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

Constitutional Implications of Rent- and Mortgage-Relief Legislation Enacted in Response to the COVID-19 Pandemic

Can You Sue Insurance Companies for Emotional-Distress Damages?

The COVID-19 pandemic may give rise to a variety of novel insurance coverage disputes, and some of those disputes may include claims by policyholders for emotional distress due to a bad-faith claim denial. In California, however, the right to emotional-distress damages in the context of an insurance bad-faith claim is hotly contested. Two older decisions from the California Court of Appeal created a split in the law – with one court ruling that a plaintiff may recover only the emotional-distress damages caused by financial loss (e.g., anxiety over unpaid medical bills), and another court holding that once a plaintiff proves some financial loss, he can recover all of his emotional-distress damages, even if not caused by the financial loss. Recent decisions have referenced these two rules in passing without grappling with the conflict. This article explains why California courts will likely limit emotional-distress damages to injuries that are directly tied to economic loss. The damages principles in this article generally apply to claims for bad-faith breaches of any type of insurance contract.
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Press Pools Protect 1st Amendment During Pandemic

In the days of the coronavirus pandemic, social distancing has become our national mantra, and sheltering in place our current occupation. And at the same time that the demand for information from government sources has increased, governments have been forced to restrict public access severely in the name of public health. Ended (at least temporarily) are the days where reporters were free to roam government buildings, to develop sources in close, personal contact, and to sit in packed briefing rooms questioning officials on the news of the day. Even the White House press corps has had to adjust — with social distancing rules being enforced in the normally crowded James S. Brady Press Briefing Room after one of the press corps’ members tested positive for COVID-19. Although governments — federal, state and local — may be justified today in limiting the number of journalists who can cover government activities in person, it is imperative that this justification not be used as a means to silence probing, critical coverage.
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

I. Overview

In a previous alert, we discussed the constitutional principles governing legislative responses to COVID-19 under the Takings, Contracts, Due Process, and Equal Protection Clauses of the U.S. Constitution.[1] Here, we apply those principles to proposals currently being debated in state legislatures that would provide broad residential and commercial rent and mortgage relief. For example, a recent amendment to California Assembly Bill No. 828 would both prohibit residential eviction proceedings for failure to pay rent during the declared state of emergency, and, upon the resumption of such proceedings after the emergency, provide that a tenant could have her rent judicially reduced by 25% for 12 months if the pandemic has adversely affected the tenant’s ability to pay, absent material economic hardship to the landowner. Importantly, under the California bill, landowners owning 10 or more rental units would be presumed not to suffer material economic hardship due to rent reduction.

New York also is considering several bills suspending rent payments for residential or small-business commercial tenants. One such bill (Senate Bill S8125A) suspends rent payments for 90 days, without any obligation to later pay back the suspended rent, for those tenants who have lost income or shuttered their place of business due to government-ordered COVID-19 restrictions. The bill also would provide mortgage relief to landowners experiencing financial hardship from the lost rental payments.[2] Another bill (Senate Bill S8140A) would provide vouchers to tenants whose rent burden is more than 30% of their income and have experienced a substantial loss of income due to COVID-19, although those vouchers would have market-price caps.

These and other novel rent- and mortgage-relief schemes may raise constitutional considerations, both for landowners and for lenders with loans secured by the property in question.

II. Regulatory Takings

Landowners and lenders may be able to challenge rent- and mortgage-relief legislation by arguing that they are subject to a compensable regulatory taking. Whether a landowner or lender has been subjected to a regulatory taking will depend on the specific features of the particular legislation at issue and, to the extent the claim is brought on an “as-applied” basis, the landowner’s or lender’s specific circumstances. To raise a takings challenge, the challengers would want to highlight, inter alia, “the extent to which the regulation interferes with reasonable investment-backed expectations.” Palazzolo v. Rhode Island, 533 U.S. 606, 617 (2001).

To be sure, some courts have previously upheld certain rent-control regimes in states like California and New York, based on the specific characteristics of those regimes at the time of the legal challenges. See, e.g., Guggenheim v. City of Goleta, 638 F.3d 1111, 1120-22 (9th Cir. 2010) (en banc); Fed. Home Loan Mortg. Corp. v. New York State Div. of Hous. & Cmty. Renewal, 83 F.3d 45, 48 (2d Cir. 1996) (collecting cases). But the recently proposed legislation appears to be unlike anything either state has previously enacted. For example, some of the proposed COVID-19 bills contemplate permanently depriving at least some landowners of their contractually expected rent, and depriving at least some lenders of the revenue stream that enable debt payments and the maintenance of their collateral, which are a sort of “interfere[nce] with distinct investment-backed expectations” unlike that presented in these prior court challenges. Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 539 (2005) (internal quotation marks omitted).

Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003), is one example of a successful challenge to an onerous rent-regulation regime. There, the court held that federal legislation that forced certain landowners to provide low-income housing beyond the originally-agreed-upon period of twenty years constituted a taking requiring just compensation. The court concluded that the character of the government’s action was akin to a physical taking, as the developers were able to rent their properties only to low-income tenants for up to an additional twenty years. Id. at 1337-40. In addition, the law destroyed the owners’ reasonable investment-backed expectations, as they expected to be able to free themselves from the low-income housing restrictions at the end of the initial twenty years. Id. at 1346-53. Other cases, too, have contemplated that preventing a landowner from recouping the costs to maintain the property—thereby creating “negative value”—may amount to a regulatory taking. See, e.g., Love Terminal Partners v. United States, 126 Fed. Cl. 389, 425 (2016), rev’d on other grounds, 889 F.3d 1331 (Fed. Cir. 2018). Landowners thus may be able to rely on these cases in arguing that legislation akin to that proposed in California and New York constitutes an unlawful taking by forcing them to continue renting apartments to non-paying tenants, thereby severely diminishing—or even eliminating—their rental revenue and significantly impairing their investment-backed expectations in their rental properties. And in the same way, lenders may be able to argue that mortgage-relief schemes would undermine their reasonable expectations in the loans secured by the property.

The strength of each individual Takings claim will depend on the particular features of the challenged legislation, the particular characteristics of the affected buildings, and the particular harms inflicted on the plaintiffs and those similarly situated. Landowners and lenders facing COVID-19-related legislation should therefore keep in mind that they may have a viable regulatory-takings claim and should seek further guidance where appropriate.

III. Other Constitutional Challenges

A. The Contracts Clause

Landowners and lenders may also be able to challenge state rent- and mortgage-relief legislation as violating the Contracts Clause of the U.S. Constitution when the law effectively overwrites the terms of existing agreements—for example, by reducing or suspending rent payments under the California and New York proposals—and thereby forces landowners and lenders to bear an outsized portion of the economic burden resulting from the COVID-19 pandemic.

State laws that “operate[ ] as a substantial impairment of a contractual relationship” and that are not “drawn in an ‘appropriate’ and ‘reasonable’ way to advance ‘a significant and legitimate public purpose’” violate the Contracts Clause. Sveen v. Melin, 138 S. Ct. 1815, 1821-22 (2018) (internal quotation marks omitted)). Landowners and lenders may argue that a statute permanently depriving them of all or part of their rental and mortgage payments—in addition to undermining the contractual bargain and interfering with their reasonable expectations under their rental and mortgage agreements—would exceed a reasonably necessary response to the pandemic and inappropriately shift to landowners and lenders the financial burdens of the economic interruption. Moreover, depending on the legislation being challenged, landowners and lenders may be able to identify more reasonable alternatives that the state legislature eschewed. For instance, if the legislation permanently deprives landowners of rental payments, it could be argued that the legislation is unreasonable, particularly in light of the fact that some other proposed bills contemplated a voucher-based system that would spread the costs of rent relief across taxpayers without undermining or altering previously entered contracts. But to the extent the voucher system does not permit full recoupment of the lost rental payments, even a voucher or other cost-spreading measure could be subject to constitutional scrutiny if challenged by landowners.

Some courts have previously upheld certain rent regulations against Contracts Clause attacks, primarily on the ground that residential leasing is a “heavily-regulated industry” and that, according to these courts, landowners therefore “cannot claim surprise that [their] relationships with certain tenants are affected by governmental action.” Kraebel v. N.Y.C. Dep’t of Hous. Pres. & Dev., 959 F.2d 395, 403 (2d Cir. 1992). Cases like Kraebel, however, are distinguishable on multiple grounds. For example, Kraebel involved a rent-relief law that ultimately reimbursed landowners for any loss of expected rent payments. 959 F.2d at 398. Some of the California and New York bills, however, appear to contemplate permanently depriving at least some landowners of the reduced or suspended rent payments. Moreover, even if a particular landowner could anticipate regulations similar to those previously enacted by the state or locality in which the landowner’s properties are located, it could “not contemplate th[e] departure” from previous measures embodied in legislation that goes far beyond traditional limitations and requirements, including the permanent loss of their contractually expected rent payments. West End Tenants Ass’n v. George Washington Univ., 640 A.2d 718, 735 (D.C. 1994).

Thus, the Contracts Clause may offer landowners and lenders a potential avenue for challenging state COVID-19 rent-relief legislation that interferes in their ongoing contractual relationships and shifts to them the financial burdens of the pandemic’s economic interruption.

