Publications Archives

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

GLOBAL OVERVIEW

The Impact of Coronavirus on the Operations of Financial Institutions: Key Guidance Issued by U.S. Financial Regulators

Since the early stages of the coronavirus (COVID-19) pandemic, U.S. financial regulators have issued a flurry of guidance. This Alert analyzes select guidance from regulators to date on three key issues: (1) the additional planning that financial institutions should undertake going forward, (2) how financial institutions should adjust day-to-day banking operations during coronavirus, including complying with their Bank Secrecy Act/anti-money laundering (“BSA/AML”) obligations, and (3) how COVID-19 affects oversight of financial institutions, including supervisory priorities and deadlines.

Key U.S. financial regulators presently appear focused on ensuring safety, soundness, and liquidity, but are acting with flexibility given the operational challenges facing, and the increased demands imposed on, U.S. financial institutions. We will continue to monitor developments, including whether regulators maintain this approach over the long term with respect to any COVID-19 performance gaps, as well as potential supervisory and enforcement options.
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Covid-19, the CARES Act and Tax Planning for Real Estate and Passthrough Businesses

The pandemic caused by Covid-19 has affected the lives of people across the globe. Widespread lockdowns and government restrictions on travel, commerce, and social gatherings have reduced or temporarily eliminated revenues for many businesses and led to numerous layoffs. The pandemic has had and will continue to create challenging conditions for the real estate industry including, for example, empty hotels, restaurants and offices, delays in construction projects, and missed rent or mortgage payments.

In March, Congress passed stimulus bills to provide emergency relief to individuals and businesses adversely impacted by Covid-19. During that process a number of tax related proposals emerged. Real estate investment trusts (REITs), for example, sought temporary relief from distribution requirements, noting that enforcing those requirements during this unprecedented economic period could force a choice between solvency and maintaining REIT status. In addition, real estate businesses sought to correct a drafting error from the 2017 Tax Act involving qualified improvement property (QIP) (i.e., certain improvements to the interior of a non-residential building that occur after the building is placed in service) that would allow the immediate and full deduction (via bonus depreciation) of the cost of QIP, consistent with other similar tangible personal property.
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New Risks Resulting from COVID-19 Analyzed under Spectrum of German Criminal, Regulatory and Civil Exposure

After more than one month of widespread measures to fight the Coronavirus, we can observe the first enforcement actions throughout Europe for alleged misconduct illustrating the wide spectrum of issues facing enforcement agencies. For instance, on April 2, 2020, the Public Prosecutor’s Office of Braunschweig announced that it is investigating the COVID-19-related deaths of elderly people in a nursing home in Wolfsburg/Germany under the suspicion of negligent homicide. On the other end of the spectrum, courts in the United Kingdom and the Netherlands have recently sentenced defendants for assault/threatening to custodial sentences because they coughed/threatened to cough at policemen. These are drastic cases, but they illustrate that with the proceeding of the COVID-19 crisis new exposure arises for business leaders and compliance officers alike.

The changing enforcement and risk landscape is partly a result of the quick adjustment of enforcement agencies to the “new normal” under restrictive measures stipulated through a series of ad hoc regulations that dramatically change the way businesses and their employees used to operate a few weeks ago. Under German law, liability can be of criminal, regulatory or civil law nature.
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1. Planning

In the initial response to coronavirus, financial regulators have issued guidance regarding how financial institutions should plan for pandemics, the financial risks posed by them, and the specific areas of responsibility for boards of directors and senior management.

Pandemic Planning and Preparedness

FFIEC, on behalf of its member agencies, issued an update to earlier guidance on how federally regulated banks and credit unions should plan and prepare for a pandemic.[2] The new guidance explains the pandemic-related information that needs to be included in a financial institution’s business continuity plan. Specifically, the plan should include, among other things, a preventative plan to reduce the impact of a pandemic, a documented strategy for scaling a response to pandemic efforts, and a comprehensive framework of facilities, as well as testing and oversight of the program. This planning should be accompanied by a business impact analysis of the potential effects of a pandemic and appropriate risk assessment and management.

DFS issued guidance requiring “New York State Regulated Institutions” to submit a report describing their pandemic preparedness.[3] The term “New York State Regulated Institutions” is not defined and appears to apply broadly to all DFS-regulated entities. The report must describe the financial institution’s “plan of preparedness to manage the risk of disruption to its services and operations.” The report is required to cover, “at a minimum,” preventative measures to mitigate the risk of operational disruption, a documented strategy addressing the impact of the outbreak in stages, an assessment of all facilities, an assessment of potential increased cyberattacks and fraud, an assessment of the preparedness of critical outside-party service providers and suppliers, employee protection strategies, and development of a communications plan, as well as testing and governance. And, on cybersecurity specifically, DFS issued additional guidance instructing regulated entities to “assess” and “address” a number of cybersecurity risks posed by working arrangements adopted during the pandemic, including ensuring secure connections, configuring remote working video and audio conferencing applications to limit unauthorized access, revisiting phishing training and testing “at the earliest practical opportunity,” and coordinating with critical third-party vendors to determine how they are adequately addressing new risks.[4]

Financial Risk Planning

DFS issued another piece of guidance requiring the same “New York State Regulated Institutions” to submit a second report regarding assurance relating to the financial risks from COVID-19.[5] The report must “describ[e] the institution’s plan regarding managing the potential financial risk” arising from coronavirus. Specifically, the plan must include an assessment of: (i) the credit risk ratings of the customers, counterparties and business sectors impacted by coronavirus; (ii) the credit exposure to customers, counterparties and business sectors impacted by coronavirus arising from lending, trading, investing, hedging and other financial transactions; (iii) the scope and the size of credits adversely impacted by coronavirus that currently are in, or potentially may move to, non-performing/delinquent status; (iv) the valuation of assets and investments that may be, or have been, impacted by coronavirus; (v) the overall impact of coronavirus on earnings, profits, capital, and liquidity; and (vi) reasonable and prudent steps to assist those adversely impacted by coronavirus.

2. Banking Practices During an Emergency

Financial regulators have also issued guidance on how financial institutions should conduct operations during this pandemic. Three key issues the guidance has covered are remote work arrangements, providing payment relief to customers, and complying with BSA/AML obligations.

Remote Work Arrangements

As explained in a recent Gibson Dunn alert, the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (“CISA”) issued updated guidance outlining which employees in the financial services sector, among others, are considered essential.[6] In the financial services sector, this includes employees needed to process transactions, maintain orderly market operations, and provide business, commercial, and consumer access to bank and non-bank financial services and lending services. These workers “should be encouraged to work remotely when possible” but, if remote work is not possible, financial institutions should use strategies such as offsetting shift hours and social distancing to reduce the likelihood of the spread of COVID-19.

The FRB, OCC, and Treasury Department have all issued statements recognizing the CISA classifications.[7] The FRB, for example, advises that supervised financial institutions should provide essential employees and contractors with a letter explaining that the identified worker is an essential critical infrastructure worker who needs to be allowed access to their place of work.[8] DFS has issued guidance permitting employees to work from home,[9] and FINRA has temporarily suspended the requirement to maintain updated Form U4 information for registered persons who are temporarily working in alternate locations due to COVID-19.[10] DFS has also issued guidance providing that New York State-chartered institutions may conduct meetings by teleconference or videoconference during the declared Disaster Emergency and 60 days thereafter.[11]

Lending, Borrower Accommodation, and Customer Assistance

The U.S. financial regulators have also issued extensive guidance encouraging financial institutions to assist consumers that may be struggling financially due to COVID-19. The FDIC and OCC issued similar guidance, which is consistent with the FRB’s pre-existing guidance regarding responses to major disasters or emergencies, encouraging financial institutions to try to provide relief to customers affected by the pandemic.[12] The FRB, FDIC, NCUA, OCC, and CFPB issued a joint statement encouraging banks, savings associations, and credit unions to offer responsible small-dollar loans to both consumers and small business.[13]

The guidance from all these regulators generally follows a similar pattern of (1) acknowledging the likely financial hardship for individuals and small businesses due to the pandemic; (2) encouraging financial institutions to do their part to alleviate the adverse impact caused by COVID-19; and (3) providing suggested measures that financial institutions may take to do so. Examples of suggested measures include offering payment accommodations, waiving overdraft and ATM fees, easing credit terms for new loans, waiving late fees for loan balances and credit card balances, increasing ATM daily cash withdrawal limits, waiving early withdrawal penalties on time deposits, and increasing credit card limits for creditworthy customers. The FRB, DFS, the FDIC, and OCC also provided assurances that prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism.[14]

Although the above guidance is voluntary, some consumer relief guidance is not optional. DFS promulgated regulations requiring banks to grant 90-day forbearances on residential mortgages for borrowers that are suffering financial hardship as a result of the COVID-19 pandemic and also to waive ATM, overdraft, and credit card late payment fees. Those regulations were previously summarized by Gibson Dunn here.

Bank Secrecy Act Compliance

U.S. regulators, notably FinCEN, have issued a number of pieces of guidance on how financial institutions should continue to comply with their BSA/AML obligations during the pandemic.

FinCEN issued guidance stating that compliance with the BSA “remains crucial to protecting our national security by combating money laundering and related crimes, including terrorism and its financing,” and, as such, “FinCEN expects financial institutions to continue following a risk-based approach” and “diligently adhere to their BSA obligations.”[15] At the same time, FinCEN “recognizes that certain regulatory timing requirements with regard to BSA filings may be challenging during the COVID-19 pandemic and that there may be some reasonable delays in compliance.” Nevertheless, financial institutions are advised to “contact FinCEN and their functional regulator as soon as practicable [regarding] concern[s] about any potential delays in [their] ability to file required Bank Secrecy Act (BSA) reports.”[16] To that end, FinCEN has created a new mechanism to contact the agency through its website for COVID-19-related issues.[17] Such communications “are strongly encouraged but not required.”[18] FinCEN also encourages financial institutions to contact their regulators or examiners “as soon as practicable if a financial institution has BSA compliance concerns because of the COVID-19 pandemic.”

The OCC has issued guidance supporting FinCEN’s approach to BSA/AML compliance, stating that it “encourages all banks to follow a risk-based approach to managing their BSA compliance programs.”[19] Specifically, “[w]hen evaluating a bank’s BSA compliance program, the OCC will consider the actions taken by banks to protect and assist employees, customers, and others in response to the COVID-19 pandemic, including any reasonable delays in BSA report filings, beneficial ownership verification or re-verification requirements, and other risk management processes.”[20] Again, banks are encouraged to contact examiners if they anticipate delays.

At a more granular level, FinCEN has also issued guidance regarding filing SARs for COVID-19-related activity and complying with beneficial ownership obligations when dispensing loans under the Paycheck Protection Program (“PPP”). As financial institutions continue to monitor transactions in compliance with their obligations under the Bank Secrecy Act and relevant anti-money laundering laws, FinCEN has specifically identified various COVID-19-related scams that may occur, including companies selling unapproved or misbranded products making false health claims and bad actors soliciting donations or stealing personal information by impersonating health-related government agencies, international organizations, or healthcare organizations.[21] In the event that financial institutions detect any of these typologies or suspect suspicious transactions linked to COVID-19, they are asked to enter “COVID19” in Field 2 of the Suspicious Activity Report (“SAR”) template.

Regarding loans issued under the PPP, analyzed in detail in a separate Gibson Dunn client alert, FinCEN issued guidance clarifying that if PPP loans are being made to existing customers and their necessary information was previously verified, it does not need to be re-verified for FinCEN Rule CDD purposes.[22] As for new customers, FinCEN clarified that, for all natural persons with a 20% or greater ownership stake in the applicant business, collection of their owner name, title, ownership percentage, TIN, address, and date of birth will be deemed to satisfy applicable BSA requirements and FinCEN regulations governing the collection of beneficial ownership information.

Relief on CECL Implementation

Even before the effects of the pandemic began to make themselves felt, the new current expected credit losses (“CECL”) methodology promulgated by the Financial Accounting Standards Board concerned many banking institutions, which feared pro-cyclical effects on credit loss allowances, and ultimately, reductions to capital. In 2019, U.S. banking regulators modified their capital rules to permit banks to phase in over a period of three years the day-one effects of the transition to CECL, to smooth out those effects over time.

On March 27, 2020, the U.S. regulators issued an interim final rule that provided alternative relief, by permitting banking organizations to phase-in over a period of five years the effects of the transition to CECL that occur during the first two years of implementation. Under this approach, no effects of CECL implementation will be recognized for the first two years; banking organizations will phase in the effects over years three through five.[23] In addition, Section 4014 of the CARES Act provides banking organizations with the option not to comply with CECL until the earlier of the end of 2020 or the end of the COVID-19 emergency.[24] On March 31, 2020, the banking regulators issued a statement to the effect that the regulatory relief and Section 4014 are not mutually exclusive; a banking organization that elects to use the statutory relief may also elect the regulatory capital relief after the expiration of the statutory relief period. The two-year period in the regulatory relief would be reduced by the number of quarters that the banking organization made use of the statutory relief.[25]

3. Supervisory Priorities and Deadlines

U.S. financial regulators have also provided guidance on how COVID-19 will affect examination priorities and reporting deadlines.

Regarding examinations, the FRB released guidance stating that it “is reducing its focus on examinations and inspections at this time” and that “[a]ny examination activities will be conducted off-site until normal operations are resumed.”[26] For supervised institutions with less than $100 billion in assets, the FRB intends to cease all regular examination activity unless there is an urgent need, or it is critical for consumer protection. The FRB intends to reassess its approach in the last week of April. Supervisors are also focusing efforts to ensure that supervisory findings are still relevant and appropriately prioritized in light of changing circumstances. And, as noted above, the FRB, DFS, the FDIC, and OCC have provided assurances that prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism.

Regulators have also extended various reporting and submission deadlines. A selected list of reporting deadlines that have been extended to date is included in the table below. Please consult the website of your financial regulators to confirm current deadlines and extensions. In general, if a financial institution will not be able to meet a submission deadline as a result of COVID-19, the best practice is to contact your financial institution’s regulator.[27]

Table 1 – Deadlines Extended by U.S. Financial Regulators

Agency	Task	Extension / Deadline
FDIC	Q1 2020 Regulatory Report Filings	30-day grace period[28]
FDIC	Reports of Condition and Income (Call Report) due March 31, 2020	30-day grace period
FinCEN	FIN-2020-R001 ruling on CTR filing obligations when reporting transactions involving sole proprietorships and entities operating under a “doing business as” (DBA) name	Indefinitely
FRB	Deadline for remediating existing supervisory findings unless the FRB notifies the institution otherwise	90 days
FRB	Revised Control Framework for determining when one company controls another company for purposes of the Bank Holding Company Act and Home Owners’ Loan Act	Effective date delayed six months, until September 30, 2020[29]
FINRA	Comment Period for Regulatory Notice 20-05	May 31, 2020
FINRA	Comment Period for Regulatory Notice 20-04	May 15, 2020
FINRA	Annual Reports	10-day extension for reports related to fiscal years ending January 2020 through March 2020
FINRA	FOCUS Reports	10-day extension for FOCUS reports related to periods ending in February 2020 through April 2020
FINRA	· Rule 3120 Report · Rule 3130 Certification	Deadlines that fall between March 1 and May 1, 2020 are extended until May 31, 2020
FINRA	Fingerprinting requirements for FINRA members and employees	Temporary exemption until May 30, 2020
FINRA	Timeframe for individuals designated as principals under FINRA Rule 1210.04 prior to February 2, 2020 to pass appropriate examination(s)	Extended to May 31, 2020
NY DFS	Annual stockholder meetings	Institutions will have seven months instead of four months from the beginning of an institution’s fiscal year end if the prior deadline for the stockholder meeting occurs during the disaster emergency
NY DFS	· Annual reports and comparative statements of commercial banks · Annual reports of licensed lenders · Quarterly reports of budget planners · Audited financial statements of budget planners · Annual reports and audited financial statements of check cashers · Certifications of compliance with cybersecurity requirements · Transaction monitoring and filtering · Volume of operation reports · Volume of servicing reports · Quarterly financial statements of virtual currency licensees · Annual reports of student loan servicers	45-day extension

[1] This alert covers select guidance issued by the Federal Reserve Board (“FRB”), the Federal Financial Institutions Examination Council (“FFIEC”), the New York Department of Financial Services (“DFS”), the Office of the Comptroller of the Currency (“OCC”), the Financial Industry Regulatory Authority (“FINRA”), the Federal Deposit Insurance Corporation (“FDIC”), and the Financial Crimes Enforcement Network (“FinCEN”). It does not cover every COVID-19-related guidance issued by these regulators nor does it discuss guidance issued by the U.S. Department of Justice, the Securities and Exchange Commission, or state financial regulators other than DFS.

[2] Federal Financial Institutions Examination Council, Interagency Statement on Pandemic Planning (Mar. 6, 2020), https://www.ffiec.gov/press/pr030620.htm. The member agencies of the FFIEC are the FRB, FDIC, OCC, and the National Credit Union Administration (“NCUA”) and the Consumer Financial Protection Bureau (“CFPB”).

[3] N.Y. Dep’t of Fin. Servs., Re: Guidance to New York State Regulated Institutions and Request for Assurance of Operational Preparedness Relating to the Outbreak of the Novel Coronavirus (Mar. 10, 2020), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20200310_risk_coronavirus.

[4] N.Y. Dep’t of Fin. Servs., Re: Guidance to Department of Financial Services (“DFS”) Regulated Entities Regarding Cybersecurity Awareness During COVID-19 Pandemic (Apr. 13, 2020), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20200413_covid19_cybersecurity_awareness.

[5] N.Y. Dep’t of Fin. Servs., Re: Guidance to New York State Regulated Institutions and Request for Assurance Relating to Potential Financial Risk Arising from the Outbreak of the Novel Coronavirus (Mar. 10, 2020), https://www.dfs.ny.gov/industry_guidance/industry_letters/il20200310_financial_risk_coronavirus.

[6] Cybersecurity and Infrastructure Security Agency (CISA) of the Dep’t of Homeland Security, Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response (Apr. 17, 2020), https://www.cisa.gov/publication/guidance-essential-critical-infrastructure-workforce.

[7] For example, the Treasury Department also includes “key third-party providers who deliver core services” in its definition of essential financial services sector workers. U.S. Department of the Treasury, Memorandum: Financial Services Sector Essential Critical Infrastructure Workers (Mar. 22, 2020), https://www.aba.com/-/media/documents/incident-response/Financial-Services-Sector-Essential-Critical-Infrastructure-Workers.pdf.

[8] Bd. of Governors of the Fed. Reserve Sys., SR 20-6: Identification of Essential Critical Infrastructure Workers in the Financial Services Sector During the COVID-19 Response (Mar. 27, 2020), https://www.federalreserve.gov/supervisionreg/srletters/sr2006.htm.

[9] N.Y. Dep’t of Fin. Servs., Order (Mar. 12, 2020), https://www.dfs.ny.gov/system/files/documents/2020/03/ea20200312_covid19_relief_order.pdf.

[10] Financial Industry Regulatory Authority, Regulatory Notice 20-08: Pandemic-Related Business Continuity Planning, Guidance and Regulatory Relief, https://www.finra.org/rules-guidance/notices/20-08.

[11] N.Y. Dep’t of Fin. Servs., Order (Apr. 16, 2020), https://www.dfs.ny.gov/system/files/documents/2020/04/ea200416_banking_order_re_virtual_and_stockholder_meetings_due_to_c_19.pdf.

[12] Fed. Deposit Ins. Corp., Regulatory Relief: Working with Customers Affected by the Coronavirus, FIL-17-2020 (Mar. 13, 2020), https://www.fdic.gov/news/news/financial/2020/fil20017.html; Office of the Comptroller of the Currency, Pandemic Planning: Working With Customers Affected by Coronavirus and Regulatory Assistance (Mar. 13, 2020), https://www.occ.treas.gov/news-issuances/bulletins/2020/bulletin-2020-15.html; Bd. of Governors of the Fed. Reserve Sys., SR 13-6 / CA 13-3: Supervisory Practices Regarding Banking Organizations and their Borrowers and Other Customers Affected by a Major Disaster or Emergency (Mar. 29, 2013), https://www.federalreserve.gov/supervisionreg/srletters/sr1306.htm.

