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Andrew L. Fabens is a partner in the New York office of Gibson, Dunn & Crutcher.  Mr. Fabens is Co-Chair of Gibson Dunn’s Capital Markets Practice Group and is a member of Gibson Dunn’s Securities Regulation and Corporate Governance Practice Group. Mr. Fabens advises companies on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws, corporate governance issues and stock exchange listing obligations. He represents issuers and underwriters in public and private corporate finance transactions, both in the United States and internationally. His experience encompasses initial public offerings, follow-on equity offerings, investment grade, high-yield and convertible debt offerings (including green and SLB bonds) and offerings of preferred, hybrid and derivative securities. In addition, he regularly advises companies and investment banks on corporate and securities law issues, including M&A financing, spinoff transactions and liability management programs.

Hillary Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s Securities Regulation and Corporate Governance, Energy and Infrastructure, Oil and Gas, M&A and Private Equity practice groups. Ms. Holmes’ practice focuses on capital markets, securities regulation, and corporate governance, primarily in the energy industry.  Ms. Holmes represents public companies and private companies of all sizes, MLPs, investment banks, management teams, and private equity in all forms of capital raising transactions, including IPOs, registered offerings of debt or equity, private placements, 144A offerings of debt or equity, joint ventures, structured investments, de-SPAC transactions, direct listings, sustainable financings, and spin-offs. Ms. Holmes provides regular counseling regarding securities laws, SEC reporting, ESG issues and governance matters. Ms. Holmes also frequently advises boards of directors, special committees and financial advisors in complex M&A transactions, conflicts of interest, and special situations.

Perlette Jura is a partner in Gibson Dunn’s Los Angeles office. Her practice focuses on complex trial and appellate litigation. She co-chairs the firm’s Transnational Litigation Group and its Environmental Social Governance practice. She has played a key role in a number of the firm’s most high-profile transnational, environmental and technology-driven matters. Ms. Jura has extensive experience working with the food and beverage, agricultural, aerospace, automotive, emerging technology and energy industries. In 2021, Ms. Jura was named among the Lawdragon Global Litigation 500, which recognizes those who specialize in international arbitration, public international law and advise leading corporations. She was recognized by Benchmark Litigation as one of the “Top 250 Women in Litigation” in 2020 and 2019. The Los Angeles Business Journal named Ms. Jura to its list of “Most Influential Women Lawyers” in Los Angeles, featuring 50 of the most accomplished female attorneys working in the region. In 2020, BTI Consulting Group honored Ms. Jura a Client Service All-Star, an attorney “who stand[s] above all the others in delivering the absolute best in client service.”

Michael A. Mencher is a corporate associate in the San Francisco office of Gibson, Dunn & Crutcher. He is a member of the Firm’s Capital Markets, Securities Regulation & Corporate Governance and ESG practice groups. His practice focuses on advising technology, life sciences and other public and pre-public companies on governance, ESG and sustainability, investor relations and SEC reporting and compliance matters and representing issuers in a wide variety of capital markets transactions, including initial public offerings and follow-on equity financings, sustainable finance transactions, private placements and debt financings.

Yair Y. Galil is of counsel in the New York office of Gibson Dunn, where he is a member of Gibson Dunn’s Global Finance, Business Restructuring and ESG Practice Groups. His experience includes representation of sponsors, issuers, financial institutions and investment funds in complex financing transactions. The business contexts for these transactions have ranged from corporate finance (including sustainability-linked credit facilities), to leveraged acquisitions and dividend recaps, to debt buybacks and other out-of-court capital restructuring transactions, to debtor-in-possession and bankruptcy exit financings. He also frequently performs credit analyses on a borrower’s debt instruments, and advises on vulnerabilities and potential restructuring approaches.


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This April 2021 edition of Gibson Dunn’s Aerospace and Related Technologies Update discusses newsworthy developments, trends, and key decisions from 2020 and early 2021 that are of interest to companies in the aerospace, space, defense, satellite, and drone sectors as well as the financial, technological, and other institutions that support them.

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

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TABLE OF CONTENTS

I.  Unmanned Aircraft Systems

A. New Rules Remote ID
B. Flight Over People, Over Vehicles, or at Night
C. Continued Lack of Clarity on Airspace
D. Newsworthy FAA Approvals
E. COVID-19 and Use of Drones

II.  Government Contracts

III.  Space

A. First Private Human Space Launch
B. Noteworthy Space Achievements in Countries Other than the United States
C. Other Noteworthy Space Developments
D. NASA’s Perseverance Rover, Past Updates, and Future Plans
E. Record-Setting Private investment
F. Satellite Internet Constellations
G. Expected Impact of Biden Administration

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I.  Unmanned Aircraft Systems

A.  New Rules Remote ID

On December 28, 2020, the FAA released final rules regarding the Remote Identification of Unmanned Aircraft (“Remote ID”) and operations at night.[1] These rules, published in the Federal Register on January 15, 2021,[2] require that certain unmanned aircraft (“drones”) broadcast their identification and location during operation. The final rules reflect the FAA’s attempt to balance the competing interests in the federal airspace between commercial operators, hobbyists, law enforcement, and the general public.

The FAA received significant feedback on the Remote ID rules following its initial December 31, 2019 Notice of Proposed Rulemaking (“NPRM”), accumulating over 53,000 comments from manufacturers, organizations, state and local governments, and a significant number of individual recreational pilots.[3] In a departure from the original proposal, under the final rule, drones must broadcast the required Remote ID information “using radio frequency spectrum compatible with personal wireless devices” rather than over the internet to a third-party service provider.[4] The FAA received substantial feedback criticizing the original proposal as expensive and requiring additional hardware and a data plan from a wireless carrier, depending on internet connectivity.[5] But with drones now required to broadcast Remote ID information over ranges that can be received by cell phones, members of law enforcement and the general public will be able to receive the broadcasts and determine flight information about drones flying in their vicinity without special receiving technology.[6]

Compliance with Remote ID Rules

The rules create three ways in which operators and manufacturers can comply with the Remote ID rules: (1) a drone containing “Standard Remote ID,” (2) a drone retrofitted with a “broadcast module,” and (3) a drone without Remote ID operating recreationally in specified areas.[7] The rules include an exception for drones weighing less than 0.55 pounds (250 grams), which are not subject to the Remote ID rules if flown recreationally.[8]

Standard Remote ID

The primary form of compliance is “Standard Remote ID.”[9]  Standard Remote ID is built into a drone at the time of manufacturing and tested for compliance via FAA-approved methods. It requires the most robust broadcast, including the location of both the drone and its operator, along with certain flight parameters, a unique ID assigned to the drone and registered by the operator, and an emergency status indication. Additionally, Standard Remote ID drones must be configured to prevent takeoff if the Remote ID equipment is not functional.

Remote ID Broadcast Module

The second form of compliance involves the installation on a drone of a Remote ID “broadcast module.”[10] This allows drones not manufactured with Standard Remote ID, including those currently in use, to comply with the Remote ID rules. The broadcast module’s transmission is similar to Standard Remote ID, except that it broadcasts the takeoff location rather than the location of the operator. Furthermore, drones outfitted with a broadcast module are not required to send an emergency status indication, and need not prevent the drone from taking off if the module is not functional. Unlike Standard Remote ID drones, those fitted with a Remote ID broadcast module are expressly limited to operation within visual line of sight.

Manufacturers should not rely on the Remote ID broadcast module moving forward. Starting eighteen months after the final rule becomes effective, manufacturers must meet the Remote ID standard in their production of drones. Restrictions on operation of noncompliant drones will take effect thirty months after the final rule becomes effective. As of now, the FAA has delayed implementation of the rule until April 21, 2021 as part of the Biden administration’s regulatory freeze.[11]

FAA-Recognized Identification Areas

Lastly, the new rules create FAA-Recognized Identification Areas (“FRIAs”) in which drones can be operated recreationally without complying with the Remote ID rules.[12] FRIAs are fixed locations where drones can be flown safely, thus preserving minimally regulated operations at hobbyist airfields, such as those maintained by the Academy of Model Aeronautics. In a departure from the proposed rules in the NPRM, which limited applicants to community-based organizations, the new rules expanded the list of potential FRIA applicants to include educational institutions.

Addressing Concerns Regarding Improper Use

The commercial drone industry has faced questions and concerns that drones will be operated in an unprofessional manner or used by malicious individuals to obtain data for nefarious purposes.[13] Law enforcement and government agencies have also shared concerns related to illegal operations, such as interference with manned aircraft.[14] The Remote ID rules will help address those concerns by allowing these organizations to identify the drone owner or determine if the drone is not equipped with Remote ID and not legally operating. Addressing these concerns will minimize some of the resistance the industry has faced. Further, Remote ID helps lay a foundation for an ecosystem in which tens of thousands of drones operate autonomously beyond visual line of sight on a daily basis. Although the current rules may be modified and more technology-developed, transmitting basic identification and location information will be a pillar of future large-scale autonomous operations. These rules are an important early step on the path to an integrated regime for regulating a rapidly growing body of unmanned aeronautical operations.

B.  Flight Over People, Over Vehicles, or at Night

On December 28, 2020, the FAA released final rules impacting drone operations over people, over moving vehicles, or at night.[15] Prior to the new rules, Part 107 of the FAA regulations required commercial drone operators to receive a waiver in order to fly over people, over moving vehicles, or at night. In early 2019, the FAA and the Department of Transportation shared an NPRM, proposing alterations to Part 107 to make the operation of small unmanned aircraft over people or at night legal, under certain circumstances, without a waiver. On January 15, 2021, the final rule was published in the Federal Register.[16] The rule is scheduled to take effect on April 21, 2021.[17]

Drone Operations Over People

The new law permits commercial drone operations over people under certain conditions based on four categories of drones operating under Part 107. Category One, Two, and Four drones must be compliant with Remote ID rules discussed above to have sustained flight over open-air assemblies, but Category Three drones may never operate over open-air assemblies.

Category One is the most lenient category, consisting of drones that are both under 0.55 pounds (250 grams) and lack any exposed rotating parts that would cause lacerations.[18] Due to the weight restrictions, the drones in this Category will most likely initially be limited to photography and videography drones, but these restrictions may result in innovation of new lightweight sensors for expanded operations within Category One.

Categories Two and Three cover drones greater than 0.55 pounds and less than 55 pounds.[19] These categories allow drones to be flown over people only if the manufacturer has proven that a resulting injury to a person would be under a specified severity threshold. Category Two aircraft will need to demonstrate a certain injury threshold, and Category Three aircraft will have a higher injury threshold with additional operating limitations. Category Three drones can only operate over people (1) in a restricted access site in which all individuals on the ground have notice, or (2) without maintaining any sustained flight over people unless they are participating in the operations or protected by a structure.[20]

The new rules also created a fourth category that was not included under the proposed rules, but clarifies that specific drones for which the FAA has issued an airworthiness certificate under Part 21 can conduct operations over people unless prohibited under its operating limitations.[21]

Drone Operations Over Moving Vehicles

Although the proposed rule did not allow operations over moving vehicles, the final rule does allow such operations under two circumstances: (1) if in a restricted access site and the people in the vehicle are on notice, or (2) when the drone does not maintain sustained flight over moving vehicles.[22] This addition is a welcome change for all drone operators who no longer have to cancel, delay, or change an operation due to an unexpected vehicle or nearby traffic.

Drone Operations at Night

The rule also allows operations at night under two conditions: (1) the remote pilot in command must complete an updated initial knowledge test or online recurrent training, and (2) the drone must have proper anti-collision lighting that is visible for at least three statute miles.[23] Operators will be pleased with this change because it removes the need for nighttime waivers and delays associated with obtaining such waivers.

Looking Ahead

The Part 107 changes are steps in the right direction for increased commercial use of drones. Operating over people, moving vehicles, and at night expands the applications and timing of operations available to commercial operators. The additions to the proposed rules, such as permitting operations over moving vehicles, are an indication that the FAA is listening to the drone community and working to advance this industry.

C.  Continued Lack of Clarity on Airspace

While new rules for Remote ID and operations over people, over moving vehicles, and at night are helpful to move the industry forward, they do not address the most challenging legal issue that remains for the commercial drone industry: control of low-altitude airspace. It remains unclear as to how much, if any, airspace is owned by private landowners and whether states and municipalities have any jurisdiction over low-altitude airspace. Furthermore, a legislative solution on this issue is increasingly improbable, and it will instead likely be decided by the courts years in the future.

In a nutshell, the confusion regarding low-altitude operations stems from the FAA’s claim that it controls the airspace “from the ground up” and that the claim that it does not control all the airspace below 400 feet is a “myth.”[24] However, many local governments and property owners do not agree with the FAA’s interpretation.  While the FAA has jurisdiction over “navigable airspace,” many assert that the boundary of where that airspace ends and begins is far from clear.[25]

To date, this boundary has not been directly addressed by a court in the context of drones. The closest that federal courts have come to addressing this issue was in July 2016 when U.S. District Judge Jeffrey Meyer, of the District of Connecticut, questioned the FAA’s position: “[T]he FAA believes it has regulatory sovereignty over every cubic inch of outdoor air in the United States . . . . [T]hat ambition may be difficult to reconcile with the terms of the FAA’s statute that refer to ‘navigable airspace.’”[26] The dicta raised the question of where the FAA’s authority begins, but noted that the “case does not yet require an answer to that question.”[27] In time a case will require such an answer.

The legal uncertainty surrounding low-altitude operations remains one of the most significant barriers to large-scale commercial operations, and it is likely to be one of the most important issues for the industry for years to come.

D.  Newsworthy FAA Approvals

This past year saw several groundbreaking approvals of new uses for unmanned aircraft systems, specifically in operations beyond the visual line of sight and in the agricultural context. The industry also saw progress in setting airworthiness standards.

Beyond the Visual Line-of-Sight Approvals

Perhaps the most well-known approval occurred in August 2020, when, according to public filings, the FAA approved Amazon’s use of a fleet of Prime Air delivery drones, allowing the company to expand its unmanned package delivery operations.[28] The FAA issued this authorization under Part 135 of its Unmanned Aircraft Systems regulations, which govern the use of drones beyond the visual line of sight (“BVLOS”) of the operator.[29] Although the Prime Air fleet is not yet fully scaled, this authorization enables the company to soon be able to deliver packages weighing five pounds or less in areas with relatively low population density.[30]

Further expanding the boundaries of BVLOS drone use, the FAA gave its first-ever approval of a company’s use of automated drones without a human operator on site earlier this year.[31] In January 2021, the FAA authorized American Robotics, a Boston-based drone systems developer that specializes in operating in rugged environments, to begin such automated operations.[32] Obtaining this approval required a four-year testing program in which the company ran up to ten automated drone flights per day.[33] While only beginning to be fully understood, the automated use of drones without the need for on-site human personnel could have enormous ramifications for the agricultural, energy, and infrastructure industries.[34]

Agricultural Use Approvals

The agricultural industry may experience additional aerospace innovation after the FAA approved the Iowa-based startup Rantizo’s use of drone swarms to spray crops.[35] The company received approval in July 2020 to operate three-drone swarms, which move in concert with one another with the help of one drone operator and one visual observer.[36] The approval will allow the company to cover between 40 and 60 acres of farmland per hour.[37]

Rantizo was not the only company to receive approval to operate drone swarms. In October 2020, the company DroneSeed obtained FAA approval to use five-drone swarms of heavy-lift drones beyond the visual line of sight for reforestation efforts in Arizona, California, Colorado, Montana, New Mexico, and Nevada.[38] Each of the company’s drones can carry up to a 57-pound payload, and reports suggest that the company may focus its reforestation efforts on areas ravaged by wildfires.[39]

Creation of Airworthiness Standards

Lastly, in September 2020, the FAA opened for public comment its first-ever set of type-certification airworthiness standards relating to drones, with the goal of streamlining the certification of certain classes of drones.[40] Whereas the FAA has airworthiness standards in place for most types of manned aircraft, allowing companies seeking approval of such vehicles to avoid a cumbersome, case-by-case process, no such process previously existed for drones. The creation of a standard airworthiness certificate for drones as a class of aircraft could significantly shorten the drone approval process, potentially accelerating innovation in the aerospace industry.

E.  COVID-19 and Use of Drones

As discussed in last year’s update, many expected the global COVID-19 pandemic to usher in a new era of drone applications. In the early months of the pandemic, governments began using drones in novel ways: spraying disinfectant across large areas, developing disease detection mechanisms, and even enforcing social distancing requirements. Though these initial reports of drone usage in the age of COVID-19 dealt mostly with disease control efforts, corporations soon shifted their focus to the socially distant environment, turning to drones to facilitate deliveries to consumers and medical providers alike and provide services in a safer way.

Consumer Deliveries

For years, corporations have been hoping to facilitate deliveries via drone, and the pandemic amplified consumer interest. With more and more people looking to avoid crowds and stay at home, demand for drone delivery of consumer goods increased, and many companies deployed their technology to facilitate deliveries via drone.

Wing (Alphabet’s drone delivery company) launched a pilot program in October 2019, partnering with several local retailers to deliver certain products to people in Christiansburg, Virginia.[41] Since the pandemic, it has expanded its program by adding new products and new retailers, and deliveries have more than doubled.[42]

In North Dakota, Flytrex, an airborne delivery service company, launched a program allowing customers to order from a selection of 200 Walmart items.[43] The two companies recently introduced a partnership in North Dakota for grocery deliveries.[44] The company also delivers snacks to golfers at King’s Walk course in North Dakota.[45]

In addition to consumer goods, food delivery via drone has also increased since the pandemic. In fact, Flytrex has begun testing drone delivery of food and drink items in North Carolina.[46] And in Alabama, the company Deuce Drone has partnered with some restaurants for drone doorstep delivery.[47]

As discussed above, in August 2020, Amazon received FAA approval under Part 135 of FAA regulations to “safely and efficiently deliver packages to customers.”[48] This allows Amazon to transport property on small drones “beyond the visual line of sight.”[49] Amazon, which began testing drones in 2013, is continuing to test the technology and has not yet deployed drones at scale.[50]

Medical Supplies Deliveries

Drones also delivered medical supplies in 2020. In May, Zipline, a company that has been using drones to deliver blood in Rwanda since 2016, began delivering medical supplies and personal protective equipment via drones to a medical center in North Carolina.[51]

In November 2020, Wal-Mart received approval to deliver COVID-19 test kits to El Paso, Texas residents.[52] A few months later, Nevada-based Flirtey announced: “that it has successfully conducted multiple deliveries of at-home COVID-19 test kits in Northern Nevada during the initial phase of its test program.”[53] Drone delivery of COVID-19 test kits is more efficient and more convenient, and it reduces exposure risks.[54]

Remote Service Providers

Beyond deliveries, the pandemic also drove up demand for remote services as companies adapted to social distancing guidelines that made providing in-person services more difficult. Since the pandemic started, flights by construction-related companies are up 70%.[55] DroneDeploy, a startup that “has a program that analyzes drone footage of farmers’ fields and helps make recommendations about when to apply pesticides” has reported that these agriculture flights have tripled during the first several months of the pandemic.[56] The company also reported significant increases in flights using its energy app, which helps solar panel installers calculate where best to place the panels.[57]

Lasting Impact?

Though there has certainly been an expansion of drone services in the U.S., this expansion is not widespread. Many of the examples discussed above are limited to small geographic areas and it is still unclear when mass adoption will occur. While the pandemic appears to have pushed forward the adoption of drone delivery and service programs, it is unclear if that mentality will change after societies are no longer quarantined at home. Will there be as much of a demand for drone deliveries and services once there is no longer a pandemic-driven crisis?

Despite these uncertainties, many are optimistic about the future of drone deliveries. Technologies are improving, and most of the elements needed for the widespread adoption of drones are already available in the market.[58]

 II.  Government Contracts

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

DFARS 252.227-7103(f) Does Not Prohibit Markings On Noncommercial Technical Data That Restrict Third-Party Rights

In The Boeing Co. v. Sec’y of the Air Force, 983 F.3d 1321 (Fed. Cir. 2020), the Federal Circuit considered whether Defense Federal Acquisition Regulation Supplement 252.227-7103(f) (“DFARS 252.227-7103(f)”) applies to legends that restrict only the rights of third parties but do not restrict the rights of the Government. Boeing applied a legend to its technical data that stated, “NON-U.S. GOVERNMENT ENTITIES MAY USE AND DISCLOSE ONLY AS PERMITTED IN WRITING BY BOEING OR THE U.S. GOVERNMENT.” The Government rejected Boeing’s data deliverables because the legend allegedly did not conform to DFARS 252.227‑7103(f), which stated that the contractor could “only assert restrictions on the Government’s rights,” and specified the legends authorized under the contract. The Armed Services Board of Contract Appeals’ (“ASBCA”) decisions below found in favor of the Government. On appeal, Boeing argued that its legend conformed to the requirements of DFARS 252.227-7103(f) because the clause is applicable only to legends that assert restrictions on the Government’s rights, and is silent on legends that assert restrictions on the rights of third parties. The Federal Circuit agreed with Boeing that DFARS 252.227-7103(f) applies only to legends that assert restrictions to the Government’s rights in the data, and is silent on legends that restrict the rights of third parties. The Federal Circuit remanded the decision to the ASBCA to decide whether, as a matter of fact, Boeing’s legend asserted rights that restricted the Government’s rights in the data on which the legend was included.

ASBCA Declines To Decide Whether Fly America Act Applies To Indirect Costs

In Lockheed Martin Corp., ASBCA No. 62377 (Jan. 7, 2021), the ASBCA did not reach the question of whether the Fly America Act, 49 U.S.C.A. § 40118, as implemented by Federal Acquisition Regulation 52.247-63, Preference for U.S.-Flag Air Carriers, applies to a contractor’s indirect costs because there was no “live dispute” between the parties. FAR 52.247-63, “requires that all . . .Government contractors and subcontractors use U.S.-flag air carriers for U.S. Government-financed international air transportation of personnel (and their personal effects) or property, to the extent that service by those carriers is available.” It further requires that “[i]f available, the Contractor, in performing work under this contract, shall use U.S.-flag carriers for international air transportation of personnel (and their personal effects) or property.”

In 1997, Lockheed Martin Corporation and the Government entered into a memorandum of understanding (“MOU”) that the Fly America Act applied only to direct costs. However, in 2019, the corporate administrative contracting officer (“CACO”) withdrew the MOU on the purported basis that the MOU had misinterpreted FAR 52.247-63, and issued a final decision asserting the interpretation that FAR 52.247-63 applies to indirect costs. The ASBCA did not address the merits of the issue, finding that because Lockheed had not changed its practices as a result of the Government’s withdrawal of the MOU or the CACO’s final decision, there was no evidence that there was a live dispute to decide.

ASBCA Clarifies Types Of Activities That Are Not Unallowable Costs Under The FAR

In Raytheon Co. & Raytheon Missile Sys., ASBCA Nos. 59435 et al., (Feb. 1, 2021), the ASBCA issued a lengthy decision on the allowability of various types of costs incurred by Raytheon Company and its business segment Raytheon Missile Systems (“Raytheon”). The ASBCA sustained all but $18,109 of Raytheon’s appeals of the Government’s $11.8 million claims. The types of costs addressed in the decision include costs for Raytheon’s Government relations group, costs for Raytheon’s corporate development group, and airfare costs.

Government Relations Costs. In 2007 and 2008, Raytheon included Government relations group costs as indirect costs in its incurred cost submissions, but withdrew a portion of those costs as unallowable lobbying costs in accordance with FAR 31.205-22, Lobbying and political activity costs, which requires that contractors “maintain adequate records to demonstrate that the certification of costs as being allowable or unallowable…pursuant to this subsection complies with the requirements of this subsection.” The Government disagreed with Raytheon’s practice and disallowed 100 percent of the costs incurred by Raytheon’s Government relations group as expressly unallowable costs.