B. The Due Process and Equal Protection Clauses

The Due Process Clause of the Fourteenth Amendment may also provide a potential ground for challenging state laws that deprive landowners and lenders of revenue. A plaintiff asserting a substantive due process claim must prove: (1) a valid property interest and (2) that defendants “infringed on that property right in an arbitrary or irrational manner.” Royal Crown Day Care LLC v. Dep’t of Health & Mental Hygiene of City of New York, 746 F.3d 538, 545 (2d Cir. 2014) (internal quotation marks omitted). As with the Contracts Clause challenge, affected entities could argue that a particular rent- or mortgage-relief law arbitrarily and irrationally infringes on landowners’ and lenders’ property rights. See, e.g., Regina Metro. Co. v. New York State Div. of Hous. & Cmty. Renewal, — N.E.3d —, 2020 WL 1557900 (N.Y. Apr. 2, 2020) (per curiam) (holding that retroactive extension of statute of limitations for time-barred rent-overcharge claims violated due process on rational basis review); Richardson v. City & Cty. of Honolulu, 759 F. Supp. 1477, 1494 (D. Haw. 1991) (holding that ordinance imposing maximum ceiling on renegotiated lease rents for condominiums did not rationally further the legitimate goal of reducing the cost of leasehold housing because it applied to condominiums not used for residential purposes, did not limit rates charged to sublessors, did not consider the market value of the property, and designated no government authority to oversee its application).

Similarly, the Equal Protection Clause of the Fourteenth Amendment may provide another path to challenge COVID-19 rent- or mortgage-relief legislation, particularly where the proposals would place unique burdens on landowners and lenders. The legislation could also be challenged under the corollary provisions of state constitutions. See, e.g., Pennell v. City of San Jose, 721 P.2d 1111, 1117 (Cal. 1986) (rejecting the claim that “equal protection is . . . denied simply because some landlords may receive rents different (albeit nonconfiscatory) from those received by other landlords with similarly situated apartments,” but noting that it “might be inclined to hold such a scheme unconstitutional if the disparity in approved rents among landlords with and without hardship tenants was shown to be so great as to be characterized as arbitrary or grossly unfair”).

Granted, some cases discussing the Due Process and Equal Protection Clauses in the rent-control or rent-stabilization context have concluded that the specific controls at issue in those cases were rationally related to a legitimate government purpose. See, e.g., Pennell v. City of San Jose, 485 U.S. 1, 12-14 (1988); Harmon v. Markus, 412 F. App’x 420 (2d Cir. 2011). But these cases did not involve anything like the proposals being discussed in response to COVID-19, including provisions that would retroactively and permanently deprive landowners of their contractually expected rent payments. Thus, notwithstanding decisions declining to grant Due Process Clause challenges to particular rent-control measures, the COVID-19-related rent-relief legislation may be sufficiently irrational—both in its substance and in targeting landowners—to constitute violations of the Due Process and Equal Protection Clauses.

IV. Conclusion

We cannot prejudge the constitutionality of any contemplated COVID-19 rent-relief legislation. The analyses under the clauses of the federal and state constitutions that most readily apply to economic regulation turn on the specific features of the challenged legislation, among other case-specific considerations. But as the nation moves through this crisis, and legislatures consider relief to those impacted by COVID-19, it bears remembering that the operations of federal, state, and local governments remain subject to constitutional scrutiny, and rent- and mortgage-relief legislation may raise significant constitutional questions in response to which affected landowners or lenders may be able to bring suit.

[1] See Gibson Dunn’s March 27, 2020 Client Alert, Constitutional Implications of Government Regulations and Actions in Response to the COVID-19 Pandemic, available at https://www.gibsondunn.com/constitutional-implications-of-government-regulations-and-actions-in-response-to-the-covid-19-pandemic/

[2] Some states are considering or have already passed mortgage-forbearance legislation that may similarly impact constitutional protections afforded to lenders, as discussed in this alert. See, e.g., DC Act 23-286 COVID-19 Response Supplemental Emergency Amendment Act of 2020 (enacted Apr. 10, 2020) (establishing a system for deferred mortgage payments); N.J. Bill A3948 (as introduced) (establishing a system for deferred mortgage payments and rent suspensions) (introduced Apr. 13, 2020).

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

Authors: Avi Weitzman, Akiva Shapiro, Lochlan Shelfer, and Declan Conroy

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

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

Join our team of Gibson Dunn London lawyers, led by partner and former Lord Chancellor Charlie Falconer QC, for a discussion of these changes and to answer your questions on how they will affect British businesses and community, including the impact on new and ongoing business relationships.

In this webinar we will cover:

Recent competition and consumer law developments, including changes to antitrust, merger control and consumer protection policy
Business support measures announced by the UK Government, with a focus on the Coronavirus Business Interruption Loan Scheme for small and large businesses and the Coronavirus Corporate Finance Facility
The potential triggering of force majeure clauses and related doctrines in commercial agreements governed by English law

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

PANELISTS:

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

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

Deirdre Taylor: A partner in Gibson Dunn’s Antitrust and Competition Group. Experience in a full range of antitrust issues, including cartel investigations, merger control, and abuse of dominance.

Amar K. Madhani: A senior associate in Gibson Dunn’s Corporate team. Focuses on general corporate and corporate finance transactions, including domestic and international mergers and acquisitions, joint ventures, private equity, venture capital and equity capital markets transactions.

Piers Plumptre: An associate in Gibson Dunn’s Dispute Resolution and International Arbitration Groups. Experience in international arbitration, complex commercial litigation, financial services disputes, regulatory investigations, and international fraud and white collar crime.

GLOBAL OVERVIEW

Corporate/M&A in Times of the Corona Crisis – Current Legal Developments for German Business

On March 28, 2020, the German Federal legislature’s response to the Corona crisis entered into force, introducing a varied array of far-reaching legislative measures to stabilize and support the German economy. In the sphere of corporate law, such statutory implementation measures are, in particular, contained in the Act on the Mitigation of the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedural Law and the so-called Act on the Introduction of an Economic Stabilization Fund. The German Institute of Auditors (Institut der Wirtschaftsprüfer – IDW) has dealt with the consequences of the Corona crisis on current and future financial statements in three separate official communications in March and April 2020. The EU Commission reacted a couple of days ago by publishing a Communication providing guidance on the foreign investment control mechanisms of the Member States. Last but not least, several anti-trust authorities have issued statements either specifically with regard to merger control issues or, more generally, regarding the application of the competition rules in the current crisis situation, including, inter alia, the EU Commission and the German Federal Cartel Office.
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COVID-19: Regulatory Forbearance for Fund Annual Reports under EU AIFMD

The European Securities and Markets Authority has published a public statement detailing actions to mitigate fund managers’ reporting obligations. This client alert provides EU alternative fund managers (“AIFMs”), and non-EU AIFMs marketing their funds in the EU, with an overview of the impact of the public statement on the obligation to publish an annual report for the funds they manage.
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Federal Trade Commission and Department of Justice Issue Joint Statement Regarding COVID-19 and Competition in Labor Markets

The COVID-19 pandemic has drastically reshaped the economy in many ways, and labor markets are not immune to its impact. As demands for goods and services—and the workers required to meet those demands—shift, employers should carefully consider the antitrust implications of any steps they might take to adjust to changing markets.
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Force Majeure Primer and Flowchart for Oil and Gas Leases

Within the oil and gas industry, force majeure clauses are often (but not always) included in oil and gas leases where they play an important role. These clauses provide generally that, under certain circumstances, a lessee may be relieved from the consequences of a failure to comply with the terms of the lease due to the occurrence of an unforeseen event, even where the resulting liability might otherwise include damages or the forfeiture of the lease.

Assessing the applicability and enforceability of such clauses in oil and gas leases requires a highly fact-specific analysis. To assist clients in identifying issues they should evaluate in connection with their lease obligations in the face of the pandemic, we have prepared the following five-step analysis and flowchart to assist in the review and assessment of force majeure clauses in your oil and gas leases.
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Recent Trends Involving Intellectual Property Rights in the Responses to COVID-19

As the pandemic continues, organizations around the world are grappling with the intellectual property implications associated with encouraging the rapid distribution of personal protective equipment (“PPE”) and the development of pharmaceutical treatments to help fight COVID-19. Increasing public attention is also being directed to misconduct associated with some of these efforts, such as price gouging for PPE, or the distribution of fake or ineffective products. In this alert, we review recent initiatives promoting the donation of intellectual property rights that entities may use in connection with their efforts to combat COVID-19, related pending legislation, and how some entities are using trademark law to combat what they regard as price gouging for PPE and false marketing of coronavirus testing kits.
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Supreme Court Reschedules Half of Remaining Cases for Argument in Fall 2020

On April 13, the Supreme Court announced that for the remainder of this Term, it will hear (by telephone) only 10 of the 20 cases that were previously scheduled for oral argument in March and April 2020. The remaining cases apparently “will be carried over and the arguments will be conducted early in the 2020 term.” Much has been made of the 10 cases the Court has scheduled for extraordinary telephonic arguments in May. The 10 cases that were carried over, however, have thus far received less attention. Those cases (including consolidated cases) include several of significant importance to the business community and are summarized in this client alert.
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On March 28, 2020, the German Federal legislature’s response to the Corona crisis entered into force, introducing a varied array of far-reaching legislative measures to stabilize and support the German economy. In the sphere of corporate law, such statutory implementation measures are, in particular, contained in the Act on the Mitigation of the Consequences of the COVID-19 Pandemic in Civil, Insolvency and Criminal Procedural Law (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht – hereinafter the “COVID-19 Pandemic Mitigation Act”) and the so-called Act on the Introduction of an Economic Stabilization Fund (Wirtschaftsstabilisierungsfondsgesetz – WStFG). A selective overview of some of these implementation measures adopted in the corporate law domain is given in Section 1.1 (Corporate Caw “Light” in the Context of State Measures under the WStFG) and 1.2 (Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act).

