Publications Archives

Dallas partners Andrew LeGrand and Trey Cox and associate Thomas Molloy are the authors of “Best Practices for Texas Lawyers Negotiating Over Email,” [PDF] published by Texas Lawyer on April 24, 2020.

This briefing covers steps sponsors should consider taking when fundraising in the current environment.

Investor Sentiment

Investor interest in private investment funds is generally expected to remain subdued in the months ahead. Based on recent industry surveys:

a majority of surveyed investors are generally open for business or are at least in the market to “re-up” with existing sponsor relationships;
many investors plan to reduce, or are considering reducing, new fund commitments this year;
a minority of investors are proceeding only with investment opportunities that were in progress prior to the pandemic or are pausing investments for the time being;
fundraising is expected to be quite difficult for debut sponsors and sponsors with whom an investor has no pre-existing relationship;
travel restrictions and social distancing measures are key practical barriers hampering investors from meeting in person with sponsors and conducting on-site diligence, which is contributing to a stronger preference for re-ups;
some investors have liquidity concerns given the prospect of smaller distributions and accelerated drawdowns by some sponsors, including to pay down balances under subscription lines; and
due to the public markets “denominator effect,” institutional investors with less flexible portfolio allocation requirements (e.g., pension funds) may need to scale back their alternative investment programs.

These trends may become especially challenging for less established sponsors throughout 2020 and into 2021. Sponsors currently or soon to be fundraising should plan to be proactive in communicating with investors about the impact of the pandemic on their investments and operations.

Offering Materials

Sponsors should update disclosures in fund offering materials to ensure their continued accuracy, including:

Market/industry outlook. Discussion regarding the relevant market or industry may need to be revised to account for material changes in market conditions and expectations.
Track record. Discussion of predecessor fund performance should include disclaimers that prior performance was achieved in different market circumstances. Any detailed financial information should be accompanied by an explanation of any material changes since the relevant measurement dates.
Case studies. Sponsors should revisit whether particular case studies are appropriate under current market conditions and may need to include additional disclaimers or omit such case studies from the offering materials.
Risk factors. Risk factors should be revised to reflect the foreseeable impact of the pandemic (including macro-level and fund-specific risks), as well as other future pandemics or similar disruptions.

Investor Due Diligence

Given investor scrutiny of the impact of the COVID-19 pandemic, sponsors should consider preparing standard responses to potential inquiries, including:

Existing portfolios. What have been the adverse effects on predecessor funds’ portfolios, and what steps has the sponsor been taking in response? Is there an expanded need for follow-on investments or bridge financings with respect to existing portfolio companies under stress from the pandemic?
Pipeline concerns. What is the expected impact on the sponsor’s investment pipeline and ability to deploy capital given travel restrictions that are affecting the ability to conduct onsite research with respect to potential investments, potential changes in cost and availability of financing, risk of deal-level MAC clauses being triggered, and potential delays in closing transactions because of COVID-19 mitigation policies?
Valuation methodology. Should portfolio investments be revalued, or do recent market disruptions make publicly traded share valuations less indicative of fair market value than they normally would be? Any changes with respect to valuation methodology and assumptions need to be clearly disclosed to and discussed with investors.
Business continuity plans and disaster recovery plans. Do the sponsor’s business continuity and disaster recovery plans, both for itself and its portfolio companies, take account of disruptions from this and potentially from other pandemics?
ESG and COVID-19-related community service. How are the sponsor and its portfolio companies helping those most affected by the pandemic?
Information use. Given office closures and work-from-home arrangements, do the sponsor’s IT policies and infrastructure relating to cybersecurity, data privacy and confidentiality meet current challenges, such as affording staff remote VPN access and defending against increased phishing attempts, the emerging videoconference hacking trend, etc.?
Reporting. Does the sponsor have a plan to minimize any potential delays in providing financial reports, including potential delays by portfolio companies in providing information necessary for the sponsor’s funds to complete their financial reports?

Closings

As the fundraising pace is expected to slow over the next several months, sponsors should consider:

Fundraising period. While there are pros and cons, it may be suitable for some sponsors to seek a longer fundraising period (e.g., 18 months instead of 12 months) from the outset rather than having to seek a fundraising period extension later.
Rolling closings. As prospective investors may be subject to disparate constraints and timelines for when they can subscribe, sponsors should consider holding smaller, more frequent closings than usual in order to secure capital as it becomes available in 2020 and into 2021.
Dry closings. Making the initial closing a dry closing (i.e., delaying the commencement of the investment period and the management fee) may provide a time buffer allowing greater flexibility in extending first closing benefits to investors making commitments across a wider initial closing window.

Regulatory Considerations

For marketing efforts into non-U.S. jurisdictions that require regulatory filings or approvals to comply with local private placement rules, sponsors should build in extra time for pre-closing steps. Regulators may be less responsive (or temporarily unresponsive) during the pandemic and could remain backlogged after resuming operations.

Sponsors must consider where prospective investors are physically located in assessing which jurisdiction’s rules will apply to an offering. In particular, as a result of the COVID-19 pandemic, high net worth individuals may not be located in the country where they normally reside.

Communications with Existing Investors

Finally, given expected increased reliance on re-ups in any fundraising process, sponsors should be providing clear, meaningful and more frequent portfolio updates to maintain trust and maximize investor goodwill.

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

John Fadely – Hong Kong (+852 2214-3810, [email protected])
Bill Thomas – Washington, D.C. (+1 202-887-3735, [email protected])
Kevin Heilenday – Washington, D.C. (+1 202-887-3507, [email protected])
Alicia Shi – Hong Kong (+852 2214-3745, [email protected])
Kobe Chow – Hong Kong (+852 2214-3769, [email protected])

Orange County partner Blaine Evanson and Orange County associates Taylor King, Jessica Hudak and Monica Paladini are the authors of “Argued Vs. Submitted Cases At 9th Circ. During Pandemic,” [PDF] published by Law360 on April 24, 2020.

To address the pandemic, the Government announced several sweeping regulations and ushered through the Coronavirus Act 2020. These actions have a broad impact on law, public policy and daily life, impacting areas including health, social welfare, commerce, trade, competition, employment and the free movement of people.

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:

Updates on financial support measures for UK businesses
The pandemic’s effect on the oil and gas market, including the crash in the oil price and key issues facing the industry
Emerging issues in international trade

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

PANELISTS:

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

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

Amar Madhani: A senior associate in the London Corporate M&A practice group of Gibson Dunn. Mr. Madhani’s practice focuses on general corporate and corporate finance transactions, including domestic and international mergers and acquisitions, joint ventures, private equity, venture capital and equity capital markets transactions.

Mitasha Chandok: A senior corporate associate in the Oil and Gas practice group. Ms. Chandok’s experience includes cross-border mergers and acquisitions, joint ventures and project development, routinely advising clients in the energy, natural resources and related infrastructure sectors.

Patrick Doris: A partner in the Disputes Resolution practice group of Gibson Dunn. Mr. Doris’ practice covers a wide range of disputes, including white-collar crime, internal and regulatory investigations, contentious antitrust matters, multi-jurisdictional commercial litigation, administrative law challenges against governmental decision-making before the UK and EU courts, public international law and commercial human rights law matters.

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.

With passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”), Congress unleashed the greatest torrent of aid to private businesses this country has ever seen. Additional waves of assistance also are likely, all of which will spawn a massive, multi-branch oversight effort. And that’s not even counting investigations of alleged profiteering, other false claims, and the government’s response to the pandemic. Until November, a barrage of investigations and oversight will be conducted against the backdrop of the 2020 presidential election. The political reality is sure to intensify oversight efforts, particularly of private businesses that receive CARES Act funds.

This alert describes the various government entities that will oversee and investigate the use of CARES Act funds. It begins with Congress, noting the current and soon-to-be-created committees that will be tasked with, or have jurisdiction to, oversee funds dispersed through the CARES Act. The alert then explores the role that Inspectors General will play in overseeing expenditure of the funds, augmented by two supplemental oversight bodies created under the Act.
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When a Commercial Contract Doesn’t Have a Force Majeure Clause: Common Law Defenses to Contract Enforcement

The rapid spread of the COVID-19 pandemic, and stringent government orders regulating the movement and gathering of people issued in response, continues to raise concerns about parties’ abilities to comply with contractual terms across a variety of industries. As discussed previously here, force majeure clauses may address parties’ obligations under such circumstances. Even without force majeure clauses, depending on the circumstances parties may seek to invalidate contracts or delay performance under the common law based on COVID-19. To assist in considering such issues, we have prepared the following overview. As the analysis of the applicability of any of the doctrines below is fact-specific and fact-intensive, this overview is intended only as a starting point. We encourage you to reach out to your Gibson Dunn contact to discuss specific questions or issues that may arise.
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Congressional Oversight and Investigations

Congressional oversight of the CARES Act and its progeny, as well as the Administration’s response to COVID-19, will be robust and multifaceted. This oversight has already begun, and more is forthcoming. Yesterday, April 23, the House established a select subcommittee to spearhead oversight and investigative efforts. In the Senate, Majority Leader McConnell has designated a CARES Act oversight coordinator. Pursuant to the bill, a bicameral commission is being established to examine implementation of the CARES Act. And at the same time, several committees in both the House and Senate have either begun or announced COVID-related investigations or oversight. As a result of all these efforts, CARES Act and other COVID oversight is likely to dominate the investigative agenda of Congress for this year and likely next.

We look at the various congressional oversight and investigative efforts in the subsections below.

House Select Committee on the Coronavirus Crisis

On April 23, the House of Representatives passed H. Res. 935, a resolution establishing a new bipartisan select investigative subcommittee of the Committee on Oversight and Reform to oversee the Trump administration’s response to the coronavirus pandemic, called the “Select Subcommittee on the Coronavirus Crisis” (“Coronavirus Subcommittee” or “the Subcommittee”).[1]

The Subcommittee will be composed of 12-members, with Speaker Pelosi (D-Calif.) choosing seven members and House Minority Leader Kevin McCarthy (R-Calif.) choosing five.[2] House Majority Whip Jim Clyburn (D-SC) has already been tapped to chair the Subcommittee.[3]

In remarks made on the House floor, Speaker Pelosi indicated that the Subcommittee’s efforts will be mainly directed towards investigating the implementation of the coronavirus stimulus packages and rooting out any sort of profiteering and fraud. Specifically, she stated that the Subcommittee “will be laser-focused on ensuring that taxpayer money goes to workers’ paychecks and benefits and it will ensure that the federal response is based on the best possible science and guided by health experts — and that the money invested is not being exploited by profiteers and price gougers.”[4] And in previous statements, Speaker Pelosi had similarly emphasized that the Committee would focus its attention on “preventing waste, fraud and abuse” and would “protect against price gouging, profiteering and political favoritism.”[5]

It is worth noting, however, that the Coronavirus Subcommittee’s mandate is significantly broader than simply overseeing the implementation of the coronavirus stimulus packages and protecting against profiteering. Indeed, pursuant to H. Res. 935, the Subcommittee has been given an expansive scope and is officially charged with investigating and reporting on the following issues relating to the pandemic:

the efficiency, effectiveness, equity, and transparency of the use of taxpayer funds and relief programs to address the coronavirus crisis;
reports of waste, fraud, abuse, price gouging, profiteering, or other abusive practices related to the coronavirus crisis;
the implementation or effectiveness of any Federal law applied, enacted, or under consideration to address the coronavirus crisis and prepare for future pandemics;
preparedness for and response to the coronavirus crisis, including the planning for and implementation of testing, containment, mitigation, and surveillance activities; the acquisition, distribution, or stockpiling of protective equipment and medical supplies; and the development of vaccines and treatments;
the economic impact of the coronavirus crisis on individuals, communities, small businesses, health care providers, States, and local government entities;
any disparate impacts of the coronavirus crisis on different communities and populations, including with respect to race, ethnicity, age, sex, gender identity, sexual orientation, disability, and geographic region, and any measures taken to address such disparate impacts;
executive branch policies, deliberations, decisions, activities, and internal and external communications related to the coronavirus crisis;
the protection of whistleblowers who provide information about waste, fraud, abuse or other improper activities related to the coronavirus crisis;
cooperation by the executive branch and others with Congress, the Inspectors General, the Government Accountability Office, and others in connection with oversight of the preparedness for the response to the coronavirus crisis; and
any other issues related to the coronavirus crisis.[6]

In short, the Subcommittee is tasked with investigating companies, grant recipients, and the Administration, with respect to matters broadly related to the pandemic.

It is noteworthy that the Subcommittee is authorized to investigate the preparedness for and response to the coronavirus crisis, considering Speaker Pelosi had previously said that the Subcommittee’s mandate would be forward-looking in nature.[7]

While the Subcommittee has a broad scope, Speaker Pelosi’s statements and the nature of the Subcommittee suggest that one of its focuses will be on tracking how the recovery money is distributed and which entities ultimately receive that money. For instance, the Subcommittee will almost certainly review the Paycheck Protection Program (PPP) disbursements, the $349 billion in loan guarantees offered to small businesses under the SBA’s 7(a) program pursuant to the CARES Act as well as an additional $321 billion appropriated for the PPP under a fourth coronavirus package passed on April 23. There already has been considerable negative publicity focused on national hotel and restaurant chains that have received millions of dollars in grants pursuant to the PPP.[8]

Moreover, the fact that Rep. Jim Clyburn has been tapped as the chair also provides some leads on the potential direction and focus of the Committee’s oversight efforts. In response to being named chairman of the Coronavirus Subcommittee, Rep. Clyburn stated he believes “very strongly that we cannot let the assistance directed toward addressing this crisis accrue in an unequitable fashion” and that in previous crises like the Great Depression and other recessions, parts of the country “were left behind, having not been treated equitably.”[9] These statements indicate that Rep. Clyburn will focus the Subcommittee’s attention on investigating whether the Trump administration implements the provisions aimed at providing financial assistance to workers and families as intended, including whether individuals and households receive the additional unemployment insurance funds and direct rebates.

The Subcommittee has been given all the bells and whistles an investigative Chair could desire. The Subcommittee Chair has the authority to issue subpoenas, both for testimony and documents. Staff can take depositions. And, unusually but importantly, the Chair can compel the submission of information via interrogatory.[10] Members can be allotted more than the usual five minutes for questioning during hearings, and the Subcommittee’s staff will be permitted to question witnesses at hearings[11] Of course, there are still questions concerning the feasibility of actually convening hearings in light of the social distancing guidelines put in place in response to the coronavirus crisis. And while there have been some discussions concerning the possibility of holding virtual hearings, it remains to be seen whether Congress would pursue that option.[12]

Several Republican lawmakers voiced their opposition to the formation of the Coronavirus Subcommittee as being duplicative and unnecessary. In particular, Reps. Greg Walden (R-OR), Patrick McHenry (R-NC), and Kevin Brady (R-TX), Ranking Members of the Energy and Commerce, Financial Services, and Ways and Means Committees, respectively, sent Speaker Pelosi a letter on April 23, questioning Pelosi’s claim that the Subcommittee will be bipartisan and noting that “standing committees have the respective institutional knowledge and expertise to ensure the appropriate questions are asked and answered.”[13] Rep. McCarthy had previously voiced similar concerns in response to the Speaker’s initial announcement regarding the Subcommittee.[14] Republicans could choose not to participate in the Subcommittee once it is formed. When the Select Committee on Events Surrounding the 2012 Terrorist Attack in Benghazi (also known as the “Benghazi Committee”) was announced, Democrats initially did not commit to participating in it and a number of Democratic lawmakers suggested that appointing members to the Committee would give credence to an unnecessary and wasteful investigation.[15] Nevertheless, ultimately the Democrats did choose to fully participate in the Benghazi Committee, with Speaker Pelosi reasoning that Democrats could at least have access to pertinent information and a say in determining the direction of the committee’s investigation.[16] It seems similarly unlikely in this scenario that the Republicans would choose to not participate on the Subcommittee.

Other House Oversight and Investigations

It is almost certain that the Subcommittee will not be the only House body to investigate and oversee COVID-related matters. Indeed, committees and lawmakers are already beginning to review and investigate possible fraud, abuse, and/or profiteering related to COVID-19, and it is likely that more investigations will be announced in the near future.

For example, on April 1, Maxine Waters, Chair of the House Committee on Financial Services, sent a letter to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza, stating “[a]ny funds granted through the [PPP] must not be used to pay any debts or obligations to private funds, including management or consulting fees.”[17] Her letter stressed that the purpose of the program is to help companies maintain workforce levels, pay and benefits, and provide workers with a minimum of two weeks paid leave. Other House committees that could oversee different elements of the coronavirus packages include Energy and Commerce, Judiciary, and Ways and Means.

Moreover, there are other aspects of the coronavirus pandemic that Congress is likely to investigate besides the administration and implementation of the stimulus packages. Some of these investigations have already been initiated. For instance, in an April 15 letter Senator Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.) inquired into the role private equity firms have played in decisions made by physician practices that they own.[18] Further, Rep. Raja Krishnamoorthi, a member of the House Committee on Oversight and Reform and Chairman of the Subcommittee on Economic and Consumer Policy, sent a letter on April 15, 2020 requesting documents and information from a corporation regarding its contract to produce low-cost, portable ventilators intended to be stockpiled by the federal government in the event of a pandemic.[19] Similarly, the Democratic members of the Subcommittee on Antitrust, Commercial and Administrative Law, led by House Judiciary Committee Chairman Jerrold Nadler (D-NY) and Antitrust Subcommittee Chairman David N. Cicilline (D-RI), have initiated an inquiry of their own related to the development of ventilators for the national stockpile. On April 10, 2020, those Members sent a letter to the Federal Trade Commission Chairman Joseph Simons requesting documents regarding the FTC’s investigation of a company’s acquisition of a rival medical device manufacturer.[20] Specifically, the request relates to allegations of abandoning a contract to develop inexpensive portable ventilators for the national stockpile.[21]

Senate Oversight and Investigations

While the Republican-controlled Senate is unlikely to conduct as much oversight of the CARES Act as the Democratic-controlled House, we will see oversight and investigative activity. Majority Leader McConnell announced that Chairman Mike Crapo (R-ID) of the Senate Banking Committee will lead and coordinate the Senate’s oversight of the CARES Act.[22] McConnell stated that “[t]he Banking Committee already has jurisdiction over the largest parts of the legislation, including economic stabilization and the Federal Reserve” and that “Chairman Crapo will also work closely with the chairs of other committees of jurisdiction as they supervise their own portions of the CARES Act.” As the Majority Leader suggests, other Senate committees, particularly Homeland Security and Governmental Affairs, Finance, and Small Business & Entrepreneurship, will have jurisdiction over various elements of the coronavirus packages.

It also appears that there will be multiple investigations and other oversight inquiries into the causes of the coronavirus pandemic and the Trump administration’s preparedness for, and initial response to, the pandemic. For example, Senate Homeland Security and Governmental Affairs Committee Chairman Ron Johnson (R-Wis.) has already stated that his committee will begin a probe into the origins and response to the coronavirus pandemic.[23] Johnson added that the probe will focus on why the national stockpile of equipment was not better prepared, why pharmaceutical ingredients and medical devices are manufactured overseas, and the World Health Organization’s response to the virus.