The ASBCA held that the Government had the burden to prove that the costs were expressly unallowable and that there was no basis to shift the burden to the contractor. The ASBCA further held that the Government did not meet its burden of proving that any of the Government relations costs included in Raytheon’s incurred costs submissions were unallowable, and that Raytheon’s method of removing unallowable lobbying costs was proper based on its disclosed accounting practice.

Corporate Development Costs. Raytheon included a portion of corporate development group costs as indirect costs in its incurred cost submission in 2007 and 2008, but withdrew a portion of the costs as unallowable organizational costs under FAR 32.205-27, Organization Costs. Raytheon implemented a “bright line” rule for its employees to determine the difference between costs for allowable activities under FAR 31.205-12, Economic Planning Costs, and FAR 31.205-38, Selling costs, and costs for unallowable activities under FAR 31.205-27. The Board found Raytheon’s corporate development employees kept track of their time in accordance with the bright line rule, that the allowable costs for the corporate development group were supported by documentation and credible witness testimony, and that the Defense Contract Management Agency (“DCMA”) did not meet its burden of proving that the corporate development costs were unallowable organization costs under FAR 31.205-27.

Airfare Costs. With respect to airfare costs, the ASBCA addressed two distinct issues: (1) whether the pre-Jan. 11, 2010 version of FAR 31.205-46(b) required Raytheon to take into account its corporate discounts in determining its allowable airfare; and (2) whether Raytheon’s policy of allowing business class travel for trans-oceanic flights in excess of 10 hours was reasonable and consistent with FAR 31.205-46(b). Prior to Jan. 11, 2010, FAR 31.205-46(b) stated:

Airfare costs in excess of the lowest customary standard, coach, or equivalent airfare offered during normal business hours are unallowable except when such accommodations require circuitous routing, require travel during unreasonable hours, excessively prolong travel, result in increased cost that would offset transportation savings, are not reasonably adequate for the physical or medical needs of the traveler, or are not reasonably available to meet mission requirements. However, in order for airfare costs in excess of the above standard airfare to be allowable, the applicable condition(s) set forth in this paragraph must be documented and justified.

(Emphasis added.) Effective Jan. 11, 2010, FAR 31.205-46(b) was amended to read: “Airfare costs in excess of the lowest priced airfare available to the contractor during normal business hours are unallowable except …” (emphasis added).

The ASBCA concluded that prior to Jan. 11, 2010, contractors were not required to factor in any negotiated corporate discounts when determining the allowable amounts of airfare costs. The ASBCA also held that Raytheon’s travel policy “documented and justified premium airfare,” as required by FAR 31.205-46(b), and that there is no requirement that premium airfare be “documented and justified” on an individual, flight-by-flight basis. Moreover, the ASBCA held that the CO acted within the scope of his authority when he determined that Raytheon’s travel policy complied with FAR 31.205-46(b), and that his determination was binding on DCMA.

ASBCA Rules That Government Shares Liability for Contractor’s Underfunded Pension Plan

In Appeal of Northrop Grumman Corp., ASBCA No. 61775  (Oct. 7, 2020), the ASBCA found that Northrop Grumman (“NG”)’s valuation of a nonqualified defined benefits pension plan adopted in 2003 and frozen in 2014 was compliant with the Cost Accounting Standards despite the Government’s objections to the company’s valuation methodology. During the plan’s existence, NG allocated its costs to numerous government contracts, all of which included FAR 52.215-15, Pension Adjustments and Asset Reversions; FAR 52.230-2, Cost Accounting Standards; and FAR 52.233-1, Disputes.

When the plan was frozen, NG calculated that the plan’s liabilities exceeded its market value and requested that the Government pay its pro rata share to NG to “true-up” the plan under CAS 413. The Government argued, inter alia, that NG’s reduction to its calculation of investment income to account for taxes on such income was non-compliant with CAS 412. Although the Board disagreed with NG’s approach of reducing its investment rate of return by the marginal tax rate, the Board found that roughly the same outcome would have been achieved had NG accounted for taxes as an administrative expense. Because FAR 30.602(c)(1) provides that the Government should make no adjustment to the contract when there is no material cost difference due to the alleged CAS violation, the Board sustained NG’s appeal and remanded to the parties to calculate the amount due and owing from the Government to NG.

Contractor’s REAs Were Not Contract Disputes Act (“CDA”) Claims Subject to the CDA Statute of Limitations 

In Appeal of BAE Sys. Ordnance Sys., Inc., ASBCA No. 62416 (Feb. 10, 2021), the Board considered whether BAE’s requests for equitable adjustment (“REAs”) constituted claims in light of the Federal Circuit’s recent decision in Hejran Hejrat Co. Ltd v. United States Army Corps of Engineers, 930 F.3d 1354 (Fed. Cir. 2019). In Hejran Hejrat, the Federal Circuit ruled that, under certain circumstances, an REA can actually constitute an implicit request for a final decision.

BAE submitted three REAs seeking reimbursement for state-issued fines it received as a result of environmental conditions at the plant. The contracting officer (“CO”) replied that he would “entertain reimbursement” of a portion of the state fines, but later issued a “final determination” rejecting the REAs entirely.  Subsequently, BAE submitted a CDA claim to which the Government failed to respond. BAE appealed the deemed denial of its claim to the Board. The Army then moved to dismiss the appeal asserting that BAE’s challenge to the CO’s decision was untimely because the REAs were, in fact, CDA claims, and the CO’s final determination upon them was thus a CO’s Final Decision. In denying the government’s motion to dismiss the appeal for lack of jurisdiction as outside of the CDA’s statute of limitations, the Board found that “BAE did all that it could to keep its REAs from falling within the realm of being also considered CDA claims by carefully avoiding making a request — explicit or implicit — for a [contracting officer]’s final decision.” Therefore, the Board found that BAE’s claims were timely filed and denied the government’s motion to dismiss.

III.  Space

A.  First Private Human Space Launch

On November 15, 2020, the launch of SpaceX’s Resilience marked the first “NASA-certified commercial human spacecraft system.”[59] The mission is the first of six crewed missions NASA and SpaceX plan to fly as part of the Commercial Crew Program, a program designed to provide “safe, reliable, and cost-effective transportation to and from the International Space System from the United States.”[60] The crew is comprised of four members, including three NASA astronauts and one member of the Japan Aerospace Exploration Agency.[61]

Resilience autonomously docked at the International Space Station on November 16, 2020 for a sixth-month stay, making it the longest space mission launched from the United States. During the mission, the crew is conducting various science and research investigations, including a “study using chips with tissue that mimics the structure and function of human organs to understand the role of microgravity on human health and diseases.”[62] The crew will also conduct various space walks, encounter several uncrewed spacecraft, and welcome crews from the Russian Soyuz vehicle and the next SpaceX Crew Dragon.[63] At the end of the mission, Resilience will autonomously undock and return to Earth.

B.  Noteworthy Space Achievements in Countries Other than the United States

Countries and private companies are racing to the Moon, Mars, and even asteroids. This space race involves countries that are both newcomers to space and those that seek a return to the unknown.

China

Chang’e-5’s Lunar Exploration Mission

Following the Chang’e-4’s successful lunar exploration mission in 2019,[64] China reached the Moon again in 2020. On November 23, 2020, Chang’e-5 lifted off from Wenchang Space Launch Center on Hainan Island, China and went into the Moon’s orbit on November 28, 2020.[65] The descender craft separated from the orbiter on November 29, 2020 and landed on the Mons Rümker region of Oceanus Procellarum on December 1, 2020.[66] Once on the Moon’s surface, the lander system used a scoop and drill to dig up lunar samples.[67]  After collection and storage, Chang’e-5 made its return to Earth on December 16, 2020, landing in the Siziwang Banner grassland of the autonomous region of Inner Mongolia in northern China.[68] The successful mission retrieved about 1,731 g (61.1 oz.) of lunar samples.[69]  Chang’e-5 was China’s first successful lunar sample return mission,[70] and the first in the world in over four decades since the Soviet Union’s Luna-24 in 1976.[71]

The Chang’e-5 venture demonstrates China’s increasing capability in space, and is part of a broader effort under the Chinese National Space Administration Chang’e Lunar Exploration Program.[72] The Chang’e-6, expected to launch in 2023, will be China’s next lunar sample-return mission.[73]

Tianwen-1 Reaches Mars’s Orbit

China’s first independent interplanetary mission is well underway with the launch of the Tianwen-1 spacecraft on July 23, 2020.[74] After a 202-day, 295-million-mile journey through space, it arrived in orbit around Mars on February 10, 2021.[75] The first phase of Tianwen-1’s mission is to circle Mars’s orbit and map the planet’s morphology and geology, while allowing the orbiter to find a secure landing zone.[76]

About three months after arrival into orbit, in May 2021, the craft’s lander is expected to detach from its orbiter and descend onto Mars’s surface in a region known as Utopia Planitia.[77] Once on the surface, the lander will unveil a rover carrying a panoramic camera.[78] The solar-powered rover will also investigate surface soil characteristics for potential water-ice distribution with a ground-penetrating radar.[79] Tianwen-1 comes on the heels of several successful lunar missions for China’s space program.[80]

China’s Ambitious Plans for a Space Station

China has ambitious plans for a new space station.[81] Tianhe, the station’s core module, is expected to launch sometime in 2021.[82] The module is 59 feet (18 meters) long, weighs about 24 tons (22 metric tons), and will provide living space and life support for astronauts and house the outpost’s power and propulsion elements.[83] Tianhe’s launch will be one of eleven total liftoffs that will be required to build the space station, which China wants to finish by the end of 2022.[84]

China’s iSpace Fails to Reach Orbit During Second Attempt

China’s iSpace, also known as Beijing Interstellar Glory Space Technology Ltd. (a different company than the Japanese lunar startup ispace) was the first Chinese private company to reach orbit when it successfully launched its Hyperbola-1 rocket on July 25, 2019.[85] On February 1, 2021, iSpace’s four-stage Hyperbola-1 rocket failed to reach orbit during its second attempt to go to space.[86]

Despite its failed launch, iSpace is a prominent name in the Chinese private space industry, having raised $173 million in Series B funding for the Hyperbola rocket line. The company has indicated plans for a potential IPO and is in the midst of creating its Hyberbola-2 rocket.[87] Other private Chinese companies, including Galactic Energy, One Space, and Deep Blue Aerospace, are planning launches later this year.[88]

Japan

Hayabusa2’s Samples From Asteroid Ryugu

After spending over a year collecting and storing samples on a near-Earth asteroid named Ryugu,[89] Japan’s Hayabusa2 spacecraft started its journey back towards Earth in November 2019.[90] It completed its yearlong journey to return the asteroid samples back to Earth on December 5, 2020.[91] The return capsule landed in South Australia, carrying with it samples from the asteroid’s surface and interior.[92] From the samples, scientists hope to learn more about the composition of Ryugu’s minerals, as well as the origin and evolution of the solar system.[93]

Hayabusa2 was originally launched in 2014,[94] and its mission is far from over.[95] The Hayabusa2’s main craft separated from the return capsule just two days before the delivery of Ryugu’s samples was complete and retreated back to work on an extended mission.[96] Hayabusa2’s extended mission will feature visits to two more asteroids, one in 2026 and another in 2031.[97]

Japanese Startup Is Targeting the Moon in 2021

A Japanese startup, ispace (a different company than China’s iSpace), is targeting the Moon.[98] On August 22, 2020, company representatives stated ispace intends to go to the lunar surface on a stationary lander in 2021.[99] The company is also planning a second mission in 2023, in which it will deploy a rover for surface exploration.[100] These two missions will ride as secondary payloads on SpaceX Falcon 9 rockets, and together make up ispace’s Hakuto-Reboot program.[101]

United Arab Emirates

Hope Arrives on Mars

On February 9, 2021, the UAE’s Hope orbiter entered into Mars’s orbit,[102] making the UAE the fifth country to visit the Red Planet (China became the sixth the next day with its Tianwen-1 mission),[103] and the first Arab nation in history to do so.[104] Hope will take up a near-equatorial orbit as it observes the planet’s atmosphere, weather, and climate systems.[105] Hope also aims to study the leakage of hydrogen and oxygen into space, which scientists suspect is a contributing factor to Mars missing the once-abundant water that previously occupied its surface.[106]

Russia

Expected Launch of Luna-25 in October 2021

After a nearly half-century hiatus for its space program,[107] Russia is gearing up for a launch to the Moon.[108] Russia’s Luna-25 spacecraft will be the first Russian or Soviet Moon mission since 1976,[109] and will mark the reactivation of Russia’s Moon exploration program.[110] The Luna-25 lander will include scientific instruments to research the composition and structure around the Moon’s south pole.[111]  Luna-25 is expected to launch in October 2021.[112]

Looking Ahead

As more countries join the space race, the global community benefits from all of research, technology, and discoveries resulting from outer space exploration. With upcoming missions to the Moon, Mars, and the development of a space station, the upcoming year is sure to result in tremendous advancement in our understanding of space.

C. Other Noteworthy Space Developments

The last year featured a number of developments in space technology, including from SpaceX, which became the first private company to launch astronauts to space, made progress on its Starship design, and launched a public beta program of its Starlink satellite internet service.

Crewed Flights

On May 30, 2020, SpaceX became the first private company to launch astronauts into orbit.[113] The mission marked the first launch of NASA astronauts from the U.S. since the space shuttles were retired in 2011.[114] The Falcon 9 Rocket carried a Crew Dragon capsule, an upgraded version of SpaceX’s Dragon capsule, which has been used to carry cargo to the space station.[115] While on board, the astronauts, tested all of the systems and verified that they performed as designed.[116] The astronauts arrived at the International Space Station on May 31, 2020,[117] and returned safely to Earth on August 2, 2020.[118]

Just five and a half months later, SpaceX sent astronauts to space again.  As discussed above, on November 15, 2020, NASA’s SpaceX Crew-1 mission lifted off—the first of six crewed missions NASA and SpaceX plan to fly as part of the Commercial Crew Program, a program designed to provide safe, reliable, and cost-effective transportation between the ISS and the U.S.[119] The mission marked many firsts, including “the first flight of the NASA-certified commercial system designed for crew transportation.”[120] In contrast to the May launch, the Crew-1 mission transported four astronauts (three NASA astronauts and one from the Japan Aerospace Exploration Agency) to the International Space Station for a six-month science mission.[121] The crew arrived safely on November 16, and will eventually reboard Crew Dragon for transport back to Earth.[122]

Starship SN Flights

Following the successful launch of its first astronaut mission in May, SpaceX shifted gears to focus on the Starship, the rocket designed to launch cargo and up to 100 passengers at a time on missions to the Moon and Mars.[123] CEO Elon Musk acknowledged that the rocket has many milestones to reach before people can fly in it.[124]

After multiple launches of several starship prototypes failed, on August 4, 2020, SpaceX flew the Starship SN5 test vehicle for the first time ever.[125] Though the SN5 was only in the air for about 40 seconds, the short hop allowed SpaceX to gather valuable data necessary to analyze and smooth out the launch process.[126]

Just several weeks later, SpaceX launched SN6, which rose to nearly 500 feet above the ground before touching down near the launchpad.[127] Similar to the SN5 launch, the launch of the SN6 prototype was used to help SpaceX understand the technologies needed for a fully reusable launch system for deep space missions.[128]

On December 9, 2020, SpaceX launched Starship SN8 to 40,000 feet above its facility in Boca Chica, Texas.[129] After completing several objectives, including testing its aerodynamics and flipping to prepare for landing, the rocket exploded on impact as it attempted to land.[130] SpaceX declared the launch a success; despite the fiery landing, the nearly seven-minute flight provided helpful information to improve the probability of success in the future.[131]

Other Updates

SpaceX launched many satellites into orbit in 2020. Throughout the year, SpaceX launched satellites for the U.S. Space Force[132] and foreign militaries.[133] SpaceX also began to launch satellites for its Starlink mega-constellation, an infrastructure project designed to provide global broadband coverage to people in rural and remote areas.[134] As of January 29, 2021, SpaceX had deployed 1,023 satellites over the course of 18 launches.[135] In October, SpaceX began a public beta program of the Starlink satellite internet service in the northern U.S., Canada, and the U.K.[136] By February 2021, the Starlink satellite internet service had over 10,000 users.[137]

SpaceX had a monumental fundraising year. In May, SpaceX raised more than $346 million.[138] In August, the company reported its largest single fundraising round to date: $1.9 billion in new funding.[139] SpaceX also sold an additional $165 million in common stock.[140] In December, SpaceX began discussing another funding round with investors. This round will likely value the company at a minimum of $60 billion and possibly as high as $92 billion.[141]

D.  NASA’s Perseverance Rover, Past Updates, and Future Plans

Two of NASA’s biggest accomplishments this year were the successful landing of the Perseverance Rover on Mars and the publication of the Artemis Plan, a document that outlines NASA’s intention to return a human to the Moon.

Perseverance Rover

On February 18, 2021, NASA’s Perseverance Rover landed safely in an area known as Jezero Crater on Mars.[142] Perseverance’s mission is to search for signs of ancient life and collect samples of rock and regolith for a return to Earth.[143] The Perseverance Rover will examine Martian dirt and rock with a variety of sophisticated scientific gear, including an instrument called SuperCam, which will zap rocks with a laser and gauge the composition of the resulting vapor.[144] The Rover will also utilize its drill and long robotic arm to collect samples and seal them into special tubes, and these samples will be brought back to Earth, perhaps as early as 2031.[145] Once returned, these samples will be analyzed and studied by scientists for decades to come.[146]

Artemis Plan

The United States is pushing forward on its plans to return to the Moon, with NASA publishing its comprehensive Artemis Plan in September 2020.[147] Under the Artemis Plan, the United States plans to send the next man and first woman to the Moon by 2024, and establish a sustained human presence on the Moon by 2028.[148] However, Congress is only providing $850 million for work on the Human Landing System to support NASA’s Artemis mission, well short of the requested $3.37 billion on the project.[149] This shortfall is the biggest risk to the ambitious goals and timing of the Artemis Plan.[150]

The Artemis I Mission

Artemis I is set to be the first mission under the Artemis Plan, and it is currently scheduled for launch on November 2021.[151] It will be an uncrewed mission from NASA’s Kennedy Space Station in Florida.[152] This mission will allow NASA to test its powerful new Space Launch System and Orion spacecraft.[153]

Commercial Lunar Payload Services

Under the Artemis Plan, NASA established the Commercial Lunar Payload Services initiative (“CLPS”) to partner with the U.S. commercial space industry to introduce new lander technologies and deliver payloads to the surface of the Moon.[154] As of February 2021, NASA had 14 companies on contract through CLPS to bid on delivery science experiments and technology demonstrations to the lunar surface.[155] Most recently, NASA awarded Firefly Aerospace of Cedar, Texas approximately $93.3 million to deliver a suite of ten science investigations and technology demonstrations to the Moon in 2023.[156]

Lunar Orbital Platform Gateway

The Lunar Orbital Platform Gateway is instrumental to NASA’s goal of sustaining a human presence on the Moon.[157] The Gateway will be a station orbiting the Moon that will serve as a holding area for astronaut expeditions and science investigations, as well as a port for deep space transportations.[158] NASA has selected SpaceX to provide launch services for the first two Gateway modules, the Power and Propulsion Element (“PPE”) and Habitation and Logistics Outpost (“HALO”), which are targeted to launch together no earlier than May 2024.[159]

Human Landing System

NASA’s Human Landing System Program (“HLS”) is tasked with developing a lander that will haul two astronauts to the Moon in 2024, and then safely return them to lunar orbit before their trip back to Earth.[160] Three companies have been selected to begin development work for the HLS: Blue Origin (of Kent, Washington), Dynetics, a Leidos company (of Huntsville, Alabama), and SpaceX (of Hawthorne, CA).[161]  HLS is also charged with developing a sustainable, long-term presence on and around the Moon.[162]

E.  Record-Setting Private investment

Over the past several years, there has been increased interest in investing in pure aerospace companies, and more recently, space and space-satellite-based companies have become the focus of special-purpose acquisition companies (“SPACs”).[163] Numerous milestones are driving the rise of space stocks traded on exchanges. For example, companies such as Virgin Galactic have been developing, and are on the cusp of starting, a commercial space tourism service; AstraSpace is entering the public market through a blank-check merger with Holicity; and Momentus is going public via Stable Road Capital, among others.[164] In addition to the above, exchange traded funds (“ETF”) have been rising in popularity as well.

To further illustrate the above, one only has to look to ETFs such as Procure Space ETF, a space-related fund launched in 2019, which has holdings in various space stocks.[165] In January, Cathie Wood’s Ark Investment Management announced in a filing that it was looking to start the ARK Space Exploration ETF.[166] This ETF would focus on exposure to “companies involved in space-related businesses like reusable rockets, satellites, drones, and other orbital and sub-orbital aircrafts.”[167]

In terms of SPACs, the aerospace industry has shown a significant amount of growth. SPACs are among the trendiest, high-growth investment opportunities in the finance world at the moment.[168]A SPAC raises money through an IPO to acquire an existing operating company. In the past, we have seen successful SPACs such as when Virgin Galactic merged with Social Capital Hedosophia, or when Momentus Space merged with Stable Road Acquisition Corp.[169] Another company considering a merger with a SPAC is Kraus Hamdani Aerospace, whose aircraft can “safely carry satellite payloads within the stratosphere, providing a lower cost alternative to satellites with zero carbon footprint[.]”[170]  It appears that SPACs can provide a beneficial pathway for aerospace companies to obtain important access to capital.

There are other companies to watch for as well in the near term. Firefly Aerospace is a “small launch vehicle developer” that is increasingly nearing its first orbital launch attempt, and it is looking to raise $350 million to “scale up production and work on a new, larger vehicle.”[171] This is after Relativity Space, a similar launch vehicle developer, raised $500 million in November of 2020.[172]

In viewing the industry, it seems clear that the rise in space and space-related development is leading to more and more opportunities for small to large companies to expand into the public markets in order to raise the capital necessary to further expand these companies’ operations. Moreover, with the similar rise in ETFs and SPACs, access to equity in space companies, which may have been limited to a select few in years prior, is now more available to the general public than ever before. As such, the space industry market should be one to follow and watch for in the coming years.

F.  Satellite Internet Constellations

The space industry, which includes the consumer broadband sector, saw record private investment in 2020.[173] One area of investment was in the continued development of satellite constellations that provide internet access across the globe. These new technologies offer great business potential and provide internet access to underserved remote populations. In fact, federal agencies are encouraging more private investment in the space economy, including internet satellite constellations.[174]

In December 2020, the FCC awarded $9.2 billion in funding to bidders as part of the Phase I Auction from its Rural Digital Opportunity Fund (“Fund”). The Fund, established in 2019 with $20 billion in funding, is to be used for providing internet access to the millions of Americans without internet access, particularly in rural and remote areas.[175] The funding is estimated to provide high-speed broadband internet service to 5.22 million users[176]— Former FCC Chairman Ajit Pai described it as the “single largest step ever taken to bridge the digital divide.”[177] According to Pai, the awards would bring “welcome news to millions of unconnected rural Americans who for too long have been on the wrong side of the digital divide. They now stand to gain access to high-speed, high-quality broadband service.”[178]

On January 19, 2021, over 150 members of Congress wrote a letter urging the FCC “to thoroughly vet the winning bidders to ensure that they are capable” and to “consider opportunities for public input on the applications.”[179] Among other requirements, winning bidders must deliver financial statements, coverage maps, and certify to the FCC that their network is able to deliver “to at least 95% of the required number of locations in each relevant state.”[180]

Multiple companies developing satellite constellations that provide internet access from low earth orbit are creating many opportunities, but these projects have also led to some concern. The U.S. National Oceanic and Atmospheric Administration projected that the number of active satellites in orbit could increase by 50% or more in 2021.[181] The injection of more satellites into low earth orbit increases the risk of collisions between man-made objects, which could create orbital debris that itself might collide with other space objects, thus resulting in greater accumulations of “space junk.”[182] According to Morgan Stanley, some government agencies now struggle to track this orbital debris, creating potential demand for private companies to track and maintain this potentially catastrophic threat.[183]

The rapidly developing breakthroughs in satellite broadband internet access will bridge the gap in the digital divide, and be the driving force in a projected trillion-dollar industry. Morgan Stanley projects that the global space economy could generate more than $1 trillion in revenue by 2040, with satellite broadband accounting for 50-70% of the projected growth.[184]

G.  Expected Impact of Biden Administration

The inauguration of President Biden on January 20, 2020 signaled the beginning of significant changes to policies of the Trump administration in many key areas, but thus far President Trump’s space-related policies have generally proven a uniquely bipartisan area of continuity during this latest transition of power.