The Corona crisis also triggers intricate issues related to current and future financial statements: The German Institute of Auditors (Institut der Wirtschaftsprüfer – IDW) has dealt with these questions via three separate official communications in March and April 2020 (both in terms of accounting issues under the German HGB-accounting standards and IFRS). A legal overview is given below in Section 2 (Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020).

The well-documented concerns regarding increased foreign acquisition activities in sensitive industry sectors during the Corona crisis has seen the EU Commission react a couple of days ago by publishing a Communication providing additional guidance on the foreign investment control mechanisms of the Member States. On April 8, 2020, the German government has resolved a draft of the „Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes” (First Statute on the Amendment of the Foreign Trade and Payments Act). We provide a brief summary of the current German legal situation and the prospective changes under Section 3 (Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes).

Last but not least, several anti-trust authorities have issued statements either specifically with regard to merger control issues or, more generally, regarding the application of the competition rules in the current crisis situation, including, inter alia, the EU Commission and the German Federal Cartel Office (Bundeskartellamt – BKartA). We briefly analyze these latest developments below in Section 4 (Anti-Trust and Merger Control in Times of COVID-19).

TABLE OF CONTENTS

1.1 Corporate Law “Light” in the Context of State Measures under the WStFG
1.2 Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act
2.       Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020
3.       Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes
4.       Anti-Trust and Merger Control in Times of COVID-19

1.1 Corporate Law “Light” in the Context of State Measures under the WStFG

The Act on the Introduction of an Economic Stabilization Fund (Gesetz zur Errichtung eines Wirtschaftsstabilisierungsfonds – WStFG), which entered into force on March 28, 2020, provides the statutory framework for the German Federal state‘s measures aimed at stabilizing the national economy and securing jobs. The measures provided for in this new Act flank the stabilization measures at the Federal level via the support programmes of the Kreditanstalt für Wiederaufbau (KfW) as well as the additional measures taken at the level of the regional German states (Bundesländer).[1]

The decision on the stabilization measures provided for in the WStFG rests with the Federal Finance Ministry (Bundesministerium für Finanzen) which decides based on the due exercise of its discretion and after consultation with the Federal Ministry for the Economy and Energy (Bundesministerium für Wirtschaft und Energie) following an application of the respective enterprise. Relevant criteria for this discretionary decision are the importance of the applicant enterprise for the German economy, the urgency involved, the potential effects on the job market and on competition, as well as the principles of the most cost-efficient, prudent, economic use of the financial means of the Economic Stabilization Funds (Wirtschaftsstabilisierungsfonds – WSF). The applicant enterprises of real economy must, furthermore, meet at least two of the following requirements (i) balance sheet sum of more than € 43 million, (ii) more than € 50 million sales revenues, and (iii) more than 249 employees on average. Any legal entitlement to receive funds under the WStFG is expressly excluded.

In addition to providing guarantees, the WSF may also participate in recapitalization measures. The measures at its disposal include the acquisition of subordinated debt instruments, profit-sharing rights (Genussrechte), silent partnerships or convertible bonds and the acquisition of shares. The measures are in principle time-limited until December 31, 2021, but can be extended in the individual case, in particular, if such extension is required to safeguard such a stabilization measure.

In order to implement these measures, a number of corporate law provisions applicable to the respective corporate format are temporarily superimposed by the WStFG with a view to facilitating the involvement of the WSF. This concerns, in particular:

Benefitting companies, as a rule, will have to issue a self-commitment declaration (with the approval of the supervisory board), which contains rules on the due use of funding, the entry into of future liabilities, the remuneration of the company bodies, the dividend policies and other measures and which is also effective vis-à-vis the respective company and its shareholders. Such a self-commitment does not clash with the principle of the management board’s independent management capacities and responsibilities even in a stock corporation.
The exclusion of the subscription rights of existing shareholders for the benefit of the WSF in the context of capital measures has been facilitated.
New shares can be issued to the WSF with a profit or liquidation preference.
Irrespective of any contrasting provisions in the articles of association, a capital increase against contribution can be resolved with the majority of the votes cast. The necessary majority to resolve an exclusion of subscription rights is at least 2/3 of the votes cast or of the represented registered share capital (Grundkapital); if at least 50% of the registered share capital are represented, the simple majority is also sufficient in such case.
Prepayments by the WSF on its contribution obligation have discharging effect.
Further measures were introduced to simplify and accelerate capital decreases, as well as to facilitate the creation of conditional and/or authorized capital (bedingtes und/oder genehmigtes Kapital).
Resolutions regarding capital measures are effective already prior to their registration in the commercial register, provided they are published on the internet webpage of the company.
The rules on affiliated companies regarding stock corporations are not applicable until December 31, 2021 for the benefit of the WSF, as well as the German Federal Republic and its public corporations and bodies (öffentlicher Körperschaften). The rules on the representation of employees in the supervisory board of a company controlled by the WSF are, however, exempt from this exclusion and remain applicable.
Shareholders who delay or frustrate required recapitalization measures inter alia by their voting behavior or legal remedies may end up being liable to the company for damages.
Corresponding simplifications for capital measures also apply for benefitting companies in the legal format of partnerships limited by shares (KGaA) and European stock corporations (SE). In limited liability companies (GmbH) capital increases only require a simple majority of votes present; shareholders can be excluded from the company against compensation with a majority of ¾ of the votes present, if this is necessary for the stabilization measure to be successful. The WSF may be accepted as new limited partner of limited partnerships with a limited liability company as general partner (GmbH & Co. KG) or other limited partnerships by partner resolution taken by the partners present with simple majority.
Information duties vis-à-vis the economic committee (Wirtschaftsausschuss) or the works council (Betriebsrat) are excluded for participation of the WSF.
Furthermore, for stock corporations the notification duties arising under capital market rules (wertpapierhandelsrechtliche Mitteilungspflichten) do not apply, and the obligation to submit a mandatory offer to acquire shares pursuant to the Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz) is derogated from even if the thresholds are exceeded by the WSF. In tandem, the threshold for the squeeze-out of minority shareholders is lowered to 90% for the benefit of the WSF.
Further-reaching rules in favor of the WSF concern the large-scale exclusion of the rules on hidden contributions in kind (verdeckten Sacheinlagen) and of contestation rights of stabilization measures as well as the subordination of shareholder loans pursuant to the Insolvency Code (Insolvenzordnung – InsO). Contractual provisions, which otherwise would give contracting partners a right to terminate the contract on account of a change of control because the WSF joins or exits a business, are deemed to be invalid. The same applies to compensation or severance payments in favor of company organs in the case of a change of control.
By contract, self-commitment or administrative act, mitigating measures to avoid any distortions of competition can be placed on the beneficiary businesses. The limited applicability of the German Law against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB) to the WSF itself is clarified for completeness sake, notably that only part 4 (Procurement law) and part 5 (Applicability of the GWB to public enterprises) are applicable.

1.2 Other Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act

The main focus on the corporate law changes was initially put on the relaxation of the requirements for staging general meetings of German stock corporations (Aktiengesellschaft – AG), allowing them to proceed in an entirely electronic manner, as well as the possibility of delaying the ordinary general meeting (ordentliche Hauptversammlung) beyond the hitherto applicable eight month deadline.[2]

But there is a number of other, temporary provisions of company law which can be relevant for the management of corporate entities:

