcel”) sued Lucky Brand Dungarees Inc. (“Lucky Brand”) for infringement of Marcel’s “Get Lucky” trademark. In a settlement agreement, Lucky Brand agreed not to use the phrase “Get Lucky,” and Marcel released any claims regarding Lucky Brand’s use of its own marks. In 2005, Lucky Brand sued Marcel for violating its trademarks, and Marcel counterclaimed that Lucky Brand had continued to use the phrase “Get Lucky.” The district court permanently enjoined Lucky Brand from imitating the “Get Lucky” mark. In 2011, Marcel sued Lucky Brand, alleging that Lucky Brand’s use of its own marks containing the word “Lucky” infringed the “Get Lucky” mark in violation of the permanent injunction. Lucky Brand moved to dismiss on the ground that Marcel had released its claims in the settlement agreement. The district court granted the motion, but the Second Circuit vacated, holding that “defense preclusion” barred the release defense because it could have been litigated in the 2005 action but was not.
Issue:
When, if ever, does claim preclusion apply to a defense raised in a successor suit?
Court’s Holding:
Claim preclusion does not bar a new defense when the later suit raises different claims than the earlier suit.
“Any … preclusion of defenses must, at a minimum, satisfy the strictures of issue preclusion or claim preclusion.”
Justice Sotomayor, writing for the unanimous Court
What It Means:
- The Court determined that Marcel’s 2011 claim was different than its 2005 claim—in 2005 Marcel alleged infringement by use of the “Get Lucky” phrase, whereas in 2011 Marcel alleged infringement by use of Lucky Brand’s own marks. Because identity of claims is a necessary predicate to any application of claim preclusion, that determination resolved the dispute.
- The Court thus left unresolved whether claim preclusion sometimes bars a new defense. However, the Court stated in dicta that “[t]here may be good reasons to question any application of claim preclusion to defenses,” noting that a defense may go unraised for various reasons unrelated to the merits. There likely will be continued litigation over this issue.
- The Court emphasized that the identity-of-claims requirement is particularly important for trademark disputes, which “often turn[] on extrinsic facts that change over time.” This acknowledgment is consistent with the Court’s recent trend against establishing bright-line rules in trademark law, as seen in the Court’s recent decision in Romag Fasteners, Inc. v. Fossil, Inc.
The Court’s opinion is available here.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:
Appellate and Constitutional Law Practice
| Allyson N. Ho +1 214.698.3233 [email protected] | Mark A. Perry +1 202.887.3667 [email protected] | Howard S. Hogan +1 202.887.3640 [email protected] |
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Washington, D.C. partner Chantale Fiebig and associate Kelley Pettus are the authors of “Mitigating Class Action Exposure From COVID-19 Disruptions,” [PDF] published by Law360 on May 13, 2020.
In a speech on May 12, 2020, Steven Peikin, Co-Director of the U.S. Securities and Exchange Commission’s Division of Enforcement, provided insights on the Division’s enforcement priorities in light of the pandemic, as well as how the Division is managing the investigative process under remote work conditions.[1] The remarks provide helpful guidance on how companies and financial institutions can mitigate risk of investigative scrutiny for financial shocks resulting from the pandemic.
In response to the pandemic, the Enforcement Division has formed a Coronavirus Steering Committee, comprised of leadership from the Home and Regional Offices, the specialized units and the Office of Market Intelligence, to identify areas of potential misconduct and coordinate the Division’s response to COVID-19 related issues. The below areas of regulatory focus provide a helpful roadmap for companies and financial institutions, and reinforce the guidance we provided in our prior alert, to reduce the risk of drawing scrutiny.
- Insider Trading and Market Manipulation: The rapid and dramatic impact of the pandemic on the financial performance of companies increases the potential for trading that could be perceived as attributable to material non-public information. The Steering Committee is working with the Division’s Market Abuse Unit to monitor announcements in industries particularly impacted by COVID-19 and to identify potentially suspicious market movements.
- Accounting Fraud: As with other financial crises, the pandemic is likely to expose previously undisclosed financial reporting issues, as well as give rise to rapidly evolving financial reporting and disclosure challenges. The Steering Committee is on the lookout for indications of potential disclosure and reporting misconduct. In particular, the Steering Committee is reviewing public filings with an eye toward disclosures that appear out of step to companies in similar industries. The Committee is also looking for accounting that attempts to inaccurately characterize preexisting financial statement issues as coronavirus related.
- Asset Management: Asset managers confront unique challenges created by the pandemic, including with respect to valuations, liquidity, disclosures, and the management of potential conflicts among clients and between clients and the manager. The Steering Committee is working with the Division’s Asset Management Unit to monitor these issues, including failures to honor redemption requests, which could reveal other underlying asset management issues.
- Complex Financial Instruments: As with prior financial crises, the pandemic may reveal risks inherent in various structured investment products. The Steering Committee is working with the Division’s Complex Financial Instruments Unit to monitor complex structured products and the marketing of those products to investors.
- Microcap Fraud: The Steering Committee is working with the Division’s Microcap Fraud Task Force and Office of Market Intelligence, and has suspended trading in the securities of over 30 issuers relating to allegedly false or misleading claims related to the coronavirus.
As we discussed in our prior alert, by understanding the issues that can give rise to regulatory scrutiny, and consulting with counsel on how to navigate the unique challenges, issuers and financial institutions can both lower the risk of being in a regulatory spotlight, as well as resolve regulatory inquiries more efficiently.
Speaking more broadly on the Enforcement Division’s process during the pandemic, Peikin noted that the Division staff continues to remain engaged despite the new challenges of a remote work environment. The Division staff has been directed to work with defense counsel and others to reach reasonable accommodations concerning document production, testimony, interviews and counsel meetings, given the challenges of the pandemic, but also cautioned that the staff will need to protect potential claims and won’t agree to an indefinite hiatus in investigations or litigations. In particular, Peikin noted that in instances where defense counsel would not agree to tolling agreements, the Division will consider recommending that the Commission commence an enforcement action, despite an incomplete investigative record, and will rely on civil discovery to further support its claims.
Predictably, the pandemic has already led to a marked increase in Enforcement investigations and whistleblower tips. Since mid-March, the Division has opened hundreds of new investigations concerning issues related both to COVID-19 as well as traditional areas of investigation. In addition, the Division has triaged more than 4,000 whistleblower tips since mid-March, a 35% increase over the same period last year. Since March 23, the Commission has granted nine whistleblower awards, including one for over $27 million (though these awards were clearly in the pipeline long before the pandemic). Nevertheless, the notable increase in whistleblower complaints further reinforces the guidance in our prior alert on how companies can manage the heightened risks of whistleblowers resulting from the pandemic.
In sum, Peikin noted that while there is uncertainty ahead, the Enforcement Division expects the pandemic will result in increased enforcement activity as the market decline and volatility will lead to investigations of potential past misconduct as well as potential new misconduct.
____________________
[1] See May 12, 2020 Keynote Address: Securities Forum West 2020, available at https://www.sec.gov/news/speech/keynote-securities-enforcement-forum-west-2020.
Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Enforcement Practice Group, or the following authors:
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])
Tina Samanta – New York (+1 212-351-2469, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
This Alert reports on the steady pace of patent litigation and patent review filings during the COVID-19 pandemic, and notes that some aspects of ongoing patent litigation are also proceeding as usual. The Alert also discusses intellectual property litigation involving a hand sanitizer manufacturer, and provides brief updates on the Open COVID Pledge, and on manufacturer 3M’s efforts to combat price gouging of personal protective equipment (“PPE”) (earlier developments reported here and here).