Having inherited a global pandemic, among other issues, President Biden’s first priorities have primarily been more terrestrial in focus, and insight into future policy decisions generally have to be gleaned from statements made on the campaign trail. However, the administration’s early remarks regarding Trump-era ventures like the Space Force and NASA’s Project Artemis have given those with their eyes turned skyward reasons for optimism, which has only been bolstered by President Biden’s symbolic decoration of the Oval Office with a moon rock collected during the Apollo 17 mission of 1972.[185]

Space Force

On December 20, 2019, President Trump signed the National Defense Authorization Act for Fiscal Year 2020 (“NDAA”) establishing the United States Space Force as the sixth branch of the United States military, and the first new military service in more than 70 years.[186] Its duties are to “(1) protect the interests of the United States in space; (2) deter aggression in, from, and to space; and (3) conduct space operations.”[187] Since its establishment, about 2,400 service members have officially transferred into the Space Force service, with plans to grow to 6,400 active-duty troops and add a reserve component in 2021.[188]

Despite earlier speculation to the contrary, White House spokeswoman Jen Psaki recently affirmed that the Space Force “absolutely has full support of the Biden administration.”[189] In response, the Chief of Space Operations Gen. John Raymond emphasized that the White House’s unambiguous statement of support for the Space Force makes it “really clear that this is not a political issue, it’s an issue of national security.”[190] That same sentiment is also reflected in Congress among bipartisan lawmakers who view the new branch as integral to ensuring the military puts enough focus on space to counter China and Russia.[191] Although President Biden has not yet publicly detailed his plans for the future of the Space Force, it does appear to be here to stay.

Space Exploration

In early February 2021, the White House also announced support for Project Artemis, NASA’s effort to return astronauts to the lunar surface. President Biden’s endorsement of the Artemis program means it will become the first major deep space human exploration effort with funding to survive a change in presidents since Apollo, after several fitful efforts to send astronauts back to the moon and beyond ultimately went nowhere.[192]

The Trump administration embraced exploration and directed NASA to speed up its moon campaign, directing it to land another man, and the first woman, on the lunar surface by 2024, but the time frame of this goal appears to be stifled by budgetary constraints, safety concerns, and other matters of national priority like COVID-19 relief.[193] For example, NASA requested a total of $25.2 billion for FY2021, a 12 percent increase over FY2020, in order to pay for Artemis. Although Congress had been steadily adding money to NASA’s budget for several prior years, in this case it provided less, $23.3 billion, suggesting there are limits to what it will allocate.[194]

Additionally, speculation remains that the Biden administration may instead prioritize NASA missions focused on increasing earth-observation capabilities, rather than space exploration. Lori Garver, the NASA deputy administrator during the Obama administration, was a key speaker at the SpaceVision 2020 convention on November 7 and 8, 2020. She noted, “[m]anaging the Earth’s ability to sustain human life and biodiversity will likely, in my view, dominate a civil space agenda for a Biden-Harris administration.”[195] However, eleven Democratic senators have already sent a letter to President Biden urging greater funding for Project Artemis, stressing that other NASA programs should not be cannibalized to pay for it.[196] As such, the first explicit insight into President Biden’s support for human spaceflight, and the timeline at which it can proceed, will likely be the FY2022 budget request that the President will send to Congress in the coming months.

Nevertheless, space exploration remains an overwhelmingly popular and bipartisan goal among Americans. Polls taken last year showed, for example, that 80% of Americans believed space travel supports scientific discovery; 78% had a favorable impression of NASA; 73% said NASA contributes to pride and patriotism; and 71% said NASA is not just a desirable agency, but a necessary one.[197] Such uniquely bipartisan support in this area cannot go unnoticed by the administration. Indeed, it appears that even if delayed for now, the question of landing another man or woman on the moon—or beyond—is a matter of when, not if, for the Biden Administration.

________________________

   [1]   Press Release – U.S. Department of Transportation Issues Two Much-Anticipated Drone Rules to Advance Safety and Innovation in the United States, Fed. Aviation Admin. (Dec. 28, 2020), available at https://www.faa.gov/news/press_releases/news_story.cfm?newsId=25541.

   [2]   Fed. Aviation Admin., Final Rule on Remote Identification of Unmanned Aircraft (Jan. 15, 2021), available at https://www.federalregister.gov/documents/2021/01/15/2020-28948/remote-identification-of-unmanned-aircraft.

   [3]   Id. at 4396.

   [4]   Id. at 4507­–08.

   [5]   Id. at 4406.

   [6]   See id. at 4428.

   [7]   Id. at 4391.

   [8]   Id. at 4447.

   [9]   Id. at 4507.

   [10]   Id. at 4507–08.

   [11]   Fed. Aviation Admin., Operation of Small Unmanned Aircraft Systems Over People; Delay; Withdrawal; Correction (Mar. 10, 2021), available at https://public-inspection.federalregister.gov/2021-04881.pdf.

   [12]   Fed. Aviation Admin., supra note 2 at 4511–12.

   [13]   See James Roger, The dark side of our drone future, The Bulletin (Oct. 4, 2019), available at https://thebulletin.org/2019/10/the-dark-side-of-our-drone-future/.

   [14]   See Office of the Attorney General, Guidance Regarding Department Activities to Protect Certain Facilities or Assets from Unmanned Aircraft and Unmanned Aircraft Systems (Apr. 13, 2020), available at https://www.justice.gov/archives/ag/page/file/1268401/download.

   [15]     Fed. Aviation Admin., Operations Over People General Overview (Jan. 4, 2021), available at https://www.faa.gov/uas/commercial_operators/operations_over_people/.

   [16]   Operation of Small Unmanned Aircraft Systems Over People, 86 Fed. Reg. 4,314 – 4,387 (14 CFR 11, 21, 43, 107) (Jan. 15, 2021), available at https://www.federalregister.gov/documents/2021/01/15/2020-28947/operation-of-small-unmanned-aircraft-systems-over-people.

   [17]   Fed. Aviation Admin., Operation of Small Unmanned Aircraft Systems Over People; Delay; Withdrawal; Correction (Mar. 10, 2021), available at https://public-inspection.federalregister.gov/2021-04881.pdf.

   [18]   Id. at 4315

   [19]   Id. at 4315-16

   [20]   Id.

   [21]   Id. 4316-17

   [22]   Fed. Aviation Admin., Executive Summary Final Rule on Operation of Small Unmanned Aircraft Systems Over People (Dec. 28, 2020), available at https://www.faa.gov/news/media/attachments/OOP_Executive_Summary.pdf.

   [23]   Id.

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

   [25]   49 U.S.C. § 40103(b)(1); 49 U.S.C. § 40102(32); 14 C.F.R. § 91.119(b)(c).

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

   [27]   Id.

   [28]   Annie Palmer, Amazon wins FAA approval for Prime Air drone delivery fleet, CNBC (Aug. 31, 2020), available at https://www.cnbc.com/2020/08/31/amazon-prime-now-drone-delivery-fleet-gets-faa-approval.html.

   [29]   Id.

   [30]   Id.

   [31]   Flying robots get FAA approval in first for drone sector, ZDNet (Jan. 20, 2021), available at https://www.zdnet.com/article/flying-robots-get-faa-approval-in-first-for-drone-sector/.

   [32]   Id.

   [33]   Id.

   [34]   Id.

   [35]   Rantizo receives FAA approval to operate drone swarms, Clay and Milk (July 7, 2020), available at https://clayandmilk.com/2020/07/07/rantizo-receives-faa-approval-to-operate-drone-swarms/.

   [36]   Id.

   [37]   Id.

   [38]   DroneSeed is first in U.S. to receive approval from FAA for post-wildfire reforestation in California and five other states, PR Newswire (Oct. 6, 2020), available at https://www.prnewswire.com/news-releases/droneseed-is-first-in-us-to-receive-approval-from-faa-for-post-wildfire-reforestation-in-california-and-five-other-states-301146779.html.

   [39]   Id.

   [40]   Fed. Aviation Admin., Notice of Proposed Rulemaking on Type Certification of Certain Unmanned Aircraft Systems (Sept. 18, 2020), available at https://www.federalregister.gov/documents/2020/09/18/2020-17882/type-certification-of-certain-unmanned-aircraft-systems.

   [41]   Alan Levin, Alphabet’s Drone Delivery Service in Virginia Sees Surge During Pandemic, Transport Topics (Apr. 8, 2020), available at https://www.ttnews.com/articles/alphabets-drone-delivery-service-virginia-sees-surge-during-pandemic.

   [42]   Id.

   [43]   Aaron Pressman, Drone industry flies higher as COVID-19 fuels demand for remote services, Fortune (July 13, 2020), available at https://fortune.com/2020/07/13/coronavirus-drones-dji-wing-flytrex-covid-19-pandemic/.

   [44]   Id.

   [45]   Ryan Duffy, A Q&A with Flytrex CEO and Cofounder Yariv Bash, Emerging Tech Brew (Feb. 22, 2021), available at https://www.morningbrew.com/emerging-tech/stories/2021/02/22/qa-flytrex-ceo-cofounder-yariv-bash.

   [46]   Brian Straight, If drones can deliver Starbucks, what’s taking so long for packages?, Modern Shipper (Feb. 15, 2021), available at https://www.freightwaves.com/news/if-drones-can-deliver-starbucks-whats-taking-so-long-for-packages.

   [47]   Tyler Fingert, The future of doorstep delivery being tested in Mobile; Drones could soon deliver orders in minutes, Fox 10 News (Aug. 5, 2020), available at https://www.fox10tv.com/news/mobile_county/the-future-of-doorstep-delivery-being-tested-in-mobile-drones-could-soon-deliver-orders-in/article_93138836-d786-11ea-872e-536e9c4176b9.html.

   [48]   Palmer, supra note 28.

   [49]   Id.

   [50]   Id.

   [51]   John Porter, Zipline’s drones are delivering medical supplies and PPE in North Carolina, The Verge (May 27, 2020), available at https://www.theverge.com/2020/5/27/21270351/zipline-drones-novant-health-medical-center-hospital-supplies-ppe.

   [52]   Walmart using drones to deliver Covid-19 test kits to El Paso homes, ABC-7 KVIA (Nov. 16, 2020), available at https://kvia.com/news/business-technology/2020/11/16/walmart-to-start-using-drones-to-delivery-covid-19-test-kits-to-homes-in-el-paso/.

   [53]   Kaleb Roedel, Flirtey successfully conducts drone deliveries of COVID test kits, Nevada Appeal (Feb. 19, 2021), available at https://www.nevadaappeal.com/news/2021/feb/22/flirtey-successfully-conducts-drone-deliveries-cov/.

   [54]   Id.

   [55]   Aaron Pressman, Drone industry flies higher as COVID-19 fuels demand for remote services, Fortune (July 13, 2020), available at https://fortune.com/2020/07/13/coronavirus-drones-dji-wing-flytrex-covid-19-pandemic/.

   [56]   Id.

   [57]   Id.

   [58]   Bijan Khosravi, How The Global Pandemic Became An Inflection Point for Drones, Forbes (Dec. 6, 2020), available at https://www.forbes.com/sites/bijankhosravi/2020/12/06/how-the-global-pandemic-became-an-inflection-point-for-drones/?sh=1fa1ddb01870.

   [59]   NASA’s SpaceX Crew-1 Astronauts Headed to International Space Station, NASA (Nov. 15, 2020), available at https://www.nasa.gov/press-release/nasa-s-spacex-crew-1-astronauts-headed-to-international-space-station.

   [60]   Id.

   [61]   Id.

   [62]   Id.

   [63]   Id.

   [64]   See Adam Mann, China’s Chang’e Program: Missions to the Moon, Space.com (Feb. 1, 2019), available at https://www.space.com/43199-chang-e-program.html.

   [65]   NASA Space Science Data Coordinated Archive, Chang’e 5, NASA, available at https://nssdc.gsfc.nasa.gov/nmc/spacecraft/display.action?id=2020-087A.

   [66]   Id.

   [67]   Jonathan Amos, China’s Chang’e-5 mission returns Moon samples, BBC (Dec. 16, 2020), available at https://www.bbc.com/news/science-environment-55323176.

   [68]   Id.

   [69]   NASA, supra note 65.

   [70]   Adam Mann, China’s Chang’e 5 mission: Sampling the lunar surface, Space.com (Dec. 10, 2020), available at https://www.space.com/change-5-mission.html.

   [71]   Id.

   [72]   See Mann, supra note 64.

   [73]   Dr. David R. Williams, Future Chinese Lunar Missions, NASA (Dec. 21, 2020), available at https://nssdc.gsfc.nasa.gov/planetary/lunar/cnsa_moon_future.html.

   [74]   Andrew Jones, China’s Tianwen-1Mars probe captures epic video of Red Planet during orbital arrival, Space.com (Feb. 12, 2021), available at https://www.space.com/tianwen-1.html.

   [75]   Id.

   [76]   Vicky Stein, Tianwen-1: China’s first Mars mission, Space.com (Feb. 8, 2021), available at https://www.space.com/tianwen-1.html.

   [77]   Id.

   [78]   Jones, supra note 74.

   [79]   Id.

   [80]   See Mann, supra note 64.

   [81]   See Mike Wall, China plans to launch core module of space station this year, Space.com (Jan. 7, 2021), available at https://www.space.com/china-space-station-core-module-launch-spring-2021.

   [82]   Id.

   [83]   Id.

   [84]   Id.

   [85]   Elizabeth Howell, China’s ispace fails to reach orbit in 2nd launch attempt, Space.com (Feb. 4, 2021), available at https://www.space.com/chinese-startup-ispace-rocket-launch-failure.

   [86]   Id.

   [87]   Id.

   [88]   Id.

   [89]   Smriti Mallapaty, Asteroid dust recovered from Japan’s daring Hayabusa2 mission, Nature.com (Dec. 15, 2020), available at https://www.nature.com/articles/d41586-020-03451-6.

   [90]   Meghan Bartels, Samples of asteroid Ryugu arrive in Japan after successful Hayabusa2 capsule landing, Space.com (Dec. 8, 2020), available at https://www.space.com/hayabusa2-asteroid-ryugu-samples-arrive-in-japan.

   [91]   Id.

   [92]   Id.

   [93]   Mallapaty, supra note 89.

   [94]   Bartels, supra note 90.

   [95]   See Doris E. Urrutia, Japan’s asteroid sample-return spacecraft Hayabusa2 gets extended mission, Space.com (Sept. 30, 2020), available at https://www.space.com/japan-asteroid-mission-hayabusa2-extended.

   [96]   Bartels, supra note 90.

   [97]   Urrutia, supra note 95.

   [98]   Mike Wall, Japanese Company ispace Now Targeting 2021 Moon Landing for 1st Mission, Space.com (Aug. 23, 2019), available at https://www.space.com/japan-ispace-first-moon-mission-2021.html.

   [99]   Id.

   [100]   Id.

   [101]   Id.

   [102]   Jonathan Amos, UAE Hope mission returns first image of Mars, BBC (Feb. 14, 2021), available at https://www.bbc.com/news/science-environment-56060890.

   [103]   Meghan Bartels, Behold! See the 1st Mars closeup from UAE’s Hope orbiter (photo), Space.com (Feb. 16, 2021), available at https://www.space.com/uae-hope-mars-spacecraft-first-close-photo.

   [104]   Natasha Turak and Dan Murphy, United Arab Emirates becomes first Arab country to reach Mars, CNBC (Feb. 10, 2021), available at https://www.cnbc.com/2021/02/09/mars-probe-uae-attempts-to-become-first-arab-country-to-reach-mars-with-hope-probe.html.

   [105]   Jonathan Amos, Hope probe: UAE launches historic first mission to Mars, BBC (July 19, 2020), available at https://www.bbc.com/news/science-environment-53394737.

   [106]   Id.

   [107]   Leonard David, Luna-25 Lander Renew Russian Moon Rush, Scientific American (Aug. 27, 2020), available at https://www.scientificamerican.com/article/luna-25-lander-renews-russian-moon-rush/.

   [108]   Id.

   [109]   Leonard David, Russia gearing up to launch moon mission in 2021, Space.com (Aug. 7, 2020), available at https://www.space.com/russia-moon-mission-luna-25.html.

   [110]   Id.

   [111]   Id.

   [112]   Id.

   [113]   Kenneth Chang et al., SpaceX Launch: Highlights from NASA Astronauts’ Trip to Orbit, The New York Times (May 30, 2020), available at https://www.nytimes.com/2020/05/30/science/spacex-launch-nasa.html.

   [114]   Id.

   [115]   Id.

   [116]   Id.

   [117]   Meghan Bartels, Space X’s 1st Crew Dragon with astronauts docks at space station in historic rendezvous, Space.com (May 31, 2020), available at https://www.space.com/spacex-crew-dragon-demo-2-docking-success.html.

   [118]   Mike Wall, SpaceX Crew Dragon makes historic 1st splashdown to return NASA astronauts home, Space.com (Aug. 2, 2020), available at https://www.space.com/spacex-crew-dragon-demo-2-splashdown.html.

   [119]   NASA’s SpaceX Crew-1 Astronauts Headed to International Space Station, NASA (Nov. 15, 2020), available at https://www.nasa.gov/press-release/nasa-s-spacex-crew-1-astronauts-headed-to-international-space-station.

   [120]      Id.

   [121]   Id.

   [122]   Id.

   [123]   Michael Sheetz, SpaceX launches and lands another Starship prototype, the second flight test in under a month, CNBC (Sep. 3, 2020), available at https://www.cnbc.com/2020/09/03/spacex-launches-and-lands-starship-sn6-prototype-in-flight-test.html.

   [124]   Id.

   [125]   Mike Wall, SpaceX’s Starship SN5 prototype soars on 1st test flight! ‘Mars is looking real,’ Elon Musk says, Space.com (Aug. 5, 2020), available at https://www.space.com/spacex-starship-sn5-prototype-1st-test-flight.html.

   [126]   Id.

   [127]   Sheetz, supra note 123.

   [128]   Tariq Malik, SpaceX launches Starship SN6 prototype test flight on heels of Starlink mission, Space.com (Sep. 3, 2020), available at https://www.space.com/spacex-starship-sn6-first-test-flight.html.

   [129]   Michael Sheetz, SpaceX’s prototype Starship rocket reaches highest altitude yet but lands explosively on return attempt, CNBC (Dec. 9, 2020), available at https://www.cnbc.com/2020/12/09/spacex-starship-rocket-sn8-explodes-after-high-altitude-test-flight-.html.

   [130]   Id.

   [131]   Id.

   [132]   Amy Thompson, SpaceX launches advanced GPS satellite for US Space Force, sticks rocket landing, Space.com (June 30, 2020), available at https://www.space.com/spacex-space-force-gps-3-sv03-launch-success.html.

   [133]   Amy Thompson, SpaceX launches South Korea’s 1st military satellite, nails rocket landing at sea, Space.com (July 20, 2020), available at https://www.space.com/spacex-launches-south-korean-military-satellite-anasis-2-lands-rocket.html.

   [134]   Amy Thompson, SpaceX launches 60 Starlink internet satellites, sticks rocket landing, Space.com (Sep. 3, 2020), available at https://www.space.com/spacex-starlink-11-satellites-launch-september-2020.html

   [135]   Michael Sheetz, SpaceX looks to build next-generation Starlink internet satellites after launching 1,000 so far, CNBC (Jan. 29, 2021), available at https://www.cnbc.com/2021/01/28/spacex-plans-next-generation-starlink-satellites-with-1000-launched.html.

   [136]   Id.

   [137]   Michael Sheetz, SpaceX says its Starlink satellite internet service now has over 10,000 users, CNBC (Feb. 4, 2021), available at https://www.cnbc.com/2021/02/04/spacex-starlink-satellite-internet-service-has-over-10000-users.html?recirc=taboolainternal.

   [138]   Samantha Mathewson, SpaceX raises $1.9 billion in latest funding round: report, Space.com (Aug. 21, 2020), available at https://www.space.com/spacex-raises-1.9-billion-funding-round.html.

   [139]   Id.

   [140]   Id.

   [141]   Reuters, Wire Service Content, SpaceX Valuation to Hit at Least $60 Billion in New Funding Round – Business Insider, U.S. News (Jan. 28, 2021), available at https://www.usnews.com/news/technology/articles/2021-01-28/spacex-finalizing-new-funding-round-at-minimum-valuation-of-60-bln-business-insider.

   [142]   Mike Wall, Touchdown! NASA’s Perseverance rover lands on Mars to begin hunt for signs of ancient life, Space.com (Feb. 18, 2021), available at https://www.space.com/perseverance-mars-rover-landing-success.

   [143]   Id.

   [144]   Id.

   [145]   Id.

   [146]   Id.

   [147]   See NASA, The Artemis Plan (2020), available at https://www.nasa.gov/sites/default/files/atoms/files/artemis_plan-20200921.pdf.

   [148]   Thalia Patrinos, Artemis Moon Program Advances – The Story So Far, NASA (Oct. 7, 2019), available at https://www.nasa.gov/artemis-moon-program-advances.

   [149]   Id.

   [150]   See Elizabeth Howell, NASA receives $23.3 billion for 2021 fiscal year in Congress’ omnibus spending bill: report, Space.com (Dec. 22, 2020), available at https://www.space.com/nasa-2021-budget-congress-omnibus-spending-bill.

   [151]   Lia Rovira and Deborah Byrd, NASA’s moon program – Artemis – boosted at White House press briefing, EarthSky (Feb. 6, 2021), available at https://earthsky.org/space/what-is-nasas-artemis-program-moon.

   [152]   Id.

   [153]   Id.

   [154]   Commercial Lunar Payload Services, NASA (Feb. 9, 2021), available at https://www.nasa.gov/content/commercial-lunar-payload-services-overview.

   [155]   Id.

   [156]   Sean Potter, NASA Selects Firefly Aerospace for Artemis Commercial Moon Delivery in 2023, NASA (Feb. 4, 2021), available at https://www.nasa.gov/press-release/nasa-selects-firefly-aerospace-for-artemis-commercial-moon-delivery-in-2023.

   [157]   See Adam Mann, NASA’s Artemis Program, NASA (July 3, 2019), available at https://www.space.com/artemis-program.html.

   [158]   Kelli Mars, Gateway, NASA (Feb. 11, 2021), available at https://www.nasa.gov/gateway.

   [159]   Sean Potter, NASA Awards Contract to Launch Initial Elements for Lunar Outpost, NASA (Feb. 10, 2021), available at https://www.nasa.gov/press-release/nasa-awards-contract-to-launch-initial-elements-for-lunar-outpost.