Bicameral Congressional Oversight Commission

Additionally, the CARES Act created the Congressional Oversight Commission (the “Commission”), a bicameral commission composed of five members chosen by the majority and minority leaders of both houses of Congress.[24] Four of the five members of the Commission have already been announced. The Democratic appointments are Donna Shalala (D-FL), a former Health and Human Services secretary, and Bharat Ramamurtri, a former Deputy Policy Director for Economic Policy for Elizabeth Warren, to sit on the Commission.[25] Meanwhile, the Republicans have appointed Senator Pat Toomey (R-PA), a member of the Senate Banking, Budget and Finance Committees, and Rep. French Hill (R-Ark.), a member of the House Financial Services Committee.[26] The Chairperson, who has yet to be named, will be chosen by Pelosi and Senate majority leader Mitch McConnell (R-KY), in consultation with House Minority Leader McCarthy and Senate Minority Leader Chuck Schumer (D-NY).[27]

The Commission’s purpose is to conduct oversight on the implementation of the CARES Act by the Federal Government, including efforts by the Treasury Department and Federal Reserve to “provide economic stability as a result of the coronavirus disease 2019 (COVID–19) pandemic of 2020.”[28] The Commission is responsible for submitting regular reports to Congress focusing on the following elements related to the CARES Act: (i) the use of contracting authority under the CARES Act and the administration of the CARES Act by Treasury and the Federal Reserve; (ii) the impact of loans, loan guarantees, and investments on the financial well-being of U.S. citizens and the U.S. economy; (iii) the extent to which information made available pursuant to the CARES Act has contributed to market transparency; and (iv) the effectiveness of loans, loan guarantees, and investments in minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.[29]

The Commission has the authority to convene hearings, call witnesses, take testimony, hire staff, and meet regularly.[30] Moreover, the chair is empowered to obtain information from any agency by request.[31]

The Commission appears to be similar in some respects to the Financial Crisis Inquiry Commission (FCIC) that was created in response to the financial crisis of 2007-2008, and was responsible for investigating the causes of that financial crisis. The FCIC was composed of ten members that were similarly appointed on a bipartisan and bicameral basis. The FCIC spent more than a year examining the causes of the financial crisis. During that span, it reviewed millions of pages of documents, interviewed more than 700 witnesses, held 19 days of public hearings, and ultimately issued a final report.[32]

Efforts to Create a 9/11-Style Commission

There are currently multiple proposals in both the House and Senate to establish a bipartisan and bicameral commission-style panel to conduct a comprehensive and wide-ranging review of the government’s coronavirus response.[33] For the most part, these plans closely resemble the structure of the 9/11 Commission, which was a ten-member panel, evenly divided between the political parties, dedicated to investigating the failure to prevent the September 11, 2001 terrorist attacks.[34] Like the 9/11 Commission, a number of the proposals would give this panel the power to issue subpoenas and refer any defiance for prosecution.[35] However, a couple of the proposals would not have the panel begin its work until after the 2020 election.[36] Speaker Pelosi has indicated that she is supportive of an after the fact investigation but, as stated above, has emphasized that she is currently more focused on ensuring there is real-time oversight of the implementation of the CARES Act and other coronavirus stimulus packages.[37]

Agency Oversight

In parallel with Congress, Inspectors General (IGs) will play a key role in overseeing the federal pandemic response and expenditure of stimulus dollars. As further detailed below, the CARES Act provides specific funding for Offices of the IG (OIGs) at several agencies and creates two supplemental oversight bodies. This expanded role for IGs in overseeing the expenditure of the CARES Act funds is consistent with oversight mechanisms in past emergency relief packages. Both the Troubled Asset Relief Program (“TARP”) under the Bush administration and the American Recovery and Reinvestment Act of 2009 in the Obama era appropriated substantial funds for OIG oversight. And if history is any indicator, OIGs, and the army of personnel and resources they bring to bear, are likely to be involved in investigations and enforcement actions related to the spending for years to come.[38]

The Role of IGs in Oversight of Federal Spending

Created by Congress through the Inspector General Act of 1978 (“the IG Act”) in the wake of Watergate, IGs are designed to serve as independent agency watchdogs.[39] IGs are tasked with overseeing their respective agency’s programs and operations and keeping agency heads and Congress informed of fraud, waste, and abuse. To accomplish these tasks, Congress has vested IGs with robust investigatory authority. IGs may independently hire staff, access relevant agency records and information, investigate matters without interference by agency heads, and report findings and recommendations directly to Congress.[40] And perhaps the most important information gathering tools an IG has in its arsenal are its subpoena authority and ability to take witness testimony under oath.[41] IG subpoenas can be extremely broad in scope, can be served on private parties, are enforceable in federal court, and offer limited protections to recipients.[42]

Investigatory authority is not the only power that OIGs possess. They also play a significant role in enforcement, both in their own right and by serving as extra sets of eyes and ears for DOJ agents and other regulators. OIGs are staffed with trained, credentialed, and sworn special agents, investigative attorneys, and administrative investigators. The IG Act vests 25 OIGs with law enforcement authority, including the power to carry a firearm and to “seek and execute warrants for arrest, search of premises, or seizure of evidence.”[43] In 2017 alone, OIGs boasted $21.9 billion from investigative receivables and recoveries, as well as 4,383 successful prosecutions and 4,622 suspensions or debarments.[44]

OIG investigations may be initiated based on information received from a variety of sources, including other government agencies, the media, Congress, or whistleblowers. And although OIG investigations are generally inward-facing, government contractors and other recipients of federal funds may find themselves entangled in OIG investigations where they are suspected of involvement in wrongdoing in relation to an agency’s programs and operations. An OIG investigation can even reach companies who do not receive government funding but are believed to have information that may be relevant to allegations of waste, fraud, or abuse in programs that do receive federal dollars.

There are serious collateral risks to receiving an OIG subpoena or otherwise being investigated by an OIG. Whenever an OIG suspects that a federal criminal law has been violated, it may report that information to DOJ for further investigation or prosecution. For civil violations, the OIG may also refer the matter to DOJ for False Claims Act or other enforcement, impose civil penalties under the Program Fraud Civil Remedies Act, and/or refer the matter to their respective agencies for administrative action, including suspension or debarment.

CARES Act Provisions

The CARES Act appropriates over $148 million to OIGs in 14 agencies, and creates two supplemental oversight bodies to augment the IG community: 1) the Office of the Special Inspector General for Pandemic Recovery (“SIGPR”) within the U.S. Department of Treasury, and 2) the Pandemic Response Accountability Committee (“PRAC”).[45]

Existing Offices of Inspector General

Of the $148 million in appropriations for existing IGs, around $120 million of that is earmarked for IGs comprising the PRAC—the agencies that have the greatest roles in spending the stimulus money.[46] The amounts provided under the Act range from $35 million for the OIG at the Treasury Department, responsible for distributing over $500 billion in emergency relief under the Act, to $750,000 for the OIG at the Department of Agriculture, commensurate with their roles in “carrying out investigations and audits related to the funding provided to prevent, prepare for, and respond to coronavirus under [the] Act.”

Oversight of the Paycheck Protection Program

Capitalizing on lessons learned from past bailouts, Inspectors General are likely to be particularly focused on monitoring government lending under the Act, including the $670 billion Paycheck Protection Program (“PPP”) under the Small Business Administration’s (“SBA”) 7(a) program. To facilitate audits and investigations of spending under the program, the CARES Act earmarks $25 million for the OIG at the SBA, more than doubling its current annual budget, to be spent over a four-year period.[47] Given the fact that the SBA processed more loan applications over 14 days than it had in the previous 14 years combined—over 1.6 million applications through nearly 5,000 lenders nationwide when the program ran out of funds on April 16—enforcement after-the-fact is likely to be substantial as the SBA OIG wades through audits and investigations over the next several years.[48]

Failure to comply with the many regulations that attach to lending under the PPP or other programs under the CARES Act could result in fines, penalties, or worse for borrowers that fail to exercise proper diligence in applying for and using the funds from these loans. Although it was designed to make loans for small businesses more broadly and rapidly accessible, the PPP contains complex qualification and utilization criteria for borrowers (e.g., loan forgiveness under the Program is contingent on using the funds for specific purposes), who are responsible for agreeing to a battery of self-certifications–including that the applicant is eligible under the SBA’s PPP guidance.[49] Because borrowers had to quickly navigate complex applications under extraordinarily stressful circumstances to obtain PPP loans before the funds ran out, they will be vulnerable to mistakes in the application process. Thus, SBA OIG audits and investigations related to the PPP are likely to be particularly focused on material false statements in the loan application process, which could give rise to liability under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq. Through the FCA, the government can hold a PPP borrower responsible for up to three times the amount of the SBA loan if it finds the borrower knowingly made a false statement in the loan application or other representations to the government with “reckless disregard” for the truth or falsity of that statement.

As we explained in our April 8 client alert, “Fraud in the COVID-19 Age: Examining and Anticipating Changing Enforcement Activity,” in the aftermath of past crises, DOJ and qui tam relators have vigorously pursued FCA claims targeting entities that benefited from government spending—efforts contributing heftily to the nearly $40 billion that the federal government has recovered under the FCA in the last decade alone.[50] Indeed, DOJ has already signaled that it will prioritize the investigation and prosecution of coronavirus-related fraud schemes, and Attorney General Barr has issued guidance to all U.S. Attorneys to be on the lookout for misconduct.[51]

Special Inspector General for Pandemic Relief

In addition to oversight from existing IGs, the Act established a new Special Inspector General for Pandemic Recovery (“SIGPR”) within the Department of the Treasury. SIGPR has a broad mandate to oversee and audit the making, purchasing, management, and sale of loans, loan guarantees, and other investments made by the Secretary of the Treasury under the Act. To this end, the Act directs SIGPR to collect a list of all businesses that received loans and summarize “the reasons the Secretary determined it to be appropriate to make each loan or loan guarantee under th[e] Act.” The Act allocates $25 million to SIGPR to conduct this oversight.

The Act grants SIGPR the authority provided in Section 6 of the Inspector General Act of 1978. Thus, SIGPR is authorized to subpoena information in the form of documents, reports, and related information.

SIGPR’s oversight will likely receive significant public attention—through a highly political lens. The Act requires SIGPR to submit quarterly reports to “the appropriate committee of Congress.” These reports will be highly scrutinized by Congress and the media. And if the reports raise issues about specific borrowers, this may well spawn congressional investigations into those borrowers or calls for those borrowers to testify.

SIGPR’s duties are similar to the duties of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”). SIGTARP was charged with monitoring, auditing, and investigating funds dispersed through the 2008 Troubled Asset Relief Program. SIGTARP also provided quarterly reports to Congress and testified before numerous congressional committees.

Because of these similarities, SIGPR’s objectives and actions may resemble SIGTARP’s. In its reports to Congress, SIGTARP often emphasized statistics about the funds recovered from its investigations and the number of enforcement actions brought based on its investigation. Indeed, today SIGTARP’s website cites the number of individuals sent to prison based on its investigations (300).[52] The site also notes that SIGTARP investigations led to 24 enforcement actions against institutions, many of which are widely recognized companies.[53] SIGPR will likely channel its investigative efforts in a similar manner, hoping to expose (and recoup funds from) borrowers’ fraud or waste. And SIGPR’s oversight efforts may well focus on well-known private companies, as investigations into such companies will likely generate significant interest in SIGPR’s efforts. Finally, like SIGTARP, SIGPR will likely refer conduct uncovered during its investigations to government agencies with civil or criminal enforcement power.

Moreover, Congress is sure to pay close attention to SIGPR. In fact, Congress’ interest in SIGPR is already on display. President Trump recently nominated Brian Miller to serve as SIGPR. Miller currently serves as Special Assistant to the President and Senior Associate Counsel in the White House Counsel’s Office. Previously, Miller served as the Inspector General for the General Services Administration (“GSA”). In this role, he led a high-profile investigation into wasteful spending at a GSA conference in Las Vegas.[54] The head of GSA resigned because of the investigation.[55]

Miller’s nomination requires confirmation by the Senate, and Miller has already garnered significant criticism from Democrats. Senate Minority Leader Schumer, for example, called Miller “exactly the wrong type of person to choose for this position.”[56] Speaker Pelosi echoed this sentiment, saying: “The Inspector General providing oversight of the federal response of this historic relief package for workers and families must be independent from politics. The President’s nomination of one of his own lawyers clearly fails that test.”[57] Politically charged attacks against Miller make it more likely that Congress—particularly the Democratic-controlled House—will contend that it cannot rely on SIGPR to oversee CARES Act funds and, in turn, must conduct direct oversight of the CARES Act through investigations and hearings. Speaker Pelosi’s announcement of the House select committee exemplifies this dynamic.

There also may be tension between SIGPR’s oversight duties and the Trump Administration. Many new stories, for example, have scrutinized the signing statement President Trump issued regarding Section 4018(e)(4)(B) of the Act, which states that if “information or assistance requested by” SIGPR is “unreasonably refused or not provided,” SIGPR shall report that “without delay” to the appropriate congressional committees. President Trump’s signing statement noted that he did not understand, and his Administration would not treat, “this provision as permitting the SIGPR to issue reports to the Congress without the presidential supervision required by the Take Care Clause, Article II, section 3.”[58] This statement reflects long-standing separation of powers disputes regarding the independence of IGs, which are members of the Executive Branch. Indeed, questions arose during the Obama Administration (and prior administrations) regarding the authority and independence of IGs.[59] Still, President Trump’s signing statement may foreshadow complex internal dynamics between SIGPR and politically appointed leaders of the Treasury Department, or more generally between SIGPR and the White House.

Pandemic Response Accountability Committee

The Inspector General Reform Act of 2008 established the Council of Inspectors General on Integrity and Efficiency (“CIGIE”) to coordinate and oversee the IG community. The CARES Act requires CIGIE to establish a Pandemic Response Accountability Committee (“PRAC”) to “conduct and coordinate oversight of covered funds and the Coronavirus response.” Under the Act, the Chairperson of CIGIE, which currently is Department of Justice Inspector General Michael Horowitz, selects the Chair of PRAC. The other PRAC members are the Inspectors General of the Departments of Defense, Education, Health and Human Services, Homeland Security, Justice, Labor, and the Treasury; the Inspector General of the Small Business Administration; the Treasury Inspector General for Tax Administration; and any other Inspector General, as designated by the Chairperson from any agency that expends or obligates covered funds or is involved in the Coronavirus response.

PRAC will have an Executive Director and a Deputy Executive Director. The CARES Act provides that these appointments shall be made within 30 days of the Act’s passage by the Chair of PRAC, “in consultation with the majority leader of the Senate, the Speaker of the House of Representatives, the minority leader of the Senate, and the minority leader of the House of Representatives.” This reference to congressional coordination spurred another signing statement from President Trump, which said that any requirement for an Executive Branch Committee to consult with Congress would violate Article II of the Constitution.[60]

PRAC has already sparked political controversy. On March 30, CIGIE Chair Horowitz appointed Glenn Fine as Chair of PRAC. At the time, Fine was the Deputy Inspector General of the Department of Defense, but he was serving as the Acting Inspector General of the Department of Defense. Yet a week later, President Trump appointed a new Department of Defense Inspector General, Jason Bend, and designated a new Acting Inspector General at the Department of Defense, current Environmental Protection Agency Inspector General Sean O’Donnell. That meant that Fine was no longer on PRAC—and consequently could not serve as Chair. Democratic politicians claimed that this was yet another attempt by President Trump to thwart efforts to oversee the CARES Act. CIGIE Chair Horowitz has not yet appointed a new Chair of PRAC.

More substantively, CIGIE has announced that PRAC will “work closely with” other IGs to “ensure that the funds intended to support individuals, workers, healthcare professionals, businesses and others affected by the pandemic are used efficiently, effectively, and in accordance with the law.”[61] To do so, the CARES Act provides PRAC with significant resources and authority. In terms of resources, PRAC receives $80 million under the Act, which far exceeds the $25 million allocated to SIGPR. In terms of authority, in addition to powers under Section 6 of the Inspector General Act, PRAC has subpoena power over persons who are not federal officers or employees. This is significant, and it will enable PRAC to compel testimony from private individuals and companies.

Like SIGPR, PRAC is required to draft numerous reports about its oversight efforts. Specifically, PRAC is required to submit to the President and Congress management alerts on management risks and funding problems. PRAC is also required to submit biannual reports to the President and Congress summarizing PRAC’s activities. Finally, PRAC is permitted to submit to Congress “other reports or provide such periodic updates on the work of the Committee as the Committee considers appropriate.”

The precise role PRAC will play in oversight of CARES Act funds is uncertain, in part because PRAC is somewhat novel. No similar oversight committee was created to oversee funds dispersed under TARP. PRAC may play a supporting role, coordinating efforts between various IGs. Alternatively, PRAC may assert an independent role, using its subpoena power and funding to initiate broad-ranging investigations that cut across multiple agencies. Either way, PRAC’s existence increases the likelihood that IGs will collaborate and initiate joint investigations.

* * *

In the aftermath of the COVID-19 crisis and the torrent of aid that is flowing to mitigate its damage, businesses who receive funds under the CARES Act will face an unprecedented level of scrutiny by multiple congressional committees and agency oversight bodies. Indeed, companies that have stumbled through the gauntlet of complex certification and utilization requirements attached to lending under the Act’s various programs are already coming under investigation. Gibson Dunn lawyers regularly counsel clients on issues raised by this pandemic, and are available to assist with any questions you may have regarding CARES Act oversight and enforcement.

____________________

[1] H. R. 935, 116th Cong. (2020).

[2] Id at § 2.

[3] Press Release, Speaker’s Press Office, Apr. 2, 2020, available at https://www.speaker.gov/newsroom/4220.

[4] Kyle Cheney, House creates new select coronavirus oversight committee over GOP objections, Apr. 23, 2020, available at https://www.politico.com/news/2020/04/23/house-creates-coronavirus-oversight-committee-204316.

[5] Supra note 3.

[6] Supra note 1, § 3.

[7] Ramsey Touchberry, What Is Pelosi’s Coronavirus Committee? Why Overseeing Covid-19 Money Will Be Met With Hurdles, April 3, 2020, available at https://www.newsweek.com/what-pelosis-coronavirus-committee-why-overseeing-covid-19-money-will-met-hurdles-1496014.

[8] Jonathan O’Connell, White House, GOP face heat after hotel and restaurant chains helped run small business program dry, April 20, 2020, available at https://www.washingtonpost.com/business/2020/04/20/white-house-gop-face-heat-after-hotel-restaurant-chains-helped-run-small-business-program-dry.

[9] Press Release, Office of the Majority Whip, Apr. 3, 2020, available at https://www.majoritywhip.gov/?press=majority-whip-clyburn-statement-on-being-named-chairman-of-the-house-select-committee-on-the-coronavirus-crisis-2.

[10] Supra note 1, § 4.

[11] Id.

[12] Michael Thorning, Virtual Congressional Hearings: Could They Work? Six Recommendations, Mar. 27, 2020, available at https://bipartisanpolicy.org/blog/virtual-congressional-hearings-could-they-work-six-recommendations/.

[13] Press Release, Patrick McHenry, Ranking Republican, House Committee on Financial Services, McHenry, Walden, Brady Oppose Pelosi’s Plan to Create Partisan COVID-19 Oversight Subcommittee, Apr. 23, 2020, available at https://republicans-financialservices.house.gov/uploadedfiles/2020-04-23_gop_rankers_to_pelosi.pdf.

[14] Burgess Everett & Marianne Levine, Senate Republicans plan coronavirus probe — with a focus on China, Apr. 13, 2020, available at https://www.politico.com/news/2020/04/13/senate-republicans-coronavirus-probe-china-184206

[15] Josh Hicks, Schiff: Benghazi select committee a ‘colossal waste of time’, May 4, 2014, available at https://www.washingtonpost.com/news/post-politics/wp/2014/05/04/schiff-benghazi-select-committee-a-colossal-waste-of-time/?arc404=true.