(1) Patent Lawsuit Filings Continue at a Steady Pace
Based on year-to-year filings, the pandemic does not appear to have deterred patent owners from commencing infringement lawsuits. In March 2020, a total of 313 patent complaints were filed in the federal courts, an increase from the 256 that were filed in March 2019. Likewise, in April 2020, 380 patent complaints were filed, an increase from the 292 filed in April 2019. Petitions seeking the review of patent claims before the U.S. Patent Trial and Appeal Board (“PTAB”) also continue to be filed at a level comparable to filings before the pandemic. In March 2020, 100 petitions for review were filed, and in April 2020, 99 petitions were filed. Although these numbers are lower than the 129 and 104 petitions that were filed in March and April 2019,[1] monthly filing rates in the PTAB varied even before the pandemic.[2] The simplest take-away is that new patent cases continue to be filed in the United States at rates similar to filing rates before the pandemic.
Although patent jury trials previously scheduled for March and April have been postponed, many other court proceedings have continued during the pandemic—with appropriate adaptations. The Federal Circuit now operates essentially as a virtual court; it held telephonic oral arguments in April, and another 26 telephonic oral arguments are expected in May. And some district courts are conducting bench trials in patent cases remotely. Judge Henry Coke Jr. in the U.S. District Court for the Eastern District of Virginia, for example, is currently presiding over a bench trial in a patent infringement case, Centripetal Networks v. Cisco Systems, No. 18-cv-00094-HCM-LRL (E.D. Va. 2018), in which the plaintiff is seeking up to $557 million in damages for alleged infringement of its cybersecurity patents. Opening statements took place over Zoom on May 7. The court’s pre-trial order is available here. One patent case that was originally scheduled for a virtual bench trial in late May, however, was postponed to July 6 at the request of the attorneys.[3]
(2) Continued Efforts to Facilitate the Donation of Patent Rights During the COVID-19 Pandemic
The Open COVID Pledge, which reflects a commitment by the signers to eliminate intellectual property rights as a potential obstacle to developing products and treatments for fighting against the virus, continues to gain support. Signatories to the Open COVID-19 pledge grant a non-exclusive, royalty-free, worldwide license to use their patents and copyrights “for the sole purpose of ending” the COVID-19 pandemic. Companies such as Intel and Mozilla were among the first to subscribe, followed shortly by additional technology giants, such as Amazon, Facebook, HP, IBM, Microsoft, and Sandia National Laboratories. Since our prior update, several Japan-based technology companies have also signed on, including Canon and Toyota. AT&T, noting in a press release last week that it “generates roughly 5 patents every business day,” has signed the pledge as well.
(3) The Department of Justice and Manufacturer 3M Obtain Injunctions Associated with, Respectively, the Sale of Hand Sanitizer and the Sale of N95 Masks
Last week, Judge Carter of the United States District Court for the Central District of California permanently enjoined Innovative Biodefense, Inc. (“IBD”), which manufacturers hand sanitizers and lotions under the brand name Zylast, from “directly or indirectly manufacturing, processing, packaging, labeling, holding or distributing” certain Zylast products, like the “Zylast Broad Spectrum Antimicrobial Antiseptic” and “Zylast XP (Extended Protection) Antiseptic Foaming Wash.”[4] The injunction was issued after the Department of Justice (“DOJ”) sued IBD, on behalf of the FDA, alleging that IBD was effectively marketing certain Zylast products as new drugs (by claiming that the products were effective against various infectious diseases like Ebola and norovirus) without the requisite FDA approval, in violation of the Food, Drug, and Cosmetic Act (“FDCA”). The court previously ruled on summary judgment that IBD and its co-defendants (the company’s CEO and another employee) had violated the FDCA as a matter of law, and then held a bench trial on the defendants’ affirmative defenses of laches and unclean hands—which were based on allegations that the DOJ was selectively enforcing the FDCA against IBD to benefit the makers of the competing Purell hand sanitizer.[5] The court found that no evidence supported those defenses.
The injunction against IBD is effective until either: (a) the company obtains FDA approval to market the Zylast products through a new, abbreviated, or investigational new drug application; or (b) the company retains independent experts to review the formulation and labeling of the products and certify to the FDA (among other things) that the products comply with FDA regulations concerning over-the-counter drug formulations.
Finally, as noted in our last alert, the manufacturer 3M previously secured a temporary restraining order (“TRO”) against Defendant Performance Supply, LLC, arising from 3M’s allegations that the defendant had offered to sell New York City’s Office of Citywide Procurement millions of N95 respirators bearing the 3M logo and at inflated prices.
Following a telephonic preliminary injunction hearing on May 4, Judge Preska, of the Southern District of New York, converted the TRO into a preliminary injunction against Performance Supply, LLC, enjoining the company from among other things, “using the ‘3M’ trademarks” in connection with “3M-brand N95 respirators” and other 3M goods; from “falsely representing that 3M has increased the price(s) of its 3M-brand N95 respirators”; and from otherwise “offering to sell any of 3M’s products at a price . . . that would constitute a violation of New York General Business Law § 369-[r]” (New York’s price gouging statute).[6] In addition to concluding that 3M had demonstrated that it met the Second Circuit’s factors for a preliminary injunction, the court emphasized 3M’s efforts to collaborate “with law enforcement, retail partners, and others to help thwart third-party price-gouging, counterfeiting, and fraud in relation to 3M-brand N95 respirators during COVID-19.”[7] The court also found that 3M has taken active steps to protect the goodwill of the 3M brand, including by filing other trademark suits in California, Florida, Indiana, and Wisconsin.
We are continuing to monitor intellectual property-related updates and trends in the response to COVID-19.
____________________
[1] These figures were obtained from conducting searches in Docket Navigator. For each of the time frames discussed above, the numerical figures reflect the total number of (1) complaints filed in federal district courts asserting patent infringement and declaratory judgment claims, including claims pursuant to the Hatch Waxman Act and Biologics Price Competition and Innovation Act; and (2) petitions before the PTAB seeking inter partes review, post-grant review, or covered business method review.
[2] United States Patent and Trademark Office, Trial Statistics IPR, PGR, CBM (March 2020), https://www.uspto.gov/sites/default/files/documents/trial_statistics_20200331.pdf.
[3] Ferring Pharm. Inc. v. Serenity Pharm. LLC, No. 17-cv-9922 (CM) (SDA), Order (Dkt. 679) (S.D.N.Y. Apr. 28, 2020).
[4] United States of America v. Innovative Biodefense, Inc., No. 8:18 CV 996-DOC (JDE), Order of Permanent Injunction (Dkt. 215) at 2-3 (C.D. Cal. May 4, 2020).
[5] Id., Findings of Fact and Conclusions of Law (Dkt. 214) at 27-30.
[6] 3M Company v. Performance Supply, LLC, No. 20-cv-02949 (LAP)(KNF), Order (Dkt. 22) at 3-4 (S.D.N.Y. May 4, 2020).
[7] Id., Findings of Fact and Conclusions of Law (Dkt. 23) ¶¶ 27-29.
Gibson Dunn lawyers regularly counsel clients on the issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, or the authors:
Joe Evall ([email protected]), Richard Mark ([email protected]), Doran Satanove ([email protected]), and Amanda First ([email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson Dunn’s lawyers regularly counsel clients on issues raised by the COVID-19 pandemic, and we are working with many of our clients on their response to COVID-19. The following is a round-up of today’s client alerts on this topic prepared by the Gibson Dunn team. Our lawyers are available to assist with any questions you may have regarding developments related to the outbreak. As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s Coronavirus (COVID-19) Response Team.
GLOBAL OVERVIEW
A Glimpse Behind the Curtain: Insights to SEC Enforcement During the Pandemic and Tips for Mitigating Investigative Risk
In a speech on May 12, 2020, Steven Peikin, Co-Director of the U.S. Securities and Exchange Commission’s Division of Enforcement, provided insights on the Division’s enforcement priorities in light of the pandemic, as well as how the Division is managing the investigative process under remote work conditions. The remarks provide helpful guidance on how companies and financial institutions can mitigate risk of investigative scrutiny for financial shocks resulting from the pandemic.