   [160]   Leonard David, NASA’s 2024 Moon Goal: Q&A with Human Landing System Chief Lisa Watson-Morgan, NASA (Oct. 7, 2019), available at https://www.space.com/nasa-2024-moon-human-landing-system-chief-interview.html.

   [161]   Sean Potter, NASA Names Companies to Develop Human Landers for Artemis Moon Mission, NASA (Jan. 4, 2021), available at https://www.nasa.gov/press-release/nasa-names-companies-to-develop-human-landers-for-artemis-moon-missions.

   [162]   See Mike Wall, NASA picks SpaceX, Dynetics and Blue Origin-led team to develop Artemis moon landers, Space.com (Apr. 30, 2020), available at https://www.space.com/nasa-artemis-moon-landers-spacex-blue-origin-dynetics-selection.html.

   [163]   Gillian Rich, First Space Stock of its Kind Faces SpaceX Threat, Crowded Field, Investors.com (Feb. 2, 2021), available at https://www.investors.com/news/space-stocks-astra-space-to-go-public-but-faces-spacex-threat-crowded-field/.

   [164]   Gillian Rich, You Can’t Buy SpaceX Yet But These Space Stocks Are Up For Grabs, Investors.com (Mar. 25, 2021), available at https://www.investors.com/news/space-stocks-upstart-space-companies-moon-mars/.

   [165]   Id.

   [166]   ARK ETF Trust, Registration Statement Under The Securities Act of 1933 Amendment No. 31, Securities and Exchange Commission (Jan. 13, 2021), available at https://www.sec.gov/Archives/edgar/data/0001579982/000110465921003837/tm212832d1_485apos.htm.

   [167]   Ark Invest, Space Exploration, Ark-Invest.com (2021), available at https://ark-invest.com/strategy/space-exploration/.

   [168]    Mike Bellin, Alan Jones, and Eric Watson, How special purpose acquisition companies (SPACs) work, PWC (accessed Apr. 2, 2021), available at https://www.pwc.com/us/en/services/audit-assurance/accounting-advisory/spac-merger.html.

   [169]   Rich, supra note 164.

   [170]   Melissa Rowley, How SPACs Are Changing The Investment Landscape For Space Exploration And Beyond, Forbes (Feb. 9, 2021), available at https://www.forbes.com/sites/melissarowley/2021/02/09/how-spacs-are-changing-the-investment-landscape-for-space-exploration-and-beyond/?sh=5a2ba29435c4.

   [171]   Rich, supra note 164.

   [172]   Id.

   [173]   5 Key Themes in the New Space Economy, Morgan Stanley (Feb. 4, 2021), available at  https://www.morganstanley.com/ideas/space-economy-themes-2021.

   [174]   Id.

   [175]   Michael Sheetz and Magdalena Petrova, Why in the Next Decade Companies Will Launch Thousands More Satellites Than in all of History, CNBC (Dec. 15, 2019), available at https://www.cnbc.com/2019/12/14/spacex-oneweb-and-amazon-to-launch-thousands-more-satellites-in-2020s.html; Federal Communications Commission, 2020 BROADBAND DEPLOYMENT, 5 FCC Rcd 8986 (11) (Apr. 20, 2020), available at https://docs.fcc.gov/public/attachments/FCC-20-50A1.pdf.

   [176]   David Shepardson, FCC Awards $9.2 Billion to Deploy Broadband to 5.2 Million U.S. Homes, Businesses U.S. (2020), available at https://www.reuters.com/article/us-usa-internet-fcc/fcc-awards-9-2-billion-to-deploy-broadband-to-5-2-million-u-s-homes-businesses-idUSKBN28H2V1.

   [177]   Christopher Davenport, FCC Announces Billions of Dollars in Awards to Provide Rural Areas with Broadband Access, Washington Post (Dec. 7, 2020), available at https://www.washingtonpost.com/technology/2020/12/07/fcc-digital-divide-spacex-broadband/.

   [178]   Id.

   [179]   Ryan Tracy, Elon Musk’s SpaceX Riles Its Rivals for Broadband Subsidies, The Wall Street Journal (Jan. 31 2021), available at www.wsj.com/articles/elon-musks-spacex-riles-its-rivals-for-broadband-subsidies-11612108801.

   [180]   Public Notice: Rural Digital Opportunity Fund Phase I Auction (Auction 904) Closes; Winning Bidders Announced; FCC Form 683 Due January 29, 2021, Federal Communications Commission (Dec. 7, 2020), available at https://docs.fcc.gov/public/attachments/DA-20-1422A1.pdf.

   [181]  Morgan Stanley, supra note 173.

   [182]   The Economist, It’s time to tidy up space, The Economist (Jan. 16, 2021), available at https://www.economist.com/leaders/2021/01/14/its-time-to-tidy-up-space.

   [183]  Morgan Stanley, supra note 173.

   [184]  Space: Investing in the Final Frontier | Morgan Stanley, Morgan Stanley (July 24, 2020), available at https://www.morganstanley.com/ideas/investing-in-space.

   [185]  Jeffrey Kluger, The Biden Presidency Could Fundamentally Change the U.S. Space Program, Time (Jan. 29, 2021), available at https://time.com/5933447/biden-space-nasa/.

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

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

   [188]   Rebecca Kheel, Space Force Expected To Live On Past Trump Era, The Hill (Dec. 19, 2021), available at https://thehill.com/policy/technology/530936-space-force-expected-to-live-on-past-trump-era.

   [189]   Reuters, Biden Decides to Stick with Space Force as Branch of U.S. Military, Reuters (Feb. 3, 2021), available at https://www.reuters.com/article/us-usa-biden-spaceforce/biden-decides-to-stick-with-space-force-as-branch-of-u-s-military-idUSKBN2A32Z6.

   [190]   Sandra Erwin, Raymond: Space Force ‘Not a Political Issue’, Space News (Mar. 3, 2021), available at https://spacenews.com/raymond-space-force-not-a-political-issue/.

   [191]   Kheel, supra note 199.

   [192]  Christian Davenport, The Biden Administration Has Set Out To Dismantle Trump’s Legacy, Except In One Area: Space, The Washington Post (Mar. 2, 2021), available at https://www.washingtonpost.com/technology/2021/03/02/biden-space-artemis-moon-trump/.

   [193]   Marcia Smith, Biden Administration “Certainly” Supports Artemis Program, Space Policy Online (Feb. 4, 2021), available at https://spacepolicyonline.com/news/biden-administration-certainly-supports-artemis-program/.

   [194]   Id.

   [195]   Lia Rovira, How Will the U.S. Space Program Fare Under Joe Biden?, EarthSky, (Jan. 10, 2021), available at https://earthsky.org/human-world/how-will-the-u-s-space-program-fare-under-joe-biden.

   [196]   Smith, supra note 204.

   [197]   Kluger, supra note 196.


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Each month, Gibson Dunn’s Media, Entertainment and Technology Practice Group highlights notable developments and rulings that may impact future litigation in this area. This month we focus on the increasingly popular digital asset known as non-fungible tokens or “NFTs” and related issues in the entertainment space and beyond.

Issue: Non-Fungible Tokens (NFTs)

Summary: NFTs have gone mainstream in what some have called a new “gold rush.” An NFT sold for almost $70 million at a Christie’s auction last month, NFTs of basketball video highlights have generated hundreds of millions of dollars in sales on the NBA Top Shot platform, and NFTs even were the subject of a skit on a recent episode of Saturday Night Live. Some consider them a fad or a bubble, citing the almost $600,000 sale of an image of an animated flying cat with a pop-tart body that anyone can download from the internet for free. But in one form or another, NFTs are here to stay. Even if the market matures and interest wanes in some unconventional pieces of digital art, NFTs will continue to offer a significant potential revenue stream for artists and entities in the film and television, music, and online gaming industries, among many others. We highlight below some of the emerging legal and policy issues related to NFTs, which include intellectual property law, profit participation issues, securities law, and even climate change.

What do the music group Megadeth, former University of Iowa basketball player Luka Garza, and New York City track and field center The Armory have in common?  In the span of 24 hours earlier this month, each of them entered the rapidly expanding NFT market. They joined a number of artists and entertainers who have led the charge in selling NFTs. As film studios and other entities with large content libraries consider following suit, they will need to consider a number of deeply rooted legal issues against a relatively new technological backdrop.

I. Background

There are widely varied understandings of NFTs and related issues concerning tokens and blockchain technology. While many of our readers are familiar with these terms, a brief introduction is helpful to frame the issues that follow.

A. What are NFTs and What is the Blockchain?

An NFT, or “non-fungible token,” is a unique unit of data stored on a public ledger of transactions called a blockchain. The unique data could represent an image, an electronic deed to a piece of property, or a digital ticket for a particular seat at a sporting event. In contrast to these “non-fungible” tokens, cryptocurrencies such as Bitcoin and Ether—just like U.S. dollars, British pounds and other “fiat” government-issued currencies—are fungible; one penny in your pocket has the same intrinsic value as the penny under your couch cushion.

Today, NFTs generally reside on the Ethereum blockchain, which also supports, among other things, the cryptocurrency Ether—the second largest cryptocurrency in terms of market capitalization and volume after Bitcoin. While other blockchains can have their own versions of NFTs, right now Ethereum is the most widely used (though NBA Top Shot uses the Flow blockchain).

But what is a blockchain? As noted above, it is an electronic database or ledger showing a history of transactions. Each transaction is represented by an entry into the electronic ledger and multiple ledger entries are ordered in data batches known as “blocks” to await verification on the network. New blocks are added after the current block reaches its data limit.  The blocks are connected using cryptography: each block contains a “hash” (a sort of coded electronic signature linking it to the previous block), which is how the blockchain gets its name.

A key feature of the Ethereum blockchain that distinguishes it from a database one might have at a business or law firm is that the blockchain is decentralized across a community of servers. Data is not stored in any one location or managed by any particular body. Rather, it exists on multiple computers simultaneously, with network participants holding identical copies of the ledger reflecting the encrypted transactions.

That is why blockchains are touted as both verifiable and secure.  It is similar to the tracking details showing each step in a package’s journey from the shipper to its final delivery destination. Unlike the tracking details provided by a shipping company, however, on the blockchain no one person can alter that record to change the encrypted data without the network’s users noticing and rejecting the fraudulent version. And if any one computer system fails, there are duplicate images of the tracking details on the blockchain ledger available on other computers around the world.

B. What Do You Get When You Buy An NFT?

While an NFT is unique, it is important to keep in mind what that unique digital item actually is.  In most cases the NFT is a digital identifier recording ownership, not—to borrow an example from the above—the actual image of the pop-tart cat. What amounts to your “receipt” is reflected in the blockchain, but the image file itself resides elsewhere.

This has to do with blockchain storage limitations and costs. The digital image itself theoretically can be stored in metadata on the blockchain, but in the vast majority of cases it is hosted on a regular website or the decentralized InterPlanetary File System (IPFS). The identifier is logged on the blockchain, but if the image is taken down from its non-blockchain location—say, because it violates someone’s copyright—the NFT could end up being a unique digital path to a closed door (even if there may be seemingly identical “copies” of the digital asset elsewhere). The immutable purchase record would remain on the blockchain, but the original image might not be viewable.

Almost uniformly, the NFT transfer conveys an interest in a licensed copy while copyright ownership of the underlying image or song is not transferred. The NFT may be in a limited edition and it may have some additional perceived value because it is officially authorized by the copyright holder or originated from the address of the copyright holder. But while the underlying copyright can be transferred when the NFT is sold or licensed, typically it isn’t. The terms and conditions of an NFT platform may reveal the limits of what actually is being transferred and how it might be used.

Under NBA Top Shot’s terms, for example, the purchaser who obtains a license to a “Moment” cannot use it for a commercial purpose, modify it, or use the image alongside anything the NBA considers offensive or hateful. An NFT platform that controls the image file is able to remove that file from its platform.

* * *

Monetization strategies for NFTs are constantly evolving, so one cannot generalize and say that all NFTs fall in one legal bucket or another. An NFT can be fair use of a copyright or it can violate it. An NFT likewise could be a simple collectible or it may be offered in such a way to convert it into a security subject to myriad regulations and disclosure requirements. It depends on the NFT.  But as the market evolves, complicated questions will need to be answered by NFT creators, platforms, and, potentially, courts.

II. Intellectual Property

Any NFT platform must be particularly focused on the intellectual property rights underlying the NFTs stored, sold, or licensed on the platform. A single NFT may include various copyrightable elements, including a video clip and any accompanying music. Whereas the platform may be able to invoke a statutory liability protection with respect to some potential claims—like defamation—certain intellectual property claims are not precluded.

Specifically, Section 230 of the Communications Decency Act of 1996 shields certain online service providers from liability for hosting content that someone else created.  In particular, Section 230(c)(1) states that “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”

To the extent Section 230 applies to a particular NFT platform, the law’s broad protection still has carve-outs. Among other things, it does not apply to “any law pertaining to intellectual property.” Courts have different interpretations of the scope of Section 230’s reference to “intellectual property.” In Perfect 10 v. CCBill, 488 F.3d 1102 (9th Cir. 2007), the Ninth Circuit ruled that Section 230 permitted claims under federal intellectual property laws but preempted state intellectual property claims alleging a violation of the plaintiff’s right of publicity. In Atlantic Recording Corp. v. Project Playlist, Inc., 603 F. Supp. 2d 690 (S.D.N.Y. 2009), a Southern District of New York court reached the opposite conclusion, holding that the “intellectual property” carve-out extended beyond intellectual property claims under federal law to include state-law claims.

Whether or not an NFT platform would be subject to potential liability for violating someone’s state-law right in her or his name and likeness, federal intellectual property law still would apply.  And offering an NFT that potentially infringes a copyright could result in liability for the platform if, for example, it does not take the necessary steps under the Digital Millennium Copyright Act. That risk is heightened for some platforms given how easy it is to tokenize someone else’s work. Speculators can turn any digital image into an NFT that they can then try to sell, even if the original creator does not agree to that use or even know about it.

Studios and other intellectual property rights holders will need to be especially vigilant in protecting their intellectual property—and NFT platforms likewise will need to promptly remove content if a copyright owner notifies it of an infringement—as the market for small pieces of content expands.

III. Profit Participations

Especially in the current NFT environment, it is not difficult to imagine the potential value of tokenized iconic moments from movies and television. Of course, there would be a number of contractual issues for a rightsholder to navigate, which would vary from deal to deal.  Valuable clips might come from movies dating back long before the advent of NFTs, the internet, or even computers. The relevant agreements certainly would not address NFTs, but even analogous provisions might be difficult to identify. Agreements may refer to “clips,” for example, but typically a clip is used to promote the full program or film rather than to be monetized on its own.

Depending on what it depicts, an NFT might not be a “clip” at all.  Again using NBA Top Shot as an example, a “Moment” is not just a short video excerpt showing a pass or dunk; it is a package of on-court video, still photographs, digital artwork, and game information. Contracts would need to be analyzed to determine if the NFT should be categorized as a clip, a derivative production, merchandising, promotional material, or something else, with potential consequences on the calculation of gross receipts and any corresponding rights to profit participations or Guild royalties.

Exclusivity provisions in film or television licenses to third parties might bar or limit a studio from “minting” an NFT from a work in its library. Other considerations might also limit a rightsholder’s willingness to enter the NFT space. With vast libraries of well-known and high‑quality content, however, studios are better positioned than most to take advantage of the increased interest and marketability of discrete portions of a film or program.

IV. Securities Law

Particularly in light of the SEC’s increased focus on cryptocurrencies, including its recent lawsuit accusing Ripple Labs Inc. and two of its executives of engaging in an unregistered “digital asset securities offering,” anyone involved in marketing an NFT should give careful consideration to whether the NFT is a security under U.S. law.

This should be of particular concern to the celebrities marketing their own NFTs. Several years ago, in response to celebrity endorsements for cryptocurrency Initial Coin Offerings (ICOs), the SEC warned that “[a]ny celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.”[1] A failure to do so would be “a violation of the anti-touting provisions of the federal securities laws.”[2] The same principle would apply to NFTs, with the key question being whether an NFT is a security. This issue has significant bearing on the NFT platform as well. If an NFT is a security, the offeror must follow securities law disclosure requirements and restrictions on who may invest.

The term “security” in U.S. securities laws includes an “investment contract” as well as other instruments like stocks and bonds. Both the SEC and federal courts often use the “investment contract” analysis to determine whether unique instruments, such as digital assets, are securities subject to federal securities laws.

To determine whether a digital asset has the characteristics of an investment contract, courts apply a test derived from the U.S. Supreme Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Under that Howey test, federal securities laws apply where

  1. there is an investment of money or some other consideration,
  2. in a common enterprise,
  3. with a reasonable expectation of profits,
  4. to be derived from the efforts of others.

Again, it would depend on the NFT, but transactions that resemble a fan buying a collectible likely would not be securities under this test. The notion that an NFT is non-fungible also makes it less likely to be a security.

Nevertheless, the NFT market is a creative one. Many NFTs, for example, are configured through the “smart contracts”—which are essentially computer programs—to automatically pay out royalties to the digital artwork’s original creator with every future sale of the NFT on that platform; the artist could package those royalty rights for sale to potential investors.

NFT issuers also can sell fractional interests in NFTs or groups of NFTs. As prices for some NFTs climb into the stratosphere, this approach becomes more appealing to potential buyers who want a piece of the NFT but are unwilling or unable to pay for the whole thing. According to recent statements by SEC Commissioner Hester Peirce, however, doing so increases the likelihood that the NFT would be deemed a security under the Howey test.[3] That likelihood grows where the NFT issuer or a third party claim to be able to help increase the NFT’s value.

V. Climate Change

A major issue that has arisen related to NFTs— and cryptocurrency generally—is their believed effect on the environment. Articles abound comparing the energy consumption of the Ethereum blockchain to entire countries. An analysis by Cambridge University asserts that what it calls the “Bitcoin network” uses more energy than Argentina.[4] NFTs thus have proven somewhat controversial, with one online marketplace for digital artists dropping its plans to launch an NFT platform after backlash that included an artist labeling NFTs an “ecological nightmare pyramid scheme.”[5]

Some contend that these ecological concerns are exaggerated and misleading, noting that NFTs themselves do not cause carbon emissions. As one platform wrote in a recent blog post, “Ethereum has a fixed energy consumption at a given point of time.”[6] The carbon footprint of the Ethereum blockchain would be the same if people minted more NFTs or stopped minting them altogether. But even the post acknowledges that “[i]t is true that Ethereum is energy intensive.”[7]

The crypto energy consumption issue relates to how blockchain technology currently operates. To validate a transaction—and engender trust in a system that is not backed by any central bank or other government authority—the blockchain network relies on a method called “Proof of Work.” The hashing function described above that allows the blocks to be chained together requires complex mathematical equations that only powerful computers can solve. “Miners” must solve these equations to add a new block to the chain. As incentive to solve the mathematical puzzles, the miner receives a reward of new tokens or transaction fees.

The energy costs to complete the hash functions under the Proof of Work model can be high, with miners using entire data centers to compete to solve the puzzles first and garner the reward. To mitigate any environmental effects, mining sites may increasingly rely on renewable energy and “stranded” energy, which is surplus energy created, for example, by excess power that some hyrdroelectric dams around the world generate during rainy seasons.

Another option, at least for the Ethereum blockchain, is moving to a “Proof of Stake” model. Rather than relying on miners using significant amounts of electricity in a race to solve an equation the fastest, the Proof of Stake model involves validators of transactions who are assigned randomly via an algorithm. These validators also have to commit some of their own cryptocurrency, giving them a “stake” in keeping the blockchain accurate.

Reports indicate that Ethereum may move to the Proof of Stake model as soon as this year.[8] Doing so would decrease energy consumption associated with NFTs, allow more transactions per second than in the Proof of Work model, and seemingly remove (or at least mitigate) an apparent drag on the willingness of some to embrace NFTs.

At the same time, one recent article noted what a crypto-mining finance company executive called the “‘inherent security issue of using the native tokens of a blockchain to decide the future of those tokens or the blockchain.’”[9] If the value of the tokens fall, the value of a validator’s stake falls along with it. The validator then has less to lose if they decide to propose an incorrect transaction or otherwise misbehave.

VI. Conclusion

NFTs present significant opportunities for content creators and owners, but they also present novel legal and policy issues across a wide range of areas as the technology continues to evolve. Beyond those listed here, areas of potential concern include Commodities/Derivatives, Tax, Data Privacy, and Cross-Border Transactions. Understanding the potential complications of moving into the NFT space is a necessity in anticipation of the regulatory scrutiny and litigation that often follow similar explosions of interest and investment.

_______________________

[1] https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos (Nov. 1, 2017).

[2] Id.

[3] https://cointelegraph.com/news/sec-s-crypto-mom-warns-selling-fractionalized-nfts-could-break-the-law (Mar. 26, 2021).

[4] https://www.bbc.com/news/technology-56012952 (Feb. 10, 2021).

[5] https://www.theverge.com/2021/3/15/22328203/nft-cryptoart-ethereum-blockchain-climate-change (Mar. 15, 2021).

[6] https://medium.com/superrare/no-cryptoartists-arent-harming-the-planet-43182f72fc61 (Mar. 2, 2021).

[7] Id.

[8] https://www.coindesk.com/ethereum-proof-of-stake-sooner-than-you-think (Mar. 17, 2021).

[9] https://cryptonews.com/exclusives/proof-of-disagreement-bitcoin-s-work-vs-ethereum-s-planned-s-9788.htm (Apr. 3, 2021).

 

The following Gibson Dunn lawyers assisted in the preparation of this client update: Michael Dore and Jeffrey Steiner.

Gibson Dunn 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, the authors, or the following leaders and members of the firm’s Media, Entertainment & Technology Practice Group:

Scott A. Edelman – Co-Chair, Media, Entertainment & Technology Practice, Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com)
Kevin Masuda – Co-Chair, Media, Entertainment & Technology Practice, Los Angeles (+1 213-229-7872, kmasuda@gibsondunn.com)
Orin Snyder – Co-Chair, Media, Entertainment & Technology Practice, New York (+1 212-351-2400, osnyder@gibsondunn.com)
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Nathaniel L. Bach – Los Angeles (+1 213-229-7241,nbach@gibsondunn.com)

Please also feel free to contact the following members of the firm’s Digital Currencies and Blockchain Technology team:

Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
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Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
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© 2021 Gibson, Dunn & Crutcher LLP

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

Los Angeles partner Christopher Dusseault is the author of “High court to consider when AGs can intervene,” [PDF] published by the Daily Journal on April 15, 2021.

On April 15, 2021, the United States announced a significant expansion of sanctions on Russia, including new restrictions on the ability of U.S. financial institutions to deal in Russian sovereign debt and the designation of more than 40 individuals and entities for supporting the Kremlin’s malign activities abroad.  As part of a sprawling package of measures, the Biden administration imposed sectoral sanctions on some of Russia’s most economically consequential institutions—including the country’s central bank, finance ministry, and sovereign wealth fund.  The administration also blacklisted an array of individuals and entities implicated in Russia’s annexation of Crimea, foreign election interference, and the SolarWinds cyberattack.  Most of the sanctions authorities included in newly issued Executive Order (“E.O.”) 14024 were already in force across a range of earlier Executive Orders and actions promulgated to respond to Russia’s initial incursion into Crimea in 2014, Moscow’s malicious cyber activities, election interference, chemical weapons attacks, and human rights abuses.  This new initiative, however, suggests that the Biden administration is prepared to move aggressively to deter Moscow from further engaging in destabilizing activities.  Moreover, we assess that this new initiative by the Biden administration is designed, at least in part, to elicit multilateral support, principally from the United Kingdom and the European Union.  Whether Washington’s transatlantic allies take up the call (London is apparently poised to follow soon) and whether these measures ultimately change Russia’s behavior remains to be seen.  In the meantime, the already frosty relationship between the West and Moscow appears likely to further deteriorate, which could have significant repercussions for multinational companies active in both jurisdictions.