[16] Jennifer Steinhauer & Jonathan Weisman, Pelosi Picks 5 Democrats for Panel on Benghazi, May 21, 2014, available at https://www.nytimes.com/2014/05/22/us/politics/bucking-deputies-pelosi-picks-5-democrats-for-benghazi-panel.html.

[17] Press Release, House Committee on Financial Services, April 2, 2020, available at https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=406477.

[18] Isaac Arnsdorf, Medical Staffing Companies Cut Doctors’ Pay While Spending Millions on Political Ads, Apr. 20, 2020, available at https://www.propublica.org/article/medical-staffing-companies-cut-doctors-pay-while-spending-millions-on-political-ads.

[19] Press Release, House Committee on Oversight and Reform, Krishnamoorthi Seeks Documents on Ventilators Meant to Supply Federal Stockpile, April 15, 2020, available at https://oversight.house.gov/news/press-releases/krishnamoorthi-seeks-documents-on-ventilators-meant-to-supply-federal-stockpile.

[20] Press Release, House Judiciary Committee, Nadler, Cicilline, and Antitrust Subcommittee Democrats Demand Answers on FTC Approval of Covidien’s Acquisition of Newport Medical Instruments, Apr. 10, 2020, available at https://judiciary.house.gov/news/documentsingle.aspx?DocumentID=2914.

[21] Id.

[22] Press Release, Senate Majority Leader’s Press Office, Apr. 17, 2020, available at https://www.republicanleader.senate.gov/newsroom/press-releases/mcconnell-announces-oversight-plans-for-historic-cares-act-.

[23] Burgess Everett & Marianne Levine, Senate Republicans Plan Coronavirus Probe – with a focus on China, Apr. 13, 2020, available at https://www.politico.com/news/2020/04/13/senate-republicans-coronavirus-probe-china-184206.

[24] Coronavirus Economic Stabilization Act of 2020, Pub. L. No. 116-136 § 4020.

[25] Kyle Cheney & Melanie Zanona, Pelosi, McConnell name picks to serve on coronavirus oversight panel, Apr. 17, 2020, available at https://www.politico.com/news/2020/04/17/french-hill-coronavirus-oversight-panel-192660.

[26] Id.

[27] Pub. L. No. 116-136 § 4020(c).

[28] Pub. L. No. 116-136 § 4020(b).

[29] Id.

[30] Pub. L. No. 116-136 § 4020(e).

[31] Id.

[32] Rock Center for Corporate Governance, available at http://fcic.law.stanford.edu/.

[33] Kyle Cheney, Lawmakers fight for a piece of coronavirus ‘9/11 Commission’, Apr. 6, 2020, available at https://www.politico.com/news/2020/04/06/congress-coronavirus-commission-168195; Press Release, Senator Dianne Feinstein’s Newsroom, Apr. 10, 2020, available at https://www.feinstein.senate.gov/public/index.cfm/press-releases?ID=8FFEB75D-F6BB-4138-BD68-2B5629335340.

[34] Id.

[35] Id.

[36] Id.

[37] Mike Lilis, Pelosi forms House committee to oversee coronavirus response, Apr. 2, 2020, available at https://thehill.com/homenews/house/490798-pelosi-forms-house-committee-to-oversee-coronavirus-response.

[38] In FY 2017, approximately 13,000 employees at 73 OIGs conducted audits, inspections, evaluations, and investigations. See CIGIE’s Annual Report to the President and Congress, Fiscal Year 2017, available at https://www.oversight.gov/sites/default/files/cigie-reports/FY17_Annual_Report_to_the_President_and_Congress.pdf.

[39] See generally Kathryn A. Francis, Cong. Research Serv., R45450, Statutory Inspectors General in the Federal Government: A Primer (2019), available at https://fas.org/sgp/crs/misc/R45450.pdf.

[40] Id.

[41] The IG Act authorizes IGs to subpoena information in the form of documents, reports, and related information. See 5 U.S.C. app. 3 §6(a)(4).

[42] Federal courts have enforced IG administrative subpoenas where “the subpoena (1) is within the IG’s statutory authority; (2) seeks information reasonably relevant to the inquiry; and (3) is not unreasonably broad or burdensome.” See United States v. Westinghouse, 788 F.2d 164, 171 (3d Cir. 1986).

[43] Pub. L. No. 107-296, § 812; listed in 5 U.S.C. Appendix (IG Act) §6(f); see generally Wendy Ginsberg, Cong. Research Serv., R43722, Offices of Inspectors General and Law Enforcement Authority: In Brief (Sept. 2014), available at https://fas.org/sgp/crs/misc/R43722.pdf. Relevant to CARES Act oversight, the OIGs for the Departments of Labor and Treasury, as well as the SBA, are among those vested with Law Enforcement Authority.

[44] Council of the Inspectors General on Integrity and Efficiency, Annual Report to the President and Congress, Fiscal Year 2017, published January 3, 2019, available at https://www.oversight.gov/sites/default/files/cigie-reports/FY17_Annual_Report_to_the_President_and_Congress.pdf.

[45] In addition to the provisions related to OIGs, the Act allocates $20 million to the Government Accountability Office (“GAO”) and provides a mandate for GAO reports to Congress on all expenditures of funds under the act, including monthly briefings to congressional committees on the implementation of the new law, as well as quarterly reports to the public.

[46] The PRAC includes Inspectors General of the Departments of Defense, Education, Health and Human Services, Homeland Security, Justice, Labor, and the Treasury; the Inspector General of the Small Business Administration; the Treasury Inspector General for Tax Administration; and any other Inspector General, as designated by the Chairperson from any agency that expends or obligates covered funds or is involved in the coronavirus response.

[47] See SBA, Office of Inspector General, FY 2019 Congressional Budget Justification, available at https://www.sba.gov/sites/default/files/2019-08/FY_2019_CBJ_Office_of_Inspector_General.pdf.

[48] See Robin Saks Frankel, The Paycheck Program Ran Out of Funding. What’s Next for Small Business Owners?, Apr. 16, 2020, available at https://www.forbes.com/sites/advisor/2020/04/16/the-paycheck-protection-program-ran-out-of-funding-whats-next-for-small-business-owners; see also SBA’s Agency Financial Report: Fiscal Year 2019, available at https://www.sba.gov/sites/default/files/2019-12/SBA_FY_2019_AFR-508.pdf (“In FY 2019, the SBA approved more than 58,000 loans in the 7(a) and 504 loan programs, providing [approximately] $28 billion to small businesses.”).

[49] SBA, Paycheck Protection Program Interim Final Rule- Additional Eligibility Criteria and Requirements for Certain Pledges of Loans, Apr. 14, 2020, available at https://www.sba.gov/document/policy-guidance–ppp-interim-final-rule-additional-eligibility-criteria-requirements-certain-pledges-loans.

[50] Fraud in the COVID-19 Age: Examining and Anticipating Changing Enforcement Activity (Apr. 8, 2020), available at https://www.gibsondunn.com/fraud-in-the-covid-19-age-examining-and-anticipating-changing-enforcement-activity.

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

[52] SIGTARP Investigations By the Numbers, Office of the Special Inspector General for the Troubled Asset Relief Program, available at https://www.sigtarp.gov/Pages/Home.aspx.

[53] Id.

[54] Alexander Abad-Santos, GSA Threw an $800,000 Party and All You Got Was the Bill, The Atlantic, Apr. 3, 2012, available at https://www.theatlantic.com/politics/archive/2012/04/gsa-threw-800000-party-and-all-you-got-was-bill/329797/.

[55] Lesa Jensen, GSA head resigns over ‘wasteful’ Las Vegas seminar, CNN, Apr. 2, 2012, available at https://www.cnn.com/2012/04/02/politics/gsa-head-resigns/index.html.

[56] Press Release, Senate Democrats, Apr. 4, 2020, available at https://www.democrats.senate.gov/newsroom/press-releases/schumer-statement-on-nomination-of-brian-miller-to-be-special-inspector-general-for-pandemic-recovery.

[57] Press Release, Speaker’s Press Office, Apr. 6, 2020, available at https://pelosi.house.gov/news/press-releases/pelosi-statement-on-nomination-of-white-house-lawyer-as-inspector-general-for.

[58] Remarks by President Trump at Signing of H.R.748, The CARES Act, Oval Office, Mar. 27, 2020, available at https://www.whitehouse.gov/briefings-statements/remarks-president-trump-signing-h-r-748-cares-act/.

[59] See Obama Administration Frustrates Inspectors General on Records Access, Government Executive, Feb. 3, 2015, available at govexec.com/management/2015/02/obama-administration-frustrates-inspectors-general-records-access/104496/.

[60] More specifically, President Trump’s statement said that required consultation with Congress would “violate[] the separation of powers by intruding upon the President’s power and duty to supervise the staffing of the executive branch under Article II, section 1 (vesting the President with the ‘executive Power’) and Article II, section 3 (instructing the President to ‘take Care’ that the laws are faithfully executed).”

[61] Press Release, CIGIE, Apr. 1, 2020, Additional Inspectors General Designated As Members of CIGIE’s Pandemic Response Accountability Committee, available at https://www.ignet.gov/sites/default/files/files/PRAC-press-release-additional-members.pdf.

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 contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team or the following authors:

Authors: Michael Bopp, Stuart Delery, Roscoe Jones*, Benjamin Belair, Luke Sullivan, and Crystal Weeks

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

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

Impossibility of Performance

The doctrine of impossibility is available where performance of a contract is rendered objectively impossible.[1] In assessing whether impossibility of performance applies to your situation and your contract, it is useful first to determine whether the jurisdiction applicable to your contract or dispute has codified the doctrine. As in California, the statutory language might provide guidance to or place limitations on its applicability.[2]

A party seeking to invoke the impossibility doctrine under common law must show that the impossibility was produced by an unanticipated event and the event could not have been foreseen or guarded against in the contract.[3] Courts have held that impossibility of performance during times of emergency or disaster has generally excused performance on the basis of governing law, governmental regulations, or the disruption of transportation or communication networks. However, the economic consequences of those events do not necessarily permit a claim of impossibility.

A handful of cases from the early 20th century which discuss epidemics in connection with school closures and resulting performance failures under teacher contracts are divided on whether performance was excused.[4] Federal courts have excused performance for impossibility where, in times of war, manufacturers prioritized governmental orders issued under the Defense Production Act.[5] In the wake of the September 11, 2001 terrorist attacks, courts excused performance resulting from the effective lockdown of communications in New York City.[6]

In New York, the doctrine is narrowly construed and is limited to specific circumstances, including “the destruction of the means of performance by an act of God, vis major, or by law.”[7] Thus, it will be necessary to evaluate the impact of any governmental orders relating to COVID-19, or any applicable court orders, to assess their impact on any given contract. The First Appellate Division of New York previously found that performance of music recording and management contracts was objectively impossible after a court ordered that the parties could not have any contact with each other.[8] There, the means of performance was made impossible by operation of law—the court’s order that the parties cease contact.

By contrast, historically, performance has not been excused where the impossibility or difficulty was caused “only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy.”[9] Certain New York courts have rejected claims of impossibility related to an economic downturn with the explanation that “the risk of changing economic conditions or a decline in a contracting party’s finances is part and parcel of virtually every contract.”[10]

Commercial Impracticability of Performance

As with impossibility, the doctrine of commercial impracticability may also be available where performance is rendered impracticable. The treatment and availability of commercial impracticability varies significantly across states, with some treating it as its own standalone defense and others including it under the umbrella of the impossibility defense.[11] But regardless of the form it takes, many states that recognize commercial impracticability as a defense have adopted the Restatement (Second) of Contracts Section 261, or similar language, which provides that a party’s duty to perform under a contract is excused where “performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.”[12] Looking to Section 261 for guidance, one Hawaii court found that fear and uncertainty in the aftermath of the September 11, 2001, by themselves, were insufficient grounds for showing impracticability.[13]

As in the case of the doctrine of impossibility, the impracticability at issue must be the product of unforeseen events. In general, mere economic loss or hardship is insufficient to render performance impracticable because courts generally treat it as foreseeable.[14] However, in some circumstances the defense may be available where performance “can only be done at an excessive and unreasonable cost.”[15]

The Uniform Commercial Code, which has been adopted as law in most states, covers commercial contracts, including contracts related to the sale and leasing of goods, commercial paper, banking transactions, letters of credit, auctions and liquidations of assets, storage and bailment of goods, securities, financial assets and secured transactions. For a transaction governed by the UCC, the defense of commercial impracticability may apply where performance “has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.”[16]

Frustration of Purpose

The doctrine of frustration of purpose may be available where “a change in circumstances makes one party’s performance virtually worthless to the other,” thereby frustrating the principal purpose in making the contract.[17] Whether or not frustration of purpose applies depends on the precise wording of the contract but, in any event, the frustration itself must be “substantial.”[18] Or, in other words, “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”[19]

Similar to the doctrines of impossibility and impracticability, frustration of purpose is applied narrowly and is limited to instances where the event rendering the contract valueless is unforeseeable.[20] It has been most commonly applied by courts upon the death or incapacity of a person necessary for performance, the destruction or deterioration of a thing necessary for performance, or a change in the law that prevents a person from performing.[21]

Moreover, as with the doctrine of impossibility, frustration of purpose does not usually apply merely “because it becomes more economically difficult to perform.”[22] For example, a New York federal district court rejected an argument that losses prevented the defendant from being able to pay the plaintiff because “[t]he application of the frustration of purpose doctrine in such circumstances would ‘place in jeopardy all commercial contracts.’”[23]

Consequences of Successful Defense

If one of the above defenses were deemed to apply, the duties of the party asserting the defense may be discharged.[24] However, if impossible or impracticable performance were temporary in duration, these doctrines generally would excuse performance only for so long as the disabling condition persisted. In addition, if performance were excused, courts could potentially grant quantum meruit claims of the counterparty, in order to equitably adjust for gains and losses sustained by the parties. This could require the excused party to reimburse the counterparty for expenses incurred in expectation of the performance.[25]

We expect all of these doctrines to be tested in the context of the COVID-19 pandemic and the associated governmentally mandated shutdowns and other actions. We will continue to monitor developments in this regard and are available to discuss if you have any questions.

[1] See Kel Kim Corp. v. Central Mkts., 70 N.Y.2d 900, 902 (1987).

[2] For example, under the California Civil Code, performance is excused when a party “is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.” Cal. Civ. Code § 1511(2).

[3] Kel Kim Corp., 70 N.Y.2d at 902; see also, e.g., Citadel Builders, LLC v. Transcon. Realty Inv’rs, Inc., 2007 WL 1805666, at *4 (E.D. La. June 22, 2007) (noting that although hurricanes are foreseeable events in New Orleans during the summer, impossibility defense was available because Hurricane Katrina and her aftermath “devastated th[e] area in ways beyond what anyone predicted”); Gregg School Tp., Morgan Cty. v. Hinshaw, 76 Ind. App. 503 (Ind. App. Ct. 1921) (performance excused due to legally mandated school closure related to Spanish Influenza).

[4] Phelps v. School District No. 109, Wayne County, 302 Ill. 193, 198 (1922) rejected the defense on the basis that the closure had been foreseeable. Gregg School Tp., Morgan County, 76 Ind. App. 503, however, excused performance because the law of the land (which allowed closure of schools) was part of every contract.

[5] Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 996 (5th Cir. 1976); U.S. for Use and Benefit of Caldwell Foundry & Mach. Co. v. Texas Const. Co., 224 F.2d 289, 293 (5th Cir. 1955).

[6] See, e.g., Bush v. Protravel Int’l, Inc., 192 Misc.2d 743, 750 (N.Y. Civ. Ct. 2002) (acknowledging impossibility defense may be available where communications and transportation networks damaged by September 11, 2001 terrorist attack in New York City).

[7] Kolodin v. Valenti, 115 A.D.3d 197, 200 (N.Y. App. Div. 1st Dep’t 2014).

[8] Id.

[9] 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281 (N.Y. 1968); see also Stasyszyn v. Sutton E. Assocs., 161 A.D.2d 269, 271 (N.Y. App. Div. 1st Dep’t 1990) (absent an express contingency clause “compliance is required even where the economic distress is attributable to the imposition of governmental rules and regulations” rendering performance more costly “or the inability to secure financing”).

[10] Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 27 Misc. 3d 1222(A) (N.Y. Sup. Ct. Albany Cty. 2010), aff’d, 88 A.D.3d 1224 (N.Y. App. Div. 3d Dep’t 2011); Urban Archaeology Ltd. v. 207 E. 57th St. LLC, 68 A.D.3d 562, 562 (N.Y. App. Div. 1st Dep’t 2009) (doctrine not available because “economic downturn could have been foreseen or guarded against in the [contract]”).

[11] Courts in New York and California both treat impracticability as a form of the impossibility defense. See Axginc Corp. v. Plaza Automall, Ltd., 2017 WL 11504930, at *8 (E.D.N.Y. Feb. 21, 2017), aff’d, 759 F. App’x 26, 29 (2d Cir. 2018) (New York courts do not recognize “commercial impracticability as a separate defense to the doctrine of impossibility; rather, impracticability is treated as a type of impossibility and construed in the same restricted manner.”); Emelianenko v. Affliction Clothing, 2011 WL 13176615, at *28 (C.D. Cal. June 7, 2011) (“The enlargement of the meaning of ‘impossibility’ as a defense [] to include ‘impracticability’ is now generally recognized.”).

[12] E.g., LECG, LLC v. Unni, 2014 WL 2186734, at *6 (N.D. Cal. May 23, 2014), aff’d, 667 F. App’x 614 (9th Cir. 2016) (California); Waddy v. Riggleman, 216 W. Va. 250, 258 (W. Va. 2004) (West Virginia); Tractebel Energy Mktg., Inc. v. E.I. Du Pont De Nemours & Co., 118 S.W.3d 60, 65 (Tex. App. 14th Dist. 2003) (Texas); Step Plan Servs., Inc. v. Koresko, 12 A.3d 401, 414 (Pa. Super. Ct. 2010) (Pennsylvania).

[13] OWBR LLC v. Clear Channel Comm’cs, Inc., 266 F. Supp. 2d 1214, 1222 (D. Haw. 2003) (analyzing impracticability doctrine in context of contract containing force majeure provision).

[14] See, e.g., Karl Wendt Farm Equip. Co. v. Int’l Harvester Co., 931 F.2d 1112, 1117 (6th Cir. 1991) (dramatic downturn in farm equipment market causing defendant to go out of business did not excuse unilateral termination of its dealership agreements due to commercial impracticability).

[15] Emelianenko, 2011 WL 13176615, at *28; see also City of Vernon v. City of Los Angeles, 45 Cal.2d 710, 720 (1955).

[16] U.C.C. § 2-615(a); see also, e.g., Cal. Com. Code § 2615 (codifying language of U.C.C. § 2-615).

[17] PPF Safeguard, LLC v. BCR Safeguard Holding, LLC, 85 A.D.3d 506, 508 (N.Y. App. Div. 1st Dep’t 2011) (citing Restatement (Second) of Contracts § 265 (1981)). The Restatement (Second) of Contracts § 265 provides that “[w]here, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.” The Restatement commentary further explains that Section 265 requires that (1) the purpose that is frustrated was a “principal purpose” in making the contract, such that without it the transaction “would make little sense”; (2) the frustration is substantial; and (3) the non-occurrence of the frustrating event was a basic assumption on which the contract was made. Restatement (Second) of Contracts § 265, cmt. a.