[13] Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19 (Mar. 26, 2020), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200326a1.pdf. This March 26 guidance follows a March 19 joint statement from the Federal Reserve, FDIC, and OCC stating that the agencies will look favorably on retail banking and lending activities that meet the needs of small businesses and farms, in connection with the Community Reinvestment Act. See Office of the Comptroller of the Currency, Pandemic Planning: Joint Statement on CRA Consideration for Activities in Response to COVID-19 (Mar. 19, 2020), https://www.occ.gov/news-issuances/bulletins/2020/bulletin-2020-19.html.

[14] In the FDIC’s “Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019,” the FDIC stated that it would be acceptable for a bank to offer borrowers affected by COVID-19 payment accommodations, such as allowing borrowers to defer or skip some payments or extending the payment due date. See Fed. Deposit Ins. Corp., Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as COVID-19) – As of April 15, 2020, https://www.fdic.gov/coronavirus/faq-fi.pdf. Additionally, on April 7, 2020, the FRB, the CFPB, the FDIC, NCUA, and OCC issued an updated statement “encouraging financial institutions to work prudently with borrowers” affected by COVID-19 and providing additional information regarding loan modifications. Specifically, the agencies “encourage financial institutions to work prudently with borrowers” and “will not criticize institutions for working with borrowers in a safe and sound manner[] and will not direct supervised institutions to automatically categorize all COVID-19-related modifications as TDRs (troubled debt restructurings).” Bd. of Governors of the Fed. Reserve Sys. et al., Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) (Apr. 7, 2020), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200407a1.pdf.

[15] Financial Crimes Enforcement Network, Press Release, The Financial Crimes Enforcement Network Provides Further Information to Financial Institutions in Response to the Coronavirus Disease 2019 (COVID-19) Pandemic (Apr. 3, 2020), https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-provides-further-information-financial.

[16] Financial Crimes Enforcement Network, The Financial Crimes Enforcement Network (FinCEN) Encourages Financial Institutions to Communicate Concerns Related to the Coronavirus Disease 2019 (COVID-19) and to Remain Alert to Related Illicit Financial Activity (Mar. 16, 2020), https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-fincen-encourages-financial-institutions.

[17] Specifically, parties are advised to go to https://www.fincen.gov/contact and select “COVID19” in the “Subject” drop down menu.

[18] Financial Crimes Enforcement Network, Press Release, The Financial Crimes Enforcement Network Provides Further Information to Financial Institutions in Response to the Coronavirus Disease 2019 (COVID-19) Pandemic (Apr. 3, 2020), https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-provides-further-information-financial.

[19] Office of the Comptroller of the Currency, Bank Secrecy Act/Anti-Money Laundering: OCC Supports FinCEN’s Regulatory Relief and Risk-Based Approach for Financial Institution Compliance in Response to COVID-19 (Apr. 7, 2020), https://www.occ.treas.gov/news-issuances/bulletins/2020/bulletin-2020-34.html.

[20] Id.

[21] Financial Crimes Enforcement Network, Press Release, The Financial Crimes Enforcement Network (FinCEN) Encourages Financial Institutions to Communicate Concerns Related to the Coronavirus Disease 2019 (COVID-19) and to Remain Alert to Related Illicit Financial Activity (Mar. 16, 2020), https://www.fincen.gov/news/news-releases/financial-crimes-enforcement-network-fincen-encourages-financial-institutions.

[22] Financial Crimes Enforcement Network, Press Release, Paycheck Protection Program Frequently Asked Questions (FAQs) (Apr. 13, 2020), https://www.fincen.gov/news/news-releases/paycheck-protection-program-frequently-asked-questions.

[23] Joint Press Release: Agencies Announce Two Actions to Support Lending to Households and Businesses (Mar. 27, 2020), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200327a.htm.

[24] Coronavirus Aid, Relief, and Economic Security Act § 4014, Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27, 2020).

[25] Joint Statement on the Interaction of Regulatory Capital Rule: Revised Transition of the CECL Methodology for Allowances with Section 4014 of the Coronavirus Aid, Relief, and Economic Security Act (Mar. 31, 2020), https://www.fdic.gov/news/news/financial/2020/fil20032a.pdf.

[26] Bd. of Governors of the Fed. Reserve Sys., Federal Reserve Statement on Supervisory Activities (Mar. 24, 2020), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200324a1.pdf.

[27] The Federal Reserve, for example, has explicitly stated it does not expect to take supervisory action against a banking organization that takes reasonable and prudent steps to comply with the Board’s reporting requirements but is unable to do so in these difficult times. See Bd. of Governors of the Fed. Reserve Sys., SR 13-6 / CA 13-3: Supervisory Practices Regarding Banking Organizations and their Borrowers and Other Customers Affected by a Major Disaster or Emergency (Mar. 29, 2013), https://www.federalreserve.gov/supervisionreg/srletters/sr1306.htm.

[28] FDIC-supervised institutions are encouraged to contact the FDIC in advance of the official filing date if they anticipate a delayed submission.

[29] For more information on the Federal Reserve’s Revised Control Framework, see our previously published client alert on this topic, available at https://www.gibsondunn.com/federal-reserve-new-control-framework-somewhat-greater-opportunities-for-minority-investments/.

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

The following Gibson Dunn lawyers assisted in preparing this client alert: Matthew Biben, Stephanie Brooker, Joel Cohen, Kendall Day, Mylan Denerstein, Arthur Long, Adam Smith, Joseph Warin, Linda Noonan, Chris Jones, Susanna Schuemann, and Tory Roberts.

*Mr. Jones and Ms. Schuemann are admitted only in New York and Washington, D.C. Ms. Roberts is admitted only in California. All are practicing under the supervision of Principals of the Firm.

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

After more than one month of widespread measures to fight the Coronavirus,[1] we can observe the first enforcement actions throughout Europe for alleged misconduct illustrating the wide spectrum of issues facing enforcement agencies. For instance, on April 2, 2020, the Public Prosecutor’s Office of Braunschweig announced that it is investigating the COVID-19-related deaths of elderly people in a nursing home in Wolfsburg/Germany under the suspicion of negligent homicide.[2] Sadly, twenty-two people had died as a consequence of the infection with the virus. According to the allegations the hygienic measures taken to protect the inhabitants from contagion were insufficient and a prohibition to allow third party visits to the inhabitants was ordered too late. On the other end of the spectrum, courts in the United Kingdom and the Netherlands have recently sentenced defendants for assault/threatening to custodial sentences because they coughed/threatened to cough at policemen.[3]

These are drastic cases, but they illustrate that with the proceeding of the COVID-19 crisis new exposure arises for business leaders and compliance officers alike.

1. Sources of liability and exposure

Businesses, whether run by individuals or by companies, have a responsibility to appropriately protect their employees, customers, and business partners from dangers deriving from business operations. The COVID-19 pandemic should remind managers of this fundamental obligation when running the business during the current crisis. Given the dynamic of the situation, this might involve a series of measures to be taken or adjusted ad hoc, that in the short or mid-term have potentially substantial impact on the way the business is run or even may have to discontinue the business.

Under German law, liability can be of criminal, regulatory or civil law nature:

Individual managers may be held criminally responsible, if they fail to comply with required safety standards that cause bodily harm of others (e.g. for negligent bodily harm or negligent killing), or be held liable for regulatory/criminal offenses if they fail to comply with official orders and regulations based (e.g. orders under the Infectious Diseases Protection Act, IfSG[4]). They can also be held responsible and fined with a fine of up to €10 million for committing a regulatory offense if they fail to duly oversee their employees and therefore facilitate or enable that they commit offenses;
Companies and partnerships can be held administratively responsible and fined, if an offense was committed by a representative of the company/partnership, e.g. a board member, or a person having managing responsibilities (Leitungsperson) and as a result thereof, (i) duties incumbent on the business have been violated, or (ii) the business has been enriched or (iii) was intended to be enriched. In addition, any economic gain derived from the violation may be subject to disgorgement;
Finally, individual managers as well as companies/partnerships represented by them may be held responsible under civil law for damages if as a result of their business decisions other people, including employees, suffer bodily harm.

2. Attributing criminal responsibility to management for business decisions in situations of crisis

If employees, customers, or business partners become infected with the virus due to poor organizational and safety standards, it is conceivable that managers can be held responsible for not having prevented the infection. This does not only apply to a single executive board member responsible for occupational health and safety. Rather, in the current situation, every board member needs to have these issues in mind.

The German Federal Court of Justice held in a famous judgment^[5] that the entire board can be made criminally responsible for bodily harm, no matter whether the individual board member was internally responsible for health and safety matters. In that particular case, the board members of a company were convicted for dangerously inflicting bodily harm on customers because they unanimously decided to refrain from a recall of a shoe leather spray that was detrimental to health when used.[6]

The court, by invoking principles of company law, set out the following:

“The principles of general responsibility and general competency of the management attach if for a particular reason, such as in situations of crisis and exception, the enterprise as a whole is concerned. In such a situation, the entire management is called upon to act.”^[7]

When neglected or inadequate safety and health measures can lead to a potentially fatal infection of employees, business partners and customers, as in the current COVID-19 pandemic, it is an exceptional situation that affects the entire company. Therefore, the current crisis triggers the general responsibility of the entire management meaning that business leaders must feel responsible that adequate organizational measures be taken to prevent harm to both employees and third parties such as customers, visitors and business partners. It is therefore recommendable to Compliance Officers to put such measures on the agenda of the entire board and make members aware of their duties to inform themselves, to decide on adequate measures and to ascertain their implementation.

3. Holding the business responsible for offences of its business leaders

As set out above, companies and partnerships can be held administratively responsible and fined, if an offense was committed by a representative of the company/partnership, e.g. a board member, or a person having managing responsibilities (Leitungsperson) and as a result thereof, (i) duties incumbent on the legal entity have been violated, or (ii) the legal entity has been enriched or (iii) was intended to be enriched.

For instance, if a company hires employees, it is a duty incumbent to the company that runs the business to protect its employees from dangers arising at the workplace. In contrast, a mere break of a curfew by a manager outside of the business cannot lead to fining the company because observing a curfew is a duty that entirely attaches to the individual.

4. Creating civil liability exposure

In addition, individual managers as well as companies/partnerships represented by them may be held responsible as joint obligors under civil law for damages if as a result of their business decisions other people suffer bodily harm. For instance, if a company were to sell a protective mask that due to its composition is knowingly harmful to the customers making use of it.

Such liability usually arises under sec. 280(1), 241(2), 823(1) and/or (2) of the German Civil Code if an offense that serves to protect individual interests is committed (e.g. negligent bodily harm). In the case of employees, civil liability can also arise on the basis of employment law but will often be excluded due to the provisions of the mandatory accident insurance (sec. 104 Social Code VII).

The amount to be compensated under German civil law does not include punitive damages that is known in other jurisdictions, but is calculated as the difference between the victims hypothetical financial situation had the event causing the damage not occurred and its real financial situation, supplemented by a sum for non-material damage for pain and suffering.

5. Special Recommendations by Public Authorities in re COVID-19

Apart from special requirements for particular businesses that may require specific instructions relating to the operation of the business (e.g. dealing with customers and business partners), as a minimum measure, we would recommend implementing and controlling the effective use and application of the workplace-related recommendations by public authorities.

Adhering to such recommendations would, absent more specific circumstances mandating more stringent measures, allow management to show that it did not act negligently and would further demonstrate compliance with its general obligation set out in Sec. 4 Work Protection Act (ArbSchG) stipulating that work must be organized in such a way that risks to physical and mental health are avoided and minimized.

In this regard, we deem the following recommendations as particularly useful which are targeted at the need of employers:

Recommendations by the Federal Center for Health Education (BzGA): https://www.infektionsschutz.de/fileadmin/infektionsschutz.de/Downloads/Infoblatt-Arbeitgeber-Coronavirus.pdf (in German; last visited April 20, 2020);
Recommendations by the World Health Organization: https://www.who.int/docs/default-source/coronaviruse/getting-workplace-ready-for-covid-19.pdf?sfvrsn=359a81e7_6 (in English, last visited April 20, 2020);
The Robert Koch Institute^[8] has published specific information with respect to the prevention of infections in nursing homes and hospitals: https://www.rki.de/DE/Content/InfAZ/N/Neuartiges_Coronavirus/nCoV.html (in German, last visited April 20, 2020);
Lastly, the Federal Ministry of Health has put together a website with hotlines, podcasts and useful links for many topics affected by COVID-19: https://www.bundesgesundheitsministerium.de/coronavirus.html#c17634 (mostly in German, partly in further languages including English, last visited April 20, 2020).

Additional helpful guidance can often be found for members on the websites of the respective industry associations. These are more specific to the specific industry requirements relevant from case to case.

[1] See in this regard, https://www.gibsondunn.com/covid-19-german-infectious-diseases-protection-act-what-makes-you-stay-at-home/ (last visited April 20, 2020).

[2] https://www.sueddeutsche.de/gesundheit/gesundheit-wolfsburg-corona-tode-in-seniorenheim-staatsanwaltschaft-ermittelt-dpa.urn-newsml-dpa-com-20090101-200402-99-565664 (in German, last visited April 20, 2020).

[3] https://www.sueddeutsche.de/panorama/coronavirus-grossbritannien-polizei-1.4866309 (in German, last visited April 20, 2020).

[4] See in this regard, https://www.gibsondunn.com/covid-19-german-infectious-diseases-protection-act-what-makes-you-stay-at-home/ (last visited April 20, 2020).

[5] See Federal Court of Justice, Judgment of July, 6, 1990, 2 StR 549/89.

[6] The defendants were sentenced to fines and imprisonment (up to 18 months) with probation.

[7] Our translation, the original quote has the following wording: „Doch greift der Grundsatz der Generalverantwortung und Allzuständigkeit der Geschäftsleitung ein, wo – wie etwa in Krisen- und Ausnahmesituationen – aus besonderem Anlaß das Unternehmen als Ganzes betroffen ist; dann ist die Geschäftsführung insgesamt zum Handeln berufen […].“ Federal Court of Justice, Judgment of July 6, 1990, 2 StR 549/89, para. 51.

[8] For the role of the Robert Koch Institute, see https://www.gibsondunn.com/covid-19-german-infectious-diseases-protection-act-what-makes-you-stay-at-home/ (last visited April 20, 2020).

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please contact your usual contacts or any member of the Firm’s Coronavirus (COVID-19) Response Team or the following authors in Germany:

Authors: Benno Schwarz, Ralf van Ermingen-Marbach and Andreas Dürr

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

Washington, D.C. partner Judith Alison Lee is the author of “Final CFIUS regulations come into effect: mandatory filing requirements,” [PDF] published in the Financier Worldwide magazine’s April 2020 issue.

In a decision that directly addresses an issue of critical importance for the daily fantasy sports industry, on April 16, 2020, the Illinois Supreme Court held that head-to-head daily fantasy sports matches do not constitute “gambling” as contemplated by the state’s criminal statutes. Dew-Becker v. Wu, 2020 IL 124472. In this alert, we summarize (1) the current landscape of sports betting regulation in the United States, as well as treatment of daily fantasy sports vis-à-vis sports betting, (2) the analysis of the Illinois Supreme Court in the Dew-Becker case, and (3) the potential impact of the Dew-Becker ruling, and rulings by other state courts on the issue decided in the Dew-Becker case, on the daily fantasy sports industry.

Current Landscape – Sports Betting and Daily Fantasy Sports

Following the historic reversal of the federal ban on sports betting in 2018 by the U.S. Supreme Court in Murphy v. National Collegiate Athletic Association, et al., 138 S.Ct. 1461 (2018)[1], the regulation of sports betting was placed in the hands of each state, which has caused a patchwork of state legislation and case law governing sports betting to emerge in the last two years. The federal Interstate Wire Act of 1961 further complicates this state-by-state legal landscape, as it prohibits the transmission of sports bets or wagers through interstate commerce. As a result, online sports betting operations (where legalized) currently require the bettor to be geographically located in the same state as the sportsbook operator accepting bets.

While daily fantasy sports have not been generally viewed as sports betting, the question remains an important one for daily fantasy sports operators and their customers. At the federal level, daily fantasy sports are specifically excluded from the definition of “bet” or “wager” under the Uniform Internet Gambling Enforcement Act of 2006, the federal statute regulating online gambling. See 31 USC 5362(1)(E)(ix).

For the states that have adopted legislation regarding sports betting, those that have chosen to explicitly address the treatment of daily fantasy sports are in the minority, although more than twenty states have passed laws declaring that daily fantasy sports are not gambling or otherwise regulating the contests as a lawful activity. Currently, the industry’s largest platforms offer paid contests in 43 states and the District of Columbia, but do not offer paid contests in seven states (Arizona, Hawaii, Idaho, Louisiana, Montana, Nevada, and Washington). In the case of Nevada, the state Gaming Control Board has classified daily fantasy sports as a form of gambling (which is legal in the state) that is subject to Nevada’s existing regulatory scheme requiring a state license, thus practically preventing operators from entering the market.

One state appellate court has concluded that daily fantasy sports are a form of gambling. Earlier this year a New York state appellate court, in a split decision, affirmed a lower court’s finding that interactive fantasy sports constitute gambling after applying the “material degree of chance” test applied by a minority of courts. White v. Cuomo, 62 Misc. 3d 877 (N.Y. Sup. Ct. 2018), reargument denied, (N.Y. Sup. Ct. 2019), and aff’d as modified, 181 A.D.3d 76 (N.Y. App. Div. 2020). The New York State Attorney General has filed a notice of appeal to challenge this ruling.

Dew-Becker Ruling

In making its determination in the Dew-Becker case, the Illinois Supreme Court, in an opinion penned by Chief Justice Burke, applied the “predominant factor test” used by most courts and concluded that daily fantasy sports do not constitute gambling. The “predominant factor test” is used to determine whether a game is a “game of chance”, and therefore constitutes gambling, by evaluating whether the element of chance or the element of skill predominantly controls the game’s result. Relying heavily upon recent statistical studies demonstrating the importance of player skill in head-to-head daily fantasy sports games, the majority concluded that the outcomes of such games are predominantly skill-based, and therefore, not gambling.

The court discussed, but ultimately did not use, two other tests that other states have employed to determine whether a contest is one of skill or chance. First, the court rejected the “material element test” (employed by the New York court in White v. Cuomo discussed above), which analyzes whether the game involves the element of chance to a material degree, reasoning that the test “depends too greatly on a subjective determination of what constitutes ‘materiality.’” Second, the court rejected the “any chance test”, which analyzes whether the game involves any element of chance whatsoever, reasoning that the test “is essentially no test at all” because “every contest involves some degree of chance.”

Furthermore, the court underscored the ability of the state legislature to change the laws and regulations applicable to daily fantasy sports in Illinois, noting that the determination of whether “regulation of DFS is unnecessary or inappropriate…is for the legislature. We determine here only that the DFS contest at issue in this case does not fall under the current definition of gambling.” Dew-Becker v. Wu, 2020 IL 124472 at *6.

The decision was not unanimous, however – in a dissent, Justice Karmeier sharply questioned the majority’s application of the predominant factor test, stating in his dissent that because the element of chance (e.g., the participant cannot influence the athletes’ performance) might ultimately thwart the participant’s efforts or skill in daily fantasy sports, the character of such game is one of chance. The dissenting opinion also foreshadowed the plaintiff’s intent, as stated by his counsel in press reports following the decision, to file a motion for rehearing on the grounds that the issue of head-to-head daily fantasy sports as a game of skill v. chance was not directly litigated by the parties.

Potential Impact

As the legal and regulatory treatment of both sports gambling and daily fantasy sports continues to unfold on the state level, the outcomes could have significant consequences for the development of the daily fantasy sports industry and for the business of daily fantasy sports operators. Whether state courts classify daily fantasy sports as a form of sports gambling may determine whether the industry is subject to the evolving and complex (and costly) regulatory laws governing sports gambling in the particular state.