Shareholder resolutions of German limited liability companies (GmbH) may be adopted in text form or by written vote in the year 2020 even if there is no express enabling clause to do so in the relevant articles of association. It is not necessary that all shareholders consent to such procedure. Text form will not require a personal signature by hand. It is sufficient that the declaration is legible and the name of the person making the declaration is given and that the declaration is embodied on a lasting data medium (e.g. a hard drive, USB stick, but also an e-mail). Such derogation from the holding of presence meetings even without consent of all shareholders, however, does not remove the other formalities for the adoption of resolutions. In particular, whenever resolutions on potentially contentious matters are proposed, the deadline accorded for the submission of written votes should match the regular convocation or resolution announcement periods (Fristen für die Beschlussankündigung). Such a waiver of holding a presence meeting also does not derogate any other form requirements applicable to the adoption of shareholder resolutions, which means that changes to the articles of association or measures under the German Conversion Act (Umwandlungsgesetz – UmwG) continue to require notarial recordings.
If proposed measures under the Conversion Act (UmwG) require the submission of closing balance sheets (Schlussbilanz) as an attachment of the mandatory commercial register filings (for instance the balance sheet of the transferring entity in the case of mergers), under the current law, the balance sheet reference date (Bilanzstichtag) used in such filings could not be older than eight months by the time the register filing was submitted to the registry court. This time period has now been extended to twelve months for register filings made in 2020. For example, the register filing of a merger, which is proposed to be submitted on June 1, 2020, would now be permitted to make use of the annual financial statements with reference date as of June 30, 2019 rather than having to prepare an interim balance sheet of a more recent date.
The management bodies of companies, who benefit from the conditional derogation of the duty to file for insolvency due to COVID-19 for an interim period until, at present, September 30, 2020 despite being in a state of over-indebtedness or illiquidity,[3] may make continued payments in the ordinary course of business during such period despite the existence of over-indebtedness or illiquidity without incurring the personal liability they would otherwise incur. Such payments in a COVID-19-caused technical state of insolvency are deemed by law to be in line with the standards of care of a prudent business person and manager. The reform law lists, by way of examples, payments aimed at maintaining or restarting business operations or designed to implement an operational restructuring concept. However, this new rule places a significant standard of care on the management of companies in financial distress. The necessary assessment notwithstanding whether any measures proposed to be taken is part of the ordinary course of business operations, management will furthermore have to ensure in advance that the company can indeed avail itself of this interim insolvency filing derogation by falling within the scope of the rule. In particular, the state of financial distress must be on account of COVID-19 and there has to be a (reasonable) expectation that such financial distress can be overcome. Management can, however, rely on an (albeit rebuttable) legal presumption that both these requirements apply to the company if the state of over-indebtedness/illiquidity did not already exist as of December 31, 2019.

2. Dealing with the Corona Crisis in the Annual Financial Statements for the Business Years 2019 and 2020

Since the first COVID-19 cases had already been publicized in December 2019 but the cataclysmic consequences for public health and the economy in Germany and Europe only started to be felt in earnest from the end of February 2020, the question whether and if so, how the Corona crisis might also have to be taken into account in the financial statements for the completed fiscal year 2019 quickly became a topic of discussion. Two separate official communications published by the German Institute of German Auditors (Institut der Wirtschaftsprüfer – IDW) dated March 4, 2020[4] and dated March 25, 2020[5] provided crucial guidelines. On April 8, 2020, the IDW has published a third communication that specifically deals with specific questions asked in response to the two earlier guidelines.[6]

In summary, it can be said that the IDW does not view the Corona crisis as a point in time event and, thus, as a value-enhancing event (wertaufhellend) under the German HGB-accounting standards or an adjusting event under IFRS but rather as an ongoing process of a certain duration, which therefore is deemed to be value-justifying (wertbegründend) under the HGB-rules or a non-adjusting event under IFRS. The crisis is, thus, of particular relevance for the reporting in the current fiscal year 2020 and potentially future fiscal years beyond.

Based on this assessment of the crisis as an, in principle, value-justifying event, the developments surrounding the corona virus, nevertheless, are to be reflected in the (consolidated) notes to the HGB financial statements 2019 in the individual case if they qualify as a “matter of particular importance” according to § 285 No. 33 or § 314 para. 1 No. 25 HGB. According to the IDW that is the case if the effects of COVID-19 are likely to influence the picture conveyed by the financial statements 2019 and, without subsequent supplemental reporting, the developments after the balance sheet date would be judged significantly differently by the addressees of the financial statements. The IDW reaches similar conclusions also for the assessment to be made under IFRS.

Further, it should be noted that developments surrounding the coronavirus will in many cases be reflected in the (Group) management reports for the completed fiscal year 2019, at least, in the risk and forecast reporting. According to the IDW such an inclusion in the risk report is warranted in principle if the possible further developments lead to negative deviations from the forecasts and goals of the business, such circumstances are a material individual risk and the financial statements would otherwise not provide an accurate picture of the risk position of the group.

It is also possible that the current dramatic changes of the economic parameters result in a situation where management has to revise its expectations of the forecast performance indicators in such a way that an appropriate reflection in or revision of the forecast report in the financial statements 2019 is required.

In the ongoing auditing season for the fiscal year 2019 special focus should, thus, be placed on subsequent, critical developments and close coordination with external advisors is particularly well advised. The European Securities and Market Authority (ESMA) has, in this context, appealed to issuers to create transparency with regard to the actual and potential consequences of COVID-19 and include corresponding clarifying assessments in the financial statements for the fiscal year 2019 to the extent they are not yet finalized and established.[7] This is even more critical in cases where the crisis affects a business in such an impactful way that makes it apparent at this stage that it can no longer be assumed that the company will be able to continue its business operations (§ 252 para. 1 No. 2 HGB). It is possible that under certain circumstances the going concern assumption must be retroactively abandoned also for the fiscal year 2019. The IDW states in its communication that in those concrete individual cases where the Corona pandemic no longer allows the company to justify the continuation of its business activities based on a going concern assumption, „the financial statements must be prepared in accordance with the provisions of IDW RS HFA 17 (e.g. valuation from a liquidation perspective), and the going concern assumption must be abandoned” which applies “even if the reason for the departure did not occur until after the balance sheet date.”[8]

3. Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes

As a reaction not least to concerns that weakened enterprises might be acquired by investors from abroad, a global trend to tighten the controls on foreign investment in local business is noticeable. For instance, Australia has recently announced that all foreign investments will now be subject to control.[9] The USA had tightened their investment control rules already in February (the so-called 2018 Foreign Investment Risk Review and Modernization Act (FIRRMA)) and extended the competencies of the U.S. Committee on Foreign Investment in the United States (CFIUS). Now certain investments into the life sciences sector below the regular control thresholds are nevertheless subject to the CFIUS filing requirement.[10]

The EU Commission has also published a communication on March 26, 2020,[11] in which it urged the member states to introduce mechanisms to comprehensively control foreign investment or make full use of such already existing[12] control mechanisms in order to jointly protect strategically important industries against acquisition by foreign investors during the times of crisis. The communication expressly is not limited to the health industry only, but puts special focus on this industry. Already in its earlier communication of March 13, 2020,[13] the Commission had asked the Member states to protect critical installations and technologies. Such communications are not binding, but provide important guidelines for the shaping of the national investment control regimes by the member states – and, thus, relevant clues as to what investors can expect in future.

While Spain, for instance, has already reacted to the Commission’s communication with a provisional obligation to obtain an ex ante clearance for foreign direct investments into strategic sectors,[14] it otherwise remains to be seen how the other EU member states will position themselves. Certain EU member states had already tightened their investment control regimes before the COVID-19 pandemic struck.[15] But even if it turns out that there might not be a full-scale across the board adaptation of national legislation, a more stringent practical implementation can certainly be expected.

The drive to attempt to harmonize the investment control regimes in the member states pre-dates the COVID-19 crisis: On October 11, 2020 the Regulation establishing a framework for the screening of foreign direct investments into the Union (EU-Screening-Regulation)[16] will enter into force. It provides, inter alia, for a consultation procedure between the Commission and/or member states, on the one hand, and the competent member state, on the other hand, in the context of which the Commission and the member states can suggest mitigation measures or prohibitions for investments which go beyond the initial decision of the competent member state.

With the aim of adapting German law to this EU Regulation, and consequently not purely in direct response to the COVID-19 pandemic and its consequences, the Federal government cabinet on April 8, 2020 launched a draft bill called the First Statute on the Amendment of the Foreign Trade and Payments Act and other Laws (Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes (AWG) und anderer Gesetze),[17], which is based on a ministerial draft bill dated January 30, 2020.[18]

The pre-existing fundamental differentiation in the German foreign direct investment control rules between the so-called cross-sectoral control (§§ 55-59 of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV)) and the so-called sector-specific control (§§ 60-62 AWV) is maintained in principle:

The cross-sectoral control, in principle, covers all acquisition transactions which give an acquirer from outside the Union direct or indirect control over at least 25 per cent of the voting rights in a national enterprise. If the national enterprise conducts its business in a particularly security-relevant sector, as conclusively listed in § 55 para. 1 S. 2 AWV, the control threshold is set at 10 per cent of the voting rights. Acquisitions within the Union are only covered in so far as they are deemed to be a circumvention of the investment control rules. A prohibition of the acquisition currently may only be issued if the public order and security of the Federal Republic of Germany is endangered.[19] The acquirer, furthermore, has the option – e.g. whenever there are uncertainties regarding the applicability and scope of §§ 55 et seq. of the AWV and/or to ensure deal security – of applying for a certificate of non-objection.