In response to the pandemic, the Enforcement Division has formed a Coronavirus Steering Committee, comprised of leadership from the Home and Regional Offices, the specialized units and the Office of Market Intelligence, to identify areas of potential misconduct and coordinate the Division’s response to COVID-19 related issues. The following areas of regulatory focus provide a helpful roadmap for companies and financial institutions, and reinforce the guidance we provided in our prior alert, to reduce the risk of drawing scrutiny.
Read more
Update on Intellectual Property-Related Issues in the Responses to COVID-19
This Alert reports on the steady pace of patent litigation and patent review filings during the COVID-19 pandemic, and notes that some aspects of ongoing patent litigation are also proceeding as usual. The Alert also discusses intellectual property litigation involving a hand sanitizer manufacturer, and provides brief updates on the Open COVID Pledge, and on manufacturer 3M’s efforts to combat price gouging of personal protective equipment (“PPE”) (earlier developments reported here and here).
Read more
COVID-19 United Kingdom Weekly Bulletin – May 13, 2020
This weekly bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in the following key areas: Competition and Consumers; Corporate Governance (including accounts, disclosure and reporting obligations); Cybersecurity and Data Protection; Disputes; Employment; Energy; Finance; Financial Services Regulatory; Force Majeure; Government Support Schemes; Insolvency; International Trade Agreements (private and public); Lockdown and Public Law issues; M&A and Private Equity; Real Estate; and UK Tax.
Read more
On 5 May 2020, twenty-three European Union (“EU”) Member States[1] signed an agreement purporting to terminate approximately 130 intra-EU bilateral investment treaties or “BITs” (the “Termination Agreement”). The Termination Agreement will enter into force 30 days after the Secretary-General of the Council of the EU receives a second instrument of ratification, approval or acceptance.[2]
The four EU Member States that have not signed the agreement are: Austria, Finland, Ireland and Sweden. Any intra-EU BITs concluded by these EU Member States shall not be affected by the Termination Agreement. The United Kingdom (the “UK”), which left the EU on 31 January 2020, was not a signatory, and its BITs with EU Member States therefore remain in force.
The Termination Agreement does not apply to multilateral investment treaties where EU Member States are parties, such as the Energy Charter Treaty (the “ECT”).
Background
Intra-EU BITs are agreements between two EU Member States containing reciprocal undertakings for the promotion and protection of private investments made by nationals of the signatories in each other’s territories. Apart from providing for substantive investment protections against adverse state measures (such as expropriation, unfair or inequitable treatment or discrimination), these BITs typically include arbitration provisions allowing for the settlement of investment disputes between the contracting Member State hosting the investment, and investors of the other contracting Member State before a private international arbitration tribunal instead of national courts.
The preamble of the Termination Agreement considers, inter alia, that, “in compliance with the obligation of Member States to bring their legal orders in conformity with [EU law]”, Member States must “draw the necessary consequences from [EU law] as interpreted in the CJEU in [the Achmea Judgment]”. The Achmea Judgment (Achmea B.V. (formerly known as Eureko B.V.) v. Slovakia) was rendered by the Court of Justice of the European Union (the “CJEU”) on 6 March 2018. The CJEU held that investor-State arbitration clauses in intra-EU BITs, such as the one in Article 8 of the BIT between The Netherlands and Slovakia,[3] are incompatible with EU law.[4] Further information about the Achmea Judgment can be found in our previous client alert here.
Following the Achmea Judgment, respondent EU Member States in intra-EU investment treaty arbitration proceedings (i.e., involving an investor from an EU Member State) have consistently sought to challenge the jurisdiction of tribunals relying on the findings of the Achmea Judgment. So far, these efforts have proved unsuccessful; indeed, every single arbitral tribunal that has considered the “intra-EU objection” to jurisdiction has rejected it.
The Termination Agreement
(1) What does the Termination Agreement cover?
In summary, the Termination Agreement provides as follows:
- Pursuant to Article 2(1), certain intra-EU BITs are terminated – a full list of which is contained in Annex A to the Agreement.
- Article 2(2) confirms that the “sunset clauses” in those intra-EU BITs – that is, clauses in treaties that extend the protection of investments made prior to the date of termination of the BIT for a further period of time – are, likewise, terminated.
- Article 3 further clarifies that the sunset clauses contained in intra-EU BITs that have previously been terminated prior to the Termination Agreement are, similarly, terminated. The relevant BITs are listed in Annex B to the Agreement.
- Article 4(1) states that the signatories confirm that arbitration clauses in intra-EU BITs are contrary to EU law and are “thus inapplicable” as of “the date on which the last of the parties to a[n intra-EU BIT] became a Member State of the [EU]”. The practical effect of this provision is that any arbitration clauses under the relevant BITs cannot serve as the basis for arbitration proceedings and the Termination Agreement applies retroactively as of the date the last contracting party to the BIT joined the EU.
- Article 4(2) confirms that the termination of the intra-EU BITs and sunset clauses described above shall take effect as soon as the Termination Agreement enters into force.
- Article 5 states that arbitration clauses in terminated intra-EU BITs shall not serve as the legal basis for new arbitration proceedings. In other words, a tribunal constituted under such BITs would lack jurisdiction since there would be no consent to arbitration.
- Article 7 sets out the “duties” of the signatories in either pending or new arbitration proceedings. Respondent states to either type of proceedings that have signed the Termination Agreement must inform the relevant arbitral tribunals in those proceedings of the “legal consequences of the Achmea Judgment” as described in Article 4 of the Termination Agreement – i.e., that arbitration clauses in intra-EU BITs have no legal effect. (This is, however, a wider interpretation of what the CJEU in fact concluded in the Achmea Judgment, which is that intra-EU BITs “such as Article 8 of the Agreement [between the Netherlands and Slovakia]” (emphasis added) are precluded under EU law.)
- In addition, where those signatories are parties to judicial proceedings concerning an award issued on the basis of an intra-EU BIT, they are obliged to ask the competent court to “set aside, annul [or] refrain from recognising and enforcing” the award. (Of course, in the context of proceedings brought under the Convention on the Settlement of Investment Disputes (the “ICSID Convention”), national courts have no power to set aside or annul ICSID awards as the Termination Agreement envisages.)
The Termination Agreement then sets out two “transitional measures” designed to aid EU Member States involved in pending arbitration proceedings.
First, the Agreement provides that an investor may ask the Member State to enter into settlement discussions in such proceedings, which shall be overseen by “an impartial facilitator”.[5] Any final settlement agreement must include an obligation for the investor to withdraw the arbitration claim or renounce execution of its award, as well as a commitment to refrain from initiating new arbitration proceedings.[6] The Termination Agreement, however, is silent as to what might happen if such settlement discussions are unsuccessful and how pending arbitration proceedings are then to proceed.
Second, the Termination Agreement entitles investors to “access the judicial remedies under national law against a measure contested in Pending Arbitration Proceedings” even if national time limits for bringing such actions have expired (but subject to the time limits in the Agreement). This is, again, subject to, inter alia, an investor withdrawing the pending arbitration proceedings and waiving all rights and claims pursuant to the relevant BIT.
It is yet to be seen how the Termination Agreement will impact pending arbitration and national court proceedings concerning intra-EU BITs. Ultimately, those tribunals and national courts will need to assess how the Termination Agreement interacts with other international obligations of the EU Member States that might also be in play, such as those under the ICSID Convention and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
(2) What does the Termination Agreement not cover?
The preamble to the Termination Agreement expressly notes that it does not cover intra-EU proceedings under Article 26 of the ECT, and the Termination Agreement suggests that this will be dealt with by the EU and its Member States “at a later stage”.[7]
Further, Article 6(1) states that it does not affect “Concluded Arbitration Proceedings”– proceedings where a final award was rendered prior to the Achmea Judgment on 6 March 2018, and where no challenge to that award was pending (for example, annulment proceedings) on that date – which explicitly “shall not be reopened”. Article 6(2) similarly notes that the Termination Agreement does not affect agreements to settle an arbitration that were initiated prior to the Achmea Judgment.