State regulatory schemes governing sports betting have varied widely. Emerging issues facing gaming operators include: market access based on a limited number of state licenses, distinctions between brick and mortar, mobile, and online platforms, the use of official sports league data, integrity fees, and player protections. If courts in other states follow the reasoning applied by the Illinois Supreme Court in Dew-Becker, using the “predominant factor test” or otherwise, in likewise reaching the conclusion that daily fantasy sports do not constitute gambling, daily fantasy sports operators conducting business in those states will have greater certainty that their operations are not subject to the legal and regulatory hurdles and costs imposed by evolving, and at times ambiguous, laws and regulations applicable to sports betting in those states.

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[1] Gibson, Dunn & Crutcher LLP represented the State of New Jersey in this victory.

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

Authors: Kevin Masuda, Maurice Suh, Sarah Graham and Maya Hoard

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

After a busy 2019, legal developments related to artificial intelligence and automated systems (“AI”) continued apace into the new decade and saw tangible regulatory frameworks begin to take shape on both sides of the Atlantic. Continuing to tread lightly, in January 2020 the U.S. federal government issued “AI principles” to guide agencies in regulating the private sector—a tentative first step towards federal regulatory oversight for AI.[1] The following month, the European Commission (“EC”) published its comprehensive and highly anticipated draft legislative proposal for the regulation of AI in the EU. Now—as lawmakers worldwide focus efforts and resources on the evolving pandemic crisis and the private sector is hamstrung by shelter-in-place orders—the forward momentum has faltered. Nonetheless, we offer this brief overview of the most recent developments in the AI space, and take a deep dive into the fast-evolving status of intellectual property (“IP”) policy on AI.

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I. U.S. Federal Legislation & Policy

II. EU Legislation & Policy

III. Intellectual Property

IV. Autonomous Vehicles

V. Employment Law/Hiring

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I. U.S. FEDERAL LEGISLATION & POLICY

OMB Guidance for Federal Regulatory Agencies

The February 2019 Executive Order “Maintaining American Leadership in Artificial Intelligence” (“EO”) directed the Office of Management and Budget (“OMB”) director, in coordination with the directors of the Office of Science and Technology Police, Domestic Policy Council, and National Economic Council, and in consultation with other relevant agencies and key stakeholders (as determined by the OMB), to issue a memorandum to the heads of all agencies to “inform the development of regulatory and non-regulatory approaches” to AI that “advance American innovation while upholding civil liberties, privacy, and American values” and consider ways to reduce barriers to the use of AI technologies in order to promote their innovative application.[2] The White House Office of Science and Technology Policy further indicated in April 2019 that regulatory authority will be left to agencies to adjust to their sectors, but with high-level guidance from the OMB, as directed by the EO.[3]

In January 2020, the OMB published a draft memorandum featuring 10 “AI Principles” and outlining its proposed approach to regulatory guidance for the private sector which echoes the “light-touch” regulatory approach espoused by the 2019 EO, noting that promoting innovation and growth of AI is a “high priority” and that “fostering innovation and growth through forbearing from new regulations may be appropriate.”[4] As expected, the principles favor flexible regulatory frameworks consistent with the EO[5] that allow for rapid change and updates across sectors, rather than one-size-fits-all regulations, and urge European lawmakers to avoid heavy regulation frameworks. The key takeaway for agencies is to encourage AI and, when it is necessary to regulate, to tread lightly and not overregulate or risk impeding AI development.

The 10 “AI Principles” for U.S. regulatory agencies are:

Public Trust in AI—In response to concerns about the risks of AI, the memorandum notes that it is “important that the government’s regulatory and non-regulatory approaches to AI promote reliable, robust, and trustworthy AI applications, which will contribute to public trust in AI.”
Public Participation—An agency should foster public trust by encouraging public participation in its AI regulation; therefore, “[a]gencies should provide ample opportunities for the public to provide information and participate in all stages of the rulemaking process, to the extent feasible .…”
Scientific Integrity and Information Quality—Agencies should develop regulatory approaches “[c]onsistent with the principles of scientific integrity” to foster public trust. “Best practices include transparently articulating the strengths, weaknesses, intended optimizations or outcomes, bias mitigation, and appropriate uses of the AI application’s results.”
Risk Assessment and Management—Agencies should not be overly cautious in regulating. “It is not necessary to mitigate every foreseeable risk . . . .” Instead, agencies should use a practical cost-benefits analysis. “[A] risk-based approach should be used to determine which risks are acceptable and which risks present the possibility of unacceptable harm, or harm that has expected costs greater than expected benefits.”
Benefits and Costs—Again, agencies are directed to carefully consider the costs of regulation and to avoid hampering innovation. “Such consideration will include the potential benefits and costs of employing AI, when compared to the systems AI has been designed to complement or replace, whether implementing AI will change the type of errors created by the system, as well as comparison to the degree of risk tolerated in other existing ones.”
Flexibility—Agencies are directed to eschew “[r]igid, design-based regulations that attempt to prescribe the technical specifications of AI applications” that will become impractical and ineffective “given the anticipated pace with which AI will evolve ….” Instead, “agencies should pursue performance-based and flexible approaches that can adapt to rapid changes and updates to AI applications.”
Fairness and Non-Discrimination—Responding to concerns that AI may incorporate or create harmful bias, the memorandum notes that “[a]gencies should consider in a transparent manner the impacts that AI applications may have on discrimination” because “AI applications have the potential of reducing present-day discrimination caused by human subjectivity.”
Disclosure and Transparency—Continuing with the theme of fomenting public trust, agencies are directed to consider the role disclosures may play (e.g., disclosures when AI is being used). However, “[w]hat constitutes appropriate disclosure and transparency is context-specific, depending on assessments of potential harms, the magnitude of those harms, the technical state of the art, and the potential benefits of the AI application.”
Safety and Security—Agencies are to implement controls “to ensure the confidentiality, integrity, and availability of the information processed, stored, and transmitted . . . ,” and consider cybersecurity and potential risks relating to malicious AI deployment.
Interagency Coordination—Agencies are directed to coordinate with each other to share experiences and to ensure “consistency and predictability of AI-related policies that advance American innovation and growth in AI,” while “appropriately protecting privacy, civil liberties, and American values and allowing for sector- and application-specific approaches when appropriate.”

Consistent with its light-touch approach, the draft memorandum also proposes several non-regulatory approaches, including the use of sector-specific policy guidance or frameworks, pilot programs and experiments, and voluntary consensus standards—and particularly encourages cooperation with the private sector. The memorandum also advocates for agencies to foster AI development through providing access to federal data and models for AI research and development, communicate with the public in a meaningful way about approaches to AI, participate in the development of consensus standards and conformity assessment activities, and cooperate with international regulatory bodies.

Comments on this draft memorandum closed on March 13, 2020, with 81 submissions from individuals, organizations, and companies.[6] An updated, finalized memorandum is forthcoming. As currently drafted, agencies will have 180 days from the issuance of the final memorandum to develop plans consistent with the AI Principles.

II. EU LEGISLATION & POLICY

On February 19, 2020, the EC presented its long-awaited proposal for comprehensive regulation of AI at EU level: the “White Paper on Artificial Intelligence – A European approach to excellence and trust” (“White Paper”).[7] In an op-ed published on the same day, the president of the EC, Ursula von der Leyen, wrote that the EC would not leave digital transformation to chance and that the EU’s new digital strategy could be summed up with the phrase “tech sovereignty.”[8]

As covered in more detail in our recent client alert “EU Proposal on Artificial Intelligence Regulation Released,” the White Paper favors a risk-based approach with sector and application-specific risk assessments and requirements, rather than blanket sectoral requirements or bans. The EC also released a series of accompanying documents, the “European strategy for data” (“Data Strategy”)[9] and a “Report on the safety and liability implications of Artificial Intelligence, the Internet of Things and robotics” (“Report on Safety and Liability”).[10] The documents outline a general strategy, discuss objectives of a potential regulatory framework, and address a number of potential risks and concerns related to AI. The White Paper, which was previewed by Ms. von der Leyen at the beginning of her presidency, is the first step in the legislative process.[11] The draft legislation, which is part of a bigger effort to increase public and private investment in AI to more than €20 billion per year over the next decade,[12] is expected by the end of 2020.

While the first part of the White Paper mostly contains general policy proposals intended to boost AI development, research and investment in the EU, the second outlines the main features of a proposed regulatory framework for AI. In the EC’s view, lack of public trust is one of the biggest obstacles to a broader proliferation of AI in the EU. Thus, as we have noted previously,[13] the EC seeks “first out of the gate” status and aims to increase public trust by attempting to regulate the inherent risks of AI—not unlike the General Data Protection Regulation (“GDPR”). The main risks identified by the EC concern fundamental rights (including data privacy and non-discrimination) as well as safety and liability issues. In addition to proposing certain adjustments to existing legislation that impacts AI, the EC concludes that new regulations specific to AI are necessary to address these risks.

According to the White Paper, the core issue for any future legislation is the scope of its application: the assumption is that any legislation would apply to products and services “relying on AI.” Furthermore, the EC identifies “data” and “algorithms” as AI’s main constituent elements, but also stresses that the definition of AI in a regulatory context must be sufficiently flexible to provide legal certainty, while also allowing for the legislation to adapt to technical progress.

In terms of substantive regulation, the EC favors a context-specific, risk-based approach—instead of a GDPR “one size fits all” approach. An AI product or service will be considered “high-risk” when two cumulative criteria are fulfilled:

Critical Sector: The AI product or service is employed in a sector where significant risks can be expected to occur. Those sectors should be specifically and exhaustively listed in the legislation; for instance, healthcare, transport, energy and parts of the public sector, such as the police and the legal system.
Critical Use: The AI product or service is used in such a manner that significant risks are likely to arise. The assessment of the level of risk of a given use can be based on the impact on the affected parties; for instance, where the use of AI produces legal effects, leads to a risk of injury, death or significant damage.

If an AI product or service fulfills both criteria, it will be subject to the mandatory requirements of the new AI legislation. Importantly, the use of AI-based applications for certain purposes will always be considered high-risk when those applications fundamentally impact individual rights. Examples include the use of AI for recruitment processes or for remote biometric identification (such as facial recognition). Moreover, even if an AI product or service is not considered “high-risk,” it will remain subject to existing EU rules, such as the GDPR.[14]

Harking back to the 2019 “Ethics Guidelines for Trustworthy Artificial Intelligence” drafted by the High Level Expert Group on Artificial Intelligence,[15] the EC sets out six key categories which we can expect to see in the upcoming AI legislation: rules governing training data; data and record-keeping requirements; information provision, transparency and accountability; robustness and accuracy; human oversight; and specific requirements for remote biometric identification. The EC also previews a regulatory framework for data and product liability legislation in its accompanying Data Strategy and Report on Safety and Liability.

Companies active in AI should closely follow recent developments in the EU given the proposed geographic reach of the future AI legislation, which is likely to affect all companies doing business in the EU. While the current public health crisis may well delay the timeline, we remain likely to see legislative activity in Europe in the near term. In the meantime, the EC has launched a public consultation period and requested comments on the proposals set out in the White Paper and the Data Strategy, providing an opportunity for companies and other stakeholders to provide feedback and shape the future EU regulatory landscape. Comments may be submitted until May 19, 2020 at https://ec.europa.eu/info/consultations_en.

III. INTELLECTUAL PROPERTY

A. Update on USPTO AI Policy

U.S. patent activity involving AI continues to increase dramatically. During the U.S. Patent and Trademark Office’s (“USPTO”) recent Patent Public Advisory Committee (“PPAC”) Quarterly Meeting, Senior Policy Advisor and Acting Chief of Staff Coke Stewart remarked that “over the past several years” the growth in patent applications and patent grants touching on AI has been “radical,”[16] as demonstrated by the following graphics.[17]

As to the basic character or characteristics of AI from the USPTO’s perspective, Acting Chief of Staff Stewart explained that the USPTO today views it as a “tool,” not as an independent entity capable of, for example, innovation. In response to a question about how AI could fulfill patent law’s duty of candor, for example, Ms. Stewart stated, “I think it’s fair to say the way the [USPTO] is seeing [AI] at this point is they see AI as a tool, much like a surgeon and a scalpel or a photographer with a camera, that’s being used to conceive of inventions. We’re not really seeing artificial intelligent machines spontaneously creating.”[18] Notwithstanding, in remarks delivered at “Trust, but Verify: Informational Challenges Surrounding AI-Enabled Clinical Decision Software,” USPTO Deputy Director Laura Peter confirmed that “it has been reported” that a patent application pending before the USPTO names a machine as an inventor. While Deputy Director Peter declined to comment specifically on that application, she highlighted a number of the Office’s “forthcoming AI milestones,” including, among other items addressed below, a possible future “opportunity to further discuss patent applications on inventions for which a machine is claimed to be an inventor.”[19]

One notable forthcoming milestone is the USPTO’s report summarizing the responses to, and potentially providing the USPTO’s conclusions regarding, its two recent Federal Register Notices on AI.[20] As we explained in an earlier client alert,[21] on August 27, 2019, the USPTO published a request for public comments on 12 patent-related questions regarding AI inventions,[22] including the elements of an “AI Invention,” the character of natural persons’ contributions to AI Inventions, and whether revisions were needed to the current law on inventorship, ownership, eligibility, enablement, and/or level of ordinary skill in the art to take into account AI developments. Most notably, the USPTO requested public comment on whether an AI machine could be the inventor of an invention described in a U.S. patent.[23] Shortly thereafter, the USPTO issued a second Federal Register Notice requesting public comment on “the fields of copyright, trademark, database protections, and trade secret law, among others,” which the USPTO believed “may be similarly susceptible to the impacts of developments in AI.”[24]

As of March 18, 2020, the USPTO had received nearly 200 responses to the two requests from individuals, corporations, associations, academia, and others.[25] USPTO’s Acting Chief of Staff Coke Stewart remarked in January 2020 that this “feedback” was “incredible” and expected the Office’s report summarizing the responses to be published in spring 2020. In her remarks at “Trust, but Verify,” Deputy Director Peter indicated this forthcoming report “may include relevant conclusions.”[26]

Another forthcoming milestone for the USPTO’s work on AI include a second report, slated for “late Spring,” from the USPTO Office of the Chief Economist on the patent landscape of artificial intelligence-related inventions.[27] Finally, one of the milestones highlighted by Deputy Director Peter has come to pass: the USPTO’s new internet portal on “all intellectual property-related initiatives and content on [AI] technologies, including Federal Register Notices, research and reports, and news stories” launched on March 3, 2020; it may be found here.

Finally, the USPTO continues to make clear that it views its role in protecting and promoting the private sector’s development of AI in the larger context of the federal government’s policy. As Senior Policy Advisor and Acting Chief of Staff Stewart noted at the quarterly PPAC meeting (and as discussed above), the OMB issued a draft Memorandum on January 7, 2020, providing “guidance to all Federal agencies to inform the development of regulatory and non-regulatory approaches regarding technologies and industrial sectors that are empowered or enabled by” AI, and proposed ways “to reduce barriers to the development and adoption of AI technologies.”[28]

B. Update on the USPTO’s New Eligibility Guidelines

On October 17, 2019, the USPTO issued additional patent subject matter eligibility guidance (“October 2019 PEG”), following its January 2019 guidance to help clarify the process that examiners should undertake when evaluating whether a pending claim is directed to an abstract idea under the Supreme Court’s two-step Alice test and thus not eligible for patent protection under 35 U.S.C. § 101 (the January “2019 PEG” was addressed in a previous Gibson Dunn client alert[29] ). [30] The October 2019 Guidance addresses five major themes from the comments to the 2019 PEG, including:

evaluating whether a claim recites a judicial exception;
the groupings of abstract ideas enumerated in the 2019 PEG;
evaluating whether a judicial exception is integrated into a practical application;
the prima facie case and the role of evidence with respect to eligibility rejections; and
the application of the 2019 PEG in the patent examining corps.[31]

The USPTO also issued three appendices with the updated guidance, including Appendix 1, which contained new examples “illustrative” of major themes from the comments.[32]

The following are a few notable items from the October 2019 PEG:

The meaning of “recites” in Step 2A, Prong One. Step 2A, Prong One asks whether the claim “recites an abstract idea, law of nature, or natural phenomenon.”[33] A claim “recites a judicial exception when the judicial exception is ‘set forth’ or ‘described’ in the claim. While the terms ‘set forth’ and ‘describe’ are thus both equated with ‘recite,’ their different language is intended to indicate that there are two ways in which an exception can be recited in a claim.”[34] “Set forth” is used with regard to claims where, for example, the “identifiable” mathematical expression is “clearly stated,” as in Diamond v. Diehr, whereas “describes” is used where an identifiable concept (like that of intermediated settlement, as recited in the claim at issue in Alice v. CLS Bank) is not called out by name.[35]

Multiple abstract ideas in a claim. Examiners are instructed not to “parse” claims that “recite multiple abstract ideas, which may fall in the same or different groupings, or multiple laws of nature” in Step 2A Prong One.[36] Instead, the examiner “should consider the limitations together” to be an abstract idea for Step 2A Prong Two (which asks whether the claim recites “additional elements that integrate the judicial exception into a practical application”[37] ) and Step 2B (which asks whether the claim recites “additional elements that amount to significantly more than the judicial exception”[38] ), “rather than a plurality of separate abstract ideas to be analyzed individually.”[39]

Identifying abstract ideas. Further guidance on identifying abstract ideas enumerated in the 2019 PEG and their relationship to judicial decisions, including with respect to:[40]

Mathematical concepts: Commenters suggested distinguishing between the types of math recited in the claims when making an eligibility determination. After consideration, the USPTO declined to implement this suggestion.[41]

Mathematical calculations: “[N]o particular word or set of words,” like “calculating,” are required to indicate that a claim recites a mathematical calculation.[42]

Mental processes: “Claims do not recite a mental process when they do not contain limitations that can practically be performed in the human mind, for instance when the human mind is not equipped to perform the claim limitations.”[43] Commenters suggested that “an examiner should determine that a claim, when given its broadest reasonable interpretation, recites a mental process only when the claim is performed entirely in the human mind.”[44] After consideration, the USPTO did not adopt this suggestion, as it was not consistent with case law holding that “[c]laims can recite a mental process even if they are being claimed as being performed on a computer[]”[45] or with a physical aid, like pencil and paper.[46]

Examination procedure. Additional guidance was provided regarding the examination procedure for tentative abstract ideas.[47]

Step 2A Inquiry. A “new mini-flowchart” can be found on page 11 of the October 2019 PEG, which “depict[s] the two-prong analysis that is now performed in order to answer the Step 2A inquiry.”[48]

Improving the Functioning of Technology. The October 2019 PEG further explains the process for determining whether the claimed invention improves the functioning of a computer or other technology.[49] As noted in previous client alerts, the 2019 PEG clarified that the “improvements” analysis in Step 2A is not to reference what is well-understood, routine, conventional activity.[50] Rather, well-known, routine, conventional activity will only be considered if the analysis proceeds to Step 2B (whether the claims recite additional elements that amount to “significantly more” than the judicial exception).[51]

For those on the patent application frontlines, Appendix 1 to the October 2019 PEG will be of particular use to practitioners faced with crafting claims to cover AI-related inventions. According to the USPTO, “the examples are intended to illustrate the proper application of the eligibility analysis to a variety of claims in multiple technologies.”[52] Example 46, for example, pertains to a livestock management system that automatically detects and tracks the behavior of livestock animals using information provided by sensors and smart labels.[53] The information is stored in a herd database, which can contain a plurality of possible behavior patterns that are either normal or indicative of disease, stress, or other issues of interest to the farmer.[54] Based on behavioral triggers, the system automatically controls farm equipment, like sorting gates and automatic feed dispensers.[55] The example provides four exemplary claims, and explains why each is or is not eligible for patenting.[56] Notably, eligible claims tied the elements relating to machine learning (i.e., receiving the electronic data from the various sensors, analyzing it, comparing it to a database that is automatically updated to identify behavioral patterns associated with illness or stress) to physical, practical applications, like a feed dispenser capable of providing therapeutically effective additives to the animals’ feed or a sorting gate capable of automatically segregating the ill animal from the rest of the herd.[57]

For companies using or developing AI-related inventions, the rules on patenting are likely to be in flux in the near term as the USPTO adapts to the changing nature of technology and innovation. We will continue to closely monitor developments, and stand ready to advise companies seeking to navigate a path to maximizing the quality and value of their patent protection.