The sector-specific control, in contrast, exclusively covers acquisition transactions pursuant to which a foreigner (including foreigners from other EU member states) acquires, directly or indirectly, at least 10 per cent of the voting rights in a national enterprise which produces or develops one of the goods listed conclusively in § 60 AWV. Pursuant to the government draft bill, in the future, not only the production and development of such goods would qualify for a sector-specific control, but also expressly the modification or use of such goods. A prohibition of the acquisition may only be issued if material security interests of the Federal Republic of Germany are endangered.[20]

In addition, the draft bill, in particular, provides for two further key changes: On the one hand, the current concept of endangering in the AWG (“… if the public order or security of the Federal Republic of Germany is endangered by the acquisition“, § 5 para. 2 AWG, current version) stands to be adapted to the concept of endangering in the EU-Screening-Regulation (“…if the public order or security of the Federal Republic of Germany or another member state of the European Union … are likely endangered by the acquisition“, § 5 para. 2 AWG in the version in the draft of April 8, 2020). Via the cross-reference to § 4 para. 1 No. 4 AWG (as amended) this would apply accordingly to the public security and order regarding projects and programmes of Union interest within the meaning of Article 8 of the EU-Screening-Regulation. This will consequently result in more future transactions being within the remit of the German foreign direct investment control regime. On the other hand, it is stipulated that the underlying contractual (schuldrechtliche) acquisition transactions shall be subject in future to a dissolving condition of a prohibition both within the scope of the cross-sectoral and the sector-specific investment control procedures until such time when the control procedure is completed. The duty to notify the underlying contractual transaction continues to arise from § 55 para. 4 AWV. The implementation of transactions subject to a notification requirement shall in future in all cases only become valid upon completion of the control proceedings. This aims at reducing the risk that irreversible facts are created in the time window until the control procedure is completed by, for instance, implementing the acquisition transaction de facto in practice or the irreversible loss of information and technologies. This legal change is flanked by adding specific prohibition scenarios to § 15 para. 4 AWG, like the exercise of voting rights by the acquirer, accepting instructions how to vote, profit payments or the submission of enterprise-specific, investment control relevant information to the acquirer. The relevant Foreign Trade and Payments Ordinance shall be amended accordingly.

4. Anti-Trust and Merger Control in Times of COVID-19

There are several varying consequences of the pandemic on the timelines for merger control proceedings. Some anti-trust authorities have communicated that delays to the customary timeframes are likely,[21] while others have engaged in reviving „fast-track“ programs.[22] The European Commission has published on its website that – due to the present situation – it is currently facing difficulties to collect the necessary information from the notifying parties and other third parties like, for example, their customers, competitors and suppliers.[23] In view of the existing procedural deadlines, it will therefore be forced to make generous use of „stop-the-clock“ provisions. However, the Commission expressly remains willing and capable of accepting new merger filing applications and processing them to the best of its abilities if the notifying parties can provide very compelling reasons that militate for a speedy implementation of merger control proceedings in the individual case. The German Federal Cartel Office (BKartA) has merely issued a reminder that any currently proposed new merger control notifications should be “re-considered”,[24] but remains in full working mode and has opened additional communication channels to facilitate “remote” work and the submission of documentation. Any parties currently considering mergers and acquisitions which may be subject to filing requirements under one or several merger control regimes would, thus, be well advised under the current circumstances to re-assess the anticipated timeframes and take into account potential time delays and other procedural hurdles in obtaining merger control clearance.[25]

Even in times of crisis, the applicable anti-trust and merger control laws allow for flexible cooperation mechanisms. In a joint statement by the European Competition Network on the COVID-19 crisis,[26] it was already established that the European competition authorities will not actively intervene against cooperation forms which are aimed at securing the access for all consumers to otherwise scarce goods. Further, on April 8, 2020, the European Commission published a “Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak”.[27] The Commission’s communication is meant to provide antitrust guidance to companies cooperating in response to urgent situations related to the current coronavirus outbreak which includes, in particular, medicines and medical equipment that are used to treat coronavirus patients but also applies to similar supply emergencies resulting from the coronavirus outbreak for essential goods and services outside the health sector. On the other hand, the competition authorities have left no doubt that they will stringently quash any attempts to profiteer from the current emergency situation by way of concerted efforts or the abuse of market power. They have therefore clearly highlighted that the rules on anti-competitive behaviors, and prime amongst them the prohibition of cartels in Art. 101 TFEU/§ 1 German Competition Act (Gesetz gegen Wettbewerbsbeschränkungen – GWB), also apply as the guiding principle in these unprecedented times of crisis. Ultimately, this means that it remains incumbent on the enterprises and their legal advisors to assess the admissibility under competition law of any proposed measures in each individual case. Recognizant of the fact that such assessments are difficult enough in “normal times”, let alone in times of a global health pandemic, the European Commission has been engaging with companies and trade associations to help them in assessing the legality of their cooperation plans and putting in place adequate safeguards against longer-term anticompetitive effects, and collected and published additional information and guidelines on its website regarding “Antitrust rules and coronavirus”.[28] The key feature among this information is a specially designated email address which can be used by businesses to obtain informal advice on specific company initiatives. The German BKartA has expressly declared its support for this initiative and serves as national point of contact to discuss national concerns and matters in this regard.[29] In addition, the European Commission exceptionally declared its willingness to issue so-called ‘comfort letters’ in cases where there may still be uncertainty about whether such initiatives are compatible with EU competition laws.[30]

Special provisions apply to cooperation among businesses during the coronavirus outbreak to avoid supply shortages of critical hospital medicines and other medical products and services. For this purpose, and in addition to the Temporary Framework outlined above, the European Commission has published “Guidelines on the optimal and rational supply of medicines to avoid shortages during the COVID-19 outbreak” on April 8, 2020. These communications outline the main criteria that will be applied when assessing these possible cooperation projects.[31] In particular, antitrust guidance is provided to companies willing to temporarily cooperate and coordinate their activities in order to increase production in the most effective way and, specifically, to optimize the supply of urgently needed hospital medicines, e.g. by coordinating production, stock management, distribution and logistics. Furthermore, the European Commission has already issued a comfort letter as described above for a cooperation project among pharmaceutical producers that targets the risk of shortage of critical hospital medicines for the treatment of coronavirus patients.

[1] Also see in this context: https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/.

[2] See in this context also: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/, Section III.

[3] In this context, also see: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/, section II.2.

[4] In German available under: https://www.idw.de/idw/im-fokus/coronavirus/auswirkungen-der-ausbreitung-des-coronavirus-auf-rechnungslegung-und-pruefung–teil-1–fachlicher-hinweis-des-idw-/122498.

[5] In German available under: https://www.idw.de/idw/im-fokus/coronavirus/auswirkungen-der-ausbreitung-des-coronavirus-auf-rechnungslegung-und-pruefung–teil-2–fachlicher-hinweis-des-idw-/122878. A combined English language version of the two German communications can be found under the address: https://www.idw.de/idw/im-fokus/coronavirus/effects-of-the-spread-of-the-corona-virus-on-the-financial-statements-as-of-31-12-2019-and-their-audit/122914.

[6] In German available under: https://www.idw.de/idw/im-fokus/coronavirus/auswirkungen-der-ausbreitung-des-coronavirus-auf-rechnungslegung-und-pruefung–teil-3–fachlicher-hinweis-des-idw-/123092 and again as an English translation: https://www.idw.de/idw/im-fokus/coronavirus/questions-concerning-the-impact-of-the-spread-of-coronavirus-on-the-financial-statements-and-their-audit–part-3-/123132.

[7] https://www.esma.europa.eu/about-esma/covid-19.

[8] Guidelines of the IDW dated March 27, 2020, Page 10/37, https://www.idw.de/blob/122914/8b4b3722606c025e741eb7ac59988ded/down-corona-englische-fassung-teil-1-und-2-data.pdf.

[9] Press release dated March 29, 2020, available under: https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/changes-foreign-investment-framework

[10] Further information on the CFIUS reform see Client Alert „CFIUS Reform: Top Ten Takeaways from the Final FIRRMA Rules“ dated February 19, 2020: https://www.gibsondunn.com/cfius-reform-top-ten-takeaways-from-the-final-firrma-rules/.

[11] Communication from the Commission dated March 25, 2020, Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation), C(2020) 1981, available under: https://data.consilium.europa.eu/doc/document/ST-7028-2020-INIT/de/pdf (German, without annexes) or https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158676.pdf (English, full text).

[12] So far the following 14 member states have established control mechanisms: Austria, Denmark, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Rumania, Spain; in addition, corresponding rules also exist in Great Britain.

[13] Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Investment Bank and the Eurogroup: Coordinated economic response to the COVID-19 Outbreak; available under https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0112.

[14] Real Decreto 8/2020 dated March 18, 2020, available under: https://www.boe.es/boe/dias/2020/03/18/pdfs/BOE-A-2020-3824.pdf (in Spanish).

[15] Germany and others notwithstanding, France had already tightened its foreign investment control legislation at the beginning of last year and extended the list of sectors subject to control, see press release of January 3, 2019, available under: https://www.gouvernement.fr/en/strengthening-control-of-foreign-investments-in-sensitive-companies.

[16] Regulation (EU) 2019/452 of the European Parliament and of the Council of March 19, 2019 establishing a framework for the screening of foreign direct investments into the Union, available under: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0452&from=EN.

[17] The draft law’s text can be found under https://www.juris.de/jportal/portal/page/homerl.psml?nid=jnachr-JUNA200401047&cmsuri=%2Fjuris%2Fde%2Fnachrichten%2Fzeigenachricht.jsp.

[18] Referentenentwurf Bundesministerium für Wirtschaft und Energie, Erstes Gesetz zur Änderung des Außenwirtschaftsgesetzes dated January 30, 2020, available under https://www.bmwi.de/Redaktion/DE/Downloads/E/erstes-gesetz-zur-aenderung-des-aussenwirtschaftsgesetzes.pdf?__blob=publicationFile&v=6.