What Should Investors Consider Doing in Light of the Termination Agreement?
In light of the Termination Agreement, it would be wise for EU-based investors with investments in other EU Member States to consider structuring (or restructuring, as the case may be) their investments through a vehicle incorporated outside of the EU in order to ensure they are fully protected by a BIT between a Member State and a third State not affected by the Termination Agreement.
Caution should be taken in the context of restructuring investments, however, and investors seeking to do so should seek legal advice. This is because, whilst the re-structuring of investments before a dispute arises with a view to maximising investment treaty protections is a legitimate business goal; undertaking such a restructuring when a potential dispute is already on the horizon, may result in the loss of treaty protection.
______________________
[1] The twenty-three EU Member States are: Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia and Spain.
[2] The press release can be accessed at ec.europa.eu.
[3] The Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federative Republic, 1 January 1992.
[4] The ruling can be accessed at curia.europa.eu.
[5] Termination Agreement, Article 9(7). If the parties fail to agree on a candidate, the Termination Agreement Director General of the Legal Service of the European Commission will designate a former Member of the CJEU to appoint one “after having consulted” the parties (Article 9(8)).
[6] Termination Agreement, Article 9(14)(a).
[7] Termination Agreement, p. 5.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Jeff Sullivan, Rahim Moloo, Ceyda Knoebel, Stephanie Collins and Theo Tyrrell.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration Practice Group, or the following:
International Arbitration Group:
Cyrus Benson – London (+44 (0) 20 7071 4239, [email protected])
Penny Madden – London (+44 (0) 20 7071 4226, [email protected])
Jeffrey Sullivan – London (+44 (0) 20 7071 4231, [email protected])
Rahim Moloo – New York (+1 212-351-2413, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Join a panel of Gibson Dunn lawyers in a discussion of ways for financial services business to manage legal and regulatory risks during the COVID-19 pandemic. The panel will cover discussions of:
- expectations relating to communications with regulators
- areas of likely focus from regulators
- expectations regarding communication/engagement with clients
- focus on senior management accountability
- cultural considerations
- managing people and risks while working remotely and the return to the offices
PANELISTS:
Michelle M Kirschner: A partner in the London office. She advises a broad range of financial institutions, including investment managers, integrated investment banks, corporate finance boutiques, private fund managers and private wealth managers at the most senior level.
James Cox: A partner in the London office. He is a member of the firm’s Labor and Employment Practice Group. Mr. Cox has extensive experience in contentious and non-contentious labor and employment matters.
Steve Melrose: An associate in the London office and a member of the Dispute Resolution and White Collar Defence and Investigations groups. His practice focuses on domestic and cross-border corporate investigations, regulatory investigations and white-collar criminal matters.
Martin Coombes: An associate in the London office and a member of the Financial Institutions group. He specialises in advising on UK and EU financial services regulation. This includes a wide range of financial services and compliance issues including advice on UK and EU regulatory developments, the regulatory aspects of corporate transactions and the on-going compliance obligations of financial services firms.
Chris Hickey: An associate in the London office and a member of the firm’s Financial Institutions group. He advises on a range of UK and EU financial services regulatory matters. This includes the regulatory elements of corporate transactions, regulatory change management and ongoing compliance requirements to which firms are subject.
This bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in the following key areas:
1. Competition and Consumers
2. Corporate Governance (including accounts, disclosure and reporting obligations)
3. Cybersecurity and Data Protection
4. Disputes
5. Employment
6. Energy
7. Finance
8. Financial Services Regulatory
9. Force Majeure
10. Government Support Schemes
11. Insolvency
12. International Trade Agreements (private and public)
13. Lockdown and Public Law issues
14. M&A and Private Equity
15. Real Estate
16. UK Tax
Links to various English law alerts prepared by Gibson Dunn during this period are also included in the relevant sections.
As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the UK COVID-19 Taskforce (listed at the end of this bulletin), or one of the taskforce co-leads:
Charles Falconer – London (+44 (0)20 7071 4270, [email protected])
Anna Howell – London (+44 (0)20 7071 4241, [email protected])
1. Competition and Consumers
Merger control
The coronavirus pandemic has been considered by the Competition and Markets Authority (CMA) and Competition Appeal Tribunal (CAT) in recent decisions, to varying effect. On 6 May 2020, the CMA published its final report in the Phase II investigation of the completed acquisition by JD Sports Fashion plc of Footasylum plc. The CMA found that the merger would result in less competition across the UK and has required that JD Sports fully divest Footasylum. The CMA noted that all retailers, including the parties, are subject to the same change in market conditions and it is not clear that the parties are disproportionately impacted. JD Sports has been given flexibility in the timing of its divestiture of Footasylum given the uncertainty in the current health crisis.
On 6 May 2020, the CAT granted Sabre Corporation an extension of time to file a notice of appeal against the CMA’s decision to prohibit the anticipated acquisition by Sabre of Farelogix Inc. The CAT noted that the extension was requested against a background of exceptional circumstances. The COVID-19 crisis impeded the effective coordination and preparation of Sabre’s notice of application due to the demands placed on individuals at Sabre and its legal representatives, especially as Sabre is a technology and software provider to the global travel industry. The CAT decision was unsurprising in light of the CAT Practice Direction relating to COVID-19, published on 20 March 2020, which anticipated the CAT’s use of its power to extend time limits in exceptional circumstances.
Antitrust
On 7 May 2020, the CMA proposed accepting new commitments for a number of airlines (American Airlines, British Airways, Iberia, Aer Lingus and Finnair) to maintain their alliance on US-UK airline routes. The competition regulator noted that the long-term impact of the COVID-19 pandemic may not become clear for between two and five years, and as such the airlines’ commitments are subject to review for years. The CMA may reopen its investigation into the cooperation agreement if there is a “material change of circumstances”. This latest decision is in line with the EU and UK’s approach of maintaining competition rules during the coronavirus crisis. Last week a senior official at the European Commission commented that relaxing competition rules would slow economic recovery.
State aid
On 8 May 2020, the European Commission adopted a second amendment to the Temporary Framework for state aid measures to support the economy in the context of the coronavirus outbreak. The amendment enables Member States to provide recapitalisation aid and subordinated debt to companies in need, subject to certain conditions designed to protect fairness of competition in the EU.
Recapitalisation measures are available to non-financial companies in need, subject to a number of safeguards. The amended Temporary Framework imposes a number of conditions, for example on the necessity, appropriateness and size of the intervention, and the State’s exit from the capital of the beneficiary company. The conditions are designed to ensure that the State is adequately compensated for the risks it assumes, and to incentivise beneficiaries and/or their owners to ensure the temporary nature of the State’s intervention.
The amended Temporary Framework also allows Member States to support companies by providing subordinated debt at favourable terms. Subordinated debt is subordinated to ordinary senior creditors in the case of insolvency proceedings. The State assumes less risk because such debt cannot be converted into equity whilst the company is a going concern. Subordinated debt increases the ability of companies to take on senior debt in a way similar to capital support and so limitations apply.
2. Corporate Governance (including accounts, disclosure and reporting obligations)
The Investment Association (IA) outlines shareholder expectations on executive pay in light of COVID-19
The IA has issued guidance to remuneration committees of UK listed companies outlining shareholder expectations on executive pay in light of COVID-19. The guidance recognises that remuneration committees will need to “sensitively balance” the need to incentivise executives at a time when they are being asked to show significant leadership and resilience while being mindful of the effect the pandemic is having on shareholders, employees and other stakeholders. The guidance also notes that the IA principles of remuneration continue to be a “useful guide to shareholder expectations and best practice”. The IA will update the COVID-19 guidance as the pandemic develops. Salient points include:
- Dividend suspension/cancellation; capital raises; furlough: Shareholders expect remuneration committees to consider how to reflect the suspension or cancellation of dividends in executive pay outcomes. If bonus outcomes for 2019 have already been decided and bonuses paid, shareholders expect remuneration committees to consider whether it is appropriate to use discretionary powers or malus provisions to reduce any deferred shares related to the 2019 annual bonus. Alternatively, shareholders expect this to be “fully reflected” in 2020 bonus outcomes. Shareholders would also expect this to be reflected in executive pay outcomes if a company seeks additional capital from shareholders or takes money from the Government (i.e. by furloughing employees etc).