C. International Updates on IP Law & AI

Just as the USPTO has continued to address the relationship to and impact of artificial intelligence on U.S. intellectual property law, so has the international legal community. For example, the World Intellectual Property Organization (“WIPO”) published its Draft Issues Paper on Intellectual Property Policy and Artificial Intelligence[58] on December 19, 2019. Three intergovernmental organizations (including the European Union), 46 non-governmental organizations (including the American Intellectual Property Law Association (“AIPLA”), Intellectual Property Owners Association (“IPO”), International Association for the Protection of Intellectual Property (“AIPPI”), and a variety of international consortiums of writers and creators), 36 member states, 60 corporations (including Alibaba, BlackBerry, Ericsson, Getty Images, Intel, Merck, and Tencent Holdings),[59] and 120 individuals provided comments on the Draft Issues Paper.[60] WIPO had intended to publish a revised issues paper by the end of April 2020, with a second session of the WIPO Conversation on IP and AI to take place May 11-12, 2020.[61] Due to the impact of the worldwide pandemic, the second session has been postponed indefinitely, and, as of this writing, WIPO has not indicated whether it would meet its self-imposed April deadline for publishing its revised issues paper.

Inventorship and ownership of AI inventions were a principal focus of the draft issues paper—understandable, given the European Patent Office’s and U.K. Intellectual Property Office’s recent highly publicized rejection of patent applications in which an AI system (DABUS) was named as an inventor.[62]

IV. AUTONOMOUS VEHICLES

A. House Panel Discusses Regulation of Autonomous Vehicles (“AVs”)

In 2019, federal lawmakers demonstrated renewed interest in a comprehensive AV bill aimed at speeding up the adoption of autonomous vehicles and deploying a regulatory framework. In July 2019, the House Energy and Commerce Committee and Senate Commerce Committee sought stakeholder input from the self-driving car industry in order to draft a bipartisan and bicameral AV bill, prompting stakeholders to provide feedback to the committees on a variety of issues involving autonomous vehicles, including cybersecurity, privacy, disability access, and testing expansion. On February 11, 2020, the House Committee on Energy and Commerce, Subcommittee on Consumer Protection and Commerce, held a hearing titled “Autonomous Vehicles: Promises and Challenges of Evolving Automotive Technologies.” In a memorandum issued in advance of the hearing, the Committee states that in 2018, “36,560 people were killed in motor vehicle traffic crashes on U.S. roadways” and noting that “[n]inety-four percent of crashes are thought to be caused by driver error.”[63] Three consumer issues were addressed at the hearing: driver and passenger safety; autonomous vehicle testing; and cybersecurity concerns.

As we have addressed in previous legal updates,[64] this is not Congress’s first attempt to regulate AVs. The U.S. House of Representatives passed the Safely Ensuring Lives Future Deployment and Research In Vehicle Evolution (SELF DRIVE) Act (H.R. 3388)[65] by voice vote in September 2017, but its companion bill (the American Vision for Safer Transportation through Advancement of Revolutionary Technologies (AV START) Act (S. 1885))[66] stalled in the Senate as a result of holds from Democratic senators who expressed concerns that the proposed legislation remains immature and underdeveloped in that it “indefinitely” preempts state and local safety regulations even in the absence of federal standards.[67] Federal regulation of autonomous vehicles has so far faltered in the new Congress, as the SELF DRIVE Act and the AV START Act have not been reintroduced since expiring with the close of the 115th Congress.[68]

Observers have commented that “the main sticking point in negotiations continues to be the potential federal preemption of state and local regulations.”[69] Witnesses at the February 2020 hearing voiced concerns over adopting federal legislation, and thus preempting state regulation, without firm safety standards in place. State regulatory activity has continued to accelerate, adding to the already complex mix of regulations that apply to companies manufacturing and testing AVs. As outlined in our 2019 Artificial Intelligence and Automated Systems Annual Legal Review, state regulations vary significantly.[70]

Manufacturers and lawmakers at the hearing expressed concern that the federal government’s failure to act has left the U.S. trailing behind competitors.[71] Consumer advocacy groups, on the other hand, argued that the U.S. is “behind in establishing comprehensive safeguards.”[72] From the law enforcement angle, the San Francisco Municipal Transportation Agency, under whose oversight many companies are working on self-driving car tests, advocated for installing a “black box” in vehicles to capture crash data, and creating a national database of self-driving car incidents.[73]

According to press reports, shortly after the hearing, the House Panel released a seven-section draft bill to advocacy groups for feedback, in addition to six other sections previously circulated.[74] These seven sections are: cybersecurity; consumer education; dual use safety; authorization of appropriations; executive staffing; crash data; and exclusion of trucks from the bill’s scope. Extensive requirements aiming at preventing cyber attacks were introduced in the draft bill, including manufacturers’ affirmative duties to appoint officers with cybersecurity responsibilities, voluntarily share lessons learned across industry, and provide employee cybersecurity trainings and supervisions. The draft bill also imposes duties on manufacturers to include car accident and crash data collection systems in their AVs, along with customer education.

B. DOT Acts on Updated Guidance for AV Industry

In January 2020, the DoT published updated guidance for the regulation of the autonomous vehicle industry, “Ensuring American Leadership in Automated Vehicle Technologies” or “AV 4.0.”[75] The guidance builds on the AV 3.0 guidance released in October 2018, which introduced guiding principles for AV innovation for all surface transportation modes, and described the DoT’s strategy to address existing barriers to potential safety benefits and progress.[76] AV 4.0 includes 10 principles to protect consumers, promote markets and ensure a standardized federal approach to AVs. In line with previous guidance, the report promises to address legitimate public concerns about safety, security, and privacy without hampering innovation, relying strongly on the industry self-regulating. However, the report also reiterates traditional disclosure and compliance standards that companies leveraging emerging technology should continue to follow.

The National Highway Traffic Safety Administration (“NHTSA”) announced in February 2020 its approval of the first AV exemption—from three federal motor vehicle standards—to Nuro, a California-based company that plans to deliver packages with a robotic vehicle smaller than a typical car.[77] The exemption allows the company to deploy and produce no more than 5,000 of its “low-speed, occupant-less electric delivery vehicles” in a two-year period, which would be operated for local delivery services for restaurants and grocery stores.

C. DOT Issues First-Ever Proposal to Modernize Occupant Protection Safety Standards for AVs

Shortly after announcing the AV 4.0, NHTSA in March 2020 issued its first-ever Notice of Proposed Rulemaking (“Notice”) “to improve safety and update rules that no longer make sense such as requiring manual driving controls on autonomous vehicles.”[78] The Notice aims to “help streamline manufacturers’ certification processes, reduce certification costs and minimize the need for future NHTSA interpretation or exemption requests.” For example, the proposed regulation would apply front passenger seat protection standards to the traditional driver’s seat of an AV, rather than safety requirements that are specific to the driver’s seat. Nothing in the Notice would make changes to existing occupant protection requirements for traditional vehicles with manual controls. The public has until May 29 to comment on the Notice.[79]

Given the fast pace of developments and tangle of applicable rules, it is essential that companies operating in this space stay abreast of legal developments in states as well as cities in which they are developing or testing AVs, while understanding that any new federal regulations may ultimately preempt states’ authorities to determine, for example, safety policies or how they handle their passengers’ data.

V. EMPLOYMENT LAW/HIRING

A. Illinois Law Increases Transparency on AI Hiring Practices

On January 1, 2020, Illinois’ Artificial Intelligence Video Interview Act went into effect.[80] Under the Act, an employer using videotaped interviews when filling a position in Illinois may use AI to analyze the interview footage only if the employer:

Gives notice (need not be written) to the applicant that the videotaped interview may be analyzed using AI for purposes of evaluating the applicant’s fitness for the position.
Provides the applicant with an explanation of how the AI works and what characteristics it uses to evaluate applicants.
Obtains consent from the applicant to use AI for an analysis of the video interview.
Keeps video recordings confidential by sharing the videos only with persons whose expertise or technology is needed to evaluate the applicant, and destroying both the video and all copies within 30 days after an applicant requests such destruction.

Employers in Illinois using AI-powered video interviewing will need to carefully consider how they are addressing the risk of AI-driven bias in their current operations, and whether hiring practices fall under the scope of the new law, which does not define “artificial intelligence,” what level of “explanation” is required, or whether it applies to employers seeking to fill a position in Illinois regardless of where the interview takes place.

In February 2020, a lawsuit was filed against Clarifai Inc., an AI company specializing in computer vision and visual recognition, in Chicago.[81] One of Clarifai’s tools is a “demographics” model, which analyzes images and returns information on age, gender, and multicultural appearance for each detected face based on facial characteristics. The complaint alleges that Clarifai captured the profiles of tens of thousands of users on the dating site, OkCupid, and scanned the facial geometry of each individual, in violation of the Illinois’ Biometric Information Privacy Act (“BIPA”), to create a “face database” of OkCupid users and train its own facial recognition tools. Under the Illinois BIPA, companies can face up to $5,000 for each willful violation. While the Illinois Act currently remains the only such law in the U.S., companies using automated technology in recruitment should expect that the increased use of AI technology in recruitment is likely to lead to further regulation and legislation.

Meanwhile, the Equal Employment Opportunity Commission is investigating several cases involving claims that algorithms have been unlawfully excluding groups of workers during the recruitment process.[82]

B. New York City Aims to Regulate the Use of AI in Hiring

On February 27, 2020, the New York City Council introduced a bill to regulate the sale of “automated employment decision tool[s]” that filter candidates “for hire or for any term, condition or privilege of employment in a way that establishes a preferred candidate or candidates.”[83] If passed, the bill would go into effect on January 1, 2022.

The bill would require that technology companies conduct annual “bias audits” beforeselling AI-powered hiring tools in New York City. In addition, companies using such tools would have to notify each job candidate “within 30 days” of screening about the specific tool used to evaluate them and “the qualifications or characteristics that such tool was used to assess in the candidate.”[84] Moreover, those selling AI-powered decision making software would have to provide the purchaser of the software with the results of the annual bias audit.

Employers contemplating the use and implementation of AI-powered decision-making tools for hiring should exercise caution and ensure that these tools have been audited for discriminatory biases.

_______________________

[1] On February 11, 2020, the White House also announced 2021 budget plans to increase budgets related to AI to “pu[t] America in position to maintain its global leadership in science and technology[.]” See https://www.whitehouse.gov/briefings-statements/president-trumps-fy-2021-budget-commits-double-investments-key-industries-future/.

[2] Donald J. Trump, Executive Order on Maintaining American Leadership in Artificial Intelligence, The White House (Feb. 11, 2019), Exec. Order No. 13859, 3 C.F.R. 3967, available at https://www.whitehouse.gov/presidential-actions/executive-order-maintaining-american-leadership-artificial-intelligence/.

[3] White House AI Order Emphasizes Use for Citizen Experience, Meritalk (Apr. 18, 2019), available at https://www.meritalk.com/articles/white-house-ai-order-emphasizes-use-for-citizen-experience/.

[4] Director of the Office of Management and Budget, Guidance for Regulation of Artificial Intelligence Applications (Jan. 7, 2020), available at https://www.whitehouse.gov/wp-content/uploads/2020/01/Draft-OMB-Memo-on-Regulation-of-AI-1-7-19.pdf.

[5] For an in-depth analysis, please see our update, President Trump Issues Executive Order on “Maintaining American Leadership in Artificial Intelligence.”

[6] Regulations.gov, OMB Guidance for Regulation of Artificial Intelligence Applications, available at https://www.regulations.gov/docketBrowser?rpp=50&so=DESC&sb=postedDate&po=0&dct=PS&D=OMB-2020-0003.

[7] EC, White Paper on Artificial Intelligence – A European approach to excellence and trust, COM(2020) 65 (Feb. 19, 2020), available at https://ec.europa.eu/info/sites/info/files/commission-white-paper-artificial-intelligence-feb2020_en.pdf.

[8] EC, Shaping Europe’s digital future: op-ed by Ursula von der Leyen, President of the European Commission, AC/20/260, available at https://ec.europa.eu/commission/presscorner/detail/en/AC_20_260.

[9] EC, A European strategy for data, COM(2020) 66 (Feb. 19, 2020), available at https://ec.europa.eu/info/files/communication-european-strategy-data_en.

[10] EC, Report on the safety and liability implications of Artificial Intelligence, the Internet of Things and robotics, COM(2020) 64 (Feb. 19, 2020), available at https://ec.europa.eu/info/files/commission-report-safety-and-liability-implications-ai-internet-things-and-robotics_en.

[11] Ursula von der Leyen, A Union that strives for more: My agenda for Europe, available at https://ec.europa.eu/commission/sites/beta-political/files/political-guidelines-next-commission_en.pdf.

[12] EC, Artificial Intelligence for Europe, COM(2018) 237 (Apr. 25, 2018), available at https://ec.europa.eu/digital-single-market/en/news/communication-artificial-intelligence-europe.

[13] H. Mark Lyon, Gearing Up For The EU’s Next Regulatory Push: AI, LA & SF Daily Journal (Oct. 11, 2019), available at https://www.gibsondunn.com/wp-content/uploads/2019/10/Lyon-Gearing-up-for-the-EUs-next-regulatory-push-AI-Daily-Journal-10-11-2019.pdf.

[14] The exact implications and requirements of the GDPR on AI based products and services are still not entirely clear; see further, Ahmed Baladi, Can GDPR hinder AI made in Europe?, Cybersecurity Law Report (July 10, 2019), available at https://www.gibsondunn.com/can-gdpr-hinder-ai-made-in-europe/.

[15] For further detail, see our 2019 Artificial Intelligence and Automated Systems Annual Legal Review.

[16] Coke Stewart, (USPTO Senior Policy Advisor and Acting Chief of Staff), Remarks Delivered at Quarterly Meeting of Patent Public Advisory Committee, Tr. at p. 164 (Feb. 6, 2020), available at https://www.uspto.gov/sites/default/files/documents/PPAC_Transcript_20200206.pdf.

[17] Coke Stewart, USPTO AI Policy Update Presentation at pp. 6-7 (Feb. 6, 2020), available at https://www.uspto.gov/sites/default/files/documents/20200206_PPAC_AI_Policy_Update.pdf.

[18] Stewart, Coke (U.S.P.T.O. Senior Policy Advisor and Acting Chief of Staff), Remarks Delivered at Quarterly Meeting of Patent Public Advisory Committee, Tr. at p. 169 (Feb. 6, 2020), available at https://www.uspto.gov/sites/default/files/documents/PPAC_Transcript_20200206.pdf.

[19] Peter, Laura (Deputy Director of the U.S.P.T.O), Remarks Delivered at Trust, but Verify: Informational Challenges Surrounding AI-Enabled Clinical Decision Software (Jan. 23, 2020), available at https://www.uspto.gov/about-us/news-updates/remarks-deputy-director-peter-trust-verify-informational-challenges.

[20] Peter, Laura (Deputy Director of the U.S.P.T.O), Remarks Delivered at Trust, but Verify: Informational Challenges Surrounding AI-Enabled Clinical Decision Software (Jan. 23, 2020), available at https://www.uspto.gov/about-us/news-updates/remarks-deputy-director-peter-trust-verify-informational-challenges.

[21] Gibson Dunn, USPTO Requests Public Comments on Patenting Artificial Intelligence Inventions (Aug. 28, 2019), https://www.gibsondunn.com/uspto-requests-public-comments-on-patenting-artificial-intelligence-inventions/.

[22] Code Fed. Reg. Vol. 84, No. 166, Aug. 27, 2019, available at https://www.govinfo.gov/content/pkg/FR-2019-08-27/pdf/2019-18443.pdf.

[23] Peter, Laura (Deputy Director of the U.S.P.T.O), Remarks Delivered at Trust, but Verify: Informational Challenges Surrounding AI-Enabled Clinical Decision Software (Jan. 23, 2020), available at https://www.uspto.gov/about-us/news-updates/remarks-deputy-director-peter-trust-verify-informational-challenges.

[24] U.S.P.T.O., Director’s Forum: A Blog from U.S.P.T.O.’s Leadership (Oct. 30, 2019), https://www.uspto.gov/blog/director/entry/uspto_issues_second_federal_register.

[25] U.S.P.T.O., U.S.P.T.O. Posts Responses from Requests for Comments on Artificial Intelligence (Mar. 18, 2020), https://www.uspto.gov/about-us/news-updates/uspto-posts-responses-from-requests-comments-artificial-intelligence.

[26] Peter, Laura (Deputy Director of the U.S.P.T.O), Remarks Delivered at Trust, but Verify: Informational Challenges Surrounding AI-Enabled Clinical Decision Software (Jan. 23, 2020), available at https://www.uspto.gov/about-us/news-updates/remarks-deputy-director-peter-trust-verify-informational-challenges.

[27] Peter, Laura (Deputy Director of the U.S.P.T.O), Remarks Delivered at Trust, but Verify: Informational Challenges Surrounding AI-Enabled Clinical Decision Software (Jan. 23, 2020), available at https://www.uspto.gov/about-us/news-updates/remarks-deputy-director-peter-trust-verify-informational-challenges.

[28] Code Fed. Reg. Vol. 85, No. 1825, available at https://www.federalregister.gov/documents/2020/01/13/2020-00261/request-for-comments-on-a-draft-memorandum-to-the-heads-of-executive-departments-and-agencies.

[29] Gibson Dunn, The Impact of New USPTO Eligibility Guidelines on Artificial Intelligence-related Inventions (Jan. 11, 2019), available at https://www.gibsondunn.com/impact-of-new-uspto-eligibility-guidelines-on-artificial-intelligence-related-inventions/.

[30] U.S.P.T.O., October 2019 Update: Subject Matter Eligibility (Oct. 17, 2019), https://www.uspto.gov/sites/default/files/documents/peg_oct_2019_update.pdf.

[31] Id. at p. 1.

[32] Ibid.

[33] Id. at p. 11, Fig. 2.

[34] Ibid.

[35] Ibid.

[36] Id. at p. 2.

[37] Id. at p. 11, Fig. 2.

[38] Id. at p. 10, Fig. 1.

[39] Id. at p. 2.

[40] Ibid.

[41] Id. at p. 3.

[42] Ibid.

[43] Id. at p. 7.

[44] Id. at p. 8 (emphasis in original).

[45] Ibid.

[46] Id. at p. 9.

[47] Ibid.

[48] Id. at p. 11.

[49] Id. at pp. 12-13.

[50] Id. at p. 12.

[51] Id. at p. 15.

[52] Id. at p. 17.

[53] USPTO, App’x 1 to the October 2019 Update: Subject Matter Eligibility Life Sciences & Data Processing Examples, at 31, available at https://www.uspto.gov/sites/default/files/documents/peg_oct_2019_app1.pdf.

[54] Ibid.

[55] Ibid.

[56] Id. at pp. 32-41.

[57] Ibid.

[58] WIPO Conversation on Intellectual Property and Artificial Intelligence Second Session, Draft Issues Paper on Intellectual Property Policy and Artificial Intelligence (Dec. 13, 2019), available at https://www.wipo.int/edocs/mdocs/mdocs/en/wipo_ip_ai_2_ge_20/wipo_ip_ai_2_ge_20_1.pdf.

[59] See https://www.wipo.int/about-ip/en/artificial_intelligence/submissions-search.jsp?type_id=2416&territory_id=&issue_id=.

[60] See https://www.wipo.int/about-ip/en/artificial_intelligence/policy.html#submissions.