[19] It can be expected that the concept of endangering in the AWV will be modified in accordance with the First Statute on the Amendment of the Foreign Trade and Payments Act and other Laws to match the concept of endangering in the EU-Screening Regulation.

[20] It can be expected that the concept of endangering in the AWV will be modified in accordance with the First Statute on the Amendment of the Foreign Trade and Payments Act and other Laws to match the concept of endangering in the EU-Screening Regulation.

[21] France: Autorité de la concurrence, „Adaptation of the time limits and procedures of the Autorité de la concurrence in times of health emergency“, press release of March 27, 2020, available in English under https://www.autoritedelaconcurrence.fr/en/press-release/adaptation-time-limits-and-procedures-autorite-de-la-concurrence-times-health; Denmark: Konkurrence- og Forbrugerstyrelsen, „Time limits for merger control are suspended for 14 days“, press release of March 18, 2020, available in English under https://www.en.kfst.dk/nyheder/kfst/english/news/2020/20200318-time-limits-for-merger-control-are-suspended-for-14-days/.

[22] U.S. Federal Trade Commission, „Resuming early termination of HSR reviews“, blog post of March 27, 2020, available in English under https://www.ftc.gov/news-events/blogs/competition-matters/2020/03/resuming-early-termination-hsr-reviews.

[23] Notice of the EU Commission dated March 7, 2020, „Special Measures due to Coronavirus / COVID-19: Update of 7th April 2020“, available in English under https://ec.europa.eu/competition/mergers/covid_19.html.

[24] Bundeskartellamt, „Kommunikation mit dem Bundeskartellamt (Corona–Maßnahmen)“, Notice of March 17, 2020, available under https://www.bundeskartellamt.de/SharedDocs/Meldung/DE/AktuelleMeldungen/2020/17_03_2020_Kommunikation_Bundeskartellamt.html.

[25] In this regard also refer to our Client Alert, „U.S. Federal Trade Commission and DG COMP Implement Changes to U.S. and EU Merger Filing Procedures in Response to COVID-19“, March 16, 2020, available in English under https://www.gibsondunn.com/us-ftc-and-dg-comp-implement-changes-to-us-and-eu-merger-filing-procedures-in-response-to-covid-19/.

[26] European Competition Network, „Antitrust: Joint statement by the European Competition Network (ECN) on application of competition law during the Corona crisis“, Statement of March 23, 2020, available in English under https://ec.europa.eu/competition/ecn/202003_joint-statement_ecn_corona-crisis.pdf

[27] Communication from the Commission dated April 8, 2020, “Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak”, C(2020) 3200, available in English under: https://ec.europa.eu/info/sites/info/files/framework_communication_antitrust_issues_related_to_cooperation_between_competitors_in_covid-19.pdf.

[28] https://ec.europa.eu/competition/antitrust/coronavirus.html.

[29] Bundeskartellamt „EU-Kommission informiert zu Wettbewerbsregeln in der Coronavirus-Krise“, Notice dated March 31, 2020, available in English under https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/AktuelleMeldungen/2020/01_04_2020_EU_Commission_competition_rules_coronavirus.html?nn=4136442.

[30] See Communication from the Commission dated April 8, 2020, “Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak”, C(2020) 3200, available in English under: https://ec.europa.eu/info/sites/info/files/framework_communication_antitrust_issues_related_to_cooperation_between_competitors_in_covid-19.pdf.

[31] Communication from the Commission dated April 8, 2020, “Guidelines on the optimal and rational supply of medicines to avoid shortages during the COVID-19 outbreak”, C(2020) 2272, available in English under: https://ec.europa.eu/info/sites/info/files/communication-commission-guidelines-optimal-rational-supply-medicines-avoid.pdf.

_______________________

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

Authors: Lutz Englisch, Birgit Friedl, Marcus Geiss, Kai Gesing, Franziska Gruber, Selina Grün, Johanna Hauser, Sonja Ruttmann and Michael Walther.

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

Much has been made of the 10 cases the Court has scheduled for extraordinary telephonic arguments in May.[3] The 10 cases that were carried over, however, have thus far received less attention. They are:

Google LLC v. Oracle America, Inc., No. 18-956 (U.S.);
Ford Motor Co. v. Montana Eighth Judicial District Court, No. 19-368 (U.S.), and Ford Motor Co. v. Bandemer, No. 19-369 (U.S.);
City of Chicago v. Fulton, No. 19-357 (U.S.);
Rutledge v. Pharmaceutical Care Management Association, No. 18-540 (U.S.);
Tanzin v. Tanvir, No. 19-71 (U.S.);
Carney v. Adams, No. 19-309 (U.S.);
Texas v. New Mexico, No. 65, Original (U.S.);
United States v. Briggs, No. 19-108 (U.S.), and United States v. Collins, No. 19-184 (U.S.);
Pereida v. Barr, No. 19-438 (U.S.); and
Torres v. Madrid, No. 19-292 (U.S.).

Those 10 cases (including consolidated cases) include several of significant importance to the business community. We summarize them below.

I. The Supreme Court’s Actions in Response to the COVID-19 Pandemic

The Supreme Court’s latest rescheduling decision comes on the heels of several other accommodations the Court has made to minimize the spread of COVID-19 and ease the burden of its docket on litigants. On March 19, 2020, the Court extended the filing deadline for petitions for certiorari and expressed its willingness to grant motions for extensions of time, including motions to delay distribution to permit the filing of a reply brief in support of a petition for certiorari.[4] Then, on March 16 and April 3, 2020, the Court indefinitely postponed the oral arguments originally scheduled for its March and April sessions.[5]

On April 13, the Court clarified when it will consider the remaining cases scheduled for argument this Term. It will resolve only half of the 20 cases that were scheduled for oral argument in March and April. Ten cases will be heard telephonically on May 4, 5, 6, 11, 12, and 13 depending on the availability of counsel, and the Court will provide the news media with a live audio feed for those arguments.[6] The Court will not hear or resolve the remaining cases until the start of the October 2020 Term.

II. The Cases That Will Be Carried Over to Next Term

Seven of the carried-over cases are civil.

In Google LLC v. Oracle America, Inc., No. 19-956—a highly anticipated case potentially worth billions of dollars—the Court will consider whether and to what extent the copyright laws apply to application program interfaces, specifically, lines of Oracle’s Java code. Google used lines of Oracle’s Java code to build the Android smartphone platform so that applications developed using Java coding could run on its smartphones. Oracle argues that Google infringed its valid copyrights. Google argues that copyright protection does not extend to the specific lines of Java code at issue and, even if it did, Google’s reuse of the lines of code was fair use. Gibson Dunn filed an amicus brief on behalf of Rimini Street, Inc. in support of Google.

The consolidated cases of Ford Motor Co. v. Montana Eighth Judicial District Court, No. 19-368, and Ford Motor Co. v. Bandemer, No. 19-369, concern the exercise of specific personal jurisdiction over out-of-state corporations. The Montana and Minnesota state courts exercised personal jurisdiction over Ford in two product liability actions even though the cars at issue were designed, made, and sold outside the two states and were brought into the states by another party. The courts reasoned that they had personal jurisdiction over Ford largely because the company sells other cars in each state and its cars caused injury in each state. Ford argues that these contacts are insufficient to permit the exercise of specific personal jurisdiction.

In City of Chicago v. Fulton, No. 19-357, the Court will decide whether an entity retaining possession of bankruptcy-estate property must immediately return the property to a debtor or trustee upon the filing of a bankruptcy petition. The City of Chicago impounded several debtors’ cars and refused to turn over the cars when the debtors filed for bankruptcy. The debtors argue that the City violated the Bankruptcy Code’s automatic-stay provision by refusing to return the cars.

Rutledge v. Pharmaceutical Care Management Association, No. 18-540, presents the question whether the Employee Retirement Income Security Act of 1974 (ERISA) preempts state regulation of the rates at which pharmacy benefits managers reimburse pharmacies. An Arkansas statute effectively establishes minimum prices that pharmacy benefit managers—including pharmacy benefit managers acting on behalf of ERISA plans—must pay and the procedures they must follow to reimburse pharmacies for drugs dispensed to ERISA plan participants and beneficiaries. The Pharmaceutical Care Management Association argues that ERISA expressly preempts this state law. Gibson Dunn filed an amicus brief on behalf of the U.S. Chamber of Commerce in support of the Pharmaceutical Care Management Association.

In Tanzin v. Tanvir, No. 19-71, the Court will decide whether the Religious Freedom Restoration Act of 1993 permits suits seeking money damages against federal employees in their personal capacities. The case specifically involves three Muslim men who seek to recover money damages against federal agents who allegedly placed them on the No Fly List in retaliation after they refused to serve as informants for the government.

Carney v. Adams, No. 19-309, presents several questions related to the validity of a Delaware state constitutional provision that both limits judges affiliated with any one political party to no more than a “bare majority” on Delaware’s three highest courts and reserves the other seats for judges affiliated with the “other major political party.” Together, the provisions effectively require membership in one of the two major political parties to serve on the three highest courts. The parties dispute (1) whether respondent James Adams, a political independent, has standing to challenge the constitutional provision; (2) whether the constitutional provision violates the First Amendment; and (3) whether the “bare majority” requirement is severable and should continue in effect if the Court invalidates the provision reserving the remaining seats for members of the “other major political party.”