- Performance calculations: Companies should not adjust performance conditions for annual bonuses or “in-flight” long-term incentive awards to take account of COVID-19. Where the remuneration committee considers that the performance of the company and shareholder experience is not “commensurate with the executive remuneration outcomes”, it should use its discretion “to ensure a good link between pay and performance”.
- Windfall gains on existing 2020 grants: Where grants in 2020 have already been made, remuneration committees should look at the market and share price response during the performance period to ensure that windfall gains do not arise when awards vest. Shareholders expect committees to use discretion to reduce vesting outcomes in these circumstances.
- Future LTIP grants: Remuneration committees should considering if it is appropriate to make LTIP grants at the current time. The guidance notes that there are a number of options depending on the individual circumstances of the company, namely (1) grant on the normal timeline setting performance conditions and grant size at the current time; (2) grant on the normal timeline setting the grant size now but committing to set performance conditions within the next six months; or (3) delaying the grant to allow the remuneration committee to more fully assess the appropriate performance conditions and grant size (in which case the aim should be to make the grant within six months of the normal grant date). Remuneration committees should be careful not to isolate executives from the impact of COVID-19 in a manner that is inconsistent with the approach taken to the general workforce, and use their discretion to reduce vesting outcomes where windfall gains have been received. The guidance provides further information on grant size and performance conditions.
- New remuneration policies: Where companies have already spent significant time consulting with their shareholders on new remuneration policies to be voted on at their AGM, shareholders do not believe that those policies should now be rewritten, but consideration should be given as to whether any variable pay increases are appropriate in the current year. For those companies that are yet to consult, it may not be appropriate to bring forward remuneration policies with substantial changes if the company is significantly impacted by COVID-19, and may instead be more appropriate to wait until there is greater clarity on the future market environment.
QCA Small and Mid-Cap Sentiment Index survey
The Quoted Companies Alliance (QCA) has published results of the latest QCA Small & Mid-Cap Sentiment Index which surveyed 132 small and mid-cap UK quoted companies and 45 advisory companies. The results revealed the following key findings:
- Capital: Around half of small and mid-cap UK quoted companies plan to raise capital in the next 12 months to help manage the current crisis.
- Economic outlook: The lowest level of optimism in the UK economy was recorded in the history of the survey (approximately 10 years). Small and mid-cap companies have a significant drop in expectations regarding turnover, with mean expected growth for Q2 2020 expected to be a contraction of -5.5% compared to the expected growth of 14.4% in Q4 2019.
- Employment: 43% of small and mid-sized quoted companies intend to decrease jobs in the next 12 months and 31% intend to increase jobs. 56% of respondents have furloughed staff and 28% have laid-off employees.
- Stakeholders: 49% of respondents have undertaken new ways to engage with stakeholders with 21% offering new products or services to customers.
The full survey results can be found here.
High Pay Centre briefing: UK listed company response to the COVID-19 pandemic
The High Pay Centre (HPC) has issued research looking at the response of UK listed companies to the current COVID-19 pandemic. Key findings, as of 22 April 2020, are that:
- HPC estimates that 37% of FTSE 100 firms have cut CEO pay as a result of the economic shutdown;
- 13% of FTSE 100 firms have made cuts to bonuses or “Long Term Incentive Payments”;
- 33% of FTSE 100 firms have withdrawn or withheld dividend payments; and
- at least 18% of FTSE 100 firms are using the publicly funded job retention scheme to cover the wages of furloughed workers.
3. Cybersecurity and Data Protection
Cyber warning issued for key healthcare organisations
The UK’s National Cyber Security Centre (NCSC) has published an advisory for healthcare and medical research organisations, advising staff to improve their password security and to implement two-factor authentication to reduce the threat of compromises by cyber criminals. This comes after hackers have targeted healthcare bodies, pharmaceutical companies and research organisations and attempted to access accounts by “password spraying” (i.e. using commonly known passwords).
Contact tracing apps
As part of the Government’s Test, Track and Trace strategy, it has launched a new NHS contact-tracing app which is currently being piloted on the Isle of Wight. The app uses Bluetooth technology to detect proximity to infected individuals and notify its users accordingly. This data will be stored on a central database and, according to the app’s developers, will be suitably anonymised. Its effectiveness is dependent on the number of voluntary downloads.
In parallel, the government has been testing and developing a second alternative app based on Apple and Google’s contact-tracing technology. This also uses Bluetooth to detect proximity, but it stores data on a decentralised system.
We are yet to know which app will be chosen, but a national rollout is expected mid-May.
ICO’s focus
The ICO has announced it will be focusing its resources on supporting frontline workers against challenges to their information rights and privacy, arising from the pandemic; providing clear guidance and resources to help businesses process personal data lawfully and maintain public trust during these times; ensuring good data privacy practice in the development and deployment of AI; and developing new ways of working in readiness for the recovery phase.
4. Disputes
Recent judgments on the issue of remote hearings
In a judgment handed down on 30 April 2020 in Re A (Children) (Remote hearing: care and placement orders) [2020] EWCA Civ 583, the Court of Appeal (Civil Division) considered an appeal relating to the welfare of children on the issue of remote hearings during the COVID-19 pandemic. The Court emphasised certain “cardinal points” to be borne in mind when deciding whether to conduct a remote hearing, reiterating that this was a case management decision over which the first instance court has a wide discretion, based on ordinary principles of fairness, justice and the need to promote the welfare of the subject child or children. Guidance or indications issued by the senior judiciary are no more than that; namely, guidance or illustrations aimed at supporting the judge or magistrates in their decision. Moreover, the temporary nature of any guidance, indications or even court decisions on this subject must be remembered, and will become all the more apparent once the present restrictions on movement start to be gradually relaxed. The Court observed that many judges are finding that remote hearings take longer to set up and undertake than courtroom hearings, with the result that courts are now listing fewer cases each day than a few weeks previously. On the other hand, some court buildings have been set up for safe and socially isolated hearings and may now be safe venue for hearings when this was not the case in the early days of the lockdown.
In A Local Authority v Mother [2020] EWHC 1086 (Fam) (5 May 2020), the High Court considered further aspects of wider interest to court procedures in relation to remote hearings. The Court faced a decision as to whether to proceed with hearing lay evidence remotely or whether to adjourn the case. Among other considerations, Lieven J noted that an important factor in a fact-finding case was whether the judge would be in a worse position to judge whether or not the witnesses are telling the truth if the case were conducted remotely. However, in the absence of empirical evidence, she concluded that it was not possible to state as a generality whether it is easier to tell whether a witness is telling the truth in court rather than remotely: while on the one hand a witness may be more likely to tell the truth when feeling the pressure of the courtroom from the witness box, other witnesses may feel less defensive and more inclined to tell the truth in a remote hearing than when feeling intimidated by the court room setting.
Commercial disputes
On 4 May 2020, the Hague Conference of Private International Law (HCCH) published a toolkit, compiling guidance and resources or particular relevance during the pandemic and/or designed to assist users of the HCCH Conventions and other instruments during the pandemic. The toolkit is split into two sections, the first on International Child Protection and Family Matters and the second on International Legal Cooperation, Litigation and Dispute Resolution. The latter section covers apostilles (authentication of public documents), service of documents and taking of evidence, and international commercial contracts. Among other things, the toolkit observes that the taking of evidence remotely by video-link is of particular relevance in the current circumstances and points to its Guide to Good Practice on the Use of Video-Link under the 1970 Evidence Convention published on 16 April 2020.