[61] WIPO, Artificial Intelligence and Intellectual Property Policy (Apr. 8, 2020), https://www.wipo.int/about-ip/en/artificial_intelligence/policy.html; WIPO, WIPO Conversation on Intellectual Property and Artificial Intelligence: Second Session, (Apr. 8, 2020), https://www.wipo.int/meetings/en/details.jsp?meeting_id=55309.

[62] European Patent Office, EPO refuses DABUS patent applications designating a machine inventor (Dec. 20, 2019), available at https://www.epo.org/news-issues/news/2019/20191220.html.

[63] House Committee on Energy and Commerce, Re: Hearing on “Autonomous Vehicles: Promises and Challenges of Evolving Automotive Technologies” (Feb. 7, 2020), available at https://docs.house.gov/meetings/IF/IF17/20200211/110513/HHRG-116-IF17-20200211-SD002.pdf.

[64] For more information, please see our legal update Accelerating Progress Toward a Long-Awaited Federal Regulatory Framework for Autonomous Vehicles in the United States and, most recently, our 2019 Artificial Intelligence and Automated Systems Annual Legal Review.

[65] H.R. 3388, 115th Cong. (2017).

[66] U.S. Senate Committee on Commerce, Science and Transportation, Press Release, Oct. 24, 2017, available at https://www.commerce.senate.gov/public/index.cfm/pressreleases?ID=BA5E2D29-2BF3-4FC7-A79D-58B9E186412C.

[67] Letter from Democratic Senators to U.S. Senate Committee on Commerce, Science and Transportation (Mar. 14, 2018), available at https://morningconsult.com/wp-content/uploads/2018/11/2018.03.14-AV-START-Act-letter.pdf.

[68] U.S. Senate Committee on Commerce, Science and Transportation, Press Release, Oct. 24, 2017, available at https://www.commerce.senate.gov/public/index.cfm/pressreleases?ID=BA5E2D29-2BF3-4FC7-A79D-58B9E186412C.

[69] Zach George, Congress nears agreement on comprehensive framework for autonomous vehicles (Feb. 18, 2020), available at https://www.naco.org/blog/congress-nears-agreement-comprehensive-framework-autonomous-vehicles.

[70] See National Conference of State Legislators, Self-Driving Vehicles Enacted Legislation, available at https://www.ncsl.org/research/transportation/autonomous-vehicles-self-driving-vehicles-enacted-legislation.aspx.

[71] The Hill, House lawmakers close to draft bill on self-driving cars (Feb. 11, 2020), available at https://thehill.com/policy/technology/482628-house-lawmakers-close-to-draft-bill-on-self-driving-cars.

[72] Automotive News, Groups call on U.S. lawmakers to develop ‘meaningful legislation’ for AVs (Feb. 11, 2020), available at https://www.autonews.com/mobility-report/groups-call-us-lawmakers-develop-meaningful-legislation-avs.

[73] The Verge, We still can’t agree how to regulate self-driving cars (Feb. 11, 2020), available at https://www.theverge.com/2020/2/11/21133389/house-energy-commerce-self-driving-car-hearing-bill-2020.

[74] Bloomberg Government, Self-Driving Car Bill Drafts Silent on Maker Accountability (1), available at https://about.bgov.com/news/self-driving-car-bill-drafts-silent-on-maker-accountability-1/. Previously released draft bill includes sections on federal, state and local roles, exemptions, rulemakings, FAST Act testing expansion, advisory committees and definitions, https://www.mema.org/draft-bipartisan-driverless-car-bill-offered-house-panel.

[75] U.S. Dep’t of Transp., Ensuring American Leadership in Automated Vehicle Technologies: Automated Vehicles 4.0 (Jan. 2020), available at https://www.transportation.gov/sites/dot.gov/files/docs/policy-initiatives/automated-vehicles/360956/ensuringamericanleadershipav4.pdf.

[76] U.S. Dep’t of Transp., Preparing for the Future of Transportation: Automated Vehicles 3.0 (Sept. 2017), available at https://www.transportation.gov/sites/dot.gov/files/docs/policy-initiatives/automated-vehicles/320711/preparing-future-transportation-automated-vehicle-30.pdf.

[77] Congressional Research Service, Issues in Autonomous Vehicle Testing and Deployment (Feb. 11, 2020), available at https://fas.org/sgp/crs/misc/R45985.pdf; U.S. Dep’s of Transp., NHTSA Grants Nuro Exemption Petition for Low-Speed Driverless Vehicle, available at https://www.nhtsa.gov/press-releases/nuro-exemption-low-speed-driverless-vehicle.

[78] U.S. Dep’t of Transp., NHTSA Issues First-Ever Proposal to Modernize Occupant Protection Safety Standards for Vehicles Without Manual Controls, available at https://www.nhtsa.gov/press-releases/adapt-safety-requirements-ads-vehicles-without-manual-controls.

[79] 49 CFR 571 2020, available at https://www.federalregister.gov/documents/2020/03/30/2020-05886/occupant-protection-for-automated-driving-systems.

[80] H.B. 2557, 2019-2020 Reg. Sess. (Ill. 2019) (101st Gen. Assembly), available at http://www.ilga.gov/legislation/101/HB/PDF/10100HB2557lv.pdf.

[81] Stein v. Clarifai, Inc., No. 2020-CH-01810 (Ill. Cir. Ct. Feb. 13, 2020).

[82] Chris Opfer, AI Hiring Could Mean Robot Discrimination Will Head to Courts, Bloomberg (Nov. 12, 2019), https://news.bloomberglaw.com/daily-labor-report/ai-hiring-could-mean-robot-discrimination-will-head-to-courts.

[83] Sale of Automated Employment Decision Tools,Int. No. 1894 (Feb. 27, 2020).

[84] Id.

The following Gibson Dunn lawyers prepared this client update: H. Mark Lyon, Frances Waldmann, Brooke Myers Wallace, Tony Bedel, Emily Lamm and Derik Rao.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Artificial Intelligence and Automated Systems Group, or the following authors:

H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Frances A. Waldmann – Los Angeles (+1 213-229-7914,[email protected])

Please also feel free to contact any of the following practice group members:

Artificial Intelligence and Automated Systems Group:
H. Mark Lyon – Chair, Palo Alto (+1 650-849-5307, [email protected])
J. Alan Bannister – New York (+1 212-351-2310, [email protected])
Ari Lanin – Los Angeles (+1 310-552-8581, [email protected])
Robson Lee – Singapore (+65 6507 3684, [email protected])
Carrie M. LeRoy – Palo Alto (+1 650-849-5337, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Michael Walther – Munich (+49 89 189 33 180, [email protected])

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

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Decided April 20, 2020

Atlantic Richfield Co. v. Christian, et al. No. 17-1498

Today, the Supreme Court held 7-2 that landowners at Superfund toxic waste sites must obtain EPA approval before seeking damages under state law for cleanup beyond what EPA has ordered.

Background:
In the 1970s, Atlantic Richfield purchased a now-defunct copper-smelting operation in Montana and has since spent more than $450 million cleaning up the site under a cleanup plan created by the Environmental Protection Agency (“EPA”) pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).

In 2008, nearby private landowners filed state-law claims against Atlantic Richfield in Montana state court, seeking around $50 million in “restoration damages” to pay for cleanup above and beyond what EPA had ordered. Atlantic Richfield argued that CERCLA bars the restoration-damages claims for three reasons: (1) the landowners’ claims are, in effect, a challenge to EPA’s plan and CERCLA Section 113 strips state courts of jurisdiction over such claims; (2) the landowners are “potentially responsible parties” under CERCLA § 122 who must get EPA approval for any remedial action; and (3) CERCLA preempts such state-law claims. The Montana Supreme Court rejected each of Atlantic Richfield’s arguments.

Issues:
(1) Is a state-law claim for restoration damages in state court—seeking cleanup remedies that conflict with EPA-ordered remedies—a “challenge” to EPA’s cleanup plan that is jurisdictionally barred by CERCLA Section 113? (2) Is a landowner at a Superfund site a “potentially responsible party” that must seek EPA’s approval under CERCLA Section 122 before engaging in remedial action??

Court’s Holding:
(1) No. CERCLA Section 113 strips state courts of jurisdiction only over claims brought under CERCLA, not those brought under state law.

(2) Yes. The landowners are potentially responsible parties because hazardous substances have “come to be located” on their properties. Thus, under CERCLA Section 122, the landowners cannot take “remedial action” on their lands without EPA approval.

“Interpreting ‘potentially responsible parties’ to include owners of polluted property . . . ensure[s] the careful development of a single EPA-led cleanup effort rather than tens of thousands of competing individual ones.”

Chief Justice Roberts, writing for the Court

What It Means:

The Court’s decision provides certainty to companies with potential Superfund-cleanup exposure by making clear that EPA has exclusive authority to control both the cleanup efforts and the scope of responsible parties’ potential Superfund liability. The decision prevents landowners from imposing additional cleanup obligations or liabilities absent explicit EPA approval.
The Court’s interpretation of “potentially responsible party” means that Superfund-site landowners will need to obtain EPA authorization before significantly altering their land. But they need not obtain EPA approval to undertake minor modifications, such as “planting a garden, installing a lawn sprinkler, or digging a sandbox.”
The Court’s decision does not block landowners from bringing state-law claims seeking money damages for contamination on their land, so long as those damages are not earmarked for cleanup efforts at a Superfund site.
The Court declined to address whether CERCLA preempts state-law cleanup remedies that go above and beyond EPA’s cleanup plan.

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: Environmental Litigation and Mass Tort

Daniel W. Nelson
+1 202.887.3687
[email protected]

Stacie B. Fletcher
+1 202.887.3627
[email protected]

Decided April 20, 2020

Thryv, Inc. v. Click-To-Call Technologies, LP, No. 18-916

Today, the Supreme Court held 7-2 that the Patent Trial and Appeal Board’s decision whether a petition for inter partes review is time-barred is not judicially reviewable.

Background:
The Leahy-Smith America Invents Act permits any person who is not the patent owner to petition the Patent Trial and Appeal Board (the “Board”) for inter partes review (“IPR”) to reexamine claims in an existing patent and cancel any claim the Board finds unpatentable in light of prior art. The Board may institute an IPR if certain conditions are met, including that the petition was not “filed more than 1 year after the date on which the petitioner . . . is served with a complaint alleging infringement.” 35 U.S.C. § 315(b). The Board’s decision whether to institute an IPR is “final and nonappealable.” Id. § 314(d).

Click-to-Call owns a patent that was previously the subject of an infringement complaint filed in 2001 against Thryv and later voluntarily dismissed. In 2012, Click-to-Call again sued Thryv for infringing the patent, and Thryv petitioned for IPR less than a year later. Click-to-Call challenged the petition as untimely under § 315(b), but the Board, disagreeing, instituted IPR and issued a final written decision finding several claims unpatentable. Click-to-Call appealed the institution decision to the Federal Circuit, which ruled that § 314(d) does not apply to timeliness determinations and held that the petition for IPR had been untimely.

Issue:
Whether 35 U.S.C. § 314(d) permits judicial review of the Board’s determination that a petition for IPR was timely under § 315(b).

Court’s Holding:
No. The Board’s determination of timeliness under § 315(b) is closely related to its decision whether to institute IPR and is therefore rendered nonappealable by § 314(d).

“The agency’s application of § 315(b)’s time limit, we hold, is closely related to its decision whether to institute inter partes review and is therefore rendered nonappealable by § 314(d).”

Justice Ginsburg, writing for the Court

What It Means:

The Court reaffirmed the holding of Cuozzo Speed Technologies, LLC v. Lee, 136 S. Ct. 2131 (2016), that § 314(d) bars review of questions “closely tied to the application and interpretation of statutes related to” the decision to institute IPR. That category includes § 315(b) timing decisions.
As in Cuozzo, the Court did not establish the outer boundary of § 314(d)’s prohibition against appealability or foreclose the possibility of mandamus review in extraordinary cases. But the Court again disapproved review of Board decisions preceding the issuance of a final written decision.
Today’s ruling extends a series of decisions interpreting the America Invents Act, a statute in which the Court continues to take particular interest (deciding six cases in the last five Terms).

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]

Brian M. Buroker
+1 202.955.8541
[email protected]

I. New York Executive Orders Tolling Limitations Periods

any specific time limit for the commencement, filing, or service of any legal action, notice, motion, or other process or proceeding as prescribed by the procedural laws of the state, . . . or by any other statute, local law, ordinance, order, rule, or regulation, or part thereof, is hereby tolled from [March 20, 2020] until April 19, 2020.

The governor’s Executive Order No. 202.14 extends the suspension, or tolling period, until May 7, 2020. The Order’s tolling provision, in effect, has stopped the clock from running on a vast pool of claims’ statutes of limitations.

The gubernatorial power to issue an order suspending the statute of limitations derives from Executive Law § 29-a. Initially promulgated in 1978, Section 29-a was amended by the state legislature just a few days before the COVID-19 disaster emergency to, among other revisions, provide the governor with authority not just to suspend laws in response to an emergency event, but also to “issue any directive” in response to the emergency.[1]

(It is this “directive” authority that the governor has relied upon for his various stay-at-home orders.) The amendment to Section 29-a will expire on April 30, 2021.

As amended, Section 29-a provides that the governor may suspend any law “if compliance with such provisions would prevent, hinder, or delay action necessary to cope with the disaster or if necessary to assist or aid in coping with such disaster.”[2] The statute also makes such suspensions subject to certain “standards and limits,” including that (1) suspensions may be for no longer than 30 days, although the governor may extend the suspension for additional 30-day periods; (2) suspensions must be “in the interest of the health or welfare of the public” and must be “reasonably necessary to aid the disaster effort”; and (3) suspensions shall “provide for the minimum deviation from the requirements” of the law “consistent with the goals of the disaster action deemed necessary.”[3]

II. Previous Orders Affecting Statutes of Limitations

In a certain respect, Governor Cuomo’s orders are not novel. Prior emergencies affecting New York have prompted both executive orders impacting statutes of limitations, as well as subsequent litigation upholding those orders. The two most recent instances are the September 11, 2001 terrorist attacks and Hurricane Sandy. Governor Pataki’s Executive Order No. 113.7, issued after the September 11 attacks, “temporarily suspend[ed], from the date the disaster emergency was declared . . . until further notice” select civil and criminal rules to the extent that they barred actions “whose limitation period conclude[ed] during the period commencing from the date that the disaster emergency was declared . . . until further notice . . . .” Governor Pataki later issued Executive Order No. 113.28, setting the end-date for the suspension as October 12, 2001, and as November 8, 2001 for litigants or attorneys directly impacted by the terrorist attacks. The Second Department later interpreted the orders as creating a “grace period until [one of two end-dates] to satisfy the statute [of limitations]” for certain litigants whose limitations periods were to expire within the grace periods.[4] Following Hurricane Sandy, Governor Cuomo issued an Executive Order almost identical to the one issued by Governor Pataki that was interpreted similarly by courts.[5]

While there is a history of orders affecting statutes of limitations, Governor Cuomo’s Order No. 202.8 is wider in scope and will result in different calculations for limitations periods. The prior orders extended the statutes of limitations for only certain claims—those with limitations periods expiring during the state disaster emergency. The earlier orders thereby impacted a narrower set of claims than Order No. 202.8, which creates a blanket toll for all claims subject to New York state laws and procedural rules. The earlier orders created for those subset of cases a grace period ending on a set date, whereas Executive Order No. 202.8, and its extension under Executive Order No. 202.14, implements a uniform toll that suspends the running of the limitations clock for the number of days between March 20 and May 7 (and any further extension that the governor may order).

III. Long-Term Impact of Orders

Executive Order Nos. 202.8 and 202.14 will impact litigants’ calculation of their statute of limitations periods for years to come. Unlike prior executive orders, these recent orders will affect many more claims that will each require individual calculations rather than looking to a single end-date. Parties should be mindful, however, of some plain exceptions to the orders’ scope, which reaches only state laws and procedures. The calculation of the limitations periods for federal claims will remain subject to federal rules and statutes. Contracts that contain parties’ own negotiated limitations periods and procedures likely will fall outside the orders’ ambit as well. States are treating statutes of limitations differently, with some states choosing not to extend the periods at all, some following the New York tolling approach, and others using the grace period approach. While there is often litigation concerning which state’s law may govern the claims asserted in any particular lawsuit, such disputes may take on added significance based on the different approaches being taken to the statute of limitations. Additionally, as states take varying approaches to their statutes of limitations, litigants that can file in multiple jurisdictions may also find value in comparing the different rules concerning tolling and calculation of the statute of limitations before commencing suit.

While courts held previous emergency orders concerning statutes of limitations to be constitutional and within executive powers, these most recent orders could conceivably be subject to future challenge. Litigants might argue, for instance, that (particularly with the benefit of hindsight) the tolling of the statute of limitations was not “necessary to cope with the disaster” or went beyond the “minimum deviation” necessary. In 2002, Paul G. Feinman, then a Manhattan Civil Court judge but now an Associate Judge of the New York Court of Appeals, wrote about potential bases for challenging Governor Pataki’s executive order suspending speedy criminal trials after the 9/11 attacks.[6] He explained that the powers authorized under Section 29-a are subject to “standards and limits”[7] requiring orders to be “reasonably necessary”[8] to the disaster effort and to maintain “the minimum deviation” from statutory or other legal requirements.[9] Applying such limitations to Governor Pataki’s executive order, Judge Feinman questioned whether the order’s suspension of speedy prosecutions not “only in New York City, close to the WTC site . . . . [but also] in upstate and western counties” would be justified. He also raised the possibility of challenging the order’s scope or applicability to certain limitations periods. Such grounds for challenge may be deployed against Governor Cuomo’s Executive Order Nos. 202.8 and 202.14, but it remains to be seen whether such challenges will be successful.

____________________

[1] Act of Mar. 3, 2020, ch. 23, 2020 N.Y. Sess. Laws 1 (McKinney).

[2] N.Y. Exec. L. § 29-a(1) (amended 2020).

[3] Id. § 29-a(2)(a)-(b), (e).

[4] See Scheja v. Sosa, 4 A.D.3d 410, 411-12 (2d Dep’t 2004).

[5] No. 52: Temporary Suspension and Modification of Statutory Provisions Establishing Time Limitations on Actions and Time in Which to Take an Appeal, Office of New York State Governor (Oct. 31, 2012), https://www.governor.ny.gov/news/no-52-temporary-suspension-and-modification-statutory-provisions-establishing-time-limitations; see Williams v MTA Bus Co., 44 Misc. 3d 673, 685 (Sup. Ct., N.Y. Cty. 2014) (interpreting Governor Cuomo’s order as creating a grace period for litigants), vacated in part on other grounds, 2017 WL 1362690 (Sup. Ct., N.Y. Cty. 2017).

[6] Paul G. Feinman & Brooks Holland, Grounds May Exist to Challenge Orders Suspending Speedy Trials in Aftermath of September Attack, N.Y. St. B.J., Feb. 2002, at 34.

[7] N.Y. Exec. L. § 29-a(2).

[8] Id. § 29-a(2)(b).

[9] Id. § 29-a(2)(e).

Authors: Marshall King and Bina Nayee*

* Not licensed to practice in New York; 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.

On March 19, 2020, the State of California issued Executive Order No. N-33-20, which required all Californians to “stay home or at their place of residence except as needed to maintain continuity of operations of the federal critical infrastructure sectors” for an indefinite duration. The State Order refers to and incorporates federal guidance on what constitutes “critical infrastructure sectors,” as outlined by the U.S. Department of Homeland Security Cybersecurity and Infrastructure Security Agency (CISA). CISA’s guidance (updated March 28) broadly lists sixteen critical infrastructure sectors considered vital to the population’s health and well-being, and provides further detailed guidance (updated March 28) outlining “essential critical infrastructure workforce” roles.

While the State Order provides some clarity to individuals and businesses seeking to comply with the appropriate orders, county and city governments have issued their own orders, sometimes creating more stringent restrictions on individuals and businesses than what is mandated in the State Order. While each order is unique, there are commonalties between the orders. Each order protects the operations of the healthcare industry, essential infrastructure, and the food supply chain. Most orders explicitly encourage employers to institute work-from-home policies. All orders mandate the closure of restaurants for dine-in services, limiting restaurants to take-out or delivery. Nearly all orders mandate the closure of gyms and fitness centers.