[18] Crown IT Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 265 (N.Y. App. Div. 1st Dep’t 2004).

[19] Id.

[20] Crown IT Servs., 11 A.D.3d at 265; A + E Television Networks, LLC v. Wish Factory Inc., 2016 WL 8136110, at *12 (S.D.N.Y. Mar. 11, 2016); Warner v. Kaplan, 71 A.D.3d 1, 6 (N.Y. App. Div. 1st Dep’t 2009) (frustration of purpose “is not available where the event which prevented performance was foreseeable and provision could have been made for its occurrence”).

[21] Bayou Place Ltd. P’ship v. Alleppo’s Grill, Inc., 2020 WL 1235010, at *8 (D. Md. Mar. 13, 2020); see also Warner, 71 A.D.3d at 6.

[22] A + E Television Networks, 2016 WL 8136110, at *13.

[23] Id. (quoting 407 E. 61st Garage, Inc., 23 N.Y.2d at 282).

[24] In the event that a court rejects such defenses, a party found to be in breach of a contract may still raise the counterparty’s failure to mitigate its damages as an alternative defense or option for reducing any prospective damages award. See U.S. Bank Nat. Ass’n v. Ables & Hall Builders, 696 F. Supp. 2d 428, 440-41 (S.D.N.Y. 2010) (“In a breach of contract action, a plaintiff ordinarily has a duty to mitigate the damages that he incurs. If the plaintiff fails to mitigate his damages, the defendant cannot be charged with them.”).

[25] D & A Structural Contractors Inc. v. Unger, 25 Misc.3d 1211(A) (N.Y. Sup. Ct. Nassau Cty. 2009).

Gibson Dunn’s lawyers are available to assist with questions you may have regarding developments related to the COVID-19 outbreak. We regularly counsel clients on issues raised by this pandemic in the commercial context. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team, the Gibson Dunn attorney with whom you work, or the following authors:

AUTHORS: Shireen Barday, Mary Beth Maloney, Rahim Moloo, Hannah Kirshner, and Robert Banerjea

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

We hope that everyone is staying safe and healthy during these unprecedented times. This update provides an overview and summary of key class action developments during the first quarter of 2020 (January through March).

Part I covers three appellate interpretations of the U.S. Supreme Court’s decision in Bristol-Myers Squibb Co. v. Superior Court of California, 137 S. Ct. 1773 (2017), and whether federal courts may exercise personal jurisdiction over the claims of absent class members.

Part II reviews several critical appellate decisions relating to whether absent class members must have Article III standing, as well as further developments on the issue of Article III standing in class actions after Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).

Part III discusses a Ninth Circuit decision denying discovery to find a new class representative.

Part IV analyzes two recent decisions addressing the certification of classes alleging claims under California’s Unfair Competition Law and False Advertising Law.

_____________________

**I. Appellate Courts Begin to Consider How Bristol-Myers Applies to Class Actions**

This quarter, appellate courts wrestled for the first time with the application of Bristol-Myers Squibb Co. v. Superior Court of Cal., 137 S. Ct. 1773 (2017), to class actions.

In Bristol-Myers, the Supreme Court held that the scope of a state court’s power to exercise personal jurisdiction over a defendant requires a connection between the defendant’s activity in the forum state and the specific claims in the litigation. As we detailed in a prior client alert, a group of plaintiffs (including California and non-California residents) filed a mass tort suit in California alleging that all had been injured by a drug produced by defendant, which was incorporated in Delaware and headquartered in New York. The Supreme Court held that California could not exercise jurisdiction over the claims brought by non-residents because there was no connection between the forum and those claims.

As Justice Sotomayor noted in her dissent, the Court did “not confront the question whether its opinion here would also apply to a class action in which a plaintiff injured in the forum State seeks to represent a nationwide class of plaintiffs, not all of whom were injured there.” Id. at 1789 n.4 (Sotomayor, J., dissenting). Three federal circuit courts have now weighed in on this question, and have reached varied conclusions.

In Mussat v. IQVIA, Inc., 953 F.3d 441 (7th Cir. 2020), the plaintiff, an Illinois professional medical services corporation, received from the defendant two unsolicited faxes that failed to include the opt-out notice required by the Telephone Consumer Protection Act. Id. at 443. The plaintiff then brought a putative class action in Illinois on behalf of a nationwide class who had received similar unsolicited faxes. Id. The district court struck the class definition, reasoning that, under Bristol-Myers, absent class members each had to show minimum contacts between the defendant and the forum state when the defendant is not subject to general jurisdiction in the forum state. Id.

The Seventh Circuit reversed the order granting the motion to strike, holding that because Bristol-Myers was a mass tort action and not a class action, its principles “do not apply to the case of a nationwide class action filed in federal court under a federal statute.” Id. It reasoned that in a mass tort action, all plaintiffs are considered “parties,” because mass tort actions represent a consolidation of all possible individual claims. Id. at 447. In class actions, by contrast, the “proper characterization of the status of absent class members depends on the issue,” id., and absent class members “are not considered parties for assessing whether the requirement of diverse citizenship” has been met or “when a court decides whether it has the proper venue.” Id. The court explained “[w]e see no reason why personal jurisdiction should be treated any differently from subject-matter jurisdiction and venue: the named representatives must be able to demonstrate either general or specific jurisdiction, but the unnamed class members are not required to do so.” Id.

The D.C. Circuit took a different approach in Molock v. Whole Foods Market Group, 952 F.3d 293 (D.C. Cir. 2020). There, the court granted an interlocutory appeal after a district court denied a defendant’s motion to dismiss all non-resident putative class members for lack of personal jurisdiction. It held that the motion to dismiss was premature (because the class had not yet been certified) and declined to reach the question of whether a court may assert specific personal jurisdiction over putative class action claims of unnamed non-resident class members. Like the Seventh Circuit, the D.C. Circuit noted the unique status of putative class members, stating that they are “always treated as nonparties.” Id. at 297 (emphasis in original). “Putative class members become parties to an action—and thus subject to dismissal—only after class certification.” Id. at 298.

Judge Silberman dissented, explaining that “the party status of absent class members seems to me to be irrelevant,” because “a court’s assertion of jurisdiction over a defendant exposes [the defendant] to that court’s coercive power, so such an assertion must comport with due process of law.” Id. at 307. He went on to say that whenever a court exercises its coercive power, a defendant is “entitled to due process protections—including limits on assertions of personal jurisdiction—with respect to all claims in a class action for which judgment is sought.” Id. While the judges may have disagreed about whether Bristol-Myers bars claims by non-resident putative class members at the pleading stage, the D.C. Circuit, unlike the Seventh Circuit, did not appear to reject outright the possibility that Bristol-Myers could be relevant at the class certification stage and potentially bar non-residents from being part of the class.

The Fifth Circuit took a similarly proceduralist approach in Cruson v. Jackson National Life Insurance Company, 954 F.3d 240 (5th Cir. 2020). Like the D.C. Circuit in Molock, the Fifth Circuit ruled that any decision relating to a court’s jurisdiction over the claims of non-resident putative class members must wait until certification. Specifically, the court held that a defendant who did not raise a defense of personal jurisdiction as to non-resident putative class members in its Rule 12 motion had not waived the defense because that defense was not yet “available” against non-resident putative class members who “were not yet before the court” when the Rule 12 motion was filed. Id. at 250. Whether or not the Fifth Circuit will rule that Bristol-Myers bars courts from asserting jurisdiction over claims brought by non-resident individuals in a class action remains an open question.

Because most circuits have not definitively resolved whether a Bristol-Myers challenge is appropriate at the pleadings stage, defendants should continue to assert such arguments early in the case to avoid a finding of waiver.

II. Courts Consider the Interplay Between Article III Standing and Class Actions

In the opening months of 2020, federal appellate courts issued decisions addressing whether and when absent class members and named plaintiffs must satisfy the United States Constitution’s standing requirements, as well as what types of concrete injuries are necessary to establish standing in the wake of Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).

In Flecha v. Medicredit, Inc., 946 F.3d 762 (5th Cir. 2020), the Fifth Circuit considered whether absent class members must establish standing at the class-certification stage—a question that, as we explained in a previous update, continues to divide the federal courts of appeal. Unfortunately, however, the Fifth Circuit ultimately declined to provide a clear answer. In that case, the plaintiff brought a putative class action under the Fair Debt Collection Practices Act on behalf of a putative class of all Texans who had received a purportedly misleading debt-collection letter from defendant. Id. at 765. While the court acknowledged that “there are undoubtedly many unnamed class members here who lack the requisite injury to establish Article III standing,” the court concluded that it did not (and ought not) reach the question because the putative class could not be certified under Rule 23 in any event. Id. at 768–69. But Judge Oldham wrote separately to note his view that “Article III is just as important in class actions as it is in individual ones,” and that a putative class that includes absent members who lack standing should not be certified. Id. at 771 (Oldham, J., concurring) (citations and quotation marks omitted).

Consistent with Judge Oldham’s concurrence, the Ninth Circuit held in Ramirez v. Transunion LLC, 951 F.3d 1008 (9th Cir. 2020), that “each member of a class certified under Rule 23 must satisfy the bare minimum of Article III standing at the final judgment stage of a class action in order to recover monetary damages in federal court.” Id. at 1023. Citing Chief Justice Roberts’s observation that “‘Article III does not give federal courts the power to order relief to any uninjured plaintiff, class action or not,’” id. at 1023 (quoting Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1053 (2016) (Roberts, C.J., concurring)), the court reasoned that a contrary rule would “transform the class action—a mere procedural device—into a vehicle for individuals to obtain money judgments in federal court even though they could not show sufficient injury to recover those judgments individually,” id. at 1023–24.

Although Ramirez limited the obligation of absent class members to establish Article III standing to the “final judgment stage” of a class action, it cautioned that “district courts and parties should keep in mind that they will need a mechanism for identifying class members who lack standing at the damages phase” when they consider class certification. Id. at 1023 n.6. This decision provides a strong basis for arguing that a class may not be certified in the first place—or must be decertified—where there is no manageable method for ultimately assessing absent class members’ standing. That reading of Ramirez would align the Ninth Circuit with the Eleventh Circuit’s decision last year in Cordoba v. DIRECTV, LLC, 942 F.3d 1259 (11th Cir. 2019), which vacated a class-certification order where “individualized questions” about which class members had standing “may predominate over common issues susceptible to class-wide proof.” Id. at 1275, 1277.

In addition to analyzing when absent class members must prove they have standing, Ramirez also analyzed what kind of injury suffices, and it held that each of the absent class members had suffered a concrete injury under Article III under a “two-part inquiry” that asks “(1) whether the statutory provisions at issue were established to protect [the plaintiff’s] concrete interests (as opposed to purely procedural rights), and if so, (2) whether the specific procedural violations alleged . . . actual harm, or present a material risk of harm to, such interests.” 951 F.3d at 1025 (quotations omitted). In Ramirez, a credit-reporting agency allegedly violated the Fair Credit Reporting Act (“FCRA”) by misidentifying class members as potential terrorists and drug traffickers. Id. at 1022. Although not all class members’ credit reports were actually disclosed to third parties, the Ninth Circuit reasoned that the FCRA was enacted to protect consumers’ concrete interests and “the fact that TransUnion made the reports available to numerous potential creditors,” along with “the highly sensitive and distressing nature of the OFAC alerts,” was “sufficient to show a material risk of harm to the concrete interests of all class members.” Id. at 1027.

The Ninth Circuit offered another glimpse into how it will evaluate Article III’s “concrete injury” requirement post-Spokeo in Campbell v. Facebook, Inc., 951 F.3d 1106 (9th Cir. 2020), which involved claims that Facebook violated various privacy statutes by allegedly misusing private messages sent by users on the social-networking platform. (Gibson Dunn represented Facebook in this litigation.) Although the primary issue in the case involved an appeal of a class action settlement, following Spokeo and Frank v. Gaos, the Ninth Circuit ordered supplemental briefing after expressing doubt at oral argument that the named plaintiffs suffered any actual injury in fact, given that the challenged practices had ceased long ago. Id. at 1116. The court noted that where “we deal with an ‘intangible harm’ that is linked to a statutory violation, we are guided in determining concreteness by ‘both history and the judgment’” of the legislature. Id. Tracking its analysis in last year’s decision in Patel v. Facebook, 932 F.3d 1264 (9th Cir. 2019), and relying heavily on its post-Spokeo decision, the court wrote that because “[t]he harms protected by the[] statutes bear a ‘close relationship’ to ones that have ‘traditionally been regarded as providing a basis for a lawsuit,’” including intrusion upon the seclusion of another, the plaintiffs had Article III standing even without a tangible harm. Id. at 1117. This conclusion was confirmed by the fact that, “under the privacy torts that form the backdrop for these modern statutes, ‘[t]he intrusion itself makes the defendant subject to liability.’” Id. Determining that the named plaintiffs had Article III standing, the Ninth Circuit affirmed the District Court’s decision approving the class settlement.

III. The Ninth Circuit Holds That Discovery Cannot Be Used to Find a Named Plaintiff Before a Class Action Is Certified

The Ninth Circuit recently confronted a recurring issue in class action litigation—whether and to what extent the federal discovery process may be used to secure a new named plaintiff before class certification. In a significant win for defendants, In re: Williams-Sonoma, Inc., 947 F.3d 535 (9th Cir. 2020), held that “using discovery to find a client to be the named plaintiff before a class action is certified is not within the scope of Rule 26(b)(1).” Id. at 540.

The original plaintiff in the matter, a Kentucky resident, filed a putative class action against Williams-Sonoma in California, alleging that he had been injured by his purchase of deceptively advertised bedding. Id. at 537. Before a class was certified, however, the district court determined that Kentucky law, which prohibits class actions, governed his claims. Id. at 538. Because the named plaintiff could no longer represent the class, the district court ordered Williams-Sonoma to produce a “list of all California customers who purchased bedding products of the type referred to in [plaintiff’s] complaint” since January 2012. Id. Defendants sought a writ of mandamus, and the Ninth Circuit—which rarely grants such requests—reversed, concluding that the order was clearly erroneous because it ran afoul of the Supreme Court’s decision in Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340 (1978), and Federal Rule of Civil Procedure 26(b)(1), which limits discovery to “matter that is relevant to any party’s claim or defense.” Id. at 539 (quotation marks omitted). Because “seeking discovery of the name of a class member” is not “relevant” within the meaning of Rule 26 where a class has not been certified, the discovery was impermissible. Id.

Defendants should invoke Williams-Sonoma’s gatekeeping rationale to prevent burdensome fishing expeditions by plaintiffs in search of a more suitable named plaintiff before class certification.

IV. Appellate Courts Wrestle with the Issue of “Exposure” in California Unfair Competition and False Advertising Class Actions

During the first quarter of 2020, the Ninth Circuit and California Court of Appeal took divergent approaches to a recurring issue in class actions under California’s Unfair Competition Law (“UCL”) and False Advertising Law (“FAL”): whether class members have been “exposed” to the allegedly misleading representations at issue.

In Downey v. Public Storage, Inc., 44 Cal. App. 5th 1103 (2020), the California Court of Appeal held that plaintiffs in an FAL lawsuit must prove that exposure and deception are “susceptible of common proof.” Id. at 1119–20. The plaintiffs in that case brought a putative class action claiming that “Public Storage’s $1 promotional rate was deceptive.” Id. at 1111. The trial court denied class certification because many class members had not been exposed to the allegedly deceptive advertisements and the advertisements were not uniform. Id. at 1112.

The California Court of Appeal affirmed, holding that California’s “community of interest” requirement for class certification demands in a false advertising case that exposure and deception be susceptible of common proof. Id. at 1115. The plaintiffs did not satisfy this requirement chiefly because the evidence showed that customers could have purchased storage without seeing the allegedly misleading advertisements. Id. at 1117. The court also credited the fact that many of the advertisements contained disclosures which, as Public Storage showed, actually impacted consumers’ choices. Id. at 1118–19.

Under Federal Rule 23(b)(3), plaintiffs must show “that the questions of law or fact common to class members predominate over any questions affecting only individual members.” Fed. R. Civ. P. 23(b)(3). California applies a similar requirement. Applied in UCL and FAL cases, this requires a showing of classwide exposure to the allegedly misleading statements, such that it is subject to common proof. Here, the court rejected the plaintiffs’ argument that In re Tobacco II Cases, 46 Cal. 4th 298 (2009), a leading California Supreme Court case on the issue of exposure and reliance, “abrogated the requirements of exposure and deception.” Public Storage, 44 Cal. App. 5th at 1120. The court reasoned that Tobacco II chiefly concerned the standing requirements for the named plaintiff, not California’s community of interest requirement and its mandate that exposure and deception be susceptible of common proof.

The Ninth Circuit, meanwhile, held that if the defendant in a UCL case raises questions as to whether members of the class have been “exposed” to a particular representation, a district court has discretion to define the class in a way that automatically gives rise to a presumption of reliance on the allegedly misleading statement, and need not necessarily deny class certification. Walker v. Life Ins. Co. of the Sw., 953 F.3d 624, 634 (9th Cir. 2020).

There, a proposed class sued an insurance seller, alleging that its illustrations forecasting financial returns were misleading. Id. at 627. Some customers received a “pre-application” illustration of projected returns before or at the same time they applied for a policy, while others received a “batch” illustration of projected returns after approval of a policy application. Id. Sidestepping the practical difficulties of identifying which putative class members were exposed to which illustration, the district court defined the class by limiting it to customers who received the pre-application illustration, thereby embedding the exposure issue into the class definition. Id. at 628. As a matter of first impression, the Ninth Circuit held that a court can define a class in a way that “automatically gives rise to a presumption of reliance.” Id. at 634.

The different outcomes in these cases seemed to turn on whether it was possible to identify which putative class members had been exposed to the representations at issue. In Walker, the class could be limited to those people who receive the “pre-application” illustration, which meant classwide exposure was assured. In Downey, by contrast, there was a far broader range of statements alleged to be at issue, and determining who saw which statements and when was not possible without individualized inquiries. Defendants facing putative UCL and FAL class actions should keep this distinction in mind.

The following Gibson Dunn lawyers contributed to this client update: Christopher Chorba, Theane Evangelis, Kahn Scolnick, Bradley Hamburger, Michael Holecek, Lauren Blas, Samuel Eckman, Emily Riff, and Warren Loegering.

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

Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (+1 213-229-7000, [email protected])
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, [email protected])
Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7726, [email protected])
Kahn A. Scolnick – Los Angeles (+1 213-229-7656, [email protected])
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, [email protected])

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

As oil and gas companies enter the first quarterly reporting cycle in the current industry downturn, please join members of Gibson Dunn’s Securities Regulation and Corporate Governance, Capital Markets, Business Restructuring and Oil and Gas Practice Groups as they provide both practical advice and information about the latest legal developments. Specifically, the panelists discuss:

Disclosure considerations for your first quarter earnings release and Form 10-Q
Navigating securities laws and good governance during a crisis
Planning for hostile bids, shareholder activism and related defenses
Fulfilling fiduciary duties in the challenging environment

View Slides (PDF)

PANELISTS:

Hillary H. Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s Securities Regulation and Corporate Governance, Oil and Gas, M&A and Private Equity practice groups. Ms. Holmes advises companies in all sectors of the energy industry on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws and corporate governance issues. She represents issuers, underwriters, MLPs, private investors, management teams and private equity firms in all forms of capital markets transactions. She also advises boards of directors, special committees and financial advisors in transactions and situations involving complex issues and conflicts of interest.