Arbitration
An open letter circulated by think tank “Columbia Center on Sustainable Investment”, signed by seven eminent human rights specialists, has called for a moratorium on treaty claims against governments during the COVID-19 pandemic and a permanent ban on claims in relation to state measures in response to the pandemic. The three reasons given are: (1) there are likely to be multiple “unjustified claims” relating to “necessary business closures and other emergency responses” that governments have had to implement and which may cause losses to expected profits; (2) governments are urgently required to focus their attention to control of the pandemic, and it should avoid having to face distracting claims by foreign companies and shareholders wanting to take advantage of “vague investment treaty standards to press their claims”; and (3) a moratorium could prevent governments from facing additional financial burdens from awards running into the millions and billions, in addition to inevitable fiscal crises emerging. A Global Arbitration Review bulletin discusses this letter, and notes that, to GAR’s knowledge, there has yet to be a claim filed against a state based on a response to the pandemic. There may be reluctance by many to be seen to exploit the global crisis for gain through proceedings. Some commentators consider a moratorium unnecessary, given the slow pace of investment arbitration moves in any event.
International trade
A special issue of the United Nations Conference on Trade and Development’s Investment Policy Monitor was released on 4 May, analysing the national and international investment policies followed by various countries in response to the crisis. Several countries have taken measures in support of investment and protecting domestic industries such as by speeding up investment approval procedures, accelerating use of online tools and e-platforms, introducing incentive schemes for health related research and development, and acquiring equity in struggling domestic key companies. Some countries have tightened the foreign investment screening measures to protect the health sector and industries vital to solving the crisis. Export bans and reduction of import duties have been imposed for medical equipment. According to UNCTAD, COVID-19 has slowed down the pace of treaty-making. Several rounds of investment treaty negotiations scheduled for 2020 have been cancelled or postponed. It is thought that measures taken by states to address COVID-19 could create friction with the existing investment treaty obligations and lead to investor-state disputes.
5. Employment
No update to our COVID-19 UK Bulletin – 6 May 2020.
6. Energy
Impact of COVID-19 on projects
Although this week has seen oil prices tentatively begin to recover as some lockdown measures start to be eased, many projects, sites and companies are still struggling to cope with the pandemic’s effects. Some examples of note include:
- Brazil’s Petrobras has reported over 800 confirmed COVID-19 cases amongst its workers, compounding the already severe outbreak in Brazil. Brazil’s Public Labour Ministry (MPT) has warned that Petrobras may be held responsible if it failed to impose correct and adequate procedures. The company has also been accused of procrastinating in addressing the crisis by a Brazilian oil workers’ union.
- French supermajor Total announced a fall of 35% to its net adjusted profit compared to Q1 of last year, but will still be paying a dividend at 66 euro cents per share. It has also commented that, despite the dramatic dip in profits, it remains committed to its “medium and long-term strategy” of net-zero by 2050.
- Singapore-based KrisEnergy has warned of delays and cuts to production at its Apsara field offshore Cambodia, although has said that it is continuing development work.
- Russia-based oil and gas company Lukoil’s VP, Leonid Fedun, has been hospitalised with confirmed COVID-19.
- UK-listed Premier Oil has announced that it will seek to renegotiate its recently signed purchase from BP of a package of UK North Sea assets. This follows on from Premier successfully obtaining court sanction by way of creditor schemes of arrangement to proceed with the BP deal and another transaction with Dana Petroleum, along with additional financing consents. However, the court decision is subject to an ongoing appeal and the BP and Dana transactions remain subject to a number of other conditions.
- Russia’s Gazprom continues to maintain that there will be no delays to its onshore Chayanda development work in the Russian Federation, despite having evacuated workers amid protests of its handling of the outbreak. There have been thousands of reported cases of COVID-19 amongst builders at the site.
7. Finance
No update to our COVID-19 UK Bulletin – 6 May 2020.
8. Financial Services Regulatory
Digital sandbox
On 4 May 2020, the Financial Conduct Authority (FCA) announced that it would be collaborating with key strategic partners and the industry to pilot a “digital sandbox”. This will provide enhanced regulatory support to innovative firms tackling challenges caused by the COVID-19 pandemic.
Information security
The FCA, on 6 May 2020, issued a statement to firms setting out its expectations in relation to information security. Among other things, it emphasises the current cyber-security risks and stresses that it expects firms to (i) prioritise information security; and (ii) ensure that adequate controls are in place to manage cyber threats and respond to major incidents. Firms are expected to proactively manage the increased risk, including (for example) by ensuring that they continue to have appropriate governance and oversight arrangements in place.
Modification of the 12-week rule
The FCA has issued a Modification by Consent to the 12-week rule to support firms using temporary arrangements during the crisis. The 12-week rule allows an individual to cover for a Senior Manager without being approved, where the absence is temporary or reasonably unforeseen, and the appointment is for less than 12 consecutive weeks. If temporary arrangements last longer than 12-weeks as a result of the crisis, firms can notify the FCA that they consent to a modification of the 12-week rule. In these cases, temporary arrangements can be extended up to 36 weeks.
Financial crime
On 6 May 2020, the FCA issued a statement outlining its expectations on how firms should apply their systems and controls to combat and prevent financial crime during this crisis. Among other things, the FCA noted that whilst the current climate may give rise to operational challenges in relation to financial crime systems and controls, firms should not seek to address operational issues by changing their risk appetite. That being said, while continuing to operate within the legislative framework for anti-money laundering and counter-terrorist financing, firms may need to re-prioritise or reasonably delay some activities.
Financial Ombudsman Service approach
On 7 May 2020, the FCA published a letter (dated 15 April 2020) from Sheldon Mills, FCA Interim Executive Director of Strategy and Competition, to Caroline Wayman, Financial Ombudsman Service (FOS) Chief Ombudsman and Chief Executive, in relation to how the FOS will handle complaints that arise from firms’ acts or omissions during the COVID-19 pandemic period. The FCA has also published Ms Wayman’s response.
PRA re-prioritisation of work
On 7 May 2020, the UK Prudential Regulation Authority (PRA) published a statement on reprioritising work in the light of the COVID-19 pandemic. It sets out further details of its plans to support firms and enable them, and itself, to focus resources on the highest priority work. The PRA’s work is focused on ensuring that banks and insurers can play their part in supporting the UK economy to respond to COVID-19.
Pillar 2A capital requirements
On 7 May 2020, the PRA published a statement on the conversion of Pillar 2A capital requirements from a risk weighted assets percentage to a nominal amount, to alleviate “unwarranted pressure” on the firms it prudentially regulates.
9. Force Majeure
No update to our COVID-19 UK Bulletin – 6 May 2020.
10. Government Support Schemes
Update on Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS)
On 4 May 2020, the FCA updated its statement on the CBILS and BBLS, following the BBLS formally launching that day. It noted that on 27 April 2020 it announced that, as an interim measure pending the roll-out of the BBLS scheme, if firms complied with the relevant requirements of CBILS as announced on the same date, the FCA did not expect them to comply with certain FCA rules where the lending was regulated. Following the launch of the BBLS, the FCA confirmed this position will remain applicable to regulated lending that continues to take place under CBILS.
CBILS
UK Finance, the trade and industry body for the banking and finance sector in the UK, announced that, as of 6 May 2020, approx. £5.5 billion had been lent to small and medium-sized businesses in the UK, with the total number of loans approved increasing to 33,812 out of 62,674 applications.
BBLS
HM Treasury announced that in the first 24 hours following the launch of the UK’s Bounce Back Loans Scheme for small businesses on 4 May 2020, 69,500 loans had been approved from more than 130,000 applications, constituting approximately £2 billion in lending.
11. Insolvency
No update to our COVID-19 UK Bulletin – 6 May 2020.
12. International Trade Agreements (private and public)
No update to our COVID-19 UK Bulletin – 6 May 2020.