On March 16, 2020, the first wave of state and local orders restricting personal movement and non-essential business operations began with seven Bay Area counties and the City of Berkeley issuing “Shelter In Place” orders. These orders, while initially in effect until April 7, have now been modified to extend to May 3. (San Francisco, San Mateo, Marin, Contra Costa, Alameda, Santa Cruz, Santa Clara, City of Berkeley.) The County-level orders frame the restrictions differently than the statewide order, focusing on essential “businesses” at the local level, such as grocery stores, banks, and hardware stores. Comparatively, the state order identifies sixteen critical sectors, rather than identifying specific type of business. Despite the framing of these issues, the orders appear to be consistent in which businesses are allowed to continue operating.

On March 31, 2020, the Bay Area counties issued revised orders, which supersede the prior orders. (San Francisco, San Mateo, Marin, Contra Costa, Alameda, Santa Cruz, Santa Clara, City of Berkeley.) The new orders tighten and clarify the restrictions on personal conduct and “essential” activities and businesses, and extend their duration to May 3. These orders mandated that businesses “that include an Essential Business component” “alongside non-essential components must, to the extent feasible, scale down their operations to the Essential component only[.]” The revised orders similarly mandate that all construction must stop, except for the following exceptions: (1) projects immediately necessary to the maintenance, operation, or repair of Essential Infrastructure; (2) projects associated with Healthcare Operations; (3) affordable housing that is or will be income-restricted, including multi-unit or mixed-use developments containing at least 10% income-restricted units; (4) public works projects if specifically designated as an Essential Governmental Function by the City Administrator; (5) shelters and temporary housing, but not including hotels or motels; (6) projects immediately necessary to provide critical noncommercial services to individuals experiencing homelessness, elderly persons, persons who are economically disadvantaged, and persons with special needs; (7) construction necessary to ensure that existing construction sites that must be shut down under this Order are left in a safe and secure manner, but only to the extent necessary to do so; and (8) construction or repair necessary to ensure that residences and buildings containing Essential Businesses are safe, sanitary, or habitable to the extent such construction or repair cannot reasonably be delayed.

While the Bay Area counties previously determined that their March 16 Shelter in Place Orders were “complementary” to the State Order, those counties now are stating that their revised March 31 orders are more restrictive. Executive Orders from Bay Area counties indicate that the county orders, which contain, in some respects, “more stringent restrictions[,]” must be complied with in order to “control the public health emergency as it is evolving within the County and the Bay Area.”

Much like the Bay Area, Southern California adopted a patchwork of local city- and county-wide executive orders governing the crisis. The City of Los Angeles and the County of Los Angeles both issued “Safer at Home” orders identifying similar, though not identical, “Essential Businesses” that are permitted to operate during the crisis. For example, the City of Los Angeles prohibits any open houses or “in-person showings of housing for lease or sale[,]” while the County permits professional services related to the transfer and recording of ownership in housing, “including residential and commercial real estate and anything incidental thereto[.]” More nuanced, the County permits the operation of businesses “that supply office or computer products needed by people who work from home[,]” while the City more broadly permits businesses “that supply or provide storage for products needed for people to work from home.”

Recently, several localities in Southern California, including Los Angeles County and San Diego County, separately issued local orders requiring some businesses to post “Social Distancing Protocols” at all entrances of the facility in order to be visible by the public and by employees. The mandated form Protocols require the business to include specific information about the measures that the business is taking to comply with the social distancing and sanitation procedures mandated by the local orders. While the Protocols generally require similar information, the orders are inconsistent as to which businesses must post the protocols. In Los Angeles County, all Essential Businesses must post a Protocol, while San Diego County requires only businesses that remain open to the public.

To add a further layer of complication, each level of government authority has the power to enforce its orders, usually through either a fine or imprisonment. However, each government entity has a different approach to the enforcement of the orders. Many officials, including the California Governor Gavin Newsom, have taken the public stance that they are hoping for voluntary cooperation of businesses and residents, with the hope that formal enforcement measures are not necessary. Governor Newsom stated that he did not expect to use law enforcement to enforce the order at this time, but that the “social pressure” is “the most powerful enforcement tool we have.”

Initially, some mayors indicated that they did not intend for the widespread police enforcement of the orders. However, in recent days, we have seen an increased level of enforcement in the Bay Area and in Southern California. On April 3, Los Angeles prosecutors filed criminal charges against four local, non-essential businesses that “flagrantly” refused to close, including a smoke shop, a shoe store, and a discount electronics retailer. One individual in the Los Angeles area was cited $1000 for surfing, despite repeated warnings from a police officer that the beaches were closed. Similarly, San Francisco police chief Bill Scott said that San Francisco cited at least one person and one business for violating the City’s Shelter in Place Order, and the City Attorney recently obtained a warrant that to shut down an underground nightclub that was operating in violation of the local Order. Other localities have already begun to enforce their ordinances more strictly. In the City of Manhattan Beach located in Los Angeles County, the city issued 129 citations and shut down four construction projects over a single weekend for violations of the city’s social distancing ordinance. While the current enforcement is generally focused on individuals and businesses that ignore government demands for compliance with orders, it’s not clear whether all businesses were given a warning prior to the enforcement actions. We may continue to see a tightening on the enforcement of these orders as the virus continues to spread or as the level of compliance with the orders decreases.

The current regulatory landscape in response to the COVID-19 pandemic in California is complex and continually evolving. This trend is likely to continue into the foreseeable future. As the pandemic continues, cities and counties will tailor their restrictions to the needs of the locality. The COVID-19 restrictions are still new and have not been clarified through litigation, In the face of such uncertainty, businesses must proactively monitor the announcements of the State, the counties, and the cities within which they operate, seek guidance where there is ambiguity and evaluate the risks associated with the uncertainties in each order.

Authors: Mylan Denerstein, Lauren Elliot, Victoria Weatherford and Dione Garlick

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

Houston partner James Chenoweth, New York partner Brian Kniesly, and Los Angeles partner Lorna Wilson are the authors of “Covid-19, the CARES Act and Tax Planning for Real Estate and Passthrough Businesses,” [PDF] published by Bloomberg Tax on April 15, 2020.

The Hong Kong Competition Commission (“Commission”) has brought significant changes to its leniency program. In particular, (1) leniency will now be available to individuals; and (2) corporate leniency applicants will, under certain circumstances, receive additional protection from follow-on damage claims.

Background

The Hong Kong Competition Ordinance (“Ordinance”) prohibits cartel conduct under its “First Conduct Rule.” The Commission can commence proceedings for violations of the First Conduct Rule before the Competition Tribunal (“Tribunal”), which can impose pecuniary penalties of up to 10% of an undertaking’s total gross revenues generated in Hong Kong for the duration of the contravention (capped at three years). The Ordinance does not distinguish between individuals and undertakings with respect to the maximum pecuniary penalty that can be imposed by the Tribunal, and there is not yet any precedent on this issue. The Tribunal also has jurisdiction to adjudicate follow-on damage claims.

The Commission’s previous leniency framework for cartel conduct was governed by two policies: the “Leniency Policy for Undertakings Engaged in Cartel Conduct” (the “Leniency Policy,” published in November 2015), and the “Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct” (the “Cooperation Policy,” published in April 2019) (see our previous articles here and here for further discussion of these policies). The Commission’s new policies (available here and here) expand upon the pre-existing framework for leniency applicants who report or provide substantial assistance to the Commission in connection with its investigations into cartel conduct, incentivizing early reporting by both undertakings and individuals.

Leniency for Individuals

The Commission has demonstrated a willingness to prosecute individuals under the Ordinance; the four most recent cartel cases brought (and currently pending) before the Tribunal all include individuals. However, under the previous version of the Leniency Policy, only undertakings were eligible to apply for leniency (undertakings are defined as “any entity (including natural persons), regardless of its legal status or the way in which it is financed, which is engaged in an economic activity”). This meant that employees or directors who may have, of their own accord, wished to “blow the whistle on a company” would not be able to benefit from the Leniency Policy.

In a dramatic shift, the new Leniency Policy for Individuals makes leniency available to the first individual involved in cartel conduct who reports the cartel to the Commission. In exchange for the reporting individual’s full cooperation, the Commission will not take any proceedings against the leniency applicant in relation to the reported conduct.

Notably, leniency is only available to individuals who report before the Commission has granted a leniency marker to an undertaking under the Leniency Policy for Undertakings (by contrast, the Commission may still grant an additional marker to the first undertaking to apply for leniency even in instances in which the Commission has already granted leniency to an individual involved in the same cartel).

The new policy addresses a gap in the Commission’s leniency program and will have significant implications, incentivizing directors and employees to blow the whistle on an employer that refuses to come forward.

Enhanced Protection Against Damage Claims

Under the previous version of the Leniency Policy, the Competition Commission could initiate proceedings before the Tribunal against the leniency applicant for an order that an offense had been committed (but not for the imposition of pecuniary penalties). This created a disincentive to report, as a successful leniency applicant could, by reporting cartel conduct, also expose itself to follow-on damages claims based on the Tribunal’s order.

In order to address this issue, Commission will now distinguish between “Type 1” and “Type 2” applicants in the revised policy. Type 1 applicants refer to undertakings that report cartel conduct before the Commission has opened an initial assessment or commenced an investigation. Type 2 applicants are undertakings that report after the Commission has opened an assessment or commenced an investigation.

Under the revised policy, the Commission will agree to not commence proceedings before the Tribunal against both Type 1 and Type 2 successful applicants, which will include not bringing proceedings for an order declaring that the applicant has contravened the Ordinance. However, for Type 2 applicants, the Commission may still issue an infringement notice requiring the applicant to admit to contravention of the First Conduct Rule, in order to permit a follow-on action for damages against the undertaking. The Commission will not issue such a notice unless victims have initiated follow-on action against other undertakings found to have contravened the First Conduct Rule by participation in the cartel conduct covered by the leniency agreement.

Conclusion

The revised Leniency Policy for Undertakings and the new Leniency Policy for Individuals substantially alter the incentive scheme for reporting cartel conduct in Hong Kong. The Leniency Policy for Individuals will encourage employees and directors to report behavior that they previously had little incentive to disclose. The distinction between Type 1 and Type 2 applicants provides a further incentive for undertakings to disclose any cartel conduct as soon as possible.

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following lawyers in the firm’s Hong Kong office:

Sébastien Evrard (+852 2214 3798, [email protected])
Virginia S. Newman (+852 2214 3729, [email protected])

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

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

In this webinar we will cover:

the pandemic’s effect on UK insolvency law, with a focus on wrongful trading and proposed restructuring law reform
the pandemic’s effect on financial regulation, including the adjusted expectations of FCA and PRA
an overview of the UK’s fiscal response to COVID-19

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.

Gregory Campbell: An English, Irish and New York qualified Gibson Dunn partner. Focuses on advising borrowers, sponsors, lenders, creditors and investors in cross-border financings, restructurings and special-situations transactions.

Panayiota Burquier: A senior associate in the London Tax practice group of Gibson Dunn. Ms. Burquier’s practice focuses on tax aspects of corporate, finance and real estate industry-based transactions and clients.

Martin Coombes: An associate in the Financial Institutions practice group of Gibson Dunn. Advises on a wide range of financial services and compliance issues including advice on UK and EU regulatory developments, the regulatory aspects of corporate transactions and the on-going compliance obligations of financial services firms.

Washington, D.C. partner Scott Hammond is the author of “Takeaways from the DOJ’s ACPERA roundtable and proposed next steps,” [PDF] published by Global Competition Review on April 17, 2020.

During the COVID-19 emergency, what are businesses operating in New York City to do if the Mayor issues an executive order that conflicts with one from the Governor of the State? Under applicable law and legal principles, the last word should rest with the Governor. To be sure, businesses must comply with the valid orders of local governments, but the Governor of New York may, by executive order, suspend otherwise-valid sources of law, including orders from mayors. This may be surprising to some, as New York’s Constitution provides local governments with protections from State-level encroachments in the form of the home rule doctrine, but these protections do not likely limit the Governor’s executive orders in response to the COVID-19 pandemic.

New York’s Governor’s Broad Emergency Authority.

Under New York Executive Law 29-a, a statute initially passed by the New York State Legislature in 1978, the Governor of the State of New York has immense power during certain states of emergency. The Legislature amended Section 29-a in early March to provide the Governor with even greater authority in light of the looming threat of COVID-19.[1] According to the legislative history, the amendment was intended to allow “the governor” to issue “any directive necessary to respond to a state disaster emergency.”[2]

Section 29-a provides that

Subject to the state constitution, the federal constitution and federal statutes and regulations, the governor may by executive order temporarily suspend any state, local law, ordinance, or orders, rules or regulations, or parts thereof, of any agency during a state disaster emergency, if compliance with such provisions would prevent, hinder, or delay action necessary to cope with the disaster or if necessary to assist or aid in coping with such disaster.[3]

The law further provides that the governor “may issue any directive during a state of disaster emergency declared in the following circumstances,” which include an “epidemic” and, as added by the recent amendment, a “disease outbreak.”[4] The amendment also added to the statute that “[a]ny such directive” issued by the Governor “must be necessary to cope with the disaster and may provide for procedures reasonably necessary to enforce such directive.”[5] The Governor’s power is not unlimited. In fact, if the New York State Legislature wishes to override the Governor’s directive under Section 29-a, it “may terminate by concurrent resolution executive orders issued under [Section 29-a] at any time.”[6]

Given the breadth of Section 29-a, an executive order from the Governor meant to manage the COVID-19 pandemic should fall within the scope of the Governor’s statutory authority. After all, the statute was expressly amended for this purpose.[7] Case law also supports this result. Not surprisingly, to date there has been very little litigation over the Governor’s Section 29-a powers, the only case to address the statute in meaningful detail, admittedly decided nearly 20 years ago, affirmed the Governor’s exercise of emergency authority.[8] And, just this month, a court upheld one of Governor Cuomo’s COVID-19 executive orders against a challenge that it denied criminal defendants their statutory right to a prompt preliminary hearing.[9]

Only on rare occasion have courts second-guessed governmental emergency orders. For example, last year, a court granted a preliminary injunction against an Emergency Declaration issued by the County Executive of Rockland County that shut down schools in the face of a measles outbreak.[10] That court reasoned that the outbreak was not an “epidemic” as used within the meaning of a different emergency statute from Section 29-a.[11] The recent amendments to Section 29-a should avoid this result, however, because they clarified that the Governor may issue orders in the face of both an “epidemic” and a “disease outbreak.”[12] Moreover, the Rockland County court’s reasoning does not account for the factual differences between a county-wide measles outbreak and the COVID-19 pandemic—among other things, there has been a measles vaccine available for decades.

In short, unless some other statute or constitutional provision served to limit his action, the Governor would be within his statutory authority to issue directives to New York businesses, or to suspend mass transit and public gatherings, including concerts, shows, games and other events.[13]

Local Government’s Emergency Powers and Constitutional Home Rule.

While the Mayor of New York City has authority to issue emergency orders to manage the COVID-19 pandemic, his orders are likely ineffective if they conflict with an order from the Governor made pursuant to Executive Law Section 29-a. Still, the Mayor of New York City is empowered to issue local emergency orders to deal with an ongoing or imminent crisis.[14] This stems from New York State Executive Law Section 24, which provides that a governmental “chief executive may promulgate local emergency orders to protect life and property or to bring [an] emergency situation under control.”[15] The New York City Charter itself incorporates Section 24.[16] But, as already mentioned, Section 29-a on the Governor’s emergency powers allows the Governor to “suspend any statute, local law, ordinance, or orders,”[17] which on its face includes an order from a mayor. Thus, the Governor’s emergency powers allow him to suspend a mayor’s “order[].”

In the face of the Governor’s overriding executive order, New York City’s Mayor may argue that the State Constitution limits the State’s ability to control local affairs. But while the State Constitution does provide protections through the provisions relating to home rule, those protections are limited, and indeed may be inapplicable altogether.

As the New York Court of Appeals has said,

Enacted to protect the autonomy of local governments, the Municipal Home Rule Clause allows the legislature to “act in relation to the property, affairs or government of any local government only by general law, or by special law only (a) on request of two-thirds of the total membership of its legislative body or on request of its chief executive officer concurred in by a majority of such membership.”[18]

For three reasons, constitutional home rule should not limit the Governor from issuing an order that conflicts with the New York City Mayor’s management of the COVID-19 pandemic.

First, constitutional home rule challenges may not apply to executive orders at all. The relevant constitutional text constrains the “Legislature” and the “law[s]” it may pass, not the Governor or any action he may take via executive order.[19] As one case explained in rejecting a home rule challenge to a county executive’s order, “an Executive Order” functions merely as an “implementing directive” made under an already-existing law.[20] An executive order, then, is “not a law and, therefore, claims predicated on alleged violation of the State Constitution or statute that themselves pertain to laws, are not viable.”[21] With that in mind, a mayor who wishes to challenge an executive order made pursuant to Executive Law Section 29-a would likely have to show that Section 29-a itself violates the Constitution’s home rule provisions. Such a challenge would almost certainly fail, as Section 29-a is not aimed at “the property, affairs or government of any local government,” which is the only limitation the home rule provision creates.[22]

Second, even if an executive order from the Governor were subject to a home rule inquiry, it would likely count as a permissible “general law.” Under the State Constitution, home rule does not apply to any state “general law,” meaning one “which in terms and in effect applies alike to all counties, all counties other than those wholly included within a city, all cities, all towns or all villages.”[23] Courts have thus far typically deferred to the Legislature when deciding whether a statute is properly classified as a general law,[24] which has led to an extraordinarily view of what falls into that general law category.[25]

Third, even if an executive order from the Governor were construed as a “special law” for home rule purposes, it may still be valid under the Substantial State Concern doctrine. That doctrine provides that if (1) the State has a “substantial interest” in the subject matter and (2) “the enactment . . . bear[s] a reasonable relationship to the legitimate, accompanying substantial State concern,” the Legislature may act even if doing so interferes with issues of local concern.[26] For example, in Greater New York Taxi Association v. State, the Legislature substantially expanded the number of authorized taxi medallions and modified regulations governing both yellow cabs and livery cabs in New York City specifically, despite the fact that “regulation of” taxicabs “has always been a matter of local concern.”[27] The Court of Appeals held that the law in question was valid as it meant to further “the public health, safety and welfare of residents of the state of New York traveling to, from and within the city of New York,” which constituted “a matter of substantial state concern.”[28]

* * *

In sum, the Governor would very likely be within his authority to issue a statewide order directed to businesses during the context of the COVID-19 pandemic, and a mayor of an affected municipality likely would have no recourse to challenge such an order. Executive Law Section 29-a expressly places extraordinary authority in the Governor to deal with an “epidemic” or “disease outbreak”—conditions no doubt satisfied by the current COVID-19 pandemic. Of course, any order under Section 29-a would have to be, as noted, consistent with the federal and state constitutions, which could provide a basis for challenge depending on the from that a particular order might take.

____________________

[1] See Senate Bill S7919, NY State Senate, https://www.nysenate.gov/legislation/bills/2019/s7919.

[2] Id.

[3] N.Y. Exec. L. § 29-a(1) (emphasis added); Senate Bill S7919, supra note 1.

[4] N.Y. Exec. L. § 29-a(1) (emphasis added).

[5] Id.

[6] Exec. L. § 29-a(4).

[7] See Senate Bill S7919, supra note 1.

[8] See People v. Haneiph, 191 Misc.2d 738 (Sup. Ct. Kings Cty. 2002) (rejecting criminal defendant’s motion to dismiss for failing to satisfy the state Speedy Trial statute and holding that Governor Pataki’s suspension of the Speedy Trial statute after 9/11 was not unconstitutional).

[9] See People v. Hood, 2020 WL 1672425, at *3 (N.Y. City Ct. Apr. 4, 2020) (“[T]he right to a prompt preliminary hearing is purely statutory. As such, it is within the Governor’s power to suspend that statutory right during a state emergency disaster.”)