James J. Moloney is a partner in the Orange County office of Gibson Dunn and serves as Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group. His practice focuses primarily on securities offerings, mergers & acquisitions, friendly and hostile tender offers, proxy contests, going-private transactions and other corporate matters. Mr. Moloney was with the SEC in Washington, D.C. for six years before joining Gibson Dunn. He served his last three years at the Commission as Special Counsel in the Office of Mergers & Acquisitions in the Division of Corporation Finance. In addition to reviewing merger transactions, Mr. Moloney was the principal draftsman of Regulation M-A, the comprehensive set of rules relating to takeovers and shareholder communications. He advises a wide range of public companies on reporting and other obligations under the securities laws, the establishment of corporate compliance programs, and continued compliance with corporate governance standards under the securities laws and stock exchange rules.

Ronald Mueller is a partner in the Washington, D.C. office of Gibson Dunn and a founding member of the firm’s Securities Regulation and Corporate Governance practice group. He advises public companies on a broad range of SEC disclosure and regulatory matters, executive and equity-based compensation issues, and corporate governance and compliance issues and practices. He advises some of the largest U.S. public companies on SEC reporting, proxy disclosures and proxy contests, shareholder engagement and shareholder proposals, and insider trading and Section 16 reporting and compliance. He also advises on many corporate governance matters, including governing documents for companies, boards, and board committees, such as bylaws and committee charters, director independence and related party transaction issues, and corporate social responsibility.

Michael A. Rosenthal is a partner in the New York office of Gibson, Dunn & Crutcher and Co-Chair of Gibson Dunn’s Business Restructuring and Reorganization Practice Group. Mr. Rosenthal has extensive experience in reorganizing distressed businesses and related corporate reorganization and debt restructuring matters. He has represented complex, financially distressed companies, both in out-of-court restructurings and in pre-packaged, pre-negotiated and freefall chapter 11 cases, acquirors of distressed assets and investors in distressed businesses. Mr. Rosenthal’s representations have spanned a variety of business sectors, including investment banking, private equity, energy, retail, shipping, manufacturing, real estate, engineering, construction, medical, airlines, media, telecommunications and banking.

Gerry Spedale is a partner in the Houston office of Gibson, Dunn & Crutcher. He has a broad corporate practice, advising on mergers and acquisitions, joint ventures, capital markets transactions and corporate governance. He has extensive experience advising public companies, private companies, investment banks and private equity groups actively engaging or investing in the energy industry. His over 20 years of experience covers a broad range of the energy industry, including upstream, midstream, downstream, oilfield services and utilities.

MCLE INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 0.5 credit hour, of which 0.5 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

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

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

GLOBAL OVERVIEW

Frequently Asked Questions to Assist Small Businesses and Nonprofits in Navigating the COVID-19 Pandemic

COVID-19 has been a pandemic of historic proportions, one that has required extreme public health measures, causing many individuals to stay at home and most businesses to close. Inevitably, these measures have resulted in severe and unprecedented economic hardships, especially to small businesses and nonprofits. As we all attempt to cope with the impact of the pandemic, the uncertainty faced by small businesses and nonprofits is especially acute. While there is an abundance of information being made available by both public authorities and private advisors, many people—and particularly those in smaller organizations, are simply being overwhelmed by this tidal wave of rapidly changing information.

This FAQ is intended to provide an overview of potential resources and considerations in several key areas that we believe are particularly important to small businesses and nonprofits. It addresses a number of recent legislative and regulatory developments promulgated in response to the pandemic, as well as considerations that are relevant to ongoing operations.
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COVID-19: Further Developments on the UK Financial Conduct Authority’s Expectations of Solo-Regulated Firms

In light of the significant impact of COVID-19, the UK Financial Conduct Authority (“FCA”), like many other regulatory authorities globally, has introduced a number of temporary measures impacting financial services firms. As can be seen even over the course of the last week, the FCA has made further announcements which: (i) are targeted at ensuring the financial resilience of solo-regulated firms; (ii) reduce certain short-term burdens placed on firms by permitting extensions for regulatory return filings; and (iii) clarify the FCA’s expectations regarding the use of electronic signatures. This client alert provides an overview of the impact of these announcements on FCA solo-regulated firms.
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COVID-19 United Kingdom Weekly Webinar – April 27, 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.

Our team of Gibson Dunn London lawyers, led by partner and former Lord Chancellor Charlie Falconer QC, will discuss these changes and answer your questions on how they will affect British businesses and community, including the impact on new and ongoing business relationships. This webinar will cover updates on financial support measures for UK businesses; the pandemic’s effect on the oil and gas market, including the crash in the oil price and key issues facing the industry; and emerging issues in international trade.
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Now Available: COVID-19 Resources for Public Companies

Recognizing that public companies continue to be inundated with developing disclosure and governance requirements due to the COVID-19 pandemic, Gibson Dunn has created a list (with hyperlinks) of recent publications, releases, guidance, updates, and other useful resources from the SEC, PCAOB, NYSE, Nasdaq, proxy advisory firms, institutional investors, various state governors, and other relevant entities. This list will be updated as new resources are released. The most current version can be accessed by clicking here or the “COVID-19 Resources for Public Companies.pdf” link in the upper right corner of the main page of the Securities Regulation and Corporate Governance Monitor.
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NYSE and Nasdaq Propose Temporary Waivers of Certain Market Capitalization and Trading Price Listing Requirements

In light of the market downturn and similar to action taken in the Great Recession, the NYSE and Nasdaq have proposed temporary waivers of certain market capitalization and trading price listing requirements.
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PCAOB Update – PCAOB Seeks Input on CAMs and Comments on Emerging Markets

Over the past several days, the PCAOB has taken a number of steps to make clear that it remains active during the COVID-19 crisis. For example, after issuing only one settled enforcement order during the first three months of 2020, the PCAOB has issued two settled orders in the past week. Both concerned smaller firms, but they serve to demonstrate that the Board is still carrying out its enforcement mandate.

Two other recent actions by the PCAOB also are worth highlighting: on April 17, the PCAOB requested comment from stakeholders on the implementation of its critical audit matters (CAM) standard, and on April 21, PCAOB Chairman William Duhnke, together with SEC Chairman Jay Clayton and other SEC leadership, issued a statement concerning emerging market risks. We review both of these developments below.
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Decided April 23, 2020

County of Maui v. Hawaii Wildlife Fund, No. 18-260

Today, the Supreme Court held 6-3 that the Clean Water Act requires a permit for the indirect discharge of pollutants from point sources to navigable waters via nonpoint sources, such as groundwater, if the discharge is the functional equivalent of a direct discharge.

Background:
The County of Maui disposes of treated wastewater by injecting it into groundwater through wells. Some of the wastewater eventually reaches the Pacific Ocean. Several environmental groups sued the County under the Clean Water Act, which prohibits the “discharge of any pollutant” into navigable waters without a permit. 33 U.S.C. §§ 1311(a), 1342. This permitting requirement applies only to pollutants discharged into navigable waters from a “point source”—that is, “any discernible, confined and discrete conveyance” such as a “pipe” or “container.” Id. § 1362(12), (14). The requirement does not apply to the discharge of pollutants from nonpoint sources such as groundwater. Although the County’s wastewater entered the Pacific Ocean from a nonpoint source (groundwater), the district court held that the County was required to obtain a permit because the wastewater originated in a point source (the well). The Ninth Circuit affirmed, holding that the indirect discharge of pollutants through a nonpoint source into navigable waters requires a permit if the pollutants are “fairly traceable” from the point source to navigable waters. After the Ninth Circuit’s decision, the EPA issued a new interpretive statement announcing its position that the Act does not require permits for any discharge via groundwater, although it might require permits for other indirect discharges. The United States defended that position and supported the County as an amicus curiae.

Issue:
Does the Clean Water Act require a permit for the discharge of pollutants that originate from a point source but are conveyed to navigable waters by a nonpoint source?

Court’s Holding:
Sometimes. If the discharge is functionally equivalent to a direct discharge from a point source into navigable waters, then the Clean Water Act requires a permit.

“Whether pollutants that arrive at navigable waters after traveling through groundwater are ‘from’ a point source depends upon how similar to (or different from) the particular discharge is to a direct discharge.”

Justice Breyer, writing for the Court

Gibson Dunn submitted an amicus brief on behalf of Energy Transfer Partners, L.P. in support of petitioner County of Maui

What It Means:

The Court purported to find its own “middle ground” between the positions of the parties. The Court rejected the Ninth Circuit’s “fairly traceable” test, the environmental groups’ test requiring a permit if a discharge from a point source “proximately caused” pollutants to enter navigable waters, the EPA’s groundwater-specific position, and the County’s bright-line rule that indirect discharges via nonpoint sources never require a permit.
The Court did not apply its standard to the facts of the case, and it expressly left open the question of when an indirect discharge is “functionally equivalent” to a direct discharge. The Court explained that the lower courts can resolve this question in “individual cases” using “the traditional common-law method.”
The Court directed judges to consider the Act’s “underlying statutory objectives,” and identified seven factors that may be relevant: (1) how long it takes the pollutants to reach navigable waters, (2) how far they travel, (3) what materials they flow through, (4) the extent to which they are diluted or chemically changed in transit, (5) the portion of the discharge that reaches navigable waters, (6) the manner by or area in which the pollutant enters the navigable waters, and (7) whether the pollutants maintain their specific identity. The Court stated that the first two factors, time and distance, will be “the most important” in most but not all cases.
The Court emphasized that “Congress thought that the problem of groundwater pollution, as distinct from navigable water pollution, would primarily be addressed by the States or perhaps by other federal statutes.” Statements like this may support a narrow interpretation of the Court’s new standard in cases involving groundwater.

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]

Miguel A. Estrada
+1 202.955.8257
[email protected]

Related Practice: Environmental Litigation and Mass Tort

Daniel W. Nelson
+1 202.887.3687
[email protected]

Stacie B. Fletcher
+1 202.887.3627
[email protected]

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

Decided April 23, 2020

Romag Fasteners, Inc. v. Fossil, Inc., No. 18-1233

Today, the Supreme Court unanimously held that under the Lanham Act, proof of willful trademark infringement is not a precondition to a mark holder’s recovery of the infringer’s profits.

Background:
Romag Fasteners, Inc. sells magnetic snaps used in handbags, including handbags manufactured and distributed by Fossil, Inc. Romag sued Fossil for trademark infringement under the Lanham Act after discovering that Fossil’s Chinese manufacturer had used counterfeit snaps bearing the Romag mark. Among other remedies, Romag sought an award of Fossil’s profits from sales of the infringing handbags under Section 35(a) of the Lanham Act, 15 U.S.C. § 1117(a). A jury found Fossil liable for trademark infringement. The jury also found that, although Fossil acted “in callous disregard” of Romag’s trademark rights, Fossil did not willfully infringe Romag’s trademarks. The district court held that Romag’s failure to prove willful infringement barred an award of profits under Section 35(a), and the Federal Circuit affirmed.

Issue:
Whether, under Section 35(a) of the Lanham Act, 15 U.S.C. § 1117(a), willful infringement is a precondition for an award of an infringer’s profits for a violation of Section 43(a), id. § 1125(a).

Court’s Holding:
No. A trademark defendant’s state of mind is a “highly important consideration” in determining whether to award profits, but willfulness is not an “inflexible precondition” to such an award.

“[W]e do not doubt that a trademark defendant’s mental state is a highly important consideration in determining whether an award of profits is appropriate. But acknowledging that much is a far cry from insisting on [an] inflexible precondition to recovery.”

Justice Gorsuch, writing for the Court

What It Means:

The Court’s decision resolves a split between circuits as to the role that a finding of willfulness plays in determining whether to award a disgorgement of profits in trademark infringement cases, and brings the circuits that had promulgated categorical rules (such as the Second, Eighth, Ninth, and Tenth Circuits) into line with the circuits that have considered willfulness to be only a factor to consider in making the determination. It therefore strengthens the hands of trademark owners in seeking monetary remedies from parties found liable for creating a likelihood of consumer confusion, but also confirms that willfulness is a “highly important” factor for courts to consider.
It remains to be seen whether the Court’s decision will meaningfully increase the number of profits awards in cases involving reckless, negligent, or innocent infringement.
The Court’s decision does not alter the express statutory requirement that willfulness be proven to obtain an award of profits in trademark dilution cases brought under Section 43(c) of the Lanham Act, 15 U.S.C. U.S.C. § 1125(c).

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

Allyson N. Ho
+1 214.698.3233
[email protected]

Mark A. Perry
+1 202.887.3667
[email protected]

Related Practice: Intellectual Property

Wayne Barsky
+1 310.552.8500
[email protected]

Josh Krevitt
+1 212.351.4000
[email protected]

Mark Reiter
+1 214.698.3100
[email protected]

Howard S. Hogan
+1 202.887.3640
[email protected]

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

In light of the significant impact of COVID-19, the UK Financial Conduct Authority (“FCA”), like many other regulatory authorities globally, has introduced a number of temporary measures impacting financial services firms. As can be seen even over the course of the last week, the FCA has made further announcements which:

are targeted at ensuring the financial resilience of solo-regulated firms;
reduce certain short-term burdens placed on firms by permitting extensions for regulatory return filings; and
clarify the FCA’s expectations regarding the use of electronic signatures.

This client alert provides an overview of the impact of these announcements on FCA solo-regulated firms.

FCA’s expectations relating to the financial resilience of firms

The FCA has updated its statement on its expectations of the financial resilience of FCA solo-regulated firms given the COVID-19 pandemic. The FCA has stressed the importance of the role played by firms prudentially regulated by it in supporting the functioning of the economy. It emphasised that firms should meet this responsibility by planning ahead and ensuring the sound management of their financial resources. This should, in part, be achieved through taking appropriate steps to conserve capital and plan for how to meet potential demands on liquidity (see the FCA website).

Capital and liquidity buffers

The FCA flagged that firms that have been set capital and liquidity buffers can use them to support the continuation of the firm’s activities (albeit that the firm should contact the FCA if it is planning to draw down such a buffer).

Wind-down plans

Wind-down plans should consider the impact of COVID-19 and, should a firm need to wind-down, the firm should consider how to do so in an orderly way and take steps to reduce harm to both consumers and the market.

Firms concerned that they will be unable to meet their capital requirements or debts as they fall due should contact the FCA with their plan for the immediate period ahead, as should firms whose wind-down plans have identified material execution risks.

Discretionary distributions of capital

The FCA adds a note of caution to firms considering whether to make a discretionary distribution of capital to fund a share buy-back, fund a dividend, upstream cash or meet a variable remuneration decision. It expects firms and their boards to satisfy themselves that each distribution is prudent given market circumstances and consistent with their risk appetite. The FCA specifically states that it would not expect firms to distribute capital that could credibly be required to absorb losses over the coming period.

Whilst this announcement is unlikely to be particularly controversial, it should give firms food for thought, particularly those considering taking steps such as those referred to above (for example, funding a dividend out of a discretionary distribution of capital). A key message to be drawn out from the announcement relates to firms being proactive in their communications with the regulator, for example (as noted above), where a firm is concerned that it will be unable to meet its capital requirements.

FCA grants extension for regulatory return filings

The FCA has extended submission deadlines for a number of regulatory returns. Certain returns have been given a 1-month extension and others a 2-month extension. This applies for submissions which are due up to and including 30 June 2020. Returns not specifically referred to by the FCA in its announcement do not have an extended deadline.

By way of an example, if a return is due on 22 May 2020 but a 2-month extension has been granted for this particular type of return, the submission will need to be completed by 22 July 2020. The FCA has noted that if the extended deadline date falls on a weekend, the submission is instead due the following working day. The table below details the full list of extensions granted.

1 month extension

2 month extension

COR001A (Own funds)
COR001B (COREP Leverage Ratio)
COR002 (COREP LE)
COR003 (COREP NSFR)
COR005 (Asset Encumbrance)
FRP001 (FINREP)
FSA004 (Breakdown of Credit Risk Data)
FSA005 (Market Risk)
FSA007 (Operational Risk)
FSA008 (Large Exposures)
FSA014 (Forecast Data from Firms)
FSA017 (Interest rate gap report)
FSA018 (UK integrated group – Large Exposures (UK integrated group))
FSA019 (Pillar 2 Information)
FSA055 (Systems and Controls Questionnaire)
REP005 (High Earners Report)
RMA-D2 (Financial Resources)

FIN-A (annual report and accounts)
Annual financial reports (as required under Disclosure Guidance and Transparency Rules)
Credit union complaints return (CREDS 9 Annex 1R)
Complaints return (DISP Annex 1R)
Claims management companies complaints return (DISP 1 Annex 1AB)

This announcement also follows the FCA’s statement that it is allowing fund managers an additional two months to publish their annual reports. This is one of several instances in which the FCA has exercised supervisory flexibility specifically in a fund management context over the course of the last month (further details are available here). This flexibility does not, however, extend as far as changing the usual deadlines for reporting transparency information to the FCA under the AIFMD Level 2 Regulation (Regulation 231/2013/EU).

FCA expectations regarding wet ink signatures

The FCA has also recently released a statement on its expectations (or lack of) with regard to wet ink signatures. In relation to agreements, the FCA has emphasised that its rules do not explicitly require wet ink signatures. Likewise, the rules do not generally prevent the use of electronic signatures. The position ultimately comes down to a matter of law, which should be considered before use of electronic signatures (see our signing checklist, available here).

Firms should, nonetheless, consider related requirements under the FCA Handbook. For example, firms should consider the client’s best interests rule (COBS 2.1.1R) and the fair, clear and not misleading rule (COBS 4.2.1R) to ensure that, when a client electronically signs a document, this does not make it more difficult for the client to understand what they are agreeing to. For FCA forms, the FCA has provided that firms may use electronic signatures.

Authors: Michelle Kirschner, Martin Coombes and Chris Hickey

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

Thank you for your interest in Gibson Dunn’s Securities Regulation and Corporate Governance Practice. Below is a recent posting to our Securities Regulation and Corporate Governance Monitor blog:

Now Available: COVID-19 Resources for Public Companies

___________________

VIEW BLOG

Please also feel free to contact any of the editors and members of the Securities Regulation and Corporate Governance Monitor.

On Monday, April 20, 2020, the U.S. Supreme Court granted certiorari in Van Buren v. United States, No. 19-783, to address a decade-long circuit split regarding the scope of the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030, a statute the Supreme Court has never before interpreted and that is routinely invoked in both criminal and civil settings. The case gives the Court an opportunity to decide whether a person or entity legitimately authorized to access a computer for one purpose, but accesses it for some other unauthorized purpose, violates the CFAA. The case has far-reaching implications for how millions of Americans interact with websites and use the Internet, including shaping potential criminal and civil liability for individuals who violate commonplace terms of service or exceed the scope of authorized use of their employer-provided email, computers, and databases. It also has implications for companies drafting or revising their terms of service, updating their employee Internet or email policies, or engaging in business operations that may be seen as data “scraping,” among other situations.

Statutory Background

Congress first enacted Section 1030 in 1984, long before worldwide access to the Internet existed and before personal computers became ubiquitous. The purpose of the statute was to deter “the activities of so-called ‘hackers’ who” were accessing “both private and public computer systems.” H.R. Rep. No. 98-894, at 10 (1984). Two years later, Congress amended the statute, and it became known as the CFAA. Over the years, Congress has further amended the statute to cover a broad range of “protected” computers, which include servers and other technologies connected to the Internet.