13. Lockdown and Public Law Issues
Review of lockdown restrictions
Under the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 the Government is required to review the appropriateness of the lockdown restrictions every 21 days. The outcome of the latest review due 7 May 2020 was that there would be no change to the lockdown, but that the prime minister would announce a plan on 10 May. The next review is due by 28 May 2020.
Recovery strategy
In a televised address on 10 May 2020, Prime Minister Boris Johnson outlined the Government’s stepwise plan for exiting the lockdown. The document, “Our Plan to Rebuild: The UK Government’s COVID-19 recovery strategy”, was released on 11 May. The first step, purported to begin 13 May, mainly addresses re-opening workplaces and individual social contact and exercise limits. Further steps, contingent on a reduction in the virus reproduction rate, address reopening of schools, shops, and cultural and sporting events, with the hospitality sector being last to reopen.
Virtual Parliament
On 7 May 2020, the Speaker of the House of Commons authorised remote voting on a temporary basis.
14. M&A and Private Equity
Foreign investment frameworks
Behind the headlines on ICU beds and R-numbers, a philosophical change is taking place out of the media glare which could fundamentally alter the landscape of international trade and the M&A market for some time. Last week, the Trump Administration redoubled its focus on investments from China. Although the U.S. Department of Commerce, Bureau of Industry and Security is, to some extent, simply moving forward with long-anticipated efforts to further restrict trade in a large number of sensitive technologies, the new rules also advanced several more recent Trump Administration national security and foreign policy priorities. Primary amongst these is more stringent review of biotechnology mergers in response to COVID-19. Indeed, the pandemic has provided the perfect backdrop for countries around the world to push through revisions of their foreign investment review frameworks, allowing greater flexibility for governments to screen and impede foreign investment in the name of greater economic and social protection during turbulent economic times.
The European Union has been front and centre of this process and was among the first to announce more stringent screenings of foreign direct investments, with the European Commission issuing guidance to its members in March, with the aim of preventing foreign entities from taking over European companies in key sectors related to healthcare and security. The Commission’s guidance is issued within the context of the EU FDI Screening Regulation, which will apply fully in all Member States from October 2020. The Regulation empowers Member States to review investments within its scope on the grounds of security or public order, and to take measures to address specific risks. The Regulation applies to all sectors of the economy and is not subject to any thresholds and Members States have proved more than willing to take up the opportunity offered by the guidance and to introduce “emergency” measures as the pandemic has unfolded.
Italy has extended its Golden Powers Regulation governing foreign investments to cover previously excluded sectors, such as finance, credit and insurance, even providing for the Italian government to be able to open a review procedure ex officio in case of a missed notification filing. The German government has proposed amendments to its German Foreign Trade and Payments Act, which lower the thresholds for government intervention from the current “actual threat” requirement to only “probable impairment” to German public order or security. Spain has introduced a new temporary requirement that any foreign (non-EU or non-European Free Trade Association) direct investments into a broad range of strategic sectors be approved ex-ante. The sectors included are critical physical or virtual infrastructures, critical technology, supply of essential commodities such as energy, and sectors with access to sensitive data such as personal data.
Although currently no changes to the UK regime have been announced, this is an area to watch. The Queen’s Speech in December 2019 announced the upcoming National Security and Investment Bill, which will include powers of the Foreign and Commonwealth Office to assess whether a potentially hostile party is seeking significant influence or control over a UK company and in what circumstances it should intervene. The damage to UK companies caused by the lockdown as well as the measures already taken by countries all over the world, could see the UK Government taking a broader and more interventionist approach than it otherwise would have done. As the economic effects of COVID-19 continue to evolve and drive countries toward increased nationalism and protectionism, it is likely increased restrictions on foreign investments will come into play across more countries and affect cross-border investment and, by extension, M&A. In addition to the increased economic burdens being faced by investors, review of foreign investment risks as well as the associated administrative requirements and impact on timetables will become a staple feature when assessing cross-border transactions, at least in the near term.
15. Real Estate
Government measures
Organisations across the Real Estate sector asked Government to expand the business rates holiday scheme to all sectors of the economy (currently available to retail, hospitality and leisure but not to shared office space providers). Altus Group has calculated the cost to the Treasury from the current policy as exceeding £10 billion for the 2020-2021 tax year.
The Government has also just announced its decision to postpone its overhaul/revaluation of business rates to 2022, meaning that over the next two years, they will be based on property valuations from 2015. Given the potentially dramatic dislocation certain sectors will suffer as a result of COVID-19, this is cause for serious concern for many in the industry.
The proposed “Furloughed Space Grant Scheme”, (which we reported on here), has been rejected by the Government as being too expensive. The British Retail Consortium (BRC) has warned, in a letter signed by the British Property Federation and Revo, of the “imminent collapse of many businesses” if the Government does not supplement its current support schemes.
16. UK Tax
Capital taxation and tax-exempt heritage assets
HMRC has updated its guidance on capital taxation and tax-exempt heritage assets to add information about temporary changes to the Conditional Exemption Tax Incentive Scheme. HMRC recognises that it may not be possible for owners of properties or assets in the Conditional Exemption Tax Incentive Scheme to meet all their undertakings due to COVID-19. The updated guidance includes explanations on how HMRC deals with cases relating to closing or delaying the opening of a national heritage property, conditionally exempted objects on loan to other organisations that close due to Government advice, objects that can only be seen by appointment, and difficulty in advertising, publicity and producing promotional material. For further details, see here.
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] |
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson Dunn’s lawyers regularly counsel clients on issues raised by the COVID-19 pandemic, and we are working with many of our clients on their response to COVID-19. The following is a round-up of today’s client alerts on this topic prepared by the Gibson Dunn team. Our lawyers are available to assist with any questions you may have regarding developments related to the outbreak. As always, for additional information, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or any member of the firm’s Coronavirus (COVID-19) Response Team.
GLOBAL OVERVIEW
New York Appellate Division, First Department Lifts March 2020 Suspension Order, Reinstating Key Appellate Deadlines and Effectively Reopening the Court for New Appeals
New York State’s Appellate Division, First Department handles over 3,000 appeals each year—more than the number of appeals pending in eight of the federal appellate courts in 2019. Its docket includes some of the most high-profile and significant commercial appeals in the State and the nation, as it reviews trial-level decisions issued by the Manhattan branch of the New York Supreme Court, Commercial Division.
On March 17, 2020, the First Department issued an order “suspend[ing] indefinitely and until further directive of the Court,” all perfection, filing, and other deadlines, except for matters that were already perfected for the May 2020 and June 2020 Terms of the First Department. But on May 8, 2020, the First Department rescinded its March 17, 2020 Order and reinstated “the deadlines for the remaining 2020 terms of the Court (September through December 2020 terms).” The details of the May 8 Order are important for any party considering taking an appeal to the First Department.
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How Biz Development Cos. Can Mitigate Regulatory Risks
Over the last decade, business development companies, or BDCs, became increasingly popular, and profitable, vehicles for private fund managers to raise and deploy capital. With the current pandemic hitting the portfolios of BDCs particularly hard, investors are already sounding the alarm for greater regulatory scrutiny.
In addition, the U.S. Securities and Exchange Commission’s focus on protection of retail investors makes BDCs a particularly ripe target. Moreover, because BDCs are subject to many of the complex constraints of the Investment Company Act, managers of BDCs are often caught off guard by requirements not typically confronted by managers of private funds. Nevertheless, timely attention to compliance challenges today can mitigate the risk of encountering regulatory issues down the road. Originally published by Law360 on May 11, 2020.
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The Impact of Covid-19 on Mena M&A
Many of us are facing more difficult and imperativdaily-covid-19-bulletin-may-12-2020e personal and business decisions today than before the crisis. However, despite the unprecedented nature of this situation we must believe that life, including economic activity, will begin to return to normal in the near to medium future. In this article, we look beyond the crisis to the possible long-term effects on M&A in the Middle East and North Africa (Mena) region. Originally published by Asian-mena Counsel, Volume 17 Issue 5, May 2020.