[10] See W.D. ex. rel. A v. County of Rockland, 63 Misc. 3d 932 (Sup. Ct. Rockland Cty. 2019).

[11] Id. at 936.

[12] See supra note 1.

[13] See Selfridge v. Carey, 522 F. Supp. 693, 696 n.4 (N.D.N.Y. 1981) (noting in dicta that Section 29-a “would appear to accord the Governor authority to ban public activities in certain circumstances”).

[14] See generally Exec. L. § 24.

[15] Id. § 24(1).

[16] See New York City Charter § 10-171.

[17] Exec. L. § 29-a(1).

[18] Greater N.Y. Taxi Ass’n v. State, 21 N.Y.3d 289, 301 (2013) (quoting N.Y. Const. art. IX, § 2(b)(2))

[19] See N.Y. Const., art. IX, § 2(b)(2).

[20] Godfrey v. Spano, 15 Misc. 3d 809, 817-18, 836 N.Y.S.2d 813, 819 (Sup. Ct. Westchester Cty.) (citing Clark v. Cuomo, 66 N.Y.2d 185 (1985)), judgment aff’d, 13 N.Y.3d 358 (2009).

[21] Id. See also People v. Haneiph, 191 Misc. 2d 738, 743 (Sup. Ct. Kings Cty. 2002) (affirming Governor’s order under Section 29-a while noting that an executive act is valid so “long as ‘the basic policy decisions underlying the regulations have been made and articulated by the Legislature.’” (quoting Matter of N.Y.S. Health Facilities Ass’n v. Axelrod, 77 N.Y.2d 340, 348 (1991)).

[22] See N.Y. Const., art. IX, § 2(b)(2) (emphasis added).

[23] Matter of City of Utica, 91 N.Y.2d 964, 965 (1998) (quoting N.Y. Const., art. IX, § 3(d)(1)).

[24] See Greater N.Y. Taxi Ass’n, 21 N.Y.3d at 302 (“Our review concerning what constitutes a substantial state interest is not dependent on what historically has been the domain of a given locality. Rather, our determination is dependent on the stated purpose and legislative history of the act in question.” (internal quotation marks omitted)).

[25] In one case, while a law conferred benefits only on the Museum of Modern Art in New York City, the court found it was still a “general” law because “other institutions” might “in time, meet the[] [law’s requirements] also.” See Hotel Dorset Co. v. Tr. for Cultural Res. of City of New York, 46 N.Y.2d 358, 368-369 (1978). Accordingly, it is likely that any executive order from the Governor meant to manage the COVID-19 pandemic could be written in terms that are general enough to render it a “general law,” even if the bulk of its effects are immediately felt in New York City. Cf. id.

[26] See, e.g., City of New York v. Patrolmen’s Benevolent Ass’n, 89 N.Y.2d 380, 391 (1996); see also Adler v. Deegan, 251 N.Y. 467, 491 (1929) (Cardozo, J., concurring) (“[I]f the subject be in a substantial degree a matter of state concern, the Legislature may act, though intermingled with it are concerns of the locality.”); Matter of Kelley v. McGee, 57 N.Y.2d 522, 538 (1982) (“It is well established that the home rule provisions of article IX do not operate to restrict the Legislature in acting upon matters of State concern.”).

[27] See Greater N.Y. Taxi Ass’n, 21 N.Y.3d at 296-300.

[28] Id. at 303 (emphasis in original).

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

Authors: Mylan Denerstein, Lauren Elliot, Victoria Weatherford, Lee Crain, and Michael Klurfeld

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

GLOBAL OVERVIEW

COVID-19 United Kingdom Weekly Bulletin – April 16, 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.
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COVID-19 United Kingdom Weekly Webinar – April 20, 2020

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

Join our team of Gibson Dunn London lawyers, led by partner and former Lord Chancellor Charlie Falconer QC, for a discussion of these changes and to answer your questions on how they will affect British businesses and community, including the impact on new and ongoing business relationships. This webinar will cover the pandemic’s effect on UK insolvency law, with a focus on wrongful trading and proposed restructuring law reform; the pandemic’s effect on financial regulation, including the adjusted expectations of FCA and PRA; and an overview of the UK’s fiscal response to COVID-19.
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Pharma, Medical Device, and Biotech Antitrust Update: New Developments and What They Mean – May 6, 2020 Webcast Briefing

Antitrust authorities in the U.S. and Europe have increasingly emphasized the importance of policing competition in innovation-driven health care markets, including pharmaceuticals, biologics, medical devices, and biotech. During and after the COVID-19 crisis, companies can expect greater demands on industry participants to collaborate, as governments and companies all work to develop innovative treatments and products. In addition, in recent years antitrust enforcers have been reviewing mergers and conduct throughout the industry through new analytical frameworks, and have issued new guidelines, which may have both short-term and long-term ramifications for business practices and transactions. We also can expect continued enforcement attention to perceived high drug costs. M&A transactions, litigation, and government enforcement are impacted and will continue to be impacted by these trends.

Drawing on their experiences in recent cases and their enforcement backgrounds, Gibson Dunn lawyers will discuss how to navigate these new and evolving approaches to antitrust enforcement and litigation. The panel also will discuss how pharmaceutical, medical device, biologic and biotech companies can engage effectively with enforcers, while practically managing antitrust risk in this challenging environment.
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In 2019, we witnessed ESG matters solidify their place at the center of corporate governance discussions. This was most notably illustrated by the Business Roundtable’s departure from shareholder primacy in its “Statement on the Purpose of the Corporation” issued on August 19th and signed by 181 CEOs. This embrace of corporate social responsibility is unsurprising in light of the emerging institutional investor consensus on the importance of sustainability and other social issues, what a recent Harvard Business School study of 43 global investment and pension funds termed the “investor revolution.” In addition to embracing ESG at the level of governance, issuers have also responded to this investor focus by embracing both well-established and emerging ESG financial products. For example, 2019 was a banner year for “green bond” issuances. While such issuances have grown steadily in the past half-decade, from under $40 billion in 2014 to over $170 billion in 2018, in 2019 green bond issuances globally surpassed $250 billion, an increase of over 40% from the 2018 period. With global issuances surpassing $200 billion in 2019, issuers in an increasing number of industries have begun to explore both the traditional green bond market and emerging alternative ESG financial products.

Offerings under the Green Bond Principles Framework

Historically green bond offerings have allowed issuers in industries with pronounced environmental exposure, such as energy, transportation, and utilities, to enhance their sustainability reputation and attract investment from ESG-focused funds. With the steady increase in investor pressure on ESG issues, the now well-established model of green bond issuances presents an attractive and accessible opportunity for issuers across a range of industries to highlight their commitment to sustainability. The Green Bond Principles (“GBP”), promulgated by the International Capital Markets Association (“ICMA”) and last updated in June 2018, have created a standard model for green bond offerings. The GBP framework establishes the generally accepted definition for green bonds as bonds “where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects,” with eligible projects defined according the following 10 non-exclusive categories:

renewable energy;
energy efficiency;
pollution prevention and control;
sustainable resource and land use management;
biodiversity conservation;
clean transportation;
sustainable water and wastewater management;
climate change adaptation;
eco-efficient products, production technologies and processes; and
green buildings.

The GBP also outlines the four key components of offering documents that distinguish a green bond offering:

a designation and description of Green Projects to be financed by offering proceeds;
a description of how such projects are evaluated and selected by the issuer;
a description of how offering proceeds will be managed and tracked to ensure they are used for qualifying Green Projects; and
a description of any ongoing commitment to report publicly on the use of proceeds until full allocation.Other than this supplemental disclosure in offering documents and the focus of marketing efforts, a green bond offering is largely identical to a traditional bond offering, with no difference in pricing mechanism, offering process or legal liability regime. In addition, there is generally no difference in covenants between green bonds and traditional unsecured bonds, with covenants determined by issuers’ particular credit ratings and market demands and no covenants related to Green Projects.

Questions for Green Bond Issuers

The process of preparing a green bond offering will be very familiar to existing debt issuers. Although underwriters may request additional information on an issuer’s ESG initiatives or ongoing or planned green projects, the diligence exercise should primarily focus on the issuer’s business, operations and financial condition, as in traditional bond offerings. Similarly, the content and preparation of offering documentation, such as the underwriting agreement, indenture or supplemental indenture, comfort letter and opinions of counsel, will be largely identical to a traditional bond offering. The only exceptions are the prospectus or prospectus supplement, which will include green bond specific disclosure in the “Use of Proceeds” section, and the preparation of related materials such as “green bond frameworks” or second party opinions, as discussed below.

The GBP and market practice have established a relatively well-trodden path for new green bond issuers; however, several decision-points exist for issuers. Although not required under the GBP, a green bond framework or other advance work to identify eligible green projects and establish reporting processes is highly recommended to avoid any delays at the time of an offering resulting from questions around the use of proceeds. In addition to selecting a general area of sustainability-focused investment, issuers must decide on the level of specificity in their use of proceeds disclosure, i.e. whether to define a broad category of eligible investments or specify particular projects. The GBP also recommends that the process for project selection be subject to third-party review, with many issuers achieving this by preparing a separate “green bond framework” in advance of a first offering, which outlines eligible projects and project evaluation processes, as well as post-offering proceed allocation reporting processes. Preparing such a framework in advance provides issuers time to consult with third-party review firms, with the framework later referenced or summarized in the eventual offering documents. Although recommended under the GBP, issuers must also decide whether to engage a third-party firm to provide a “Second Party Opinion” covering the alignment of the use of proceeds with the GBP and/or the issuer’s compliance with the reporting goals outlined in the offering materials. In addition to such opinions, issuers may also seek a “Climate Bond Certification” pursuant to the Climate Bonds Initiative, which requires issuers to appoint an approved outsider verifier prior to issuance in order to evaluate the proposed bond under sector-specific eligibility criteria. For marketing purposes, issuers who receive second party opinions and certifications from the Climate Bond Initiative generally disclose these facts in their offering prospectuses.

Although green bond offerings involve additional disclosure regarding the use of proceeds and ongoing reporting on proceed allocation, there are no specific provisions in green bond indentures or supplemental indentures that create penalties for non-compliance with the “eligible projects” definition or reporting commitments. Offering materials are often silent on this fact, though some issuers include an explicit statement that non-compliance with its proceeds allocation and reporting commitments does not constitute a default under the indenture. While green bond offerings do not involve additional covenant burdens, they give rise to liability concerns regarding issuer ESG disclosure. Many offering documents include an explicit statement that corporate social responsibility reports and other ESG materials on the issuer’s website do not constitute a part of the offering materials. Nonetheless, green bond offerings, whether through the inclusion of ESG-related disclosure in offering documents or by simply by focusing attention on an issuer’s ESG performance, may draw increased attention to the quality and accuracy of ESG disclosure. As a result, green bonds provide further reason for issuers and underwriters to carefully review and diligence ESG-related disclosure.

Emerging Alternative ESG Finance Products

While 2019 was a record year for green bond issuances, new alternative green finance products continue to attract attention. For example, AXA’s June 2019 proposed “Transition bond” guidelines would create a new category of bonds for projects outside the bound of the GBP’s “Green Projects.” Similar to traditional green bonds in structure, transition bond offerings would be defined by their “use of proceeds” and reporting on proceed allocation; however, as the name suggests, transition bonds would allow for investment in “climate-transition related activities,” i.e. transitions to more climate-friendly forms of energy and industrial production. AXA’s examples of such transition investments include “Cement, metals or glass energy efficiency investments,” “gas transport infrastructure which can be switched to lower carbon intensity fuels,” and “coal-to-gas fuel switch in defined geographical areas.” Transition bonds focus on the climate-impact of investments in the context of specific industry transitions, rather than the inherent sustainability of the financed projects, and, therefore, would conceivably open up the sustainability finance market to traditionally excluded industries such as oil and gas and heavy transport.

In addition to alternative sustainability-focused products, there has also been increased recent attention on “social bonds,” which under the ICMA’s “Social Bond Principles,” finance non-environmental socially beneficial projects, such as investments related to access to health, educational and financial services and “socioeconomic advancement and empowerment.” With the first social bond issuance by a U.S. financial institution in January, 2019 and the ICMA’s June, 2019 publication of a framework for harmonizing social bond and green bond reporting, the social bond market promises to further expand the scope of ESG-finance.

Emerging ESG finance products also provide alternatives to the “use of proceeds” focus of traditional green bonds and social and transition bonds. For example, in September 2019 the first “green ratchet bond” was issued in a $1.5 billion European offering by an Italian energy company. Unlike traditional green bonds, green ratchet bonds involve variable pricing based on the issuer’s environmental performance and do not allocate proceeds to specific green projects. In particular, this bond contains a coupon increase if the issuer does not achieve a target for the renewable energy share of its power generation capacity.

Consistently strong and expanding investor demand has drawn an increasingly broad set of companies into the ESG-finance market. As a result, the maturing of this market is both a story of growth and diversification. The success of traditional green bonds should be expected to attract additional investors and issuers and increase demand for alternatives to the standard GBP approach. In addition to the proliferation of products financing industries and projects outside the “eligible green projects” framework, we may also witness a push for grading within the green bond market itself, with mechanisms such as the Climate Bond Certification being used to introduce greater differentiation and hierarchy.

Gibson Dunn’s Capital Markets Practice Group is available to answer questions about green bonds and other ESG financial products and our experience with them. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets practice group, or the authors:

Andrew L. Fabens – New York (+1 212-351-4034, [email protected])
Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Stewart L. McDowell – San Francisco (+1 415-393-8322, [email protected])
Michael A. Mencher – San Francisco (+1 415-393-8301, [email protected])

Please also feel free to contact any of the following practice leaders:

Capital Markets Group:
Stewart L. McDowell – San Francisco (+1 415-393-8322, [email protected])
Peter W. Wardle – Los Angeles (+1 213-229-7242, [email protected])
Andrew L. Fabens – New York (+1 212-351-4034, [email protected])
Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])

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

This weekly bulletin provides a brief summary 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 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 – the European Commission (the Commission) stands ready to deal with new cases where firms show compelling reasons to proceed without delay

New guidance on notifications

The Commission has issued a statement encouraging parties to discuss the timing of notifications with the relevant case team. It is understood that reviews of simplified procedure cases should not raise complexities. However, for non-simplified cases, parties are being encouraged to discuss timing sufficiently in advance.
The Commission has suggested that it stands ready to deal with cases where firms can show “very compelling reasons to proceed with a merger notification without delay”. Companies rushing to notify, when not necessary, may encounter delays further into the process.
The consequences of this, as previously mentioned, is that companies will likely face delays in the pre-notification stage, unless there are compelling reasons to proceed without delay.
The Commission has also mentioned that, in some cases, it is facing practical difficulties in collecting information from the notifying parties and third parties. Although it is pro-actively trying to deal with these challenges, such difficulties can have timing impacts and expand review timelines.

Watch this space

The Commission has said that it will continue to provide updated information as the situation develops about their working practices – so we will keep you updated.

Antitrust – New Commission Guidance and Comfort Letters

New Temporary Framework

The Commission published on 8 April 2020 a new Temporary Framework which aims to provide antitrust guidance to companies willing to temporarily co-operate and co-ordinate to address or avoid shortages of essential scarce products and services resulting from unprecedented surges in demand due to the pandemic, in particular urgently needed medical supplies. The framework is focused on co-operation for critical hospital medicines and medical equipment used to treat and test coronavirus patients. Although the Commission has recognised that supply emergencies may arise outside the health sector. The Temporary Framework Communication explains the main criteria that the Commission will apply in assessing possible co-operation projects. It also explains when and how firms can obtain guidance or written comfort.

Engagement and comfort letters

The Commission has been engaging with companies and trade associations to help them in assessing the legality of co-operation plans, and assisting with putting in place adequate safeguards to guard against longer-term anticompetitive effects. It has set up a dedicated webpage and mailbox that can be used to seek informal guidance on specific initiatives. In most situations, oral guidance has been given to companies. However, the Commission has also shown willingness to exceptionally provide (at its discretion) written comfort letters concerning specific co-operation projects.
A comfort letter was issued for the first time on 8 April 2020 to “Medicines for Europe”, formerly the “European Generics Medicines Association” (EGA). This addressed a specific voluntary co-operation project amongst pharmaceutical producers – both members and non-members of the association – aimed at avoiding situations of shortages of critical hospital medicines for the treatment of coronavirus patients. It is reported that the Commission reacted quickly to the request for guidance, i.e. the association formally submitted its proposal on 6 April 2020 and the comfort letter was sent back just two days later.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 the 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 9 April 2020, the European Commission announced that it had started a consultation with member states on a proposal to further expand the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak. The new amendment, if adopted, would enable member states, under certain conditions, to recapitalise companies in need. A recapitalisation would lead to some level of state ownership or nationalisation of the companies concerned and, according to the Commission’s announcement, should remain a measure of last-resort.
For further details, see our COVID-19 UK Bulletin – 8 April 2020.

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

FCA Statement of Policy in relation to listed companies and recapitalisation issuances during the COVID-19 crisis

The FCA has announced, in a statement of policy, a series of measures aimed at assisting London listed companies to raise new share capital during the COVID-19 crisis. Key highlights are as follows:

Smaller share issues. The FCA urges market participants to review and consider carefully the recent Pre-Emption Group statement, which recommends that investors, on a case-by-case basis, consider supporting issuances by London listed companies of up to 20% of their issued share capital, on a temporary basis (for further details regarding this statement, see our COVID-19 UK Bulletin – 8 April 2020.).One condition of the additional flexibility is that a company must undertake a proper consultation with a representative sample of its major shareholders. The FCA notes the benefit of complying with the MAR Market Sounding provisions (set out in Article 11 of MAR and in related technical standards and regulatory technical standards) when conducting the consultation. Another condition is that, so far as possible, the issue should be made on a “soft-pre-emptive” basis. The FCA encourages companies to contribute to delivering “soft pre-emptive rights” by exercising their right to be consulted on, and to direct, allocation policies under MIFID II related regulations.The Pre-emption Group statement is designed to allow a company to conduct the largest possible placing to qualified investors without requiring the production of a prospectus (i.e. up to 19.99% of issued share capital over a 12 month period). Where such a placing exceeds the level of a company’s existing disapplication of pre-emption rights, it will need to be implemented using a “cashbox” structure.
Shorter form prospectuses. The FCA notes that London listed companies (and their advisors) may wish to consider using the new simplified prospectus, introduced in July 2019 when the new Prospectus Regulation came into force, when issuing new equity. This form of prospectus is designed for secondary issuances by companies that have been admitted to trading on a regulated market (or a SME Growth Market, such as AIM) for at least 18 months, and requires reduced disclosure (compared to a normal prospectus). It may not be suitable where an offer is targeting investors outside the UK and EU.
Working capital statements. For the duration of the COVID-19 crisis, London listed companies will be permitted to disclose, in an otherwise clean working capital statement, key modelling assumptions underpinning the reasonable worst-case scenario, provided that such assumptions are related to coronavirus. Such assumptions must be clear, concise and comprehensible. Non-coronavirus assumptions may not be included. In all other respects, the working capital statement must be prepared in accordance with the ESMA Recommendations and the FCA technical supplement (published alongside the FCA statement of policy), and a statement confirming this must be included.
General meeting requirements under the Listing Rules. The FCA proposes to temporarily modify the Listing Rules, on a case by case basis, with regard to Class 1 transactions and Related Party transactions. Premium listed companies undertaking a transaction within the scope of the FCA proposal may apply to the FCA for a dispensation from the requirement to hold a general meeting. It will still be necessary for a company to publish a shareholder circular and the circular will need to contain certain disclosures relating to the dispensation. In order to receive the dispensation, amongst other things, companies will need to have obtained, or will need to obtain, written undertakings from shareholders (who are eligible to vote under the Listing Rules) that they approve the proposed transaction and would vote in favour of a resolution to approve the transaction if a general meeting were to be held. A sufficient number of undertakings to meet the relevant shareholder approval threshold must be obtained. If this happens following publication of the shareholder circular, the company will be required to inform the market. Where companies have provisions in place in their constitutional documents to provide for holding virtual general meetings, the FCA will continue to support this as a means for gaining shareholder approval. Further information can be accessed here.