Executive Order 14024

E.O. 14024 authorizes blocking sanctions against, among others, (1) persons determined to operate in certain sectors of the Russian economy; (2) those determined to be responsible for or complicit in certain activities on behalf of the Russian Government such as malicious cyber activities, foreign election interference, and transnational corruption; (3) Russian Government officials; and (4) Russian Government political subdivisions, agencies, and instrumentalities.  As noted above, many of these bases for designation already exist under earlier Executive Orders.  The duplication of these authorities suggests that the Biden administration may be looking both to put its own stamp on U.S. sanctions policy and to have a single, consolidated sanctions tool that it can use to target the full range of Russian malign behavior.  E.O. 14024 also expands upon some of those earlier authorities, for example, by authorizing the imposition of sanctions against the spouse and adult children of individuals sanctioned pursuant to the new E.O.  This is a somewhat uncommon provision apparently designed to prevent sanctions evasion by those who may seek to shift assets to close relatives—a strategy that the United States has seen in its implementation and enforcement of Russian sanctions, especially with respect to oligarchs.

Restrictions on Russian Sovereign Debt

While the 46 individual and entity designations (discussed more fully below) are potentially impactful on the specific parties targeted, the most systemically important component of E.O. 14024 comes in the form of a new Directive issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”).  Such directives have in the past only been issued in the context of sectoral sanctions imposed against Russia.  This latest Directive prohibits U.S. financial institutions, as of June 14, 2021, from either (1) participating in the primary market for “new” ruble and non-ruble denominated bonds issued by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation (Russia’s principal sovereign wealth fund), or the Ministry of Finance of the Russian Federation, or (2) lending ruble or non-ruble denominated funds to those three entities.  Modeled on earlier sectoral sanctions targeting major actors in Russia’s financial services, energy, defense, and oil sectors, the new Directive prohibits U.S. financial institutions from engaging only in certain narrow categories of transactions involving the targeted entities.  Absent some other prohibition, U.S. banks may continue engaging in all other lawful dealings with the named entities.  This reflects the delicate balance that President Biden and earlier administrations have attempted to strike by imposing meaningful consequences on large, globally significant actors without at the same time roiling global markets or imposing unpalatable collateral consequences on U.S. allies.  Notably, the Biden administration stopped far short of more draconian measures such as blacklisting Russia’s sovereign wealth fund, or the Russian Government itself (as the Trump administration did in Venezuela).

The sectoral sanctions on Russia’s central bank, sovereign wealth fund, and finance ministry are further circumscribed in several key respects.  First, they do not become effective until 60 days after the issuance of the Directive.  Second, they are one of the rare instances in which OFAC’s Fifty Percent Rule does not apply, meaning that the Directive’s restrictions extend only to bonds issued by, and loans made to, the three named Russian Government entities and not to any other entities in which they may own a direct or indirect majority interest.  Third, the Directive also does not prohibit U.S. financial institutions from participating in the secondary market for Russian sovereign bonds—a potentially wide loophole under which U.S. banks may continue to purchase such debt, just not directly from the three targeted entities.  This is a loophole that could be significantly closed if the United Kingdom and European Union adopted similar measures—further supporting our assessment that the administration designed these restrictions in part to be imposed alongside similar restrictions promulgated by London and Brussels.

Particularly in light of existing restrictions on U.S. banks’ ability to participate in the primary market for non-ruble denominated Russian sovereign bonds, and from lending non-ruble denominated funds to the Russian sovereign, the Directive’s main significance is that it will make it more difficult for the Russian Government, starting on June 14, 2021, to borrow new funds in local currency.  From a policy perspective, the Directive therefore appears calculated to further restrict potential sources of financing for the Russian state—in effect, penalizing the Kremlin by driving up its borrowing costs.  Such a seemingly narrow expansion of restricted activities also leaves room to further strengthen measures if the Kremlin’s malign activities continue.

Sanctions Targeting Russia’s Other Troubling Activities

In addition to imposing restrictions on Russian sovereign debt, the Biden administration also designated dozens of individuals and entities to OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List for their involvement in Russia’s destabilizing operations abroad.  As a result of these designations, U.S. persons are generally prohibited from engaging in transactions involving the targeted individuals and entities and any property and interests in property of the targeted persons that come within U.S. jurisdiction are frozen.  Underscoring the scope of the Biden administration’s concerns, these sanctions designations target an accumulation of Russian activities during the preceding months, including efforts to cement Russian control of the Crimea region of Ukraine, foreign election interference, and the SolarWinds cyberattack.

Among those targeted were eight individuals and entities involved in Russia’s annexation of Crimea.  In particular, OFAC designated various persons involved in constructing the Kerch Strait Bridge, which connects the Crimean peninsula by rail to the Russian mainland.  These designations also targeted Russian and local government officials for attempting to exercise control over Crimea, as well as a detention facility in the Crimean city of Simferopol that has been implicated in human rights abuses.  Through these actions—which come amid reports of Russian troops massing on the eastern Ukrainian border—the United States appears to be signaling its continuing commitment to the territorial integrity of Ukraine.

In a second batch of designations, OFAC added a further 32 individuals and entities to the SDN List for attempting to influence democratic elections in the United States and Africa at the behest of the Russian state.  Notably, these designations include a network of Russian intelligence-linked websites that allegedly engaged in a campaign of disinformation and election interference.  OFAC also targeted associates and enablers of Yevgeniy Prigozhin, the principal financial backer of the Russia-based Internet Research Agency, as well as the Russian political consultant Konstantin Kilimnik.  This set of sanctions targets not only Russian actors engaged in disinformation on behalf of the Russian government, but also those that facilitate this harmful behavior—adding a new layer of accountability to the extensive disinformation-related sanctions put in place over the last five years.

Finally, the Biden administration announced a long-awaited group of designations targeting six companies in the Russian technology sector in response to last year’s high-profile SolarWinds cyberattack on government and private networks—which the United States for the first time definitively attributed to Russia’s intelligence services.  These technology companies, which were the first to be designated pursuant to E.O. 14024, were targeted because they are funded and operated by the Russian Ministry of Defense and allegedly helped research and develop malicious cyber operations for Russia’s three main intelligence agencies.

Taken together, these actions targeting a broad spectrum of disruptive activities beyond Russia’s borders mark a significant escalation of U.S. pressure on Moscow.  U.S. Secretary of the Treasury Janet Yellen in a statement described the measures as “the start of a new U.S. campaign against Russian malign behavior,” implying that additional designations may be on the horizon.  For example, a fresh round of sanctions could soon be announced if further harm were to come to the jailed Russian dissident Alexey Navalny.

Next Steps Between Washington and Moscow

This week’s wide-ranging sanctions on Moscow suggest that President Biden is likely to continue using sanctions and other instruments of economic coercion to deter and impose costs on the Kremlin.  As for what this latest development means for foreign investors and multinational companies, the answer depends in part on how Russia ultimately responds.  By reportedly holding out the possibility of a U.S.-Russia summit in a recent call with Russia’s President Vladimir Putin, as well as refraining from imposing more biting sanctions, President Biden appears to have left open the possibility of limited retaliation by Russia and an eventual de-escalation of tensions between Washington and Moscow.  The Kremlin’s public response so far has been muted, including the expulsion of a handful of U.S. diplomats and the imposition of sanctions against eight senior U.S. officials.  However, if Russia were to respond more forcefully—such as by launching an incursion further into Ukraine or through renewed cyberattacks against the United States and allied nations—the imposition of more severe sanctions barring U.S. persons from participating in the secondary market for Russian bonds or the designation of a major enterprise in the country’s energy sector could occur.  At a minimum, the sanctions announced this past week are likely to further increase the risks, and the yield, associated with new issuance of Russian sovereign debt—marking the beginning of a new chapter in U.S. Government efforts to change the Russian Government’s behavior, or at least impose significant costs if the Kremlin refuses to alter course.


The following Gibson Dunn lawyers assisted in preparing this client update: Scott Toussaint, Judith Alison Lee, Adam Smith, Stephanie Connor, Christopher Timura and Laura Cole.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
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Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com)
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© 2021 Gibson, Dunn & Crutcher LLP

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

New York partner Matthew Biben is the author of “The New Anti-Money Laundering Act: Issues for Financial Institutions,” [PDF] published by the New York Law Journal on April 16, 2021. New York associates Lee Crain and Lavi Ben Dor contributed to the article.

SEC Division of Examinations Risk Alert Provides a Useful Roadmap on Compliance Issues for Fund Managers

On Friday, April 9, 2021, the Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”), issued a Risk Alert detailing its observations of deficiencies and internal control weaknesses from examinations of investment advisers and funds regarding investing that incorporates environmental, social, and governance factors (“ESG investing”).[1]  This alert follows another recent announcement of the creation of a Climate and ESG Task Force within the Division of Enforcement to focus on ESG-related disclosures by public companies and ESG investment practices by investment funds.[2]

Key Takeaways

The Risk Alert provides useful guidance regarding the types of compliance issues the Staff is reviewing in its examinations of investment advisers, examples of deficiencies the Staff is finding, as well as instances in which the Staff has observed effective compliance practices.  Accordingly, the Risk Alert provides a useful roadmap to assist investment advisers in developing, testing and enhancing their compliance policies, procedures and practices.

On the heels of the Risk Alert, Commissioner Peirce issued a cautionary statement to express her view that the alert, “should not be interpreted as a sign that ESG investment strategies are unique in the eyes of examiners,” but simply that, as with any other investment strategy, “[f]irms claiming to be conducting ESG investing need to explain to investors what they mean by ESG and they need to do what they say they are doing.”[3]

In sum, the SEC’s focus on ESG investment strategies heightens the need for investment advisers to make sure their disclosures align with investment practices and that there is sufficient and knowledgeable oversight and review by compliance personnel to avoid a divergence between the two over time.

Concerns Identified by the Division

In the Division’s examination of investment advisers, registered investment companies, and private funds engaged in ESG investing, the Staff observed the following weaknesses:

  • Lack of adherence to global ESG frameworks where firms claimed such adherence.
  • Weakness in policies and procedures governing implementation and monitoring of ESG-related directives. For example, the Staff observed that advisers did not have adequate controls around implementation and monitoring of clients’ negative screens.
  • Inconsistency between public ESG-related proxy voting claims and internal voting policies and practices, including the dissemination of public statements that ESG-related proxy proposals would be independently evaluated on a case-by-case basis, while internal deadlines generally did not provide such case-by-case analysis.
  • Unsubstantiated or otherwise potentially misleading claims regarding ESG investing in marketing materials that touted favorable risk, return, and correlation metrics related to ESG investing, without disclosing material facts regarding the significant expense reimbursement received from the fund-sponsor, which inflated returns for those ESG-oriented funds.
  • Inadequate controls to ensure that ESG-related disclosures and marketing are consistent with the firm’s practices, including lack of documentation of ESG investing decisions and issuer engagement efforts, as well as a failure to update marketing materials timely.
  • Limited knowledge by compliance personnel of relevant ESG-investment analyses or oversight over ESG-related disclosures and marketing decisions.

Guidance for ESG Investing Disclosures and Procedures

The Staff also observed policies, procedures, and practices which were reasonably designed to convey approaches to ESG investing.  The Division noted that the following practices may be helpful to address the compliance issues identified above:

  • Simple and clear disclosures regarding the firm’s approach to ESG investments in client-facing materials.
  • Explanations regarding how ESG investments are evaluated using goals established under global ESG frameworks on the firm’s website, client presentations, and annual reports.
  • Detailed, comprehensive investment policies and procedures regarding ESG investments and factors considered in specific investment decisions; when multiple ESG investing approaches are considered, specific written procedures, due diligence documentation, and separate specialized personnel who provide additional rigor to the portfolio management process.
  • Compliance personnel who are knowledgeable about the firm’s ESG approaches and practices. Firms with dedicated ESG compliance personnel were more likely to avoid materially misleading claims in their ESG-related marketing materials and other client/investor-facing documents.

Conclusion

In conclusion, the SEC’s Risk Alert reaffirms the need for firms involved in ESG investing to ensure that their disclosures accurately describe their ESG-related investment practices.  Periodic reviews of marketing materials and other investor disclosures against current investment strategy and adherence to stated ESG metrics will avoid the types of deficiencies the Staff has observed in recent inspections, and, in the worst cases, avoid even greater scrutiny from the Division of Enforcement.

_____________________

   [1]   Division of Examinations, Risk Alert, Securities and Exchange Commission (Apr. 9, 2021), https://www.sec.gov/files/esg-risk-alert.pdf.

   [2]   Press Release, U.S. Securities and Exchange Commission, SEC Announces Enforcement Task Force Focused on Climate and ESG Issues (Mar. 4, 2021), https://www.sec.gov/news/press-release/2021-42?_sm_au_=iHVN4cW7DnktSD5NFcVTvKQkcK8MG.

   [3]   Public Statement, Statement on the Staff ESG Risk Alert (Apr. 12, 2021), https://www.sec.gov/news/public-statement/peirce-statement-staff-esg-risk-alert.


Gibson, Dunn and Crutcher’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 Securities Enforcement practice group, or the following authors:

Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com)
Tina Samanta – New York (+1 212-351-2469, tsamanta@gibsondunn.com)
Lauren Myers – New York (+1 212-351-3946, lmyers@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

The New York State Legislature, as part of its annual revenue bill, has authorized mobile sports wagering in New York, and the Governor is expected to sign that bill momentarily.  Through this landmark legislation, New Yorkers will soon be able to wager on sporting events online, just like millions of Americans who live in other states.

Although New York has long delayed legalizing various forms of sports wagering due to provisions of its State Constitution, the new mobile sports wagering law should pass constitutional muster.  As Gibson Dunn attorneys argued in a New York Law Journal article last year,[1] the Legislature has the authority to authorize mobile sports betting, consistent with the State Constitution, so long as the servers that effectively place the bets are physically housed “at” the casinos duly authorized under the State Constitution.  Through the new sports wagering law, the Legislature adopted Gibson Dunn’s constitutional interpretation:  The new law “deem[s]” “[a]ll mobile sports wagering initiated in this state” as “tak[ing] place at the licensed gaming facility where the server . . . is located.”[2]

I.  New York’s Online Sports Wagering Law Adopts Gibson Dunn’s Constitutional Interpretations and Will Likely Survive Constitutional Challenge

In 2013, New York State voters approved a constitutional amendment to allow the Legislature to authorize “casino gambling” “at” up to seven casinos in the State.[3]  Prior to this constitutional amendment, legal gambling in New York was limited to state-run lotteries and betting on horse races, as well as gambling allowed on Native American tribal lands under federal law.  The same constitutional amendment also conferred on the Legislature broad authority to regulate wagering in the State.

Pursuant to this constitutional authority, in 2019, the Legislature legalized “sports wagering” in New York State.[4]  The law then enacted provided that sports wagers may only be accepted “from persons physically present” “in a sports wagering lounge located at a casino.”[5]  In effect, the law prohibited online sports betting, since sports betters would only be permitted to make bets in person at an authorized casino.

But as Gibson Dunn attorneys argued in a 2020 New York Law Journal op-ed,[6] the Legislature had the authority to go further under the 2013 constitutional amendment.  As our attorneys explained, the Legislature could enact legislation legalizing online sports wagering for two reasons.  First, sports betting fits within the Constitution’s language empowering the legislature to legalize “casino gambling.”  Specifically, when the constitutional amendment was passed and adopted, “casino gambling” would have been understood to include sports betting.  Second, online sports wagering can be conducted “at” an authorized casino.  As our attorneys explained, a wager is nothing more than a contract, and under well-established New York law, a contract is made where the contractual offer is accepted.  When a mobile sports bettor in Manhattan, for instance, asks to place a wager by entering her bet into an app or website, that request constitutes a contractual offer.  So long as the acceptance of the Manhattanite’s bet and ultimate placement of the wager occurs at a server located at a duly authorized casino, online sports betting can be deemed to have occurred “at” a casino.

New York’s new online sports wagering law adopts Gibson Dunn’s constitutional reasoning.  The Legislature amended the 2019 law to state that “all sports wagers through electronic communication . . . are considered placed or otherwise made when and where received by the mobile sports wagering licensee on such mobile sports wagering licensee’s server . . . at a licensed gaming facility, regardless of the authorized sports bettor’s physical location within the state at the time the sports wager is placed.”[7]  The hypothetical sports bet requested by an app user in Manhattan, for example, therefore is deemed to occur “at” the casino that ultimately accepts and places the bet.  Additionally, the new law is based on a legislative declaration that “a sports wager that is made through virtual or electronic means from a location within New York state and is transmitted to and accepted by electronic equipment located at a licensed gaming facility . . . is a sports wager made at such licensed gaming facility.”[8]  Under well-established New York law, this legislative finding of fact will be considered presumptively valid, making it more likely that the law will survive a constitutional challenge.[9]

With our attorneys’ reasoning codified into law, New Yorkers across the State will be able to access online sports wagering websites and apps, and the State will begin to reap the economic benefits (including tax revenue) of these lucrative transactions.

II.  New York’s Detailed Regulatory Scheme for Mobile Sports Wagering

The new law includes a number of provisions regulating mobile sports wagering.  It clarifies that online sports betting is legal as long as the bettor is “physically present” in New York at the time of the transaction.[10]  By requiring the casino, bettor, and servers all to be located in New York, the law limits mobile sports wagering to intrastate transactions.  This allows the mobile sports betting industry to avoid problems that may arise from conducting interstate transactions, which are subject to federal regulations, including the federal Wire Act’s prohibition on using wires to transmit “bets or wagers on any sporting event or contest” if the state where the bet initiates has banned sports betting.[11]

The law‘s regulatory framework centers on the “platform providers” that will offer online sports betting services.  The law authorizes the State Gaming Commission to select two platform providers to become mobile sports wagering operators based on a competitive bidding process.[12]  The Commission may permit more than two mobile sports wagering operators if the Commission determines that doing so is “in the best interests of the state” and if the additional operators pay the same tax rate as the initial two licensees.[13]  Applicants must provide a range of information about their operations and predicted earnings.[14]  Additionally, all licensees must pay a one-time $25 million fee to the State, and the operator’s license will need to be renewed after ten years.[15]

One primary factor in assessing licensing applications will likely be the amount of tax on revenues that mobile sports wagering operators are willing to pay.  The law sets the minimum revenue tax on mobile sports wagering operators at 12%—with casinos to pay a 10% revenue tax only on in-person sports wagering.[16]  But the bidding process appears designed to reach a higher rate of taxation, explicitly stating that the ultimate tax percentage platform providers will pay “shall be determined pursuant to a competitive bidding process.”[17]  This revenue tax will be paid at least “monthly.”[18]

The new law requires any casino that offers mobile sports wagering, and each mobile sports wagering platform provider, to submit a detailed annual report to the Commission.  The report must include, among other information, the total amount of wagers placed and prizes awarded and the number of accounts established by sports bettors.[19]  New York law will also now empower the Commission to conduct financial audits of casinos and mobile sports wagering licensees and mandate that the Commission publish an annual report sharing the aggregate information that the Commission receives across all sports betting entities.[20]

Mobile sports wagering operators must satisfy a number of compliance requirements as “condition[s] of licensure.”[21]  For instance, they must limit sports bettors to a single account, take steps to ensure “to a reasonable degree of certainty” that individuals are only placing bets from within New York State, prevent minors from participating in any sports wagering, and avoid running advertisements that mislead players about the odds of winning on a bet.[22]

Conclusion

New York’s mobile sports wagering law stands on solid constitutional ground.  By deeming online bets to take place at the location of the servers housed on casinos’ premises, the new law follows the proposal made by Gibson Dunn attorneys last year and is consistent with the New York State Constitution.

___________________

   [1]   Mylan Denerstein, Akiva Shapiro & Lee R. Crain, The Constitutionality of Mobile Sports Betting in New York State, N.Y. L.J. (Jan. 31, 2020), https://www.law.com/newyorklawjournal/2020/01/31/
the-constitutionality-of-mobile-sports-wagering-in-new-york-state/.

   [2]   N.Y. Rac. Pari-Mut. Wag. & Breed. Law (PML) § 1367–a(4)(i) (post-2021 amend.).

   [3]   N.Y. Const. art. I, § 9.  These casinos authorized by the State Constitution do not include those that Native American tribes may operate pursuant to the Indian Gaming Regulatory Act, 18 U.S.C. §§ 1166–1168 and 25 U.S.C. §§ 2701 et seq.

   [4]   See PML § 1367 (pre-2021 amend.).

   [5]   Id. § 1367(3)(b), (d).

   [6]   Denerstein, Shapiro & Crain, supra note 1.

   [7]   PML § 1367–a(2)(d) (post-2021 amend.) (emphasis added).

   [8]   S.B. S2509, 2021 Leg., 2021–2022 Sess., Part Y, § 2 (N.Y. 2021) (emphasis added).

   [9]   See, e.g., All Am. Crane Serv. Inc. v. Omran, 58 A.D.3d 467, 467 (1st Dep’t 2009) (noting that laws are “presumed to be supported by facts known to the legislative body”).

  [10]   PML § 1367(1)(b) (post-2021 amend.).

  [11]   18 U.S.C. § 1084(a)–(b); cf. Murphy v. Nat’l Collegiate Athletic Ass’n, 138 S. Ct. 1461, 1483 (2018) (emphasizing that “federal policy” is to “respect the policy choices of the people of each State on the controversial issue of gambling”).

  [12]   PML § 1367–a(7) (post-2021 amend.).

  [13]   Id. § 1367–a(7)(d).

  [14]   Id. § 1367–a(7)(b).

  [15]   PML § 1367–a(2)(b), (3).

  [16]   Id. § 1367(7).

  [17]   Id.

  [18]   Id. § 1367(7)–(8).

  [19]   Id. § 1367(6).

  [20]   Id. § 1367(6), (9).

  [21]   Id. § 1367–a(4).

  [22]   Id.


The following Gibson Dunn lawyers prepared this client alert: Mylan Denerstein, Akiva Shapiro, Lee Crain, Michael Klurfeld, Grace Assaye* and Lavi Ben Dor*.

Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the following authors in New York:

Mylan L. Denerstein – Co-Chair, Public Policy Practice (+1 212-351-3850, mdenerstein@gibsondunn.com)
Akiva Shapiro (+1 212-351-3830, ashapiro@gibsondunn.com)
Lee R. Crain (+1 212-351-2454, lcrain@gibsondunn.com)
Michael Klurfeld (+1 212-351-6370, mklurfeld@gibsondunn.com)

*Ms. Assaye and Mr. Ben Dor are not yet admitted to practice law in New York and currently are practicing under the supervision of members of the New York Bar.

© 2021 Gibson, Dunn & Crutcher LLP

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

New York associate Alex Marcellesi is the author of “Evaluating Creditor Continuity of Interest: A 10-Step Process,” [PDF] published by Tax Notes Federal on March 15, 2021.