Finally, in Texas v. New Mexico, No. 65, Original, the Court will consider whether the “River Master”—a technical expert appointed by the Court—clearly erred when he calculated New Mexico’s water-delivery obligations under the Pecos River Compact between Texas and New Mexico.

The remaining three carried-over cases are criminal.

In the consolidated cases of United States v. Briggs, No. 19-108, and United States v. Collins, No. 19-184, the Court will decide whether a five-year statute of limitations applies to rape prosecutions under the Uniform Code of Military Justice (UCMJ). Each of the three respondents were convicted of rape following courts-martial that took place more than five years after the offenses were committed. The United States primarily argues that the prosecutions were permissible because at the time the rapes were committed, the UCMJ included a five-year statute of limitations unless a crime was “punishable by death,” and rape was “punishable by death.” Briggs responds that the default five-year statute of limitations applies because the death penalty could not be lawfully imposed on individuals convicted of rape. Gibson Dunn filed an amicus brief on behalf of Members of Congress in support of the United States.

Pereida v. Barr, No. 19-438, turns on the proper application of the modified categorical approach and the allocation of the burden of proof when deciding whether a noncitizen may seek relief from removal. The Immigration and Nationality Act provides a list of offenses that disqualify a noncitizen from applying for relief from removal. A state conviction is disqualifying if the conviction necessarily establishes all elements of the potentially corresponding federal offense. The question presented is whether a state conviction bars a noncitizen from applying for relief from removal when he was convicted under a statute defining multiple crimes and the record is inconclusive as to which crime formed the basis of the conviction.

The final criminal case—Torres v. Madrid, No. 19-292—considers whether an unsuccessful attempt to detain a suspect by use of physical force is a “seizure” within the meaning of the Fourth Amendment. Roxanne Torres, the petitioner, was shot twice by two police officers while she was fleeing. She argues that the application of physical force, even if it failed to prevent her escape, was a seizure for purposes of determining its constitutionality.

III. Conclusion

As explained in previous guidance, the Supreme Court will “continue to proceed with the resolution of all cases argued this Term.”[7] Thus, before the summer Recess we can expect decisions in the 29 cases that, as of April 13, had been argued but not yet decided. In light of this week’s developments, we can also expect decisions in the 10 cases that will be argued telephonically in May. The other 10 cases, summarized above, will be argued when the Court returns to work in October 2020. It remains to be seen whether or not “business as usual” in our judicial system will have resumed by then.

[1] Press Release, U.S. Supreme Court, Press Release Regarding May Teleconference Oral Arguments (Apr. 13, 2020), https://www.supremecourt.gov/publicinfo/press/pressreleases/pr_04-13-20.

[2] Jimmy Hoover, Supreme Court to Hold Arguments by Teleconference, Law360 (Apr. 13, 2020), https://www.law360.com/articles/1262483/supreme-court-to-hold-arguments-by-teleconference.

[3] See id.; Amy Howe, Court Sets Cases for May Telephone Arguments, Will Make Live Audio Available, SCOTUSblog (Apr. 13, 2020), https://www.scotusblog.com/2020/04/court-sets-cases-for-may-telephone-arguments-will-make-live-audio-available/; Jess Bravin & Brent Kendall, Supreme Court to Break Tradition, Hold Oral Arguments by Teleconference, Wall St. J. (Apr. 13, 2020), https://www.wsj.com/articles/supreme-court-to-break-tradition-hold-oral-arguments-by-teleconference-11586789676.

[4] Order (Mar. 19, 2020), https://www.supremecourt.gov/orders/courtorders/031920zr_d1o3.pdf.

[5] Press Release, U.S. Supreme Court, Press Release Regarding Postponement of April Oral Arguments (Apr. 3, 2020), https://www.supremecourt.gov/publicinfo/press/pressreleases/pr_04-03-20; Press Release, U.S. Supreme Court, Press Release Regarding Postponement of March Oral Arguments (Mar. 16, 2020), https://www.supremecourt.gov/publicinfo/press/pressreleases/pr_03-16-20.

[6] Press Release, U.S. Supreme Court, Press Release Regarding May Teleconference Oral Arguments, supra note 1.

[7] Press Release, U.S. Supreme Court, Press Release Regarding Postponement of April Oral Arguments, supra note 5.

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

Authors: Mark A. Perry, Allyson N. Ho and Megan McGlynn

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

(1) Continuing Efforts to Facilitate the Donation of Patent Rights During the COVID-19 Pandemic

As discussed in a prior alert, the urgency of the COVID-19 crisis has prompted initiatives such as the Open COVID-19 Pledge, which would permit businesses to provide urgently needed supplies without running the risk of finding themselves defendants in patent infringement litigation. Signatories to the Open COVID-19 Pledge grant a non-exclusive, royalty-free, worldwide license to use their patents and copyrights “for the sole purpose of ending” the COVID-19 pandemic. Companies such as Intel and Mozilla have subscribed to this Pledge.

Academic institutions have taken similar steps. Last week, Stanford University, Harvard University, and the Massachusetts Institute of Technology established the “COVID-19 Technology Access Framework” to encourage research institutions to implement technology transfer strategies to help in the fight against COVID-19. The principal component of the framework provides “rapidly executable non-exclusive royalty free licenses . . . for the purpose of making and distributing products to prevent, diagnose and treat COVID-19 infection during the pandemic and for a short period thereafter.” In exchange for the rights granted under these licenses, the framework requests that licensees broadly distribute products developed with the licensed technology at low cost during the term of the license. On April 10, 2020, Yale University also signed onto the framework.

International organizations, such as the U.N.-backed nonprofit “The Medicines Patent Pool,” are also working to facilitate patent sharing and streamline access to information about patents as a way to accelerate the fight against COVID-19. The Medicines Patent Pool has begun to gather patent information relating to products that are tested in clinical trials to treat COVID-19, such as the biologic tocilizumab and the antiviral remdesivir. By publishing the information on its website, the organization provides a publicly available repository of patent data that companies around the world can consult as they work on medical innovations.

Finally, the outgoing Director General of the World Intellectual Property Organization (WIPO), Francis Gurry, is reported to have stated publicly that he will make an announcement this week regarding a “special mechanism to share drug patents.” More than 135 organizations, representing more than 32.5 million educators in 199 countries, signed a letter requesting that Director Gurry facilitate the removal of licensing restrictions by intellectual property rights owners to “achieve universal and equitable access to COVID-19 medicines and medical technologies.”

Gibson Dunn will continue to monitor developments that may be of interest to businesses who hold, or seek to use, intellectual property rights.

(2) Pending and Existing Legislation Intended to Promote the Development of COVID-19 Treatments

Several efforts by the U.S. government to expedite development of medical treatments for COVID-19 involve intellectual property or implicate intellectual property rights. For example, Section 4017 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act includes programs aimed at facilitating the distribution of PPE by providing appropriations for government purchases of PPE through the Defense Production Act. A prior alert discussing the interplay between the Defense Production Act and a federal provision addressing immunity from infringement suits, 28 U.S.C. § 1498(a), is available here. Title II of the CARES Act also includes appropriations for the National Institutes of Health to support research on COVID-19 treatments.

Since the CARES Act was enacted, Senator Sasse (R-Neb.) proposed a bill intended to encourage investment into research and development for COVID-19 treatments. With respect to any “patent issued for a new or existing pharmaceutical, medical device, or other process . . . used or intended for use in the treatment of the Coronavirus Disease,” the bill (among other things) would extend patent exclusivity “for 10 years longer” than the term patent owners would otherwise receive under the Patent Act (typically, exclusivity expires 20 years from the date on which the patent application was filed in the United States, see 35 U.S.C. § 154). The bill specifies that “the term of the patent shall not begin until the date on which the [coronavirus] national emergency terminates”—and thus effectively seeks to suspend certain patent rights on the foregoing medical products during the pendency of the COVID-19 national emergency, in exchange for a 10-year extension on the “tail end” of the patent.

Finally, the federal government has also used legislation enacted prior to the coronavirus outbreak—i.e., the Public Readiness and Emergency Preparedness Act (“PREP Act”)—to provide immunities to certain businesses seeking to meet the nation’s emergency needs. The March 2020 Declaration activating the PREP Act, issued by the Secretary of the Department of Health and Human Services, extended immunity “from suit and liability under federal and state law with respect to all claims for loss caused by, arising out of, relating to, or resulting from” manufacture, testing, development, distribution, administration or use of qualifying products used to combat or reduce the spread of COVID-19 (the “PREP Declaration”). A prior alert describing the activities and products that come within PREP Act immunity is available here, and another prior alert discussing the immunity in the context of patent infringement claims is available here.

(3) Trademark Suits to Protect Against Price Gouging and False Marketing

As demand for personal protective equipment, testing kits, and other products important to the fight against COVID-19 continues to soar, so too does the risk of price gouging, false advertising, and other misconduct relating to the manufacture, distribution, or sale of such products. Some companies have asserted their copyrights and trademarks in litigation that targets some of this alleged misconduct.