The CFAA covers multiple types of unlawful computer access and, in relevant part, provides that “[w]hoever . . . intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains . . . information from any protected computer,” commits a federal crime and may face civil liability. 18 U.S.C. § 1030(a)(2). The phrase “exceeds authorized access,” which is an operative clause in a number of the provisions in the statute, is defined as: “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” Id. § 1030(e)(6); see also id. § 1030(a)(1), (2), (4), (7). A “protected computer” is any computer that “is used in or affect[s] interstate or foreign commerce or communication of the United States.” Id. § 1030(e)(2)(B).

Violations of the CFAA can result in both criminal and civil liability. A criminal conviction under the “exceeds authorized access” provision of the CFAA is typically a misdemeanor, but can be a felony punishable by fines and imprisonment of up to five years in certain situations, including where the offense was committed for “commercial advantage or private financial gain.” Id. § 1030(c)(2)(A), (B).

Importantly, the statute also authorizes civil suits for compensatory damages and injunctive or other equitable relief by parties who show, among other things, that a violation of the “exceeds authorized access” provision caused them to “suffer[ ] damage or loss.” Id. § 1030(g). That provision is often invoked in civil suits around the country.

Circuit Split

For years, the courts of appeals have split over whether a person “exceeds authorized access” under Section 1030(a)(2) by using authorized computer access for an unauthorized purpose.

On the one hand, the Second, Fourth, and Ninth Circuits have taken a narrow view, holding that a person “exceeds authorized access” only if he accesses information on a computer that he is prohibited from accessing—activity analogous to “breaking and entering” in the digital space. See United States v. Valle, 807 F.3d 508, 523–28 (2d Cir. 2015); WEC Carolina Energy Sols. LLC v. Miller, 687 F.3d 199, 205–06 (4th Cir. 2012); United States v. Nosal (Nosal I), 676 F.3d 854, 857–63 (9th Cir. 2012) (en banc); see also hiQ Labs, Inc. v. LinkedIn Corp., 938 F.3d 985, 999–1002 (9th Cir. 2019). Under this view, for example, an employee who downloads confidential information from a company database that he is authorized to access, but who does so for the improper purpose of disclosing the information to someone outside the company, has not violated the CFAA. See Nosal I, 676 F.3d at 857–63. Nor has a company that uses automated bots to scrape information from another company’s public webpage in violation of the website’s terms of use. hiQ Labs, Inc., 938 F.3d at 999–1002.

On the other hand, the First, Fifth, and Seventh Circuits have taken a broader view, holding that a person “exceeds authorized access” if, even using a computer to access information that he is legitimately authorized to access, he does so for an improper or unauthorized purpose. See United States v. John, 597 F.3d 263, 271–72 (5th Cir. 2010); Int’l Airport Ctrs., L.L.C. v. Citrin, 440 F.3d 418, 420–21 (7th Cir. 2006); EF Cultural Travel BV v. Explorica, Inc., 274 F.3d 577, 581–84 (1st Cir. 2001). Under this view, for example, an employee who downloads confidential information from an internal company system that he is authorized to access in the course of his official duties, but who does so for the improper purpose of using that information to perpetrate a fraud or for some other unauthorized purpose, has violated the “exceeds authorized access” prong of the CFAA. See John, 597 F.3d at 272–73. So too has a company that uses data‑scraping software to systematically glean a competitor’s prices from the competitor’s public website. EF Cultural Travel BV, 274 F.3d at 583–84.

In Van Buren, the Eleventh Circuit joined those circuit courts that have taken a broader view of the CFAA’s statutory sweep, affirming the conviction and eighteen-month sentence of a police officer who used a computer to look up an exotic dancer’s license plate number in exchange for a loan. The Eleventh Circuit reasoned that Van Buren “exceed[ed] authorized access” to the law-enforcement computer system when he used his legitimate access for an improper purpose, even though he had permission to access the database for other purposes. United States v. Van Buren, 940 F.3d 1192, 1205–07 (11th Cir. 2019). The court explained that it was bound by a previous decision in United States v. Rodriguez, 628 F.3d 1258 (11th Cir. 2010), which established that “even a person with authority to access a computer can be guilty of computer fraud [under the CFAA] if that person subsequently misuses the computer,” Van Buren, 940 F.3d at 1207. Under that interpretation of “exceeds authorized access,” there was “no question” that the record contained sufficient evidence for a jury to convict Van Buren of computer fraud. Id. at 1208.

Policy Implications

Although the Supreme Court might decide Van Buren narrowly based on the unique facts and procedural posture of the case, it is possible that the Court will take this opportunity to resolve the circuit split and to provide guidance about the scope of the CFAA’s “exceeds authorized access” provision. If the Court does so, it will need to balance many competing policy interests.

For example, those in favor of a narrow interpretation of the CFAA assert that the statute was not intended to be an all-purpose computer and Internet policing statute, but instead was intended to prohibit more egregious unauthorized access to computer systems akin to hacking. An expansive reading of the statute, they contend, would subject individuals to civil or criminal liability for innocuous computer or Internet use, as when an individual violates a website’s terms of service or a school’s or employer’s computer use policy.

In support of the petition for a writ of certiorari, the Electronic Frontier Foundation and other amici curiae even hypothesized that thousands of employees of federal government agencies, such as the Department of the Interior and U.S. Postal Service, would risk criminal prosecution under a broad interpretation of the statute if they violate their respective agency’s prohibitions against personal video streaming from commercial or news organizations on government-issued devices while connected to a government network.[1] The same rationale would apply in the context of potential civil liability, wherein a broad interpretation of the CFAA could subject countless individuals to substantial damages awards or onerous court-ordered injunctions for violations of computer or Internet policies.

Those endorsing the narrow view also contend that a broad construction of the statute would give prosecutors too much discretion and lead to arbitrary or discriminatory enforcement. They cite as an example Internet “hacktivist” and Harvard University student Aaron Swartz, who was indicted for unlawfully accessing MIT’s computer network (where he was in fact an authorized user) and downloading a large number of academic journal articles in violation of the network’s terms of use. Swartz tragically took his own life before standing trial.

Supporters of the narrow view further posit that a broad construction of the CFAA would put the statute on a collision course with the First Amendment by punishing online investigative techniques commonly used by journalists, academic researchers, private investigators, and others engaged in expressive conduct or speech that may also run afoul of computer or Internet terms of use.

By contrast, those in favor of a broader interpretation of the CFAA contend that an expansive interpretation of the statute is more consistent with congressional intent—to stop bad actors from computer-facilitated fraud and theft, in addition to hacking. These proponents argue that fears of over-zealous or arbitrary criminal enforcement are overblown, particularly in light of DOJ guidance setting forth a uniform charging policy for computer crimes. They also contend that a more expansive interpretation of the CFAA promotes a safer Internet that benefits and protects both companies and consumers alike, and can curb what some perceive to be unfair competitive intelligence practices, such as when a company scrapes data from the websites of competitors.

The Supreme Court’s decision in Van Buren may provide much-needed clarity on these and other issues, giving companies, consumers, and law enforcement a better understanding of what type of online and computer conduct is subject to civil and criminal liability under the CFAA. Any such guidance, in turn, would establish new parameters that companies—and others potentially liable for the activities of their agents—should closely follow when revising both their online terms of use and their internal policies governing how employees may use email, computers, and other technologies when logged onto an internal (or external) network.

____________________

[1] Brief for Electronic Frontier Foundation et al. as Amici Curiae Supporting Petitioner, Van Buren v. United States, No. 19-783 (2020), at 18–19.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Appellate and Constitutional Law and Litigation practice groups, or the following authors:

Authors: Avi Weitzman, Matthew Benjamin, Joel M. Cohen, Alexander H. Southwell, Brandon Boxler, Erica Sollazzo Payne, Doran Satanove, and Samantha Weiss

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

GLOBAL OVERVIEW

Colorado and Georgia Plan to Relax COVID-19 Restrictions and Allow Some Businesses to Reopen

On April 20, 2020 the governors of Colorado and Georgia announced plans to begin easing the restrictions the states imposed in response to the outbreak of COVID-19. Certain businesses will be permitted to reopen so long as they follow state social distancing laws and guidelines designed to limit the spread of the virus. These precautions are intended to keep any increase in COVID-19 cases to a level that can be managed by the states’ hospital systems. The plans of each state, as set out in a slide presentation by the governor of Colorado and an executive order issued by the governor of Georgia, are discussed below. Colorado urges its citizens to remain at home when they can, and Georgia’s plan includes a detailed list of mandatory precautions. In Colorado, there will be a process for local governments to issue stricter local rules based on local conditions; in Georgia such local control is expressly forbidden by the governor’s executive order. Colorado and Georgia provide different approaches to emerging from the COVID-19 restrictions and may serve as competing models as other states consider how and when to begin lifting their own COVID-19 restrictions.
Read more

COVID-19 United Kingdom Weekly Bulletin (April 22, 2020)

This weekly bulletin provides a summary and compendium of English law legal developments during the current COVID-19 pandemic in a variety of key areas.
Read more

COVID-19: Update on UK Financial Support Measures

In our client alert of 27 March 2020, we provided an overview of the financial support made available by the UK Government to: (i) investment grade businesses through the Covid Corporate Finance Facility (the “CCFF”); and (ii) small and medium sized enterprises (“SMEs”) through the Coronavirus Business Interruption Loan Scheme (the “CBILS”). In our client alert of 6 April 2020, we gave a brief overview of the measures that have been taken in the UK to support businesses and highlighted in that alert that the CBILS was being extended to larger business with an annual revenue of between £45 million and £500 million.

In this client alert we summarise: (i) the announcement of details on the Coronavirus Large Business Interruption Loan Scheme (the “CLBILS”); and (ii) the announcement of a new funding scheme for innovative companies that are facing financing difficulties due to the COVID-19 pandemic (the “Innovation and Development Scheme”).
Read more

As we head into another week of the COVID-19 pandemic, we are all struggling to cope with the rapidly changing landscape. Some of us have loved ones who have gotten sick or even passed away, others have loved ones living far away, and still others have loved ones fighting on the front lines of this pandemic as healthcare workers or first responders. And yet, amidst this uncertain and unprecedented time, we have been struck by how much this community has come together; how we have found new ways to be supportive of one another, to communicate with one another, and to form much deeper bonds than once existed. Part of this coming together has been forged through a common goal and purpose: to help those in our communities – near and far – who need our services the most.

Delivering this help has required digging deep, working through challenging conditions, and often coming up with creative and innovative means to provide results. Together we have accomplished so much already, finding ways to help the small business and immigrant communities and the healthcare workers fighting every day for all of us, just to name a few.
Read more

Colorado’s “Safer at Home” Plan Will Permit Some Businesses to Reopen, but Urges Personal Caution and Telecommuting

On April 20, Colorado Governor Polis announced a plan to scale back the restrictions on business activity currently in effect in the state. The plan, which we expect to be further detailed in the coming days, is designed to allow physical distancing rates — a measure of reductions in person-to-person interactions — which are now at 75%-80%, to decline to, but no further than, 60%-65%. In combination with the other measures the plan will include, the state expects a 60%-65% social distancing rate to keep the infection rate low enough that the outbreak can be managed by the state’s medical infrastructure.

According to the Governor’s April 20 presentation, Colorado’s current stay-home order will be permitted to lapse on Sunday, April 26, 2020 and will be replaced by the new rules. The presentation makes clear that “[t]here will be a process for local governments to modify these standards based on local conditions.” See Presentation of Jared Polis, Gov. of Colo. (Apr. 20, 2020). Under the new plan the Governor’s Office continues to encourage the citizens of Colorado, especially members of particularly vulnerable populations, to stay home as much as possible. The plan includes as well the following mandatory and optional provisions:

Mandatory:

Gatherings of more than ten are prohibited
The sick may not go to work
Offices may open to up to 50% of staff
Telecommuting must be maximized
Retail shops may open for curb-side sales. Non-critical in-store sales will be phased in
Dental care and elective medical services may open with strict precautions to ensure adequate personal protective equipment and the ability to meet critical care needs
Restaurants remain closed to dine-in business for now, but the state is considering a reduced-capacity reopening
Bars remain closed
Child care will reopen with strict precautions but university and K-12 education will remain closed
Real estate showings may begin but open houses will remain prohibited

Optional:

Face masks are encouraged
Large workplaces are advised to have symptom and temperature checks

Georgia’s Executive Order Allows Certain Businesses to Reopen and Requires Compliance With Detailed Precautionary Measures

Georgia’s plan to reopen its economy — which is set out in Governor Kemp’s Executive Order 04.20.20.01 — is modeled on the “Opening Up America Again” guidelines issued by the White House. Governor Kemp has presented his plan as a “phase-one” reopening under those guidelines. See Ga. E.O. 04.20.20.01. The governor has emphasized that Georgia’s increased hospital capacity will help ensure that the outbreak does not overwhelm the state’s medical infrastructure, and is working to increase testing capacity. The state’s existing shelter-in-place order will remain in effect until April 30, but certain businesses will be permitted to reopen, subject to a detailed list of mitigation measures, on Friday, April 24 and Monday, April 27.

In contrast to the approach taken by Colorado — which allows localities to apply stricter regulations as appropriate — Georgia’s executive order expressly supersedes conflicting local rules. In Georgia, municipalities generally have statutory home rule protections and counties have constitutional home rule protections that are subject to definition by statute. See Ga. Const. art. IX, § 2, ¶ I; Ga. Code § 36-35-3. The governor, however, has the emergency power to suspend statutes and has expressly decreed that his executive order will override the statutory home rule provisions on which local and county orders rely. See Ga. E.O. 04.02.20.01; Ga. Code § 38-3-51(d)(1).

The details of the April 27 reopening have yet to be announced, but dine-in restaurants, social clubs, and theaters are expected to be permitted to resume operations and be required to comply with the stringent precautionary rules detailed below as well as additional social distancing measures.

The governor’s April 20 executive order announces those businesses permitted to reopen on April 24 and sets out the restrictions applicable to them. The order allows these businesses to reopen for “Minimum Basic Operations,” defined to “include remaining open to the public subject to the restrictions of this Order.” The order lists twenty protocols with which business must comply.

Pursuant to the governor’s executive order, the following businesses may reopen on April 24:

Gyms
Fitness centers
Bowling alleys
Body art studios
Barber shops, beauty salons, beauty shops, and the schools for those trades
Estheticians
Hair designers
Persons licensed to practice massage therapy

Each of these businesses must comply with following mitigation measures

Screening and evaluating workers who exhibit signs of illness, such as a fever over 100.4 degrees Fahrenheit, cough, or shortness of breath
Requiring workers who exhibit signs of illness to not report to work or to seek medical attention
Enhancing sanitation of the workplace as appropriate
Requiring hand washing or sanitation by workers at appropriate places within the business location
Providing personal protective equipment as available and appropriate to the function and location of the worker within the business location
Prohibiting gatherings of workers during working hours
Permitting workers to take breaks and meals outside, in their office or personal workspace, or in such other areas where proper social distancing is attainable
Implementing teleworking for all possible workers
Implementing staggered shifts for all possible workers
Holding all meetings and conferences virtually, wherever possible
Delivering intangible services remotely wherever possible
Discouraging workers from using other workers’ phones, desks, offices, or other work tools and equipment
Prohibiting handshaking and other unnecessary person-toperson contact in the workplace
Placing notices that encourage hand hygiene at the entrance to the workplace and in other workplace areas where they are likely to be seen
Suspending the use of Personal Identification Number (“PIN”) pads, PIN entry devices, electronic signature capture, and any other credit card receipt signature requirements to the extent such suspension is permitted by agreements, with credit card companies and credit agencies
Enforcing social distancing of non-cohabitating persons while present on such entity’s leased or owned property
For retailers and service providers, providing for alternative points of sale outside of buildings, including curbside pickup or delivery of products and/ or services if an alternative point of sale is permitted under Georgia law
Increasing physical space between workers and customers
Providing disinfectant and sanitation products for workers to clean their workspace, equipment, and tools
Increasing physical space between workers’ worksites to at least six (6) feet.

Gibson Dunn is monitoring the situations in Colorado and Georgia as harbingers of what may come in other states as well.

Authors: Mylan Denerstein, Lauren Elliot, Lee R. Crain, Stella Cernak, and Parker W. Knight III

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

In our client alert of 27 March 2020, we provided an overview of the financial support made available by the UK Government to: (i) investment grade businesses through the Covid Corporate Finance Facility (the “CCFF”); and (ii) small and medium sized enterprises (“SMEs”) through the Coronavirus Business Interruption Loan Scheme (the “CBILS”). In our client alert of 6 April 2020, we gave a brief overview of the measures that have been taken in the UK to support businesses and highlighted in that alert that the CBILS was being extended to larger business with an annual revenue of between £45 million and £500 million.

In this client alert we summarise: (i) the announcement of details on the Coronavirus Large Business Interruption Loan Scheme (the “CLBILS”); and (ii) the announcement of a new funding scheme for innovative companies that are facing financing difficulties due to the COVID-19 pandemic (the “Innovation and Development Scheme”).

See also the Gibson Dunn Coronavirus (COVID-19) Resource Centre for more resources on the response to COVID-19.

Background to the CLBILS

Design Flaws with the CBILS and Pressure from Industry

Whilst the UK Government announced a package of measures worth approximately £330 billion in mid-March 2020, in recent days, the UK Government has come under pressure to ensure that all UK businesses are able to access the financial and liquidity support measures that have been made available. As at close of business on 13 April 2020, UK Finance (the industry body for the banking and finance sector in the UK) reported that of 28,461 applications made to lenders to access the CBILS, only 6,016 loans had been approved with total lending reaching £1.1 billion. Further, it has become clear that the CCFF would only be available to a select number of investment grade companies in the UK that already had a commercial paper issuance programme or those that would otherwise meet the criteria for such a programme.

Criticism of the CBILS have been growing since its launch. Industry bodies, including the British Private Equity and Venture Capital Association (the “BVCA”) have been reporting a number of structural issues with the scheme that meant large business and portfolio companies of private equity firms were not able to access much needed financial support. This is supported by the views of our private equity clients, whose portfolio companies have encountered difficulties in accessing the scheme. Some of the issues identified have been:

Process and Timing: Difficulties with access to the scheme and the process for approving applications has had a significant impact on the liquidity position of a number of companies.
Eligibility Criteria:
- Companies and industry bodies have been reporting that banks are only lending to those companies that are credit-worthy with a strong balance sheet (i.e. those companies with retained profits/equity capital and low leverage). This is because lenders retain a 20% exposure to loans advanced under the CBILS. This has prevented many venture capital backed companies and innovative tech and healthcare companies that are not typically profitable from accessing much-needed financial support.
- Importantly for our clients, guidance from the British Business Bank to lenders also provided that companies that are majority-owned by a private equity firm would not be eligible to participate in the CBILS in circumstances where additional equity funding is available to be provided by the private equity firm.
- Lenders have also been aggregating the annual revenues of private equity firm’s majority-owned portfolio companies to determine whether a single portfolio company is eligible for a CBILS loan, which had the effect of excluding the large majority of portfolio companies backed by mid to large-cap private equity firms (estimated by the BVCA to be 750+ companies).
Level of Funding: When the CLBILS was initially announced on 3 April 2020, it was suggested that the scheme would provide £25 million of funding to businesses with an annual revenue of between £45 million and £500 million. For larger companies with an annual revenue of £500 million, a loan of £25 million would represent just over half of a business’ revenue for a month. The concern expressed is that if the current low levels of economic activity prevail for a significant period into the summer months, the loans available would not provide a sufficient liquidity buffer, even with the other support measures available, to prevent many companies from going out of business.