The Investment Association offers guidance to Chairs of FTSE 350 companies

The Investment Association (IA) has sent a letter to the Chairs of all FTSE 350 companies in the context of the COVID-19 pandemic. The letter includes IA member views in relation to:

Engagement and communication. They ask that companies maintain as open a dialogue as possible and note that they support firms who place their primary focus on maintaining a business that is sustainable over the long term.
Financial reporting. They note that companies should use the additional two month flexibility provided by the FCA to publish annual accounts, if needed. See our COVID-19 UK Bulletin – 8 April 2020 for further details regarding the FCA’s policy.
AGMs. They welcome the ICSA / The Chartered Governance Institute guidance on holding AGMs under the “Stay at Home measures” and encourage companies to consider how to effectively engage with their retail and institutional shareholders in lieu of the normal AGM meeting. See our COVID-19 UK Bulletin – 8 April 2020 for further details regarding this guidance.
Dividends. They support the FRC guidance stating that firms should consider the position of the company at the time a dividend is paid, not just when it is declared. They also note that dividends are an important income stream and that shareholders would expect companies who do decide to suspend their dividends, to restart the dividend payments as soon as it is prudent to do so.
Executive pay. They note that if companies are cancelling dividend payments or making changes to their workforce pay, IA members will support Boards and Remuneration Committees that demonstrate how this should be reflected in their approach to executive pay.
Capital raisings. They note that in exceptional circumstances a cashbox placing may be the only approach suitable, and that they support the recent Pre-emption Group statement allowing companies additional flexibility under the Pre-emption Group’s guidelines on a case-by-case basis for a limited time period. They also provide additional views of IA members regarding the use of that flexibility. See our COVID-19 UK Bulletin – 8 April 2020 for further details regarding the Pre-emption Group statement.The full text of the IA letter containing further information is available here.

Global proxy provider, Institutional Shareholder Services (ISS), issues COVID-19 guidance

ISS has issued guidance to London listed companies on how its standard proxy voting guidelines should be applied in light of the COVID-19 pandemic. The guidance looks at a number of listed company issues including the postponement of AGMs and should be read in conjunction with ISS’s UK and Ireland Voting Guidelines. A full summary of the guidance will be provided in our next bulletin.

3. CYBERSECURITY AND DATA PROTECTION

Cybersecurity

No update to our COVID-19 UK Bulletin – 8 April 2020.

Data protection

The European Commission has adopted a Recommendation on a common EU approach to using technology including smartphone apps and anonymised mobility data for the COVID-19 crisis, facilitating targeted social distancing measures and virus modelling. The Commission and the European Data Protection Supervisor (EDPS) have stressed privacy and data protection in connection with this project. Member states, the Commission, and the European Data Protection Board (EDPB) will develop a “toolbox”; member states should report on and share measures taken; and the Commission will assess progress and recommend phasing out redundant measures. The UK is reportedly exploring using anonymised location data to monitor social distancing measures and viral spread.
Recommendations are a means for EU institutions to make their views known but do not have binding legal force. The EDPS is a supervisory authority that monitors EU institutions’ and bodies’ personal data processing and reviews EU legislation that affects data protection; the EDPB is comprised of the heads of each member state’s supervisory authority and the EDPS and ensures data protection law is consistently applied. The Commission’s press release on the Recommendation is available here.

4. DISPUTES

No update to our COVID-19 UK Bulletin – 8 April 2020.

5. EMPLOYMENT

Social distancing in the workplace

BEIS and PHE have updated their guidance for UK employers on social distancing and other measures, both generally Guidance for employers and businesses on coronavirus (COVID-19) and by sector (including manufacturing, transport, farming, and shipping) Social distancing in the workplace during coronavirus (COVID-19): sector.

CJRS

The Government has published further guidance on the Coronavirus Job Retention Scheme (CJRS). The key points are:

New employers can claim under the CJRS in respect of employees transferred under the TUPE or PAYE business succession rules, even where the change in business ownership occurred after 28 February 2020.
Employers can switch employees from statutory sick pay (SSP) to furlough and vice versa, but furlough should not be used to top-up SSP for short-term absences. Employers can use both the SSP and CJRS rebate schemes for the same employee but not for the same period of time. Also, employers can furlough “shielding” employees rather than placing them on SSP.
Administrators can access the CJRS, but should only use it if there is a reasonable likelihood of rehiring the workers (e.g. where a sale of the business is anticipated). (On 13 April 2020, the High Court held that administrators will be taken to have “adopted” the contracts of employees who consented to furlough for the purposes of insolvency law when they eventually apply for funding under the CJRS, so monies paid under the scheme can be paid to employees in priority over administrators’ fees and expenses and the distribution of assets to floating charge and unsecured creditors.)
Employees cannot work for organisations that are linked to the employer, as well as not working for the employer, when on furlough.
Employers that engaged in payroll consolidation schemes after 28 February 2020 can place employees on furlough.
Employers must pay the entire grant to the employee (with no deductions for fees, administration charges etc.). Employers cannot net off any part of the reclaimed grant to fund benefits in kind or salary sacrifice schemes. Furloughed employees should continue to receive these benefits in addition to their furlough salary.
Employers must continue to pay employer National Insurance and pension contributions on behalf of furloughed employees. However, the reclaimable National Insurance contributions are on the furlough salary, not the “topped-up” normal salary; employers cannot claim for pension contributions they make above the mandatory level.HMRC has advised that the CJRS is due to open 20 April 2020 and it aims to make payment within four to six working days after claims are submitted.

Tribunals

The EAT Rules have been amended to permit oral hearings by electronic communication. From 16 April 2020, the EAT will hold hearings in a limited number of appeals via telephone, Skype or other internet-based platforms. The EAT will consider whether a remote hearing might be practicable and the parties will be consulted, including on whether electronic bundles can be provided. An EAT judge will decide whether to hold a remote hearing. If that is not practicable, the case will be postponed. Parties can expect to be informed by 4 pm on the seventh day before their hearing is due to commence, failing which they should contact the EAT. Any remote hearing that would have been conducted in open court will be accessible to members of the public and the media, who can observe but not participate in or record proceedings. The time limits for instituting appeals, and the requirements for the proper and effective institution of an appeal, remain as set out in the EAT’s Rules and Practice Direction.The London Central employment tribunal has stated it intends to reopen for remote hearings (preliminary hearings and mediations) on 14 April 2020, via telephone and video.

6. ENERGY

OPEC agrees to record output cut

After substantial political pressure on all sides, OPEC+ reached a deal to cut oil output, with 23 countries in total agreeing for the next two months to collectively withhold 9.7 million barrels of oil a day from the market. Despite the record size of the cut in output, many market observers worry that the deal does not go far enough (in particular in addressing the impacts of COVID-19 on demand) and there is doubt in many quarters that the deal represents a lasting end to the recent price wars. The price of oil fell by 5% during the last phase of negotiations, so the results of the deal are yet to materialise, but the most likely impact is to create a floor.

The Railroad Commission of Texas (RRC), the state’s oil and gas regulator, held an-all day online hearing on 14 April 2020 to determine whether to order pro-rata production cuts (proration would mean that the government would cut production for all Texas producers by a set percentage). It is unclear when a final decision on regulations will be announced, given the RRC has to consider nearly 60 testimonies from industry leaders and market experts arguing for or against proration. The RRC has not limited production in Texas since 1973. Many observers consider that proration will not move the needle in terms of the oil price, given the size of the production of Texas compared to the global market, but may act to prevent permanent shut-ins in the state.

Impact of COVID-19 on energy sector workforce

As greater numbers of workers (including offshore workers) test positive for COVID-19, we are seeing delays, lockdowns and other issues arising on a number of different projects and facilities globally. Use of furloughs is also increasing (particularly in the services sector). A few specific examples include:

Petrofac announced it would furlough around 200 employees and is aiming to cut a fifth of its staff. It has not commented on which jobs are most likely to be affected.
A Total employee on the Mozambique LNG site was diagnosed with the virus and other workers are being quarantined on site.
The Hummingbird Spirit FPSO, owned by Teekay and operating in the UK North Sea, has ceased production as one of its workers was flown to shore following testing positive for the virus on 4 April 2020. It is now undergoing deep-cleaning.
Ten workers have tested positive on Chevron’s Tengiz field onshore Kazakhstan and the workers’ accommodation camp is now in lockdown.
Shell will be delaying a number of its ongoing UK North Sea projects into next year as a result of COVID-19 and the slump in prices.

7. FINANCE

No update to our COVID-19 UK Bulletin – 8 April 2020.

8. FINANCIAL SERVICES REGULATORY

No update to our COVID-19 UK Bulletin – 8 April 2020.

9. FORCE MAJEURE

No update to our COVID-19 UK Bulletin – 8 April 2020.

10. GOVERNMENT SUPPORT SCHEMES

Additional support for frontline charities

On 8 April 2020, the Government announced support of £750 million for frontline charities, hospices and community care schemes across the UK to ensure they can continue their vital work during the COVID-19 outbreak. As part of the support, £360 million will be directly allocated by Government departments to charities providing key services and supporting vulnerable people. A further £370 million is available for small and medium-sized charities, including through a grant to the National Lottery Community Fund for those in England, in order to support community organisations that are delivering food, essential medicines and providing financial advice. The support announced is in addition to some of the other measures and schemes that UK charities can access, such as the Coronavirus Job Retention Scheme, the statutory sick pay reclaim scheme and the deferral of VAT payments.

11. INSOLVENCY

No update to our COVID-19 UK Bulletin – 8 April 2020.

12. INTERNATIONAL TRADE AGREEMENTS (PRIVATE AND PUBLIC)

No update to our COVID-19 UK Bulletin – 8 April 2020.

13. LOCKDOWN AND PUBLIC LAW ISSUES

Review of lockdown restrictions

Under the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 the Government is required to review the appropriateness of the lockdown restrictions, with the first review taking place by 16 April 2020. In recent news, Foreign Secretary Dominic Raab has said that the Government does not expect to make changes to the lockdown restrictions this week and that they could continue at least another month.

Local government and democracy

Exercising powers under the Coronavirus Act 2020, under which it had already postponed all regularly scheduled elections until 2021, the Government issued regulations postponing all other elections such as by-elections and local referenda. The Government also issued regulations giving flexibility to local authorities over frequency and format of meetings, relaxing local authority accounts and audit deadlines, and granting emergency planning permissions to local authorities and health service bodies.

Administration of justice

The Government has also used its powers under the Coronavirus Act 2020 to make regulations accelerating the appointment of temporary Judicial Commissioners “to ensure that warrants can continue to be approved”. Under the Investigatory Powers Act 2016, Government warrants for obtaining communications data—usually in matters of national security or serious crime—must also be approved by a Judicial Commissioner. To that end, the time limit for such review has also been extended. Similarly, regulations have been issued extending time periods for retention of biometric data for certain counter-terrorism purposes.

Police enforcement data

The National Police Chiefs Council has said that it will publish lockdown regulation enforcement data every fortnight during the crisis. The first data are expected to be released this week.

Temporary release of prisoners

To enable greater distancing in prisons and young offender institutions to help prevent the spread of Coronavirus, the Government has issued regulations allowing for the temporary release of prisoners in specific circumstances. Regulations also make provision for such individuals to have access to means-tested benefits during their release.

14. M&A AND PRIVATE EQUITY

Checklist for executing documents

Although signing is not a formality required for most contracts, signature is the clearest way of signifying assent to the agreement. The applicable execution formalities will depend on document type (e.g. contract or deed) and the legal personality of the executing party (e.g. the formalities regarding the execution of deeds and documents by English companies are set out in sections 43-52 Companies Act 2006).

In practice, there are essentially three methods used when executing commercial contracts or deeds:

Wet ink signatures: each signatory signs hard-copy document by parties who are present at the same signing meeting.
Virtual signing: each signatory signing a hard-copy document in wet-ink, converting the document and signature into electronic form (e.g. by scanning or photocopying it) and sending it by email.
E-signing: one or more parties using an electronic signature to execute the document. This may involve the use of a web-based e-signing platform, such as DocuSign.With increasing numbers of people working at home during the current pandemic, we have seen the use of electronic signatures becoming more common and have created a helpful checklist to keep in mind when arranging for a document to be signed electronically and/or where signatories are working remotely.

For simple commercial contracts

Use of electronic signatures: Consider the use of an electronic signature for signatories that are unable to execute using wet ink. Where a simple contract is required by statute to be in writing and signed, an electronic signature can be used to execute to contract. Electronic signatures can take a number of different forms, including:
a person typing his or her name into a contract or into an email containing the terms of a contract;
a person electronically pasting his or her signature (e.g. in the form of an image) into an electronic (i.e. soft copy) version of the contract in the appropriate place (e.g. next to the relevant party’s signature block);
a person accessing a contract through a web-based e-signature platform and clicking to have his or her name in a typed or handwriting font automatically inserted into the contract in the appropriate place (e.g. next to the relevant party’s signature block); and
a person using a finger, light pen or stylus and a touchscreen to write his or her name electronically in the appropriate place (e.g. next to the relevant party’s signature block) in the contract.
Counterparts: Consider whether the contract will be signed electronically in counterparts or on the same “soft copy” of the contract. Either is acceptable under English law.
Signature blocks: Ensure that the signatory inserts his or her signature into the relevant signature block with the intention of authenticating the document.
Scanning signatures: Where a signatory executes a document virtually but does not have access to a scanner to create a soft-copy of the signature, a camera phone may be used to produce an electronic image of the signed document. The image(s) must be of a sufficient quality and the text clearly legible. The inclusion of a document identification number is also recommended.

For deeds

Is a deed necessary?: (Re)consider using simple contracts instead of deeds where possible. Very few contracts are required to be deeds as a matter of law (except, for example, powers of attorney and agreements entered into without consideration).
Additional wet ink signature formalities: Electronic signatures may be used to execute the deed in the same way as a simple contract BUT remember that the wet ink signature formalities apply:
- the deed can be validly executed by an individual if it is electronically signed by (i) the individual in the presence of a witness who attests the signature; or (ii) at the direction and in the presence of the individual and the presence of two witnesses who each attest the signature.
- the deed can be validly executed by a company if it electronically signed by (i) two authorised signatories (e.g. director or secretary); or (ii) an authorised signatory in the presence of a witness that attests the signature (see below for more details).
Counterparts: Consider whether the deed will be signed electronically in counterparts or on the same “soft copy” of the deed – either is acceptable under English law.
Signature blocks: Ensure that the signatory inserts his or her signature into the relevant signature block with the intention of authenticating the document.
Alternatives to witnessed signatures: If locating an independent witness appears problematic, consider suitable alternative arrangements, e.g. for the deed to be executed by the signature of two directors, or a director and the company secretary, to avoid the need for a witness.

Witnessing signatures

How to witness: An individual may witness a signature by witnessing the signatory insert his or her electronic signature into the relevant signature block, by whatever method that is selected by that signatory (i.e. wet ink or electronic signatures).
Who can be a witness?: Where possible, seek an independent witness that is unrelated to the signatory to avoid doubts as to the veracity of the witness’ evidence.
Confidentiality: Consider the signatories’ confidentiality obligations when selecting the witness.
Who cannot be a witness: There is no requirement under the Companies Act for the witness not to be a family member BUT remember to:
- ensure that the witness is not a party to the deed;
- avoid minors acting as a witness, or ensure that the minor is of sufficient maturity and understanding for their evidence to be regarded as reliable;
- keep a note with the deed of the practical reasons for the witness being related to the signatory.
Witness physical presence requirement: Ensure that the witness is physically present with the signatory (pursuant to recent Law Commission guidance). If a potential signatory is at home alone, the best option might be to find another signatory.

Signatories in other jurisdictions

Corporate electronic signatures: Ensure that an overseas company signature can (electronically) execute the contract under the authority of the company. Note:
- where an overseas company is required to execute an English law contract, an electronic signature can be effective provided that under the laws of the territory in which the company is incorporated, the signatory is acting under the authority (express or implied) of the company;
- it may be prudent to obtain a legal opinion from a lawyer practising in the jurisdiction in which the overseas company is incorporated to confirm that the signatories have the authority to bind the overseas company using an electronic signature.
Are electronic signatures valid? Consider the effectiveness of electronic signatures for contracts governed by the law of another jurisdiction. For example, certain contracts governed by German law require notarisation and therefore do not permit the use of electronic signatures.
Enforcement issues: Consider the terms of the contract’s dispute resolution clause. Electronic signatures will not be appropriate for documents that may be enforced in jurisdictions outside England and Wales that require wet-ink original documents.
Conditions subsequent: Where required signatories are unable to execute a document using a wet ink signature or electronic signature, consider agreeing with the other side to the transaction making certain documents a condition subsequent deliverable as soon as practically feasible.

Filing a document with a particular authority or registry

Are electronic signatures acceptable?: Check whether the authority or registry accepts electronic signatures. For example, the Land Registry requires a wet-ink signature on a paper version of any document submitted to it for registration.
Location of signatory or document: If the place of signature or the location of the document has particular legal consequences (e.g. in relation to the payment of stamp duty), the parties should check that a document executed using an electronic signature will be treated as having been executed or located in that jurisdiction.

15. REAL ESTATE

Levels of rent paid on 25 March quarter day

A recent survey of 18,350 UK properties indicates that just 48% of rent due was collected on 25 March 2020, rising to 57% a week later. The 2019 figures of the same survey were 79% and 90% respectively. The report notes that the 57% of rent paid was spread unevenly across sectors: 47% in retail, 71% in office and 62% in industrial. Hotel rents are significantly more challenged. Further, over half of the service charge payments due on the rent quarter date remained unpaid a week after the due date.

This continues to present significant challenges to investors/landlords who have ongoing debt service obligations to lenders. Fractious discussions are opening up between landlords and tenants (particularly with retail tenants in the supermarket and pharmacy sector who continue to be open for trade) which (subject to the previously reported non-eviction regulations which are set currently to expire in June 2020) will likely result in litigation (including winding-up petitions, debt recovery and bailiffs being sent to distrain). Given social distancing, however, the use of bailiffs, whilst not explicitly restricted by the Coronavirus Act 2020, is unlikely to be practicable, and remains a legal grey area.

Guidance on Energy Performance Certificates (EPCs)

On 2 April 2020, the Ministry of Housing, Communities and Local Government (MHCLG) published guidance on complying with the legal requirement to issue a valid EPC when selling or letting a property. Crucially, the legal obligation to issue an EPC remains in place but the guidance adds conditions for how EPC assessments can be conducted safely, and, if one is not possible, suggests the parties agree to conduct the assessment as soon as normal movement has been restored.

16. UK TAX

HMRC’s Coronavirus Insolvency Guidance

HMRC has relaxed its position in relation to its powers to enforce the collection of outstanding tax liabilities as a petitioning creditor and confirmed:

All insolvency activity (i.e. whether arising as a result of COVID-19 or not) has been paused. HMRC will not petition for bankruptcy or winding up orders (other than essential circumstances such as those involving fraud or other criminal activity).
HMRC will continue to consider new proposals for Company Voluntary Arrangements, Administrations, Individual Voluntary Arrangements and Trust Deeds to allow those businesses who need financial support to get access to the appropriate insolvency regime.
HMRC will support a three month deferral of voluntary arrangement contributions where the supervising insolvency practitioner considers the business is unable to maintain payments. There is no need to contact HMRC to request this deferment. On conclusion of the initial three months deferment, depending on the COVID-19 situation, further guidance will be issued.For further details see HMRC’s Coronavirus Insolvency Guidance.

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

New York partners Mylan Denerstein and Lauren Elliot, New York associate Lee Crain and San Francisco associate Victoria Weatherford are the authors of “Trump Likely Doesn’t Have Power To Reopen Businesses,” [PDF] published by Law360 on April 15, 2020.