On April 6, 2021, New York Governor Andrew Cuomo signed into law Senate Bill 297B/Assembly Bill 164B (the “New York LIBOR Legislation”), the long anticipated New York State legislation addressing the cessation of U.S. Dollar (“USD”) LIBOR.[1]  The New York LIBOR Legislation generally tracks the legislation proposed by the Alternative Reference Rates Committee (“ARRC”).[2] It provides a statutory remedy for so-called “tough legacy contracts,” i.e., contracts that reference USD LIBOR as a benchmark interest rate but do not include effective fallback provisions in the event USD LIBOR is no longer published or is no longer representative, and that will remain in existence beyond June 30, 2023 in the case of the overnight, 1 month, 3 month, 6 month and 12 month tenors, or beyond December 31, 2021 in the case of the 1 week and 2 month tenors.[3]

Under the new law, if a contract governed by New York law (1) references USD LIBOR as a benchmark interest rate and (2) does not contain benchmark fallback provisions, or contains benchmark fallback provisions that would cause the benchmark rate to fall back to a rate that would continue to be based on USD LIBOR, then on the date USD LIBOR permanently ceases to be published, or is announced to no longer be representative, USD LIBOR will be deemed by operation of law to be replaced by the “recommended benchmark replacement.” The New York LIBOR Legislation provides that the “recommended benchmark replacement” shall be based on the Secured Overnight Financing Rate (“SOFR”) and shall have been selected or recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC for the applicable type of contract, security or instrument. The recommended benchmark replacement will include any applicable spread adjustment[4] and any conforming changes selected or recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC.

The New York LIBOR Legislation also establishes a safe harbor from liability for the selection and use of a recommended benchmark replacement and further provides that a party to a contract shall be prohibited from declaring a breach or refusing to perform as a result of another party’s selection or use of a recommended benchmark replacement.

It should be noted that the New York LIBOR Legislation does not affect contracts governed by jurisdictions other than New York, and that the parties to a contract governed by New York law remain free to agree to a fallback rate that is not based on USD LIBOR or SOFR; the new law does not override a fallback to a non-USD LIBOR based rate (e.g., the Prime rate) agreed to by the parties to a contract. Although this legislation provides crucial safeguards, it should not be viewed as a substitute for amending legacy USD LIBOR contracts where possible. Rather, it should be viewed as a backstop in the event that counterparties are unwilling or unable to agree to adequate fallback language prior to the cessation date or date of non-representativeness.

The ARRC, the Federal Reserve Board and several industry associations and groups have expressed their strong support for the new law.[5]

__________________

   [1]   See https://www.nysenate.gov/legislation/bills/2021/S297.

   [2]   See https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/libor-legislation-with-technical-amendments.

   [3]   We note that certain contracts, such as derivatives entered into under International Swaps and Derivatives Association (ISDA) standard documentation, provide for linear interpolation of the 1 week and 2 month USD LIBOR tenors until USD LIBOR ceases to exist for all tenors on June 30, 2023. The New York LIBOR Legislation provides that if the first fallback in a contract is linear interpolation, then, for the 1 week or 2 month tenor USD LIBOR contracts, the parties to the contract would continue to use linear interpolation for the period between December 31, 2021 and June 30, 2023. See the definition of “LIBOR Discontinuance Event” and “LIBOR Replacement Date” in the New York LIBOR Legislation.

   [4]   Note that the ICE Benchmark Administration Limited and the UK Financial Conduct Authority formally announced LIBOR cessation and non-representative dates for USD LIBOR on March 5, 2021. These announcements fixed the spread adjustment contemplated under certain industry-standard documents. See Gibson Dunn’s Client Alert: The End Is Near: LIBOR Cessation Dates Formally Announced, available at https://www.gibsondunn.com/the-end-is-near-libor-cessation-dates-formally-announced/.

   [5]   See “ARRC Welcomes Passage of LIBOR Legislation by the New York State Legislature,” ARRC (March 24, 2021, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210324-arrc-press-release-passage-of-libor-legislation; see also, Randall Quarles, Keynote Address at the “The SOFR Symposium: The Final Year,” an event hosted by the Alternative Reference Rates Committee, New York, New York (March 22, 2021), available at https://www.federalreserve.gov/newsevents/speech/quarles20210322a.htm.


Gibson Dunn’s lawyers are available to answer questions about the LIBOR transition in general and these developments in particular. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets, Derivatives, Financial Institutions, Global Finance or Tax practice groups, or the following authors of this client alert:

Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
John J. McDonnell – New York (+1 212-351-4004, jmcdonnell@gibsondunn.com)

Please also feel free to contact the following practice leaders and members:

Capital Markets Group:
Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com)
Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com)
Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com)
Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)

Derivatives Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
Darius Mehraban – New York (+1 212-351-2428, dmehraban@gibsondunn.com)
Erica N. Cushing – Denver (+1 303-298-5711, ecushing@gibsondunn.com)

Financial Institutions Group:
Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)

Global Finance Group:
Aaron F. Adams – New York (+1 212 351 2494, afadams@gibsondunn.com)
Linda L. Curtis – Los Angeles (+1 213 229 7582, lcurtis@gibsondunn.com)
Ben Myers – London (+44 (0) 20 7071 4277, bmyers@gibsondunn.com)
Michael Nicklin – Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com)
Jamie Thomas – Singapore (+65 6507 3609, jthomas@gibsondunn.com)

Tax Group:
Sandy Bhogal – London (+44 (0) 20 7071 4266, sbhogal@gibsondunn.com)
Benjamin Fryer – London (+44 (0) 20 7071 4232, bfryer@gibsondunn.com)
Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224/+1 212-351-2344), jtrinklein@gibsondunn.com)
Bridget English – London (+44 (0) 20 7071 4228, benglish@gibsondunn.com)
Alex Marcellesi – New York (+1 212-351-6222, amarcellesi@gibsondunn.com)

© 2021 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 31st, 2021, New York became the 16th state to legalize marijuana for recreational use with the enactment of Senate Bill S854A. Under the new law, it is legal for individuals 21 and older to possess and purchase up to three ounces of marijuana.  At their place of residence, individuals are also permitted to possess up to five pounds of the drug.  While the law takes effect immediately, it is expected to take the state as long as two years to fully implement it, including setting up a system to license marijuana retailers.  The law also modifies the state’s existing medical marijuana program, in place since 2014, by expanding the types of medical conditions for which marijuana can be prescribed.

Restrictions on Employers’ Hiring and Disciplinary Policies

Of particular importance to employers, the law creates new restrictions on an employer’s ability to discipline or terminate employees for using marijuana, as well as limits on employers’ ability to refuse to hire a prospective employee for consuming the drug.  Specifically, it is now unlawful for employers to refuse to hire, employ or license, or to discharge from employment or otherwise discriminate against an individual in compensation, promotion, or terms, conditions or privileges of employment because that individual uses cannabis as permitted under state law.  N.Y. Lab. Law § 201-d(2).  However, the law allows employers to take action based on an employee’s or a prospective employee’s use of marijuana where required by federal or state law, or when an employee is impaired while on the job.  N.Y. Lab. Law § 201-d(4-a).

These restrictions build on existing provisions of New York’s medical marijuana law, which treats a person’s status as a certified user of medical marijuana as a disability that employers must accommodate where reasonably possible.  See N.Y. Pub. Health Law § 3369.  They also come on the heels of a law that took effect in New York City in May 2020, prohibiting employers from testing job applicants for marijuana usage.  See N.Y.C. Admin. Code § 8-107(31)(a).  New York City’s law exempts employers in certain cases, such as where the applicant is being considered for a safety-sensitive position.  N.Y.C. Admin. Code § 8-107(31)(b).

Trend in State and Local Laws

With the enactment of S854A, New York becomes the third state in 2021 to liberalize its laws governing marijuana use.  In February 2021, New Jersey also legalized recreational marijuana, and starting in July 2021 residents of South Dakota will be permitted to use marijuana for certain medical reasons.  Both New Jersey’s and South Dakota’s laws also place restrictions on when employers can take action based on an employee’s or job applicant’s marijuana use.  See N.J. Stat. § 24:6I-52(a); S.D. Codified Laws § 34-20G-22.

In total, 19 states and the District of Columbia now have laws restricting employers’ ability to take marijuana usage into account when making employment decisions.  These laws vary widely both in how extensively they limit employers’ actions, as well as in the number and types of exceptions they allow, creating a patchwork of different legal obligations across the country that employers must navigate.  New York’s new restrictions are among the most extensive in the nation, and will require many employers to make significant changes to longstanding drug testing and employment policies.

Takeaways for Employers

  • Employers in New York State should review their policies governing drug use among employees and job applicants to ensure they are in compliance with the new restrictions on basing employment decisions on a person’s consumption of marijuana.
  • Employers with operations in multiple states should closely examine applicable state and local laws to ensure they are in compliance with the unique limitations on how marijuana use is treated in the workplace in different jurisdictions. A uniform, one-size-fits-all policy on drug use is, in many cases, no longer feasible for employers with nationwide operations.
  • Employers should closely monitor developments in this area as states and cities adopt new laws. The rules governing how marijuana use is treated when making employment decisions are changing rapidly across the country, and employers may find that longstanding employment practices need to be adjusted as this trend continues.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Labor and Employment practice group, or the following:

Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com)
Blake Lanning* – Washington, D.C. (+1 202-887-3794, blanning@gibsondunn.com)

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

Labor and Employment Group:
Catherine A. Conway – Los Angeles (+1 213-229-7822, cconway@gibsondunn.com)
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)

*Mr. Lanning is admitted only in Indiana, and is currently practicing under the supervision of members of the District of Columbia Bar.

© 2021 Gibson, Dunn & Crutcher LLP

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

Los Angeles partners James Zelenay Jr. and Nick Hanna and associate Sean Twomey are the authors of “COVID relief will spur False Claims Act enforcement,” [PDF] published by the Daily Journal on March 31, 2021.

There were more initial public offerings (“IPOs”) of special purpose acquisition companies (“SPACs”) in 2020 alone than in the entire period from 2009 until 2019 combined, and in the first three months of 2021, there have been more SPAC IPOs than there were in all of 2020. All of these newly public SPACs are looking for business combinations and many private companies are or will be considering a combination with a SPAC as a way to go public.

After an IPO, a SPAC has a limited amount of time to acquire a target company. Many of these business combinations move quickly and a private company becomes a public reporting company in a relatively short period of time. It is important for sponsors, target companies and investors to be aware of some of the special attributes of SPACs and the post-business combination public company.

On March 31, 2021, the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “SEC”) issued a statement addressing certain accounting, financial reporting and governance issues related to SPACs and the combined company following a SPAC business combination.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Peter Wardle, Gerald Spedale and Rodrigo Surcan.

This edition of Gibson Dunn’s Federal Circuit Update summarizes key petitions for certiorari in cases originating in the Federal Circuit, addresses the Federal Circuit’s announcement that Judge Wallach will be taking senior status and the court’s updated Rules of Practice, and discusses recent Federal Circuit decisions concerning issue preclusion, Section 101, appellate procedure for PTAB appeals, and the latest mandamus petitions on motions to transfer from the Western District of Texas.

Federal Circuit News

Supreme Court:

Today, the Court decided Google LLC v. Oracle America, Inc. (U.S. No. 18-956).  In a 6-2 decision, the Court held that because Google “reimplemented” a user interface, “taking only what was needed to allow users to put their accrued talents to work in a new and transformative program,” Google’s copying of the Java API was a fair use of that material as a matter of law.  The Court did not decide the question whether the Copyright Act protects software interfaces.  “Given the rapidly changing technological, economic, and business-related circumstances,” the Court explained, “[the Court] should not answer more than is necessary to resolve the parties’ dispute.”  The Court therefore assumed, “purely for argument’s sake,” that the Java interface is protected by copyright.

This month, the Supreme Court did not add any new cases originating at the Federal Circuit.  As we summarized in our January and February updates, the Court has two such cases pending: United States v. Arthrex, Inc. (U.S. Nos. 19-1434, 19-1452, 19-1458); and Minerva Surgical Inc. v. Hologic Inc. (U.S. No. 20-440).

The Court will hear argument on the doctrine of assignor estoppel on Wednesday, April 21, 2021, in Minerva v. Hologic.

Noteworthy Petitions for a Writ of Certiorari:

There are three new potentially impactful certiorari petitions that are currently before the Supreme Court:

Ono Pharmaceutical v. Dana-Farber Cancer Institute (U.S. No. 20-1258):  “Whether the Federal Circuit erred in adopting a bright-line rule that the novelty and non-obviousness of an invention over alleged contributions that were already in the prior art are ‘not probative’ of whether those alleged contributions were significant to conception.”

Warsaw Orthopedic v. Sasso (U.S. No. 20-1284):  “Whether a federal court with exclusive jurisdiction over a claim may abstain in favor of a state court with no jurisdiction over that claim.”

Sandoz v. Immunex (U.S. No. 20-1110):  “May the patent owner avoid the rule against double patenting by buying all of the substantial rights to a second, later-expiring patent for essentially the same invention, so long as the seller retains nominal ownership and a theoretical secondary right to sue for infringement?”

The petitions in American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20-891) and Ariosa Diagnostics, Inc. v. Illumina, Inc. (U.S. No. 20-892) are still pending.

After requesting a response, the Court denied Argentum’s petition in Argentum Pharmaceuticals LLC v. Novartis Pharmaceuticals Corporation (U.S. No. 20-779).  Gibson Dunn partners Mark Perry and Jane Love were counsel for Novartis.

Other Federal Circuit News:

Judge Wallach to Retire.  On March 16, 2021, the Federal Circuit announced that Judge Evan J. Wallach will retire from active service and assume senior status, effective May 31, 2021.  Judge Wallach served on the Federal Circuit for nearly 10 years and, prior to that, served on the U.S. Court of International Trade for 16 years.  Judge Wallach’s full biography is available on the court’s website.  On March 30, President Biden announced his intent to nominate Tiffany Cunningham for the empty seat.  Ms. Cunningham has been a partner in the Patent Litigation practice of Perkins Coie LLP since 2014, and serves on the 17-member Executive Committee of the firm.  She began her legal career as a law clerk to Judge Dyk.

Federal Circuit Practice Update

Updated Federal Circuit Rules.  Pursuant to the court’s December 9, 2020 public notice, the court has published an updated edition of the Federal Circuit Rules.  This edition incorporates the emergency amendment to Federal Circuit Rule 15(f) brought about by the court’s en banc decision in NOVA v. Secretary of Veterans Affairs (Fed. Cir. No. 20‑1321).

Upcoming Oral Argument Calendar

The list of upcoming arguments at the Federal Circuit are available on the court’s website.

Live streaming audio is available on the Federal Circuit’s new YouTube channel.  Connection information is posted on the court’s website.

Case of Interest:

New Vision Gaming & Development, Inc. v. SG Gaming, Inc. (Fed. Cir. No. 20‑1399):  This case concerns “[w]hether the unusual structure for instituting and funding AIA post-grant reviews violates the Due Process Clause in view of Tumey v. Ohio, 273 U.S. 510 (1927), and its progeny, which establish ‘structural bias’ as a violation of due process.”  It attracted an amicus brief from US Inventor in support of appellant, which argues that the administrative patent judges’ compensation and performance rating system affects their decision making.  Panel M will hear argument in New Vision Gaming on April 9, 2021, at 10:00 AM Eastern.

Key Case Summaries (March 2021)

SynQor, Inc. v. Vicor Corp. (Fed. Cir. No. 19-1704):  In an inter partes reexamination (“IPR”), the Patent Trial and Appeal Board (“PTAB”) found several claims of SynQor’s patent unpatentable over the prior art.  SynQor appealed, arguing that common law preclusion arising from a prior reexamination involving two related patents collaterally estopped the Board from finding a motivation to combine.

The Federal Circuit panel majority (Hughes, J., joined by Clevenger, J.) vacated and remanded, holding that common law issue preclusion can apply to IPRs.  Analyzing the statutory scheme, the majority determined that Congress did not intend to prevent application of common law estoppel.  Instead, the estoppel provisions of 35 U.S.C. §§ 315(c), 317(b) were more robust than common law collateral estoppel and fully consistent with allowing common law estoppel.  The majority also determined that IPRs satisfied the traditional elements of issue preclusion.  The majority explained that unlike an ex parte reexamination, Congress provided the third-party reexamination requestor the opportunity to fully participate in inter partes proceedings.  The majority also determined that inter partes reexaminations contained sufficient procedural elements necessary to invoke issue preclusion.  In an IPR, a party has the opportunity to respond to the other party’s evidence, challenge an expert’s credibility and submit its own expert opinions.  Thus, the majority found that the lack of cross-examination did not prevent common law issue preclusion from applying to IPRs.

Judge Dyk dissented, arguing that common law issue preclusion should not apply to inter partes reexaminations because of the lack of compulsory process and cross-examination.

In Re: Board of Trustees of the Leland Stanford Junior University (Fed. Cir. No. 20-1012):  The PTAB affirmed the examiner’s final rejection of Stanford’s claims directed to determining haplotype phase, on the basis that the claims were ineligible.  The process of haplotype phasing involves determining from which parent an allele was inherited.  The PTAB held that the claims were directed to “receiving and analyzing information,” which are “mental processes within the abstract idea category,” and that the claims lacked an inventive concept.

The Federal Circuit (Reyna, J., joined by Prost, C.J. and Lourie, J.) affirmed.  At step one, the court held that the claims were directed to the abstract idea of “mathematically calculating alleles’ haplotype phase.”  At step two, it held that the claims lacked an inventive concept, noting that the claims recited no steps that “practically apply the claimed mathematical algorithm.”  The court held that, instead, the claims merely stored the haplotype phase information, which could not transform the abstract idea into patent-eligible subject matter.  It further held that the dependent claims recited limitations amounting to no more than an instruction to apply that abstract idea.

Mylan Laboratories v. Janssen Pharmaceutica (Fed. Cir. No. 20-1071):  Mylan petitioned for IPR of Janssen’s patent.  Janssen opposed institution on the grounds that instituting the IPR would be an inefficient use of the PTAB’s resources because of two co-pending district court actions: one against Mylan and a second against Teva Pharmaceuticals that was set to go to trial soon after the institution decision.  The Board applied its six-factor standard articulated in Fintiv and denied institution.  Mylan appealed and requested mandamus relief; arguing that denying IPR based on litigation with a third party undermined Mylan’s constitutional and other due process rights, and that application of the six-factor standard violated congressional intent.

The Federal Circuit (Moore, J., joined by Newman, J. and Stoll, J.) granted Janssen’s motion to dismiss the appeal and denied Mylan’s petition for a writ of mandamus.  The court dismissed Mylan’s direct appeal and reiterated that the court lacks jurisdiction over appeals from decisions denying institution because Section 314(d) specifically makes institution decisions “nonappealable.”  The court noted that “judicial review [of institution decisions] is available in extraordinary circumstances by petition for mandamus,” even though “the mandamus standard will be especially difficult to satisfy” when challenging a decision denying institution of an IPR.  Indeed, the court noted that “it is difficult to imagine a mandamus petition that challenges a denial of institution and identifies a clear and indisputable right to relief.”  Considering the merits of Mylan’s petition, the court explained that “there is no reviewability of the Director’s exercise of his discretion to deny institution except for colorable constitutional claims,” which Mylan had failed to present.

Uniloc 2017 v. Facebook (Fed. Cir. No. 19-1688):  Uniloc appealed from a PTAB ruling that the petitioners were not estopped from challenging the claims and that the patents at issue were invalid as obvious.  Facebook filed two IPR petitions and then joined an IPR petition that had been previously filed by Apple, which challenged only a subset of the claims in the Facebook petitions.  LG then joined Facebook’s two petitions, but not Apple’s.  After instituting trial on Facebook’s two IPR petitions, the PTAB issued it final written decision in the Apple IPR, upholding the validity of Apple’s claims.  The PTAB determined that, as of the final written decision on the Apple IPR, Facebook was estopped from challenging the overlapping claims in its own IPR petitions under § 315 (e)(1).  LG, however, was not estopped from challenging the overlapping claims.

The Federal Circuit (Chen, J., joined by Lourie, J. and Wallach, J.) affirmed.  The panel first determined that it had jurisdiction to review the challenge because the final written decision in the Apple IPR did not issue until after the institution of trial on the Facebook petitions.  Next, the panel held that LG was not a real-party-at-interest or privy of Facebook because there was no evidence of any sort of preexisting, established relationship that indicates coordination related to the Apple IPR.  According to the panel, moreover, Facebook was not estopped from addressing the non-overlapping claims (even the claim that depended from an overlapping claim) because § 315 (e)(1) specifically applies to claims in a patent.  The panel then addressed the PTAB’s obviousness determination regarding the challenged claims and affirmed the Board’s obviousness findings as supported by substantial evidence.

In Re TracFone Wireless (Fed. Cir. No. 21-118): Precis Group sued TracFone in the Western District of Texas, alleging that venue was proper because TracFone has a store in San Antonio.  TracFone moved to transfer on the grounds that venue was inconvenient, as well as improper because it no longer has a branded store in the district.  For several months, the district court (Judge Albright) did not decide the motion, and instead kept the case moving towards trial.  After eight months, TracFone petitioned the Federal Circuit for a writ of mandamus.

In its decision granting mandamus, the Federal Circuit (Reyna, J., joined by Chen, J. and Hughes, J.) ordered Judge Albright to “issue its ruling on the motion to transfer within 30 days from the issuance of this order, and to provide a reasoned basis for its ruling that is capable of meaningful appellate review.”  It also ordered that all proceedings in the case be stayed until further notice.  Notably, the court explained “that any familiarity that [the district court] has gained with the underlying litigation due to the progress of the case since the filing of the complaint is irrelevant when considering the transfer motion and should not color its decision.”  Judge Albright denied the motion to transfer the day after the mandamus decision issued.

The Federal Circuit has recently denied two other petitions for mandamus involving cases before Judge Albright.  In In re Adtran, Inc. (Fed. Cir. No. 21-115), the court denied a petition for mandamus directing Judge Albright to stay all deadlines unrelated to venue pending a decision on transfer.  In In re True Chemical Solutions (Fed. Cir. No. 21-131), the court denied a petition for mandamus reversing Judge Albright’s grant of a motion for intra-division transfer.  Notably, Judge Albright now oversees 20% of new US patent cases (link).


Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:

Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com)
Jessica A. Hudak – Orange County (+1 949-451-3837, jhudak@gibsondunn.com)

Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:

Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, aho@gibsondunn.com)
Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com)

Intellectual Property Group:
Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com)
Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com)
Mark Reiter – Dallas (+1 214-698-3100, mreiter@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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Decided April 5, 2021

Google LLC v. Oracle America, Inc., No. 18-956

Today, the Supreme Court held 6-2 that Google’s use of the Java interface in the Android platform falls within the fair use doctrine. 

Background:
Sun Microsystems launched the Java platform in the 1990s to allow software developers to write and run applications in the Java programming language. The Java platform includes pre-written code to perform a number of common functions (e.g., calculating an arithmetic mean), which software developers can incorporate directly into their own applications through the use of the Java software interface. By using Java’s software interface in their applications, developers avoid having to compose the underlying, functional code themselves.

Google launched its Android operating system in 2008. Like Java, Android includes pre-written code to perform certain common functions, making it easier for developers to create applications for Android. Although the code used by Android to perform these functions is entirely original, Android used portions of Java’s software interface. By doing so, Google allowed developers to create applications for Android using the same interface that they use to create applications for Java. In all, Android uses 11,330 lines (or 0.4 percent) of Java’s software interface.

After acquiring Java from Sun Microsystems, Oracle sued Google for copyright infringement based on Android’s use of the Java software interface. The district court concluded that copyright protection did not extend to the Java software interface, but the Federal Circuit reversed, concluding that Java’s software interface is protectable under copyright law and that the merger doctrine, which bars copyright protection when there are only a few ways to express a function, was inapplicable. On remand, a jury found that Google’s use of the Java software interface was protected under the fair use doctrine, but the Federal Circuit again reversed.