In the context of the growing criticism of the design flaws with the CBILS and the lack of access to the CCFF, the UK Government was forced to act by launching: (i) the CLBILS to provide genuine support to the majority of medium to large-sized UK businesses, and (ii) the Innovation and Development Scheme to support innovative development and research companies, including those backed by venture capital firms.

Regulatory Pressure

On 15 April 2020, the Financial Conduct Authority (FCA) published a “Dear CEO” letter setting out its expectations of banks, in relation to lending to SMEs.

In the letter to banks, the FCA reminded them that the priority is ensuring that the benefit of the package of measures introduced by the Government, including the CBILS, is passed through to businesses as soon as possible. The FCA also highlighted that responsibility for these specific lending activities should be allocated to one or more Senior Managers.

In the letter, the FCA also stated that a new small business unit has been established. This will, amongst other things, gather intelligence about the treatment of SMEs during the crisis. There is, therefore, a clear prospect of future enforcement action being taken by the FCA against banks where it does not consider that its expectations have been met. The pressure on commercial lending institutions to deliver the UK Government’s schemes and provide access to liquidity has, therefore, been increasing.

The Coronavirus Large Business Interruption Loan Scheme

On 3 April 2020, the UK Chancellor of the Exchequer, Rishi Sunak MP, announced that support would be provided to larger businesses in the UK (i.e. those with an annual revenue of in excess of £45 million) through the CLBILS. There followed an announcement on 16 April 2020, which set out the scope of the CLBILS, a scope broader than that initially announced on 3 April 2020. The UK Government has sought to design the CLBILS to support those businesses that hitherto had been unable to access funding through the CBILS or that had been ineligible to obtain funding through the CCFF. The CLBILS launched on Monday, 20 April 2020, and the key details of the scheme are as follows:

Businesses with UK-based business activity and annual revenue of more than £45 million are eligible.
Businesses with an annual revenue of between £45 million and £250 million will be able to access to up to £25 million of loans and businesses with an annual revenue of more than £250 million will have access to up to £50 million of loans.
The UK Government will guarantee 80% of each loan but unlike the CBILS, the UK Government will not cover the first twelve months of interest.
The business needs to have a borrowing proposal which the lender would consider viable, that will enable the business to trade out of any short-term to medium-term difficulty caused by the COVID-19 pandemic.
The business should be able to self-certify that it has been adversely impacted by the COVID-19 pandemic.
The business should not have received a facility under the CCFF.
Majority-owned portfolio companies of private equity firms will now be able to access the scheme following updated guidance to lenders, as such companies’ annual revenues will be assessed on a standalone basis (i.e. there will be no grouping of all of a private equity firm’s portfolio companies’ annual revenues).
Personal guarantees will not be permitted for loans of up to £250,000.
The scheme will be available through a series of accredited lenders, that will be listed on the British Business Bank website.
Credit institutions, insurers, reinsurers, building societies, public sector bodies, grant-funded further education establishments and state-funded schools are not eligible to participate in the scheme.

As a result of pressure from UK-businesses, the CLBILS appears to address some of the key issues relating to eligibility and levels of funding that had been identified with the CBILS. Large businesses now have access to up to £50 million of funding (depending on annual revenues) and companies that are not eligible to access the CCFF may still able to access the loans under the CLBILS. Importantly for the private equity industry, it also appears as though revenue-grouping for portfolio companies has been abolished together with the exclusion from the schemes of companies that are majority-owned by private equity firms.

However, one key point to note is that it appears as though businesses will need to still be credit-worthy with a viable business plan to access finance under the CLBILS. The decision on credit-worthiness remains in the hands of a business’ lenders and so businesses which maintain a high leverage levels may continue to be excluded.

The Innovation and Development Scheme

On 20 April 2020, the Chancellor of the Exchequer announced the establishment of a new Future Fund to support the UK’s innovative businesses currently affected by the Covid-19 pandemic, together with other measures to support businesses driving innovation in the UK. In total, the package announced represents £1.25 billion of additional funding through: (i) a £500 million investment fund for high-growth companies impacted by the Covid-19 pandemic, delivered in partnership between UK Government and the private-sector (the “Future Fund”); and (ii) £750 million of grants and loans to SMEs focussing on research and development.

The Future Fund

In an unprecedented step, the Future Fund will make convertible loans of between £125,000 and £5 million available to high-growth innovative businesses in the UK. The Fund will be delivered by the British Business Bank and will provide UK-based companies with funding from the UK Government. Private investors will be obliged to match the UK Government funding amount for companies to participate. These loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the loan if they are not repaid, meaning the UK Government will become a shareholder in these companies.

To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years.

The UK Government has also published a term sheet which sets out the terms of the convertible loans provided under the Future Fund here.

The UK Government’s initial commitment to the Future Fund will be £250 million, with the Future Fund due to open for applications in May 2020 and run until September 2020. The UK Government has announced that it will keep the scale of its investment in the Future Fund under review.

Grants and Loans for Research and Development

£750 million of targeted support will be made available for research and development intensive SMEs. The grants and loans will be provided through existing schemes of the UK’s national innovation agency, Innovate UK.

Innovate UK, will accelerate up to £200 million of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis. An extra £550 million will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. It has been announced that the first payments will be made by mid-May.

Conclusions

We are in unprecedented times in the United Kingdom, as is the case for many leading economies globally. The UK State (and accordingly, the UK taxpayer) is being asked to underwrite British business for it to survive during the COVID-19 pandemic. The UK Government is having to make policy announcements an almost daily basis in a very fluid situation and then rush to provide guidance and infrastructure for policy to be delivered. This has led to much criticism but the new measures appear to be designed to plug the design flaws in the initial schemes that were adopted in the early days of the developing COVID-19 crisis.

However, it remains to be seen whether the new schemes and updated guidance will enable lenders to speed up processes for approving loans and funding businesses at a time when the liquidity squeeze is being keenly felt. Central to the loan approval processes is the issue that the UK Government is guaranteeing only 80% of the exposure for lenders under the schemes with 20% of the residual risk carried by commercial lenders. In the current economic environment and prevailing macro-economic uncertainty, some lenders are discouraged from approving the loans under the schemes where they carry such residual risk. It is considered likely that further measures may need to be enacted, including having the UK Government or the Bank of England step in to guarantee 100% of the loans issued under the schemes to enable lenders to have the confidence in lending to British business. In these unprecedented times, it will remain to be seen whether further unprecedented measures are needed or whether the UK Government’s latest schemes will provide sufficient funding and liquidity for UK Business to survive what is fast-turning into a global economic crisis.

This client update was prepared by Tom Budd, Greg Campbell, Michelle Kirschner, Mark Sperotto, Attila Borsos, Amar Madhani and Martin Coombes.

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 contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team. In the UK, the contact details of the authors and other key practice group lawyers are as follows:

The Authors:
Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, [email protected])
Gregory A. Campbell – London, Restructuring and Finance (+44 (0)20 7071 4236, [email protected])
Michelle M. Kirschner – London, Financial Institutions (+44 (0)20 7071 4212, [email protected])
Mark Sperotto – London, Private Equity (+44 (0)20 7071 4291, [email protected])
Attila Borsos – Brussels, Antitrust (+32 2 554 72 11, [email protected])
Amar Madhani – London, Private Equity and Real Estate (+44 (0)20 7071 4229, [email protected])
Martin Coombes – London, Financial Institutions (+44 (0)20 7071 4258, [email protected])

London Key Contacts:
Sandy Bhogal – London, Tax (+44 (0)20 7071 4266, [email protected])
Thomas M. Budd – London, Finance (+44 (0)20 7071 4234, [email protected])
James A. Cox – London, Employment (+44 (0)20 7071 4250, [email protected])
Patrick Doris – London, Litigation & Data Protection (+44 (0)20 7071 4276, [email protected])
Ben Fryer – London, Tax (+44 (0)20 7071 4232, [email protected])
Christopher Haynes – London, Corporate (+44 (0)20 7071 4238, [email protected])
James R. Howe – London, Private Equity (+44 (0)20 7071 4214, [email protected])
Anna Howell – London, Energy, Oil & Gas (+44 (0)20 7070 9241, [email protected])
Charles Falconer, QC – London, Litigation (+44 (0)20 7071 4270, [email protected])
Jeremy Kenley – London, M&A, Private Equity & Real Estate (+44 (0)20 7071 4255, [email protected])
Penny Madden, QC – London, Arbitration (+44 (0)20 7071 4226, [email protected])
Ali Nikpay – London, Antitrust (+44 (0)20 7071 4273, [email protected])
Philip Rocher – London, Litigation (+44 (0)20 7071 4202, [email protected])
Selina S. Sagayam – London, Corporate (+44 (0)20 7071 4264, [email protected])
Alan A. Samson – London, Real Estate & Real Estate Finance (+44 (0)20 7071 4222, [email protected])
Jeffrey M. Trinklein – London, Tax (+44 (0)20 7071 4264, [email protected])

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

London partner Selina Sagayam is the author of “If you’re not on the list…” [PDF] published by the Corporate Financier magazine in its April 2020 issue.

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 firm’s Coronavirus (COVID-19) Response Team, or the co-leads of the UK COVID-19 Taskforce:

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 – COVID-19 impacting the substantive results of reviews

The UK Competition and Markets Authority (CMA) announced last week that it has provisionally cleared Amazon’s minority investment in Deliveroo, which represented somewhat of a U-turn in the CMA’s assessment of this case. The change in stance was based on the significant negative impact that the coronavirus crisis and UK lock down has had on Deliveroo’s business. In particular, compelling evidence was reportedly presented that Deliveroo would fail financially and exit the market without access to significant additional funding, which the CMA considered only Amazon would be willing and able to realistically provide at this time. The CMA stated that it currently considered that the imminent exit of Deliveroo would be worse for competition than allowing the Amazon investment to proceed.

What does this mean for clients? The CMA’s approach in this case shows that it is willing to react quickly and flexibly in response to the unfolding impact of the coronavirus on businesses. Further, that it will take into account exiting firm scenarios as the counterfactual to a merger if appropriate (i.e. provided that the relevant legal tests are met). More generally, the crisis seems likely to cause changes in markets which will impact competitive dynamics – this could influence the outcome of a competition assessment in either direction (the exact impact will vary on a case by case basis).

Antitrust – Relaxation of rules in the dairy industry

On 17 April 2020, the Government announced that elements of UK competition law would be temporarily relaxed to support the dairy industry during the coronavirus outbreak. It suggested that legislation (which would be laid shortly) will be introduced to enable collaboration between dairy farmers and producers so that they can address current market challenges resulting from the coronavirus, including adapting supply chains to avoid surplus milk going to waste and harming the environment whilst maintaining productive capacity to meet future demand. It is said that Dairy UK and the Agriculture and Horticulture Development Board (AHDB) will lead work to bring the industry together.

As mentioned previously, whilst some co-operation may be tolerated in the current environment, this is not without limits. Careful assessment is required as to whether a particular co-operation will be tolerated and safeguards must be put in place to ensure that the co-operation goes no further than strictly necessary to deal with critical issues. Companies facing issues with supply or distribution or considering co-operating with competitors should consult with counsel.

State aid

On 20 April 2020, the Government announced a £1.25 billion support package, comprising a £500 million investment fund (the Future Fund) and a £750 million grants and loan scheme. The Future Fund provides UK-based companies with loans between £125,000 and £5 million, subject to private investors at least matching the Government commitment. The loans provided by the Government will automatically convert into equity on the company’s next qualifying funding round, unless the loans are repaid. The £750 million grants and loan support will be made available to R&D intensive SMEs. The Government estimates that around 3,700 SMEs will benefit from the new grants and loan scheme. Both the Future Fund and the grants and loan scheme will launch in May. The latest measures are the first to have been adopted under the UK umbrella scheme, which was notified by the UK on 26 March 2020 and approved by the European Commission on 9 April 2020. The total budget of the umbrella scheme is estimated to reach £50 billion. For more information, see the update on Government Support Schemes below.

2. CORPORATE GOVERNANCE (INCLUDING ACCOUNTS, DISCLOSURE AND REPORTING OBLIGATIONS)

The European Securities and Markets Authority (ESMA) issues new Q&A on alternative performance measures in the context of COVID-19

ESMA has updated its Guidelines on Alternative Performance Measures (APM Guidelines) to add a new Q&A to provide guidance to issuers on the application of the APM Guidelines in the context of the COVID-19 pandemic. The APM Guidelines address the information that issuers should publish when disclosing APMs (e.g. Operating Results, EBIT, EBITDA and Free Cash-flow) to the market.

The new Q&A highlights the main principles of the APM Guidelines, encourages issuers to use caution when adjusting Alternative Performance Measures (APMs) and when including new APMs to address the impact of COVID-19, and invites issuers to provide (i) narrative information regarding the modifications made, the assumptions used and the impact of COVID-19 and (ii) information on measures taken or expected to be taken by issuers to address the impact that the COVID-19 outbreak may have on their operations and performance.

Measures in respect of Company filings, AGMs and other general meetings during COVID-19

As discussed in our COVID-19 UK Bulletin – 8 April 2020, the Secretary of State for Business, Energy and Industrial Strategy, Alok Sharma MP, announced on 28 March 2020 that the Government would, as soon as possible, bring forward legislation to assist those companies for which COVID-19 restrictions make it difficult to meet statutory obligations to hold meetings and to file documentation on the Companies Register. These measures are in the process of being developed. In the interim period, the Department for Business, Energy & Industrial Strategy together with the Financial Reporting Council, have issued a Q&A document which is designed to provide companies with additional information upon which to plan activities over the coming months. Further information is available here.

Disruption of the AGM season caused by COVID-19 – New ICSA article

The Chartered Governance Institute (ICSA) has published an article on the disruption caused to the AGM season as a result of COVID-19. This article builds on previous guidance produced by ICSA (as summarised in our COVID-19 UK Bulletin – 8 April 2020). In particular, the article highlights the need for companies to balance their legal and regulatory obligations, as well as good practice, against the need for pragmatism in the light of the pandemic, and underlines the importance of maximising stakeholder engagement within the facilities available.

ICSA has also launched a COVID-19 Hub where it intends to store helpful information relating to the impact of COVID-19 on governance.

Institutional Shareholder Services – COVID-19 guidance and launch of new online resource centre

As noted in our COVID-19 UK Bulletin – 16 April 2020, global proxy provider, Institution-al Shareholder Services (ISS), has issued guidance on how its benchmark proxy voting policies guidelines should be applied in light of the COVID-19 pandemic. The guidance should be read in conjunction with ISS’s UK and Ireland Voting Guidelines. Certain points in the guidance are unlikely to be relevant to UK listed companies. In addition, ISS has launched a COVID-19 resource centre.

Companies House pauses strike off and offers leniency for late filing appeals

Companies House has said that it will temporarily pause the strike off process in the UK to prevent companies from being dissolved during the COVID-19 pandemic. Companies House will also treat sympathetically any appeals from companies issued with a late filing penalty who have been affected by COVID-19. Companies House guidance has been updated to incorporate these measures (see our COVID-19 UK Bulletin – 8 April 2020 for a summary of the guidance previously issued by Companies House).

International Federation of Accountants (IFAC) guidance on the financial reporting implications of COVID-19

IFAC has published a summary of key areas to consider when preparing financial statements against the backdrop of the pandemic, which has been drawn from advice and guidance produced by accountancy firms, regulators and IFAC members. This includes how companies should assess COVID-19 events after the reporting period, how companies should assess going concern, and other significant effects on accounting and reporting.

Update to guidance issued by the Financial Reporting Council (FRC)

Further to recent FRC guidance, the FRC has clarified that “accounting and auditing standards on going concern have not changed”, nor has the FRC increased pressure on auditors to be tough”. The FRC notes that auditors should challenge management appropriately on their judgements and given the current uncertainty ensure that they have sufficient evidence to support the judgments they make. This is in relation to guidance for companies preparing financial statements and a bulletin for auditors covering factors to be taken into account when carrying out audits during the COVID-19 crisis, each published by the FRC on 26 March 2020 (see our COVID-19 UK Bulletin – 8 April 2020 for further information).

3. CYBERSECURITY AND DATA PROTECTION

Cybersecurity

Video Conferencing
In light of the increased use of video conferencing platforms, the Information Commissioner’s Office (ICO) has provided advice for employers, business owners and managers to share with staff, including checking privacy and security settings, being aware of phishing risks, using only tools approved by the organisation and in line with the organisation’s policies and checking software is up to date. It notes that if decisions on software/platforms are made quickly, organisations should revisit risks in due course and consider changing if circumstances change.

Data protection

European Commission (EC)
Our COVID-19 UK Bulletin – 16 April 2020 noted the EC had begun work on a common EU approach to contact-tracing apps for the pandemic. The EC has now published an EU toolbox for the use of contact tracing apps in response to COVID-19. The toolbox sets out essential requirements for national apps, including issues such as technical functionalities, cross-border interoperability requirements, cybersecurity measures and measures aimed at ensuring accessibility and inclusiveness. It is part of an ongoing process where Member States work together to devise and peer review their apps and associated measures. The EC has also published final guidance (not legally binding) on data protection and apps to combat COVID-19, specifically those in which participation is voluntary. It notes that such apps should be an “important element in the exit strategy”, while noting requirements for compliance with GDPR and the ePrivacy Directive. The EC recommends that national health authorities should be the data controllers and addresses topics including data subject rights and data minimisation.

European Data Protection Board (EDPB)
The EDPB published a letter which concerns the EC’s guidance on contact tracing apps. Whilst the EDPB supports the use of such apps for public health purposes, its letter emphasised the need to minimise interferences with private life. The EDPB suggests that such apps should not require location tracking of individual users: this would not comply with the data minimisation principle and would create security and privacy risks. The EDPB supports the EC’s proposal for a voluntary adoption of such apps, a choice that should be made by individuals. It notes that voluntary adoption requires trust and data protection principles remain important. It suggests that the most appropriate legal ground for processing (under the GDPR) is necessity for the performance of a task for the public interest, rather than consent.

ICO Regulation
In a document published on 15 April 2020, the ICO acknowledged its responsibility to adjust its regulatory approach during the pandemic and stated that it will: be flexible taking into account the impact of potential economic/resource burdens on organisations from its actions; prioritise the most serious challenges and greatest threats to the public; assist frontline organisations in providing data protection advice and guidance; take firm action against those looking to exploit the pandemic and misuse personal information; and continue to recognise the rights and protections granted to people by the law.

Whilst this gives some short-term comfort to organisations, appropriate measures should still be taken to comply with data protection laws and record decision making.

4. DISPUTES

Operation of the courts and remote hearings

On 15 April 2020, the Lord Chief Justice, Master of the Rolls and President of the Family Division issued a Message for Circuit and District Judges, in which they reflect on the judiciary’s collective experience of the recent transition to remote working, and on changes that may be needed going forward. While they acknowledge positive reports of technically effective processes, they remind judges that not all types of case are suitable for remote hearing, in particular those involving hotly contested evidence or where there are high levels of emotion. They take particular note of reports that remote hearings have proven more tiring than in-person hearings in a court room. They advised that even if all parties appear to agree to a remote hearing, this should not necessarily be taken as a green light to conduct the hearing this way. At the same time they indicated that where the parties agree that a hearing should not proceed remotely, this is “a very powerful factor” in not proceeding with a remote hearing.