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New York State’s Appellate Division, First Department handles over 3,000 appeals each year—more than the number of appeals pending in eight of the federal appellate courts in 2019. Its docket includes some of the most high-profile and significant commercial appeals in the State and the nation, as it reviews trial-level decisions issued by the Manhattan branch of the New York Supreme Court, Commercial Division.[1] The Appellate Division is often the final word in a given case; the only courts that can review its decisions—the New York Court of Appeals (New York’s high court) and the U.S. Supreme Court—control their own dockets and take relatively few cases for consideration.
On March 17, 2020, the First Department issued an order “suspend[ing] indefinitely and until further directive of the Court,” all perfection, filing, and other deadlines, except for matters that were already perfected for the May 2020 and June 2020 Terms of the First Department.[2] The order essentially closed the Court to new appeals and left the First Department’s Fall calendar in COVID-19-related limbo. But on May 8, 2020 the First Department rescinded the March 17, 2020 Order and reinstated “the deadlines for the remaining 2020 terms of the Court (September through December 2020 terms).”[3] The First Department is in all material respects now back open for business for new appeals.
The details of the May 8 Order are important for any party considering taking an appeal to the First Department. And virtually any trial court-level decision or order, even if interlocutory, can be appealed to the Appellate Division under New York’s unusually broad appealability rules. But failure to comply with the Court’s deadlines in some instances can result in a dismissal of the appeal.[4]
First Department Filing Deadlines. Filing deadlines for appeals in the First Department are driven by the First Department’s Term calendar and rules for “perfecting” appeals. In general, an appeal is deemed “perfected” when the appellant’s brief, the record on appeal or the appendix, and the notice of argument are collectively filed with the First Department and served on the respondent.[5] The First Department’s rules provide that, except where the Court has directed that appeal be perfected by a particular time, an appeal must be perfected within six months from the date of the notice of appeal.[6] If an appellant fails to perfect the appeal within six months, or the deadline set forth in an applicable Court order, “the matter shall be deemed dismissed without further order.”[7] However, the appellant can decide when to perfect the appeal within the allotted six-month period.
The appellant must also perfect the appeal for a specific “Term” of the Court. The First Department has monthly Terms from January through June and September through December, in advance of which the Court accepts submissions at set deadlines.[8] Each Term in the calendar has a designated due date for the appellant to perfect the appeal, the respondent to serve and file the responding brief, and the appellant to serve and file the reply brief.[9] The “Term” of the Court for which an appeal is perfected determines the month in which the Court will hear oral argument in the case. Although appellants may perfect an appeal any day in which the Court is open, appellants frequently opt to perfect on the last filing day of a given Term, as this gives the appellant the maximum amount of time to work on opening papers while still being heard in the given Term, and doing so also gives respondent the fewest number of days to review the opening brief and file their responding brief.
The March 17 & May 8 Orders and Perfection Deadlines. The First Department’s March 17, 2020 Order “suspended indefinitely” all perfection, filing, and other appeal deadlines “until further directive of the Court,” except for matters that were already perfected for the May 2020 and June 2020 Terms of the First Department, the perfection deadlines for which had already passed as of March 17.[10] That means that appellants considering filing any new appeals had no due dates to do so—effectively putting the First Department on a pandemic-induced pause.[11]
Now, by reinstating the “deadlines for the remaining 2020 terms,” the May 8 Order effectively reopens the Court for new appeals. Specifically, the perfection and filing deadlines for the upcoming September through December 2020 Terms, as set forth in the First Department’s calendar issued prior to the outbreak of COVID-19, are reinstated and will remain in effect.[12] Namely, if an appealing party wants its case to be heard in the September Term (the next available Term), it needs to perfect by July 13, 2020; if it wants to be heard in the October Term, it needs to perfect by August 10, 2020.[13] And importantly, the March 17 Order did not alter the pre-pandemic deadlines—essentially allowing the Court to return to its regular Fall schedule.
While the First Department has reinstated its calendar for the remainder of the year, the requirement that parties file hard copy briefs, records, and appendices with the Court “continues to be suspended until further directive of this Court.”[14]
Finally, due to the pandemic, oral argument for the May and June Terms was conducted via videoconference technology. The Court has not yet provided information on the format for oral argument for the September through December 2020 Terms. We anticipate that the Court will issue further orders in the coming months providing that information to litigants.
Gibson Dunn is monitoring the situation with respect to the First Department and is available to assist with any questions.
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[1] Appellate Division, First Judicial Department, Supreme Court of the State of New York, http://www.courts.state.ny.us/courts/ad1/ (last visited May 12, 2020); see also Table B—U.S. Courts of Appeals Federal Judicial Caseload Statistics (March 31, 2019), Admin. Office of the U.S. Courts, https://www.uscourts.gov/statistics/table/b/federal-judicial-caseload-statistics/2019/03/31 (last visited May 12, 2020).
[2] Order In the Matter of the Temporary Suspension of Perfection, Filing and other Deadlines During Public Health Emergency, N.Y. App. Div. 1st Dep’t (Mar. 17, 2020), http://www.courts.state.ny.us/courts/ad1/PDFs/Temporary%20Suspension%20Order.pdf [hereinafter March 17 Order].
[3] Order In the Matter of the Rescission of Temporary Suspension Order, N.Y. App. Div. 1st Dep’t (May 8, 2020), https://www.nycourts.gov/courts/AD1/PDFs/RescissionOrder.pdf [hereinafter May 8 Order].
[4] 22 N.Y.C.R.R. 1250.10(a). The May 8 Order also sets a new deadline for filing responding and reply papers to motions that were returnable between March 16, 2020 and May 4, 2020, as discussed in more detail below.
[5] 22 N.Y.C.R.R. 1250.9(a).
[6] 22 N.Y.C.R.R. 1250.9(a), 1250.10(a).
[7] 22 N.Y.C.R.R. 1250.10(a).
[8] 2020 Calendar, New York Supreme Court, Appellate Division – First Department, https://www.nycourts.gov/courts/AD1/2020calendars.shtml (last visited May 12, 2020) [hereinafter 2020 Calendar].
[9] Id.
[10] March 17 Order, supra note 2.
[11] Per the March 17 Order, appellants were still permitted to file opening papers initiating a new appeal, should they choose to do so, but those appeals would not be calendared and respondents’ deadlines for filing opposition papers would not be triggered.
[12] May 8 Order, supra note 3.
[13] 2020 Calendar, supra note 8.
[14] May 8 Order, supra note 3. The May 8 Order also set a new deadline for the filing of responding and reply papers on motions that were returnable between March 16, 2020 and May 4, 2020. Motions in the appellate division include anything from motions to stay trial court proceedings pending appeal and motions for preferences (i.e., an expedited appeal). Generally, a motion is “returnable” on the date that the motion will be heard by the Court. The moving party may choose the specific return date, but motions should generally be made returnable at 10:00 a.m. on any Monday in which the Court is open. 22 N.Y.C.R.R. 1250.4(a)(1); CPLR 2214(b). The deadlines for responding papers and reply papers, if any, are determined based on the return date. 22 N.Y.C.R.R. 1250.4(a)(4), (5); CPLR 2214(b). The March 17 Order suspended all filing deadlines indefinitely, including the deadlines to file responding papers and reply papers to motions. The May 8 Order reinstates applicable filing deadlines, and states that for motions that were made returnable between March 16, 2020 and May 4, 2020, the responding and reply papers must be filed by May 22, 2020.
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 the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Coronavirus (COVID-19) Response Team, or the following authors:
Akiva Shapiro – New York (+1 212-351-3830, [email protected])
Lee R. Crain – New York (+1 212-351-2454, [email protected])
Grace E. Hart – New York (+1 212-351-6372, [email protected])
Jason Bressler – New York (+1 212-351-6204, [email protected])
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