Issue:
Does the Copyright Act protect a software interface and, if so, does Android’s use of the Java software interface constitute fair use?

Court’s Holding:
The Court assumed, “purely for argument’s sake,” that the Java interface is protected by copyright, and held that Google’s use of that interface in the Android platform falls within the fair use doctrine
.

“We reach the conclusion that in this case, where Google reimplemented a user interface, taking only what was needed to allow users to put their accrued talents to work in a new and transformative program, Google’s copying of the Sun Java API was a fair use of that material as a matter of law.

Justice Breyer, writing for the Court

What It Means:

  • The Court clarified that “fair use” is a mixed question of law and fact. Reviewing courts should appropriately defer to the jury’s findings of underlying facts, but the ultimate question whether those facts show a fair use is a legal question for judges to decide de novo.
  • The Court explained that the fair use doctrine is particularly important when applying copyright law to computer programs because they almost always serve functional purposes and are bound up with uncopyrightable material. “[F]air use can play an important role in determining the lawful scope of a computer program copyright” because it provides a context-based check that can help to keep a copyright monopoly within its lawful bound.
  • The application of fair use in this case does not undermine the general copyright protection Congress provided for computer programs because the declaring code at issue, “if copyrightable at all,” is further than most computer programs are from “the core of copyright.”  This is because, as part of a user interface, the declaring code’s use “is inherently bound together with uncopyrightable ideas (general task division and organization) and new creative expression (Android’s implementing code).”  Moreover, its value (1) derives from the value that computer programmers invest of their own time and effort to learn the API’s system and (2) lies in its efforts to encourage programmers to learn and to use that system so that they will use Sun-related implementing programs.
  • Despite Google having copied portions of the Java interface “precisely,” the Court held that its use was nonetheless “transformative” because Google used the code to “create a new platform that could be readily used by programmers.” Google’s use was therefore “consistent with that creative ‘progress’ that is the basic constitutional objective of copyright itself.”
  • Commercial use does not necessarily tip the scales against fair use. The Court explained that, even though Google’s use was a commercial endeavor, that is not dispositive of the “purpose and character of use” factor, particularly because Google’s use was transformative.
  • The Court’s fair use ruling will make it easier for platform developers to reuse software interfaces when creating new platforms. This may lead to the development of less-expensive competing versions of applications, but may also disincentivize research and development of new software platforms or languages.
  • The question whether the Copyright Act protects software interfaces remains unanswered. “Given the rapidly changing technological, economic, and business-related circumstances,” the Court explained, “[the Court] should not answer more than is necessary to resolve the parties’ dispute.” The Court therefore assumed, “purely for argument’s sake,” that the Java interface is protected by copyright.

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
aho@gibsondunn.com
Mark A. Perry
+1 202.887.3667
mperry@gibsondunn.com
Blaine H. Evanson
+1 949-451-3805
bevanson@gibsondunn.com
Lucas C. Townsend
+1 202.887.3731
ltownsend@gibsondunn.com
Bradley J. Hamburger
+1 213.229.7658
bhamburger@gibsondunn.com
 

Related Practice: Intellectual Property

Wayne Barsky
+1 310.552.8500
wbarsky@gibsondunn.com
Josh Krevitt
+1 212.351.4000,
jkrevitt@gibsondunn.com
Mark Reiter
+1 214.698.3100
,mreiter@gibsondunn.com
Howard S. Hogan
+1 202.887.3640
hhogan@gibsondunn.com
  

On 25 March 2021, the Court of Justice of the EU (“CJEU”) confirmed the fines imposed in Europe on a number of pharmaceutical companies, including Xellia and Alpharma, for entering into anticompetitive ‘pay for delay’ settlement agreements.

One of the grounds of appeal rejected by the CJEU concerned the impact of the lengthy administrative procedure on Xellia’s and Alpharma’s rights of defence.  The CJEU found that Xellia and Alpharma had not proven that the Commission’s investigatory steps had taken so long as to impact their rights of defence.  In particular, Xellia and Alpharma could not blame the Commission for their own failure to preserve documents that could have assisted their defence.

The CJEU’s judgment sends a message to companies active in sectors under investigation.  Although there is no general obligation to preserve documents which would assist the Commission in the exercise of its investigatory powers in competition cases, companies are advised to preserve key documents and legal assessments for the purposes of their own defence – even when the investigation appears unconscionably dilatory.  Once aware of being a possible target of a Commission investigation, companies should preserve all relevant documents until they can be confident that no further action will be taken.  Given the recent practice of the Commission to make infringement findings against companies even where fines cannot be imposed for prescription reasons, that period of time may be very long indeed.

I. Background

In 2002, Lundbeck entered into settlement agreements with a number of generic pharmaceuticals manufacturers and resellers, including Alpharma.  The settlement agreement between Lundbeck and Alpharma was in effect until 30 June 2003.  For the period of the agreement, Alpharma generally committed not to sell generic citalopram in the EU, Norway and Switzerland, in exchange for payments from Lundbeck amounting US$ 12 million.

In October 2003, the Danish Competition Authority informed the Commission of the settlement agreements entered into by Lundbeck and the generics manufacturers and resellers.  In a press release issued on 28 January 2004, the Danish Competition Authority indicated that “the Commission [did] not wish to initiate proceedings against Lundbeck.”[1]  However, unbeknown to the public, between 2003 and 2006 the Commission conducted inspections (so-called ‘dawn raids’), primarily at Lundbeck’s premises in Europe.

In 2008 and 2009, the Commission conducted a formal inquiry into the pharmaceutical sector.  The Final Report of the Commission on the Pharmaceutical Sector Inquiry examined competition issues relevant to Lundbeck as well as Alpharma and Xellia, such as patent filing strategies (including related exchanges and litigation), as well as settlements and other related agreements.[2]

Some eight years after the Lundbeck settlement agreements, the Commission opened investigations into Lundbeck in 2010 and into Alpharma and Xellia in March 2010 and March 2011, respectively.  The Commission adopted an infringement decision in June 2013 imposing fines of approximately €146 million for ‘pay for delay’ anti-competitive agreements entered into by  Lundbeck, Alpharma, Xellia and other generic manufacturers and resellers.

On appeal before the General Court and the CJEU, Xellia and Alpharma argued that the Commission had infringed their rights of defence by failing to inform them in a timely manner of the existence of an inquiry concerning them, which allegedly caused them not to retain potentially exculpatory evidence.  In particular, Xellia and Alpharma referred to three categories of documents that had been lost due to the lapse of time: (i) drafts and comments relating to the agreements at issue, (ii) the business plans of Alpharma relating to citalopram, and (iii) the documents of external counsel.

At first instance, the General Court ruled that Xellia and Alpharma were under a duty of diligence, applicable to all investigated parties in EU antitrust proceedings, to retain all relevant documentation and evidence in order to safeguard their rights of defence.[3]  According to the General Court, the duty of diligence arose in this case due to the press release of the Danish Competition Authority of 28 January 2004, and the Commission’s Pharmaceutical Sector Inquiry of 2008-2009.[4]

The CJEU disagreed with the General Court’s reasoning.  It clarified that the duty of diligence exists but only applies to investigated companies once formal proceedings have been opened against them.  In the cases of Xellia and Alpharma, the duty did therefore not arise until 2010 and 2011, when the Commission formally opened investigations against them.  Somewhat inconsistently, the CJEU indicated that a “duty of care” should have led Xellia and Alpharma to preserve all relevant documentation as of the date of the opening of the Pharmaceutical Sector Inquiry, some four and a half years after the settlement agreements had expired.[5]

II. Obligation to Preserve Documents in EU Competition Cases

Document retention rules in Europe are generally covered by national legislation.  With regard to commercial negotiations and other business arrangements, companies are generally required under national law to preserve company books and records for a precautionary period of time (e.g., five years).

EU competition law does not impose any general obligation on companies to preserve documents that are or could be relevant to an antitrust investigation.  However, EU case law has established a general “duty of care” concerning companies and trade associations, to ensure the proper maintenance of information about their activities for evidentiary purposes.[6] Furthermore, when companies receive requests for information from the Commission, they are expected to act with greater diligence and to take all appropriate measures in order to preserve such evidence as might be reasonably available.[7]

Once an investigation is underway, companies have a general duty to cooperate in response to Commission requests for information and inspections.  In particular, the Commission has powers to request correct, accurate and complete information and documentation.[8]  Companies are also obliged to produce complete company books and records during dawn raids, and the duty of cooperation is increased when inspections have been authorised by decision.[9]

III. Deferred Detection and Lengthy Proceedings Do Not Excuse Document Losses or Short Retention Policies

General principles of EU law dictate that administrative procedures relating to competition policy must be conducted within a reasonable time.  EU Courts apply this principle by analysing the impact of lengthy investigations on the rights of defence of companies, and can reduce the amount of fines imposed where appropriate.[10]

The Commission’s failure to observe the duty to deal with a matter within a reasonable period of time normally has no effect on the validity of the administrative procedure under Regulation No. 1/2003.[11]  Limited exceptions to this general rule may be found in EU case law, for example, when the Commission fails to investigate a company for five consecutive years, thereby exceeding the statute of limitations set in Regulation No. 1/2003.[12] In order to argue successfully that their rights of defence have been infringed through the dilatoriness of the Commission’s investigation, companies must prove that they acted diligently during the different phases of an investigation and that specific and avoidable harm was caused to them.[13]

In the Alpharma and Xellia cases, the General Court considered that the Commission had carried out a number of relevant investigative steps in the period between the receipt by the Commission of the Lundbeck settlement agreements (October 2003) and the initiation of proceedings against Alpharma and Xellia (2010 and 2011, respectively).  Furthermore, the press release of the Danish Competition Authority of 28 January 2004 demonstrated that the Commission was taking an interest in Lundbeck’s settlement agreements.  Xellia and Alpharma ought to have been aware of the Commission’s likelihood of investigating ‘pay for delay’ agreements in the pharmaceutical sector, and should have acted with greater diligence to preserve any information that could be relevant for the investigation.[14]

The CJEU ultimately disagreed with the General Court on this point, considering that the “duty of diligence” did not apply during the pre-investigation phases (i.e., from 2003 to 2010-2011 in the case of Xellia and Alpharma).[15]  However, the application of the general principle of the “duty of care”, coupled with the relatively short period between the expiration of the Lundbeck settlement agreements and the Pharmaceutical Sector Inquiry (four and a half years), led the CJEU to the same conclusion as the General Court: Xellia and Alpharma could not blame the Commission for their respective failures to retain relevant evidence:

a specific duty of care requiring [companies] to ensure that information enabling details of their activities to be retrieved is retained properly in their books or records, in order, in particular, that they have in their possession the necessary evidence in the event of subsequent administrative action or judicial proceedings. […] [A] well-informed and seasoned operator […] could not be unaware and […] take precautions against the loss, due to the passage of time, of evidence that might prove to be useful to them in the context of subsequent administrative procedures or judicial proceedings.[16]

IV. Conclusion

Although EU legislation does not contain a formal duty to preserve documents that the Commission may seek or require to be produced during the course of an investigation, a failure to preserve information may weaken a firm’s ability to defend itself in subsequent proceedings.  In particular, the possibility of deferred enforcement or lengthy Commission investigations does not negate the fact that it is in the firm’s own interest to preserve relevant documents for the purposes of subsequent litigation.

Whilst this has always been recognised with respect to civil claims, it is now clear that firms would be well-advised to preserve potentially exculpatory materials, especially if they became aware that practices similar to those that they are engaging in have become the subject of an EU antitrust investigation.  This includes both cases against individuals firms and sector inquiries.

In practice, as a first step, such firms and their legal advisors should ensure that they have arranged appropriate document retention policies and practices for their emails, other internal documents and communications with actual or potential competitors.  As a second step, it is important to monitor legal developments affecting the sectors in which they operate, and to be aware of the different retention obligations they may face in different jurisdictions.  Finally, in taking these protective measures, companies should take into account the limited scope of legal professional privilege in EU competition cases, and to ensure that protected documents are clearly labelled as such and filed separately.

______________________

   [1]   See Case AT.39226 – Lundbeck, para. 728.

   [2]   See Pharmaceutical Sector Inquiry, Final Report, 8 July 2009, Section C.2.

   [3]   See Case T-471/13 Xellia and Alpharma v Commission, EU:T:2016:460, paras. 353 ff.

   [4]   See Case T-471/13 Xellia and Alpharma v Commission, EU:T:2016:460, para. 368.

   [5]   See Case C-611/16 P Xellia and Alpharma v Commission, EU:C:2021:245, paras. 135 ff.

   [6]   See Case T-240/07 Heineken v Commission, EU:T:2011:284, para. 301.

   [7]   See Case T-5 and 6/00 Neederlandse Federatieve Vereniging voor de Groothandel op Elektrotechnisch Gebied and Technische Unie v Commission, EU:T:2003:342, para. 87.

   [8]   See Regulation No 1/2003, Article 23(1).

   [9]   See Regulation No 1/2003, Article 23(1)(c).  Most inspections are authorised by formal Decision of the Commission. Per contra, most requests for information sent by the Commission are not made pursuant to a formal Decision (and in that sense responding may be considered to be a voluntary act).

  [10]   See Case C-445/11 P Bavaria v Commission, EU:C:2012:828, para. 77.

  [11]   See Case T-410/03 Hoechst v Commission, EU:T:2008:211, para. 227.

  [12]   See Case T-213/00 CMA CGM et al. v Commission, EU:T:2003:76, para. 482.

  [13]   See C 201/09 P and C 216/09 P ArcelorMittal Luxembourg et al. v Commission, EU:C:2011:190, para. 118; Case T-240/07 Heineken Nederland and Heineken v Commission, EU:T:2011:284, para. 300 ff;  Case T-410/03 Hoechst v Commission, EU:T:2008:211, para. 227.; and Case T-471/13 Xellia and Alpharma v Commission, EU:T:2016:460, paras. 357 and 358.

  [14]   See Case T-471/13 Xellia and Alpharma v Commission, EU:T:2016:460, paras. 353 ff.

  [15]   See Case C-611/16 P Xellia and Alpharma v Commission, EU:C:2021:245, paras.127-148.

  [16]   See Case C-611/16 P Xellia and Alpharma v Commission, EU:C:2021:245, paras.151-152.


The following Gibson Dunn lawyers prepared this client alert: Alejandro Guerrero and David Wood.

Gibson Dunn 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, the authors, or any member of the firm’s Antitrust and Competition practice group:

Antitrust and Competition Group:

Brussels
Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com)
Christian Riis-Madsen (+32 2 554 72 05, criis@gibsondunn.com)
Lena Sandberg (+32 2 554 72 60, lsandberg@gibsondunn.com)
David Wood (+32 2 554 7210, dwood@gibsondunn.com)
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On March 25, 2021, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) imposed additional sanctions in response to the ongoing crisis in Myanmar (also called Burma) by designating the country’s two largest military conglomerates:  (1) Myanmar Economic Holdings Public Company Limited (“MEHL”) and (2) Myanmar Economic Corporation Limited (“MEC”).

Because Myanmar’s military controls significant segments of the country’s economy, including trading, natural resources, and consumer goods, through these two companies, these designations are the most consequential sanctions measures that the Biden Administration has taken to-date in response to the situation.  By operation of OFAC’s “Fifty Percent Rule,” the sanctioned status of MEHL and MEC automatically flows to the dozens of their majority-owned subsidiaries that play critical roles throughout the country’s economy, implicating the Myanmar-based operations of numerous foreign companies that have touchpoints with the United States (over which the U.S. Government has enforcement jurisdiction).  Recognizing the far-reaching impact, OFAC has concurrently issued four general licenses (regulatory exemptions) that provide blanket authorization to engage in certain categories of activities that would otherwise be prohibited—including the wind down of any existing transactions involving MEHL, MEC, or their majority-owned subsidiaries.

Below we summarize the U.S. response thus far to the Myanmar situation, before discussing the significance of these new OFAC designations and general licenses.  We then survey briefly the latest developments in the sanctions regimes of the United Kingdom, Canada, and the European Union, which broadly align with the U.S. model.  In coordination with the United States, also on March 25, 2021, the United Kingdom designated MEHL, but did not designate MEC until April 1, 2021.  Canada, for its part, designated MEHL and MEC in 2007, and never lifted those designations.  Meanwhile, the European Union has yet to take direct action against either military conglomerate, although there are signs it might choose to do so in the near term.

An Incremental, Whole-of-Government Approach As Violence Escalates in Myanmar

On February 1, 2021, Myanmar’s military (the “Tatmadaw”) nullified the election of November 2020 that resulted in Aung San Suu Kyi’s National League for Democracy strengthening its standing in the Burmese government in comparison with the military-affiliated Union Solidarity and Development Party.  The Tatmadaw responded by seizing control of the government, detaining civilian leaders (including Aung San Suu Kyi), setting up the State Administration Council with military officers, and declaring a one-year state of emergency after which, supposedly, a new election will be held.

Ten days later, on February 11, 2021, President Biden issued Executive Order 14014—his first sanctions Executive Order—authorizing the designation of individuals and entities who, among others, directly or indirectly engaged in the situation in Myanmar or are leaders or officials of the Tatmadaw or the State Administration Council.  The initial set of designations by OFAC included six officers who played a direct role in the coup, four officers who were appointed to the State Administration Council, and three business entities owned or controlled by the military that are in Myanmar’s gem industry.  On the same day, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) announced a license review policy of “presumption of denial” for exports or reexports to Myanmar’s Ministry of Defense, Ministry of Home Affairs, armed forces, and security services.  BIS also suspended certain previously issued licenses and license exceptions related to Myanmar.  Moreover, the Federal Reserve Bank of New York blocked the Tatmadaw from accessing more than $1 billion in Myanmar Government funds held in the United States.  This initial, multi-agency response by the U.S. Government was analyzed in detail in our February 16, 2021 client alert.

For two months, the military-controlled Myanmar Government has maintained tight control over the country, violently cracking down on civilian protests.  As of April 2, 2021, more than 500 protestors have been killed, and more than 2,900 have been arrested or charged—numbers that kept rising during the drafting of this update.  The Myanmar military has declared a series of martial law orders and has created a military court system for prosecuting these protestors.  To tamp down these protest movements, the military has also intermittently blocked certain social media platforms and imposed nightly Internet shutdowns.  As the situation in Myanmar continues, so have the calls for targeted sanctions on the military—both from activists outside Myanmar and from Myanmar’s own ambassador to the United Nations (“UN”).

The Biden administration has issued sanctions on an incremental basis in response to events taking place on the ground.  Over time, OFAC announced three additional sets of designations under Executive Order 14014 (on February 22, March 10, and March 22), which included:

  • Two members of the State Administration Council;
  • Two leaders of the police, military, or security forces;
  • Two family members of Commander-in-Chief Min Aung Hlaing, as well as six business entities that they own or control; and
  • Two Light Infantry Divisions of the military.

The Biden administration has also tightened the export-control restrictions regarding Myanmar.  On March 4, 2021, BIS removed Myanmar from Country Group B and placed it in Country Group D:1, which effectively created a more restrictive review process for exports or reexports of items subject to the Export Administration Regulations (“EAR”) to end-users in Myanmar.  That same day, BIS added MEHL, MEC, Myanmar’s Ministry of Defense, and Myanmar’s Ministry of Home Affairs to its “Entity List,” which is comprised of entities determined to pose a significant risk of involvement in activities contrary to U.S. security or foreign policy interests.  Notably, with these listings, BIS chose to impose its broadest restriction―export or reexport of any item subject to the EAR to any of the four aforementioned entities requires a BIS license, and requests for such licenses are subject to a presumption of denial.

Imposing Sanctions on MEHL and MEC

On March 25, 2021, in response to the most brutal crackdown yet, OFAC designated MEHL and MEC pursuant to Executive Order 14014.  Both MEHL and MEC were established during the old Myanmar military regime, respectively in 1990 and 1997.  They were created with the express purpose of fulfilling the needs of the military and its desire to play a central role in Myanmar’s economy—MEHL focused on light industry, while MEC focused on heavy industry and supplied strategically important natural resources for the military.  Although the two entities are not state-owned, they are supervised by senior leaders of the Tatmadaw, some of whom have been designated by OFAC.

As was previewed in President Biden’s speech that accompanied the initial February sanctions, the administration is interested in targeting the “business interests” of Myanmar military.  The latest designations were made based on the connection between the two entities and the Tatmadaw’s source of revenue.  OFAC Director Andrea Gacki stated that the designation of the two conglomerates is designed to “target[] the Burmese military’s control of significant segments of the Burmese economy, which is a vital financial lifeline for the military junta.”  Myanmar’s military and its members rely heavily on the profits earned by these holding companies.

The latest designations should have a more potent effect on Myanmar’s economy than the earlier measures.  The UN Human Rights Council reported in 2019 that there are 106 businesses owned by MEHL and MEC across diverse sectors of the Burmese economy “from construction and gem extraction to manufacturing, insurance, tourism and banking.”  By operation of OFAC’s Fifty Percent Rule, those businesses that are owned, directly or indirectly, 50 percent or more by MEHL or MEC are also automatically blocked by U.S. sanctions.  U.S. persons—and non-U.S. persons engaging in a transaction with a U.S. touchpoint—are generally prohibited from engaging in transactions involving the blocked entities, as well as their properties and interests in properties that come into U.S. jurisdiction.

A considerable number of foreign companies have commercial relationships with the newly designated entities.  When the United States and other countries eased sanctions on Myanmar beginning in 2012, companies—including many from Japan, Korea, and Singapore—took advantage of business opportunities in the Myanmar market.  According to the 2019 UN Human Rights Council report, there are 14 companies that have entered into formal joint ventures with MEHL, MEC, or their subsidiaries, and 44 additional companies with meaningful contractual or other commercial ties.  Dozens of other companies from around the world also have more removed relationships with MEHL, MEC, and/or their subsidiaries.  The degree to which the activities of any of these companies will be affected by the designations will depend on the extent to which they rely, directly or indirectly, on U.S. persons, companies, and/or financial institutions.

Parallel Issuance of New General Licenses and FAQs

Recognizing the potential collateral impact that the designations of MEHL and MEC could pose, OFAC concurrently issued four general licenses and related Frequently Asked Questions (“FAQs”):

General License 4, in particular, will be a critical authority for companies that intend to exit commercial relationships with MEHL, MEC, or their subsidiaries.  Where a designated company has significant economic importance, OFAC’s practice has been to promulgate a wind-down license to minimize the immediate disruption to non-targeted businesses and persons, and to allow parties the opportunity to disengage from the designated entity while hopefully limiting the negative impact on innocent parties.  Companies affected by the new prohibitions can now take time to carefully consider options for terminating engagements with the newly-designated entities, and how each might affect the security and safety of their employees on the ground.

In comparing General License 4 to others of its kind, we have two observations.  First, General License 4 covers the “wind down” of transactions, which is a flexible and broad concept.  However, unlike some wind-down licenses that OFAC has issued in other sanctions programs, this general license does not also cover the “maintenance” of “operations, contracts, and other agreements.”  Second, General License 4 does not impose any administrative conditions on parties taking advantage of the license.  This is in contrast to other wind-down licenses under different sanctions programs that require, for example, that U.S. persons file a report with OFAC detailing the transactions undertaken pursuant to the license or that require any payments made in covered transaction to be deposited into a blocked account.  The absence of such conditions—which can be onerous—could encourage more parties to take advantage of the license.