While this message is directed at circuit and district judges, we expect that much of it will resonate in other branches of the court system.

Separately, in its daily operational summary HMCTS has announced that a new video hearing facility, Cloud Video Platform, will be deployed in certain civil and family hearings (as an alternative to Skype). It has also issued updated guidance on telephone and video hearings during the coronavirus outbreak and on how to join a telephone or video hearing.

Finally, on 14 April 2020 HMCTS published data on the number of remote hearings held over the last three weeks, indicating that an estimated 85% of hearings are now being held using video or audio; while on 15 April 2020 the Law Society published an interactive heatmap showing which courts and tribunals are operating during the COVID-19 outbreak.

Recent guidance from arbitration institutions

Various arbitral institutions have issued COVID-19 related updates over the past week. Firstly, in a display of unity, thirteen arbitral institutions – the LCIA, ICC, CRCICA, DIS, ICDR, ICSID, KCAB International, Milan Chamber of Arbitration, KIAC, SCC, SIAC, VIAC and ICFAI (the Institutions) – have issued a joint statement in which they express their intention to collaborate and contribute to stability and foreseeability in a highly unstable environment. The Institutions encourage parties and arbitrators to discuss any impact of the pandemic and potential ways to address it in an open and constructive manner, and to avail themselves of the Institutions’ respective rules and case management techniques to allow proceedings to progress without undue delay.

Secondly, the ICC has released a Guidance Note (Note) addressed to parties, counsel and arbitral tribunals in ICC arbitrations, outlining a range of measures to help mitigate the effects of COVID-19. The Note identifies aspects of the arbitral process that can take place remotely and encourages parties to file submissions and exhibits electronically, attaching a Checklist for a Protocol on Virtual Hearings (Annex I). The Note also reminds parties and tribunals that virtual hearings should adopt a “cyber-protocol” aimed at implementing measures sufficient to comply with any applicable data privacy regulations, and dealing with the privacy of the hearing and the protection of the confidentiality of electronic communications within the arbitration proceedings. Annex II provides a number of suggested clauses for inclusion in such protocols.

5. EMPLOYMENT

Update on CJRS

In our alert of 20 March 2020, we summarised the Government’s Coronavirus Job Retention Scheme (CJRS), which provides grants to UK employers to pay furloughed employees. In our alert of 27 March 2020, we provided further clarity on the scheme.

The Treasury has recently issued a Direction to HMRC with instructions for making payments under the CJRS. It has also announced that the CJRS has been extended from 31 May 2020 to 30 June 2020. The CJRS online portal is now open and can be accessed via HMRC’s Government Gateway.

The Direction contains some major changes and clarifications:

The payroll reference date has been pushed back such that employees who joined their employer between 28 February and 19 March 2020 are now eligible for furlough, provided the employer submitted real time information payroll data by that date.
In order to meet the necessary qualifying criteria, a written agreement that the employee will cease all work for the employer is required. As a result, employers may find themselves ineligible for CRJS grants in respect of employees who have been placed on informal furlough without a written agreement and claims may only be processed in respect of employees for whom a written agreement exists. It is not clear whether such a written agreement, once signed by both employer and employee, can be effective from an earlier date on which the informal furlough commenced, thus allowing the employer to claim the grant from that earlier date.
Furloughed directors must cease working for their company; however, they can undertake work to fulfil a duty or other obligation arising from an Act of Parliament relating to the filing of their company’s accounts or provision of other information relating to the administration of their company. This is a very narrow interpretation of directors’ duties.
Employers, when calculating salaries, must disregard anything which is not “regular salary or wages”, such as performance related bonuses, discretionary payments, tips, conditional payments and non-financial benefits.
Employers cannot claim for any salary which is “conditional on any matter”. Employers who made their payments conditional on the CJRS paying out may find themselves ineligible for CJRS grants.

Whilst the Direction is silent on the interaction between annual leave and furlough, HRMC have updated the Employee Guidance on the CJRS to state that it is possible to take annual leave whilst on furlough and employers are required to top up the employee’s salary to 100% when they do so.

Update on Statutory Sick Pay (SSP)

On 16 April 2020, the Statutory Sick Pay (General) (Coronavirus Amendment) (No. 3) Regulations 2020 (SI 2020/427) came into force. They further amend the schedule that the Statutory Sick Pay (Coronavirus) (Suspension of Waiting Days and General Amendment) Regulations 2020 (SI 2020/374) inserted into the Statutory Sick Pay (General) Regulations 1982 (SI 1982/894) so that a person will also be deemed incapable of work when they are isolating themselves because:

they are defined in public health guidance as extremely vulnerable and at very high risk of severe illness from COVID-19 because of an underlying health condition; and
they have been advised by a notification (sent to, or in respect of, them) that, in accordance with that guidance, they need to follow rigorously shielding measures for the period specified in the notification.

(These additions increase the scenarios in which a person is deemed incapable of work as a result of COVID-19 from three to five). HMRC updated its statutory payments manual to provide that employees do not qualify for SSP if they are on furlough. In our alert, we summarised the initial changes to SSP under the heading Instructing Employees Not to Work – SSP.

6. ENERGY

Oil price crash

On 20 April 2020, US oil prices (the West Texas Intermediate) fell to their lowest level in history, with the WTI market entering contango (i.e. price for future delivery of crude oil is higher than the spot price). With expiration of May WTI contracts looming, May WTI plummeted more than 300% dipping into the negative for the first time in history to as low as -$37.63 per barrel. At the time of writing on 21 April 2020, the crash began to spread through markets, with Brent crude oil prices fluctuating (falling 20% into the $18-$21 range) and June WTI contracts in the sub $20 range. This is a highly unusual occurrence caused by a continuing slide in short-term demand for oil, mixed with global crude storage facilities nearing capacity. The Railroad Commission of Texas (RRC), the state’s oil and gas regulator, is set to meet again later on 21 April 2020 having failed to reach an agreement regarding mandated cuts across the state previously. The oil price has continued to slide notwithstanding the biggest-ever production cuts agreed by OPEC+ recently (see our previous coverage of the OPEC+ deal in our COVID-19 UK Bulletin – 16 April 2020) which indicates that, even when the cuts kick-in, these may not have tracked the level to which demand was cratering.

Help for the energy sector

Industry has been working with Government and the CBI to understand why the sector’s take up of current Government support schemes has been limited. We previously reported on barriers in these schemes to accessibility by UK energy companies and it is unclear whether adjustments to the Government efforts have made a difference. In particular, industry group Oil & Gas UK (OGUK) has asked the Government for certainty in relation to an extension to and expansion of the job retention scheme, and assurance from the Government that the energy sector, given considerable volatility and uncertainty pre-COVID-19 and the inter-related challenges of the oil price crash and low gas prices, is able to take advantage of various programmes. The Government has now extended the scheme to last until the end of June but it remains to be seen whether it will provide additional assurances with regards to access. Please see the Employment section of this bulletin for more information regarding the furlough scheme. OGUK has also called for the Government to include testing energy sector key workers in the five-pillar testing plan, though questions around reliability of various testing procedures remain.

Help from the energy sector

BP bosses announced that they would donate 20% of their pay to mental health charities during the crisis, and over 100 medically trained North Sea divers have signed up to volunteer with the NHS to help ease pressure on staff.

Impact of COVID-19 on workers and sites

COVID-19 continues to impact energy projects globally.

Canada’s Couche-Tard will not be following through on its A$8.8 billion offer for downstream operator Caltex Australia Ltd, citing COVID-19 concerns.
After Petrofac’s recent announcement of its intention to furlough some staff, reported on in our last bulletin, the company has now confirmed it will reduce staff levels by around 20%. This follows the termination of US$1.65 billion worth of contracts by ADNOC, who awarded Petrofac the contracts for its Dalma project offshore Abu Dhabi in February.
The situation in Total’s Mozambique LNG site has worsened and the site is now under lockdown. Mozambique’s government has reported figures country-wide of COVID-19 as currently at 34 cases with at least 18 of those being Total workers.
The Hummingbird Spirit FPSO, owned by Teekay and operating in the UK North Sea, has restarted production, following lockdown and deep-cleaning.
Since some workers tested positive at Chevron’s Tengiz site in Kazakhstan, expansion work has been reduced. Chevron has stated that those measures “have been implemented in order to protect the health and safety of the Tengiz workforce and are not related to current market conditions” and that essential expansion work will still be carried out.
There have been additional reports of confirmed COVID-19 cases on several other installations globally, including in Norway, Canada and Russia.

7. FINANCE

No update to our COVID-19 UK Bulletin – 16 April 2020.

8. FINANCIAL SERVICES REGULATORY

Financial services regulatory client alert

COVID-19: Regulatory Forbearance for Fund Annual Reports under EU AIFMD

FCA’s expectations on financial resilience for FCA solo-regulated firms

The FCA has published an updated version of its statement on expectations on financial resilience for FCA solo-regulated firms during COVID-19 pandemic. In particular, the FCA expects firms to contact it if: (1) they are planning to draw down a capital or liquidity buffer; or (2) a firm’s wind-down plan identifies material execution risks due to the current crisis. The FCA has also stated that it does not expect firms to distribute capital that could credibly be required to absorb losses over the coming period. The FCA also reminds non-bank lenders subject to IFRS9 that the forward-looking information used in expected credit loss estimates should be reasonable and supportable. Further information is available here.

9. FORCE MAJEURE

No update to our COVID-19 UK Bulletin – 16 April 2020.

10. GOVERNMENT SUPPORT SCHEMES

The Coronavirus Large Business Interruption Loan Scheme (CLBILS)

On 20 April 2020, the CLBILS launched to provide finance to larger businesses in the UK. The CLBILS is available to large businesses with an annual revenue of in excess of £45 million, with loans of up to £50 million available, depending on the size of a business’ annual revenue. Businesses with an annual revenue of between £45 million and £250 million able to access loans of up to £25 million and businesses with an annual revenue in excess of £250 million are able to access loans of up to £50 million. The CLBILS will be delivered through the British Business Bank and loans will be made available through accredited lenders. Lender will not be permitted to ask for personal guarantees for loans of less than £250,000. The Government will guarantee 80% of each loan delivered under the CLBILS, but unlike the Coronavirus Business Interruption Loan Scheme, the Government will not cover the first twelve months of interest payments. Further information on eligibility can be found on the British Business Bank Website.

The Innovation and Development Scheme

On 20 April 2020, the Government announced the establishment of a new Future Fund to support the UK’s innovative businesses currently affected by the COVID-19 pandemic, together with other measures to support businesses driving innovation in the UK. In total, the package announced represents £1.25 billion of additional funding through: (i) a £500 million investment fund for high-growth companies impacted by the COVID-19 pandemic, delivered in partnership between the Government and the private-sector (Future Fund); and (ii) £750 million of grants and loans to SMEs focusing on research and development. The Future Fund will provide UK-based companies with between £125,000 and £5 million of loans from the Government, with private investors at least matching the Government’s funding. These loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the loan if they are not repaid. To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years. Further information and a term sheet for investment can be found on the Government’s website.

FCA “Dear CEO” letters

On 15 April 2020, the Financial Conduct Authority (FCA) published two “Dear CEO” letters, setting out its expectations of (i) insurers and brokers in relation to business interruption insurance sold to SMEs; and (ii) banks, in relation to lending to SMEs.

In the communication to insurers, the FCA stressed that insurers and brokers have an essential part to play in supporting customers which are not entirely clear on whether they have appropriate cover in place. The FCA noted that it would also collect data from firms to assess how policies are being interpreted. The FCA estimates that most policies do not cover pandemics and that there is therefore no obligation in such cases to pay out in relation to COVID-19. In the case of dispute, the ability of firms of a certain size to make claims to the Financial Ombudsman Service, for the prospect of a faster decision and timely payment, was also flagged.

In the letter to banks, the FCA reminded them that the priority is ensuring that the benefit of the package of measures introduced by the Government, including the Coronavirus Business Interruption Loan Scheme, are passed through to the relevant businesses as soon as possible. The FCA also highlights that responsibility for these specific lending activities should be allocated to one or more Senior Managers.

In both letters, the FCA stated that a new small business unit has been established. This will, amongst other things, gather intelligence about the treatment of SMEs during the crisis. There is, therefore, a clear prospect of future enforcement action being taken by the FCA against firms where it does not consider that its expectations have been met.

11. INSOLVENCY

No update to our COVID-19 UK Bulletin – 16 April 2020.

12. INTERNATIONAL TRADE AGREEMENTS (PRIVATE AND PUBLIC)

No update to our COVID-19 UK Bulletin – 16 April 2020.

13. LOCKDOWN AND PUBLIC LAW ISSUES

Review of lockdown restrictions

The Government stated on 16 April 2020 that the lockdown restrictions will remain in force for at least another three weeks. 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 next review is therefore due by 7 May 2020.

Virtual Parliament

Both Houses of Parliament return from Easter recess on 21 April 2020. Both the House of Commons and the House of Lords will consider measures to allow for virtual participation of its members in proceedings. The proposals—which would allow MPs and peers to participate via Zoom and Microsoft Teams, respectively—introduce virtual participation gradually, starting with oral questions and statements and progressing to debates and other functions if deemed appropriate.

14. M&A AND PRIVATE EQUITY

The Coronavirus Large Business Interruption Loan Scheme (CLBILS)

On 20 April 2020, the CLBILS launched to provide finance to larger businesses in the UK. The CLBILS is available to large businesses with an annual revenue of in excess of £45 million, with loans of up to £50 million available, depending on the size of a business’ annual revenue. Importantly for our clients, CLBILS (and the scheme for businesses with annual revenue of less than £45 million, the Coronavirus Business Interruption Loan Scheme) will now be available to majority-owned portfolio companies of private equity firms following updated guidance to lenders, as such companies will be considered on a standalone basis when assessing annual revenues (i.e. there will be no grouping of all of a private equity or venture capital firm’s portfolio companies’ revenues).

For more information on CLBILS, see the update on Government Support Schemes above.

The Innovation and Development Scheme

On 20 April 2020, the Government announced the establishment of a new “Future Fund” to support the UK’s innovative businesses currently affected by the COVID-19 pandemic. As part of the package, a £500 million investment funding scheme for high-growth companies impacted by the COVID-19 pandemic is being established. The scheme will be delivered in partnership between the Government and the private-sector and will provide UK-based companies with between £125,000 and £5 million of convertible loans from the Government through the Future Fund. The Future Fund will have an initial commitment of £250 million from the Government. To be eligible, private investors will need to match the Government’s funding. These convertible loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the convertible loan if not repaid prior to maturity. To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third party investors in the last five years. The scheme has been created to support private equity and venture capital-backed growth businesses that have been unable to access other Government business support programmes, such as the Coronavirus Business Interruption Loan Scheme, because they are either pre-revenue or pre-profit and typically rely on equity investment.

For more information on the Innovation and Development Scheme, see the update on Government Support Schemes above.

15. REAL ESTATE

Real Estate Industry lobbying Government

Retailers and landlords have come together to call on the Government for urgent help as retailers complain of existing Government loan schemes being largely inaccessible to the industry and the three month moratorium against eviction for non-payment of rents not being long enough to help them survive. The British Property Federation, together with the British Retail Consortium, has proposed a furloughed space grant scheme, comparable to plans adopted in several other European countries already. Under the proposed plan, the Government would pay a certain percentage of a landlord’s fixed costs on a sliding scale: the Government will pay 25% for those losing 40-60% of turnover; 50% for those with a turnover drop of 60-80%; 80% for a drop of 80-99%; and 100% for those not trading. Given the low levels of rent paid last quarter date, there is pressure from the industry to have a plan in force in advance of the next quarter date (24 June 2020). There has been no response as yet from the Government.

UK Hospitality, an organisation representing over 700 businesses in the hotel, restaurant and leisure industry, has warned of “mass redundancies and business failures” if the Government fails to “say something more formal about debt enforcement” as many businesses arrive at deadlines for statutory demands issued by landlords (as an alternative to eviction) which, if not contestable, would result in winding up/insolvency orders being granted.

Construction

BEIS recently released guidance that construction work may continue if carried out in accordance with the PHE social distancing guidelines wherever possible. The Construction Leadership Council (CLC) published version 3 of the Site Operating Procedures (SOPs) on 14 April, aimed at protecting the construction workforce during COVID-19, in particular, the rule of workers staying two metres apart should be respected as far as possible, and is supplemented by a “hierarchy of controls” to be adopted where social distancing is not possible (eliminate, reduce, isolate, control, PPE and behaviours). The amended SOPs have been welcomed by the construction industry for their practical and pragmatic advice with a large number of sites reopening. While some more granular issues remain to be ironed out, on the whole, developers and contractors can feel optimistic about the clarifications in terms of ongoing work (with a sharper focus on practicalities and commercial considerations) compared with when the lockdown first began.

Dividend policy for REITs

Many REITs, including Landsec, British Land and Hammerson, will not be paying dividends, either cancelling them completely or deferring them. Peel Hunt has estimated that cancelled dividends across FTSE 350 and AIM 100 exceed £19 billion. Given the REIT rules require payment of 90% of property income to shareholders within a 12 month period, damage to investors should be only short term. Conversely, REITs holding real estate in high demand (e.g. logistics and industrial) have announced they will be paying dividends.

COVID clauses

Recent press reported that Edinburgh Woollen Mill is negotiating leases for its Bonmarché stores including a COVID-19 clause, allowing Bonmarché not to pay rent until their shops can actually open. The clauses would also provide for rent to be refunded by landlords in certain circumstances in the case of a future pandemic.

16. UK TAX

No update to our COVID-19 UK Bulletin – 16 April 2020.

The Multipronged Approach to Government Oversight and Investigations Related to COVID-19 and the CARES Act

When a Commercial Contract Doesn’t Have a Force Majeure Clause: Common Law Defenses to Contract Enforcement

Congressional Oversight and Investigations

Agency Oversight

I. Appellate Courts Begin to Consider How Bristol-Myers Applies to Class Actions

II. Courts Consider the Interplay Between Article III Standing and Class Actions

III. The Ninth Circuit Holds That Discovery Cannot Be Used to Find a Named Plaintiff Before a Class Action Is Certified

IV. Appellate Courts Wrestle with the Issue of “Exposure” in California Unfair Competition and False Advertising Class Actions

Frequently Asked Questions to Assist Small Businesses and Nonprofits in Navigating the COVID-19 Pandemic

COVID-19: Further Developments on the UK Financial Conduct Authority’s Expectations of Solo-Regulated Firms

COVID-19 United Kingdom Weekly Webinar – April 27, 2020

Now Available: COVID-19 Resources for Public Companies

NYSE and Nasdaq Propose Temporary Waivers of Certain Market Capitalization and Trading Price Listing Requirements

PCAOB Update – PCAOB Seeks Input on CAMs and Comments on Emerging Markets

Colorado and Georgia Plan to Relax COVID-19 Restrictions and Allow Some Businesses to Reopen

COVID-19 United Kingdom Weekly Bulletin (April 22, 2020)

COVID-19: Update on UK Financial Support Measures

Pro Bono Newsletter – Coronavirus Response Efforts Update

Colorado’s “Safer at Home” Plan Will Permit Some Businesses to Reopen, but Urges Personal Caution and Telecommuting

Georgia’s Executive Order Allows Certain Businesses to Reopen and Requires Compliance With Detailed Precautionary Measures

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

**I. Appellate Courts Begin to Consider How Bristol-Myers Applies to Class Actions**