Notably, all four general licenses expressly limit their authorizations to transactions and activities that are prohibited by Executive Order 14014.  In relying on these licenses, parties should be careful not to engage in transactions and activities that are prohibited under another authority.  As such, the general licenses do not authorize transactions with persons or entities designated pursuant to other sanctions programs, such as Commander-in-Chief Min Aung Hlaing—who was sanctioned pursuant to Executive Order 13818 (Global Magnitsky Sanctions) for his role in the serious human rights abuses committed against the Rohingya in 2017.  As made clear in OFAC’s FAQ 400, without a general or specific license, U.S. persons are prohibited from transacting with sanctioned individuals like Min Aung Hlaing, such as by entering into contracts with them, even if they are acting on behalf of a non-blocked entity.

UK, Canada, and EU Sanctions Regimes Targeting Myanmar

When we last discussed Myanmar in our February 16, 2021 client alert, the United States was the only major state to have imposed sanctions on the military regime despite President Biden’s call for multilateralism.  That has changed.  Since February 16, 2021, the United Kingdom, Canada, and the European Union have all designated Myanmar-related actors and otherwise strengthened their respective sanctions targeting Myanmar—in ways that are complementary to the actions of the United States.

In Coordination with the United States, the United Kingdom Designates MEHL and then MEC

The United Kingdom’s own sanctions regulations regarding Myanmar went into effect on December 31, 2020, following Brexit, and in response to the Rohingya crisis.  Under the regulations, the Secretary of State may designate to the UK Sanctions List persons involved with the violation of various human rights in Myanmar, including right to life, right to liberty and security, right to a fair trial, and right to freedom of expression and peaceful assembly.  Designation results in the freezing of assets, including funds and economic resources, that are owned, held, or controlled, either directly or indirectly, by the designated person.

In response to the coup in Myanmar, the UK Foreign Commonwealth & Development Office (the “FCO”) designated three leaders of the police, military, and security forces on February 18, 2021, and five members of the State Administration Council on February 25, 2021.  On March 25, 2021, the United Kingdom joined the United States in adding MEHL to the UK Sanctions List, calling out the entity’s “involvement in serious human rights violations against the Rohingya” in 2017, as well as “its association with senior military figures.”

On April 1, 2021, the FCO added MEC to this list, noting that this designation was “in response to credible evidence that [MEC] has contributed funds to support . . . the Tatmadaw.” The FCO cited MEC’s association with senior military officers within the Tatmadaw, with MEC’s Board of Directors comprising mainly serving or retired personnel, as an additional reason for this designation.

In making the recent designations, the FCO noted that the United Kingdom “has been at the forefront of a strong, co-ordinated international response to situation in Myanmar.”  U.S. Secretary of State Blinken has also described the United Kingdom as “a close partner in our response to the coup.”

Canada’s Historical Designation of MEHL and MEC

Canada, for its part, has had targeted sanctions in place against MEHL and MEC for more than a decade.  Canada’s Myanmar-related sanctions regulations were first enacted on December 13, 2007.  As Myanmar progressed towards democratic reforms, Canada lifted its comprehensive sanctions on April 24, 2012.  While most Myanmar-related restrictions were effectively suspended, any trade in arms and related materials, as well as any technical and financial assistance related to military activities, remain prohibited.  Canada also continued to maintain sanctions against certain listed individuals and entities, including MEHL, MEC, and a number of their subsidiaries.

In response to recent events in Myanmar, on February 18, 2021, Canada designated nine senior officers of the military, the National Defence and Security Council, and the State Administration Council.  The designations brought the total number of Myanmar-related listed persons to fifty four.  Moreover, as further evidence of multilateralism, these new Canadian sanctions were announced on the same day as those imposed by the United Kingdom, reportedly as part of the two countries’ strategy of joint actions on international security issues.  In announcing the measures, Global Affairs Canada, the country’s foreign affairs department, noted that Canada’s sanctions “are part of a united response,” made “following recent measures by the United States and in coordination with the United Kingdom.”

European Union Contemplates Further Designation of Military Businesses

Prior to the coup in Myanmar, the European Union had in place a number of restrictions targeting Myanmar, including:

  • A ban on the export of equipment that can be used for political repression in Myanmar;
  • An export ban of dual-use goods for use by the Myanmar military and/or the border guard police;
  • Export restrictions on equipment for monitoring communications that could be used for political repression in Myanmar;
  • A prohibition on military cooperation with the Tatmadaw, including respective training; and
  • An arms embargo relating to Myanmar.

In addition, the European Union deploys financial sanctions that have been and remain in place against individuals and entities in Myanmar that are deemed responsible for atrocities committed against the Rohingya population.  Those designated parties are added to a consolidated list comparable to OFAC’s Specially-Designated Nationals List.

On March 22, 2021, the European Union imposed additional financial sanctions on 11 individuals considered responsible for the military coup in Myanmar and the crackdown on peaceful demonstrators that followed.  Currently, there are 25 individuals or entities designated by the European Union.

While the European Union has not designated MEHL or MEC, there are signs that it may be prepared to do so in the near term.  The European Union has stated that it is continuing to “review all of its policy options, including additional restrictive measures against economic entities owned or controlled by the military in Myanmar/Burma.”  Notably, the European Parliament, as early as February 8, 2021, urged the EU Council “to amend the current scheme of restrictive measures to include the possibility of listing companies and extending targeted sanctions to the vast economic holdings of Myanmar’s military and its members, which provide the military with its revenue.”  If the situation in Myanmar continues to deteriorate, we would not be surprised if the European Union follows its allied governments in the United States, the United Kingdom, and Canada in designating MEHL and/or MEC.

Possible Next Steps

The U.S. sanctions targeting MEHL and MEC represent a significant escalation in the economic pressure campaign against the Tatmadaw in Myanmar, members of whom exercise considerable influence over these conglomerates and profit from their many businesses.  The Biden Administration could have continued to gradually sanction the subsidiaries and affiliates of these two military conglomerates, as well as individuals associated with those entities.  Instead, it elected to sanction MEHL and MEC, knowing that restrictions would flow down to all of their majority-owned subsidiaries (by operation of OFAC’s Fifty Percent Rule).  These consequential measures may have been deemed necessary in light of the worsening situation in Myanmar.

To soften the immediate blow to those foreign companies engaged with MEHL, MEC, and/or their subsidiaries, OFAC has issued a wind-down license as it has done in the past with respect to other sanctions designations of this magnitude.  Such a license will be critical for those companies seeking to unwind their MEHL- or MEC-linked ventures, and will allow them to utilize the U.S. financial system and the U.S. dollar in doing so.  But companies will likely still face challenges in the execution of the wind-down transaction and activities.  The license, while inclusive in scope, cannot be invoked for operations that are not “ordinarily incident and necessary to” the wind-down of transactions.  Moreover, the license does not cover dealings with Commander-in-Chief Min Aung Hlaing and other individuals that are designated pursuant to other sanctions programs (e.g., Global Magnitsky Sanctions).  The license also expires on June 22, 2021, which may not be enough time for companies to effectively and safely extricate themselves from their respective arrangements.  As companies engage in the wind-down process, we anticipate that OFAC will continue to issue, modify, and renew general licenses and related guidance.

For those companies that plan to continue to operate in Myanmar, it will be important to understand the scope of U.S. sanctions restrictions, and in particular the risk of enforcement and/or designation.  The U.S. Department of Justice and OFAC continue to penalize non-U.S. companies under a theory of non-U.S. parties “causing” U.S. persons to engage in prohibited transactions.  U.S. authorities have also continued to use non-U.S. companies’ reliance on the U.S. dollar and U.S. correspondent banking as a hook to secure jurisdiction over these sorts of actions.  For that reason, it will be important for any non-U.S. company operating in Myanmar to understand the extent of its U.S. touchpoints.

In the little time that has passed since the MEHL and MEC designations, the Myanmar military has shown no signs of intending to relinquish their power.  In fact, civilian deaths have risen dramatically.  We would expect further action if this situation persists.  The U.S. Government may choose to continue targeting individuals and entities with ties to the Myanmar military pursuant to Executive Order 14014, or it could create new sanctions authorities that impose more comprehensive sanctions—either on the whole Myanmar government (see, e.g., Venezuela sanctions) or the entire country (see, e.g., Iran and Cuba sanctions).  Of course, the U.S. Government also has non-sanctions tools at its disposal.  Indeed, on March 29, 2021, U.S. Trade Representative Katherine Tai announced the suspension of U.S. trade pact with Myanmar under the 2013 Trade and Investment Framework Agreement.

Finally, we expect there to be continued coordinated action among the United States, Canada, the United Kingdom, and European Union.  The rhetoric used by officials in all four jurisdictions has highlighted the importance of multilateralism in responding to the situation in Myanmar.  That said, the sanctions regimes in these jurisdictions are not exact copies—as is evidenced by the fact that not all have sanctioned MEHL and MEC.  There will be differences that will be important to pinpoint and navigate, and that we are tracking closely.  As the aforementioned sanctions regimes converge for the most part, we do not expect the UN Security Council to do the same given the competing interests on that body.  While the UN Security Council has adopted multiple statements condemning the violence in Myanmar, countries such as China and Russia have reportedly steered the body away from even suggesting that it would impose sanctions.  We expect this to continue to be the case.


The following Gibson Dunn lawyers assisted in preparing this client update: Audi K. Syarief, Claire Yi, Adam M. Smith, Judith Alison Lee, Patrick Doris, Christopher T. Timura, Stephanie L. Connor, Richard W. Roeder, Matt Aleksic, and Rose Naing.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
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Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com)
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Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com)

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On 26 March 2021, the European Commission (the “Commission”) published guidance on the circumstances under which it is likely to accept requests from national competition authorities within the EU to investigate mergers that do not meet the EU or even national jurisdictional tests (the “Guidance”).[1] The Guidance concerns the application of the referral mechanism under Article 22 of the EU Merger Regulation, a hitherto relatively little-used provision.[2]  The Guidance firmly cements the Commission’s change in policy towards deals in the pharma and digital sectors, in particular with respect  to so-called “killer acquisitions”, designed to address an apparent enforcement gap in these sectors.[3] The effect of the Guidance is likely to increase significantly the jurisdictional reach of the Commission, and may go so far as to lead to a de facto notification process in the absence of sufficient turnover to meet mandatory filing requirements.

1.  A radical shift in the Commission’s approach

In a speech to the IBA in September 2020,[4] Commissioner Vestager (in charge of EU competition law enforcement) looked back on 30 years of EU merger control, including whether it is still right that the EU turnover-based thresholds for filings are the appropriate way to identify “mergers that matter for competition”. She noted that “these days, a company’s turnover doesn’t always reflect its importance in the market. In some industries, like the digital and pharmaceutical industries, competition in the future can strongly depend on new products or services that don’t yet have much in the way of sales”. In that speech, Vestager ruled out lowering the EUMR thresholds to capture such deals (as this would disproportionately capture a lot of irrelevant deals) and signalled that a change in approach to the Article 22 referral process “could be an excellent way to see the mergers that matter at a European scale”.

The Article 22 referral mechanism allows one or more Member States to ask the Commission to review a concentration that does not meet the EU thresholds but that (a) affects trade between Member States and (b) threatens to significantly affect competition within the territory of the Member State or States making the request. Until now, the Commission’s practice has been to discourage Article 22 referrals from Member States that did not have the power to review a deal under their own national merger control rules. This meant that deals that did not trigger national merger control in at least one Member State were not, in practice, referred for Commission review.

Vestager therefore stated that the Commission planned to “start accepting referrals from national competition authorities of mergers that are worth reviewing at the EU level – whether or not those authorities had the power to review the case themselves”.

The Guidance published on 26 March gives effect to this plan and sets out how the Commission foresees this new jurisdictional approach working.

2.  What deals are likely to be caught by this new approach

The Commission can accept referrals with respect to any deal, regardless of whether national filings might be required or not, provided that it meets the two formal conditions noted above. The Guidance makes is clear that these are low thresholds:

  • An effect on trade between Member States requires no more than “some discernible influence on the pattern of trade between Member States”, whether direct or indirect, actual or potential. The Guidance highlights that customers located in different Member States, cross-border sales/availability, collection of data across borders or the commercialisation of R&D efforts in more than on Member State would all meet this requirement.
  • Threatening to significantly affect competition within the territory of the Member State requires no more than a demonstration that “based on a preliminary analysis, there is a real risk” of such an effect. Here, the Guidance notes that this could include circumstances such as the “ elimination of a recent or future entrant, making entry/expansion more difficult, or the ability and incentive to leverage a strong market position from one market to another.

Further, given the Commission’s approach to date with respect to Article 22 referrals, in practice, we would not expect the Commission to take a restrictive approach to whether these conditions are met, particularly in cases where the Commission invites a national competition authority to make a referral request.

It is clear that the Commission’s focus is not on all deals involving new entrants, but primarily on the pharma and digital sectors where “services regularly launch with the aim of building up a significant user base and/or commercially valuable data inventories, before seeking to monetise the business” and where “there have been transactions involving innovative companies conducting research & development projects and with strong competitive potential, even if these companies have not yet finalised, let alone exploited commercially, the results of their innovation activities”.[5]

The Guidance also specifies that the Commission is most likely to exercise its discretion to investigate where the deal that has been referred to it is one in which the “turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential”. This may occur where the value of the consideration received by the seller is particularly high compared to the current turnover of the target. It may also occur where one party:

  • is a start-up or recent entrant with significant competitive potential that has yet to develop or implement a business model generating significant revenues (or is still in the initial phase of implementing such business model);
  • is an important innovator or is conducting potentially important research;
  • is an actual or potential important competitive force;
  • has access to competitively significant assets (such as for instance raw materials, infrastructure, data or intellectual property rights); and/or
  • provides products or services that are key inputs/components for other industries.

As the above, non-exhaustive list, shows, this new approach has the potential to catch almost any deal involving a new pharma or digital start-up, innovative company or company exploring new market areas. It would also clearly catch so-called “killer acquisitions” of small companies with high potential future value.

3.  How will the process work?

The Article 22 mechanism requires a Member State that wishes to make a referral to send a reasoned request to the Commission within 15 working days from when the concentration is made known to it.[6] The Commission then informs the other Member States and they have a further 15 working days to join the request if they so wish. After the expiry of this period, the Commission must decide within 10 working days if it accepts the referral request. Upon receipt of a referral request from a Member State, the Commission must inform the parties of the request. Once the parties are informed of this, the suspension obligation under the EU Merger Regulation applies and the transaction cannot be closed unless it has already been implemented.

Importantly, whilst the European merger control system is a pre-closing suspensory one and companies are used to assessing the need to factor in a Commission investigation prior to completion, the Guidance specifies that referrals can be made post-completion provided they are within a suitably short period. In this respect, the Guidance states that a period of six months is likely to be an appropriate period, although this may be longer if the deal is not made public on completion or if there is a sufficiently large potential for competition concerns or detrimental effect on consumers.

4.  What does this mean for deals?

The new approach has the potential to significantly reduce legal certainty for companies engaged in M&A activity in these sectors and to increase the procedural burdens on parties.

By moving the possibility of an EU-level review away from turnover-based thresholds, towards a more qualitative assessment of potential effects, and allowing for investigations to be opened post-completion, the Commission’s change in approach means that the EU system now mirrors that of the UK (with its broad “share of supply” test and post-completion review process) for deals that do not meet the EU merger review thresholds. The level of uncertainty that the UK’s system has meant for deals in these sectors in light of recent CMA decisions (see client alert on Roche/Spark) will now be felt at wider, EU-level.

Additionally, there is little likelihood that the Commission would refrain from using its new approach to referrals extensively.  The Guidance states that the Commission will engage actively with Member States to “identify concentrations that may constitute potential candidates for a referral” and encourages third-parties to contact either the Commission or the Member States to inform them of potential referral cases. Additionally, the Commission has, at the same time as it issued the Guidance, consulted on changes to the “simplified procedure” process to allow for easy/fast review of cases that do not raise competition concerns. The implication is that the Commission is “clearing the decks” to allow it to focus on these more interesting digital and pharma deals. We can therefore expect the Commission to actively seek out deals that might warrant an EU-level review and to secure their referral by one or more Member States.

For companies active in the pharma and digital sectors, their M&A planning will need to include not just an assessment of the relevant thresholds and filing requirements across EU Member States, but a more general assessment of the potential for an EU referral.

With the possibility that a Commission investigation could be initiated months after completion, with the attendant substantive risks, companies may find that it is advisable (at least in some circumstances) to proactively engage with the Commission to provide the information necessary to determine whether a deal is a good candidate for referral. Indeed, this type of de facto voluntary notification is expressly provided for in the Guidance.[7]

Companies’ M&A planning process will also need to factor in the potential impact on deal timing of this new approach. As section 3 above shows, the time period involved before the parties will even know if a deal is being investigated, not to mention the time involved for the actual Commission investigation, is significant.

___________________

[1]      Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases, C(2021) 1959 final, available at: https://ec.europa.eu/competition/consultations/2021_merger_control/guidance_article_22_referrals.pdf.

[2]      In the last 30 years, Article 22 referral requests by Member States  have been made only 41 times: See https://ec.europa.eu/competition/mergers/statistics.pdf (statistics to end February 2021).

[3]      In announcing the Guidance, together with the results of the Commission’s evaluation of the procedural and jurisdictional aspects of EU merger control, Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “A number of transactions involving companies with low turnover, but high competitive potential in the internal market are not reviewed by either the Commission or the Member States. A more frequent use of the existing tool of referrals under Article 22 of the Merger Regulation can help us capture concentrations which may have a significant impact on competition in the internal market”.

[4]      Available at: https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/future-eu-merger-control_en.

[5]      See Guidance, paragraph 9.

[6]      This means being in receipt of sufficient information to make a preliminary assessment as to the existence of the criteria relevant for the assessment of the referral. It is unlikely that a newspaper article or press release would qualify as providing sufficient information for the national competition authorities to make an assessment. In practice, national competition authorities can be expected to request information from the parties about deals that have attracted their (or the Commission’s) attention and the 15-day period will start running upon receipt of the parties response to their information request.

[7]      Guidance, paragraph 24.


The following Gibson Dunn lawyers prepared this client alert: Deirdre Taylor, Attila Borsos, Christian Riis-Madsen, and Ali Nikpay.

Gibson Dunn 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, the authors, or any member of the firm’s Antitrust and Competition practice group:

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Decided April 1, 2021

Facebook, Inc. v. Duguid, No. 19-511

Today, the Supreme Court unanimously held that a device counts as an automatic telephone dialing system under the Telephone Consumer Protection Act only if it stores or produces telephone numbers using a random or sequential number generator. 

Background:
Facebook users can provide a cell phone number that allows the company to send them a text message whenever someone attempts to access their account from an unknown device. Noah Duguid alleges that he has never used Facebook, yet received several of these login-notification text messages. Duguid brought a putative class action lawsuit against Facebook under the Telephone Consumer Protection Act (“TCPA”), claiming that each text message was a violation of the TCPA’s prohibitions on making calls using an automatic telephone dialing system (“autodialer”). The TCPA defines an autodialer as “equipment which has the capacity—(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” 47 U.S.C. § 227(a)(1).

The Ninth Circuit held that Duguid had plausibly alleged violations of the TCPA, even if Facebook had not sent the texts using a random or sequential number generator. A device is an autodialer under the TCPA, the Ninth Circuit ruled, so long as it has the capacity to store and automatically dial numbers.

Issue:
Whether the definition of an autodialer in the TCPA encompasses any device that can store and automatically dial telephone numbers, even if the device does not use a random or sequential number generator.

Court’s Holding:
No. A device is an autodialer under the TCPA only if it can store or produce telephone numbers using a random or sequential number generator. A device that merely stores and then automatically dials telephone numbers, but does not have the capacity to use a random or sequential number generator, is not an autodialer and is therefore not subject to the TCPA’s prohibitions
.

“Because Facebook’s notification system neither stores nor produces numbers ‘using a random or sequential number generator,’ it is not an autodialer.

Justice Sotomayor, writing for the Court

What It Means:

  • Today’s ruling makes clear that a device is an autodialer only if it has the capacity to use a random or sequential number generator. Businesses with notification systems that do not have this capacity should be able to keep those systems in place without running afoul of the TCPA’s prohibitions on the use of autodialers.
  • The Court’s ruling may help reduce class-action litigation under the TCPA. However, the precise scope of the TCPA remains uncertain, as the Court left some important questions open—for example, what counts as a “random or sequential number generator,” and whether text messages are “calls” within the meaning of the TCPA. The Court’s opinion thus leaves the door open for the FCC to adopt regulations and guidance further limiting the TCPA’s scope.
  • In writing for the Court, Justice Sotomayor performed a close textual analysis of the TCPA’s autodialer definition. The Court’s opinion provides further confirmation that the Justices have embraced a method of statutory interpretation that concentrates on the text of statutes.
  • The Court’s decision is its second major ruling on the TCPA in the past year, following Barr v. American Association of Political Consultants, Inc., in which the Court left in place the TCPA’s ban on robocalls, while invalidating the federal-debt-collection exception.

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:

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Decided April 1, 2021

FCC v. Prometheus Radio Project, No. 19 1231; and

Nat’l Ass’n of Broadcasters v. Prometheus Radio Project, No. 19 1241

Today, the Supreme Court held 9-0 that the Federal Communications Commission (FCC) permissibly relaxed three decades-old rules limiting ownership of broadcast stations as part of its quadrennial regulatory review under § 202(h) of the Telecommunications Act. 

Background:
Section 202(h) of the Telecommunications Act of 1996 directs the FCC to review its media ownership rules every four years and to “repeal” or “modify” any rule that is no longer “necessary in the public interest as the result of competition.” In the FCC’s most recent review, it modified or eliminated three decades-old restrictions on the ownership of radio stations, television stations, and newspapers because it concluded that substantial competitive changes had rendered the prior rules unnecessary. No party challenged that competition analysis, but the Third Circuit nonetheless vacated the FCC’s order because it concluded that the FCC had inadequately considered the effect of its rule changes on minority and female ownership, a factor that does not appear in Section 202(h).

Issue:
D
id the FCC permissibly relax its media ownership rules under Section 202(h) based on a finding that they were no longer necessary as the result of competition?

Court’s Holding:
The FCC permissibly relaxed its media ownership rules because it considered the record evidence and reasonably concluded that the rules no longer serve the public interest. The FCC further reasonably explained that its rule changes were not likely to harm minority and female ownership
.

“[T]he FCC’s analysis was reasonable and reasonably explained for purposes of the APA’s deferential arbitrary-and-capricious standard.

Justice Kavanaugh, writing for the Court

What It Means:

  • The Court’s decision clears the way for consolidation in the broadcast and newspaper industry.  It also eases the FCC’s ability to further implement the deregulatory mandate of Section 202(h).  Congress enacted that mandate in 1996 to require the FCC to keep pace with industry developments.
  • The Court applied the normal arbitrary-and-capricious standard in reviewing the FCC’s order, despite the Solicitor General’s call for special deference to the FCC under Section 202(h).
  • The Court confirmed that the Administrative Procedure Act “imposes no general obligation on agencies to conduct or commission their own empirical or statistical studies.” It further made clear that “nothing in the Telecommunications Act (or any other statute) requires the FCC to conduct its own empirical or statistical studies before exercising its discretion under Section 202(h).” If agencies lack perfect empirical data—which is “not unusual”—they generally need only make a reasonable predictive judgment based on the evidence available.
  • Because the FCC reasonably assessed effects on minority and female ownership, the Court did not reach the alternative argument that Section 202(h) does not require the FCC to consider this factor at all. Justice Thomas wrote a separate concurrence to state his view that the FCC had no obligation to consider minority and female ownership.
  • The Court reversed without remanding the case to the Third Circuit, a panel of which had retained jurisdiction over the case for the last 17 years.

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:

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Allyson N. Ho
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