In Florida, CoronaCide LLC, a COVID-19 test manufacturer, has accused healthcare company Wellness Matrix Group of falsely marketing CoronaCide’s test kits for at-home use. A complaint filed by CoronaCide in the U.S. District Court for the Middle District of Florida asserts that WM Group lifted text and images from CoronaCide’s materials to advertise CoronaCide’s test kits for use by consumers at home, but that the kits are only intended for use by licensed healthcare professionals.

And at least one company has used trademark law to protect against alleged price gouging for personal protective equipment. In a lawsuit filed in federal court in Manhattan, 3M claims that New Jersey company Performance Supply LLC misused the 3M trademark and employed other misleading tactics in order to “exploit the increased demand for Plaintiffs’ 3M-brand N95 respirators by offering to sell them for exorbitant prices.” Compl. ¶ 34. New York’s price-gouging statute, N.Y. Gen. Bus. Law § 369-R, allows the State Attorney General to bring an action to stop the practice when there is “any abnormal disruption of the market for consumer goods and services vital and necessary for the health, safety and welfare of consumers.” 3M’s complaint, however, asserts private causes of action under state and federal trademark law to attack the defendant’s alleged resale of the goods at an excessive price. We may see additional suits brought by companies seeking to stop abusive practices relating to the manufacture, distribution, sale, or marketing of their trademarked products used to combat COVID-19.

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

Joe Evall ([email protected]), Richard Mark ([email protected]), Doran Satanove ([email protected]), and Amanda First ([email protected])

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

Within the oil and gas industry, force majeure clauses are often (but not always) included in oil and gas leases where they play an important role.[1] These clauses provide generally that, under certain circumstances, a lessee may be relieved from the consequences of a failure to comply with the terms of the lease due to the occurrence of an unforeseen event, even where the resulting liability might otherwise include damages or the forfeiture of the lease.

STEP 1: Does COVID-19 trigger the force majeure clause?

As an initial matter, the application of a force majeure clause depends on the specific language of such clause in the lease, which can vary considerably from lease to lease. Therefore, the precise words of your force majeure clause should first be closely reviewed to determine whether one or more of the categories included within the enumerated causes could cover the current pandemic, its effects or responses to it.[2]

In some general commercial contracts, the force majeure clause will reference an “epidemic,” “pandemic,” “disease outbreak” or even “public health crisis” as a triggering event giving rise to a force majeure. However, in our experience, the inclusion of such terms in oil and gas leases are rare. More commonly, force majeure clauses in oil and gas leases specifically refer to triggering events like “acts of civil or military authority” or “government orders or regulations,” both of which may be relevant under the current climate. In an effort to “flatten the curve” and slow the spread of COVID-19, several states and jurisdictions have issued shelter-in-place or other stay-home orders to employees of nonessential businesses, which may in some cases include employees of oil and gas companies and associated contractors. Therefore, when analyzing whether the force majeure clause in an oil and gas lease has been triggered, clients should evaluate any newly enacted restrictions to understand what, if any, impact they may have on the ability to comply with lease terms. Another example of government orders which have been accepted as a force majeure event includes an interruption in operations caused by bankruptcy proceedings.[3] Therefore, to the extent the lessee’s bankruptcy proceedings are hindering its drilling or production operations, the lessee may be able to seek relief under a force majeure claim.[4]

STEP 2: Did COVID-19 effectively prevent performance by the lessee?

Many force majeure clauses explicitly incorporate a performance standard that requires performance of contractual obligations be “prevented,” “delayed,” “interrupted” or made “impossible” as a result of the force majeure event before performance will be excused. In this context, courts are reluctant to accept claims of a force majeure event when such event merely made performance more expensive or inconvenient, especially where the clause expressly requires performance to be made impossible.[5] Under the same performance standard, a Texas court rejected a force majeure claim during an industry-wide scarcity of materials where the lessee nevertheless used its limited materials in its inventory to drill other leases but not the lease at issue in the dispute.[6] Therefore, while COVID-19 may have resulted in supply chain disruptions which make it more difficult for lessees to obtain replacement parts in their drilling or production operations, it is necessary to evaluate whether performance really is impossible unless the force majeure clause in question contains a lesser performance standard.

STEP 3: Does the force majeure clause contain any additional requirements (e.g., knowledge, control, due diligence)? If not, does your jurisdiction impose any additional requirements?

Many force majeure clauses explicitly set forth additional requirements in order for lessees to be able to claim a force majeure event and obtain contractual relief from the consequences of the event. Three common additional requirements include that the force majeure event cannot have been foreseeable, must have been out of the lessee’s reasonable control and the lessee shall have exercised due diligence to overcome the condition claimed to be a force majeure event. In some jurisdictions, courts will impose one or more of these requirements regardless of whether the lease expressly includes such a requirement.

First, the unforeseeability requirement is often framed as a requirement that the force majeure event not have been within the lessee’s actual or presumed knowledge or reasonably expectable by the lessee. And in the absence of express contractual language addressing knowledge, some courts have adopted an implicit requirement of unforeseeability.[7] Thus, while it has been held that a government order postdating the execution of a lease may constitute a force majeure event,[8] a government order predating the lease execution is unlikely to constitute a force majeure event because it was knowable at the time of contracting.[9] Therefore, to the extent a lease has been entered into since the outbreak of the virus, in certain jurisdictions, you may find it more challenging to allege that the effects of COVID-19 (including the resulting government regulations) were not reasonably expected at the time of entry into the lease. Further, this unforseeability requirement is often cited by courts in rejecting claims that mere changes in commodity prices or reduction in demand constitute a force majeure event.[10] As stated by a Texas appellate court, “fluctuations in the oil and gas markets are foreseeable as a matter of law.”[11] Therefore, in order to obtain relief, the lessee must identify a permitted force majeure event (e.g., the pandemic) and prove that such permitted event and its consequences (which include a reduction in commodity prices and demand) resulted in the lessee’s inability to perform.

Second, the requirement that the event have been beyond the reasonable control of the parties has led to a division in the case law in terms of whether courts will impose such requirement in the absence of express contractual language. Thus, some courts have adopted an implicit requirement that the condition alleged to constitute a force majeure event must be beyond the lessee’s reasonable control (with the lessee’s fault or negligence negatively affecting its claim to entitlement of relief).[12] However, at least one Texas appellate court has held that a reasonable control requirement should not be implied in oil and gas leases in the absence of express language to that effect.[13]

Third, the requirement that a party seeking to invoke force majeure exercise due diligence or explore all available options to overcome the condition prior to declaring an event a force majeure event is intended to be a “proximate cause” requirement.[14] However, in the absence of express contractual language imposing such a requirement, at least one Texas appellate court has held that due diligence requirement should not be imposed on oil and gas leases absent express contractual language.[15]

STEP 4: Is the obligation or performance in question covered by the force majeure clause?

Upon establishing the occurrence of the force majeure event, the next step is examining the lease to determine the precise obligation or performance to be consequently excused. The force majeure clause may explicitly suspend or excuse all of the lessee’s obligations,[16] or, more commonly, excuse only certain of the lessee’s obligations (e.g., the lessee’s obligation to drill or produce) while requiring the lessee to comply with certain other obligations (e.g., the lessee’s obligation to make certain payments to the lessor).[17] Similarly, the lease may explicitly set forth which portion of the habendum clause that the force majeure event applies. In these cases, where the provisions are explicit, the analysis is often relatively straightforward. In other cases, the application of the force majeure clause is unclear, in which case legal analysis will need to be conducted to determine exactly what is being suspended or excused, and to what term of the habendum clause the force majeure event will apply. For example, one court has held that to the extent (i) the habendum clause in the lease does not incorporate the force majeure clause by reference or contain any language expressly subjecting it to the other lease terms and (ii) the force majeure clause does not refer to the habendum clause with specificity (i.e., “anything in this lease to the contrary notwithstanding” being insufficient), the force majeure clause would not apply to extend the primary term.[18]

Leases vary in either fixing the period of time for which the obligations are suspended or excused (e.g., one month, one year) or excuse performance for so long as the force majeure event inhibits performance (with or without a period of time within which the lessee must resume its obligations following the end of the event). If your lease contains the latter provision, you should be particularly diligent in determining whether the circumstances have changed whereby the force majeure savings provision would no longer apply.[19]

Finally, notwithstanding the foregoing, in an attempt to reconcile competing provisions of the lease and fulfill the intent of the contracting parties, courts will generally refuse to excuse performance under the force majeure clause if another clause is applicable, such as excusing production by the payment of shut-in royalties[20] or if the lease obligates the lessee to commence drilling or reworking operations within a certain amount of time following cessation of production and the force majeure event did not prevent the commencement of drilling or reworking operations.[21] Therefore, the lease should be read holistically to determine the interaction of the force majeure clause with the other provisions of the lease.

STEP 5: Are there contractual notice requirements?

Force majeure clauses generally may require either (i) a minimum amount of notice ahead of an event contemplated by the lease or (ii) notice within a certain number of days of the triggering event. Force majeure clauses in oil and gas leases are no exception. Failure to provide timely notice may prohibit a lessee from obtaining the benefit of a force majeure clause in the agreement even when a triggering event is otherwise covered by the lease’s force majeure clause.[22] Notice provisions may specify the form of the notice, to whom it must be sent, and the manner in which it must be sent. Additionally, many agreements will require that notices given thereunder must provide sufficient specificity to make clear why the relevant triggering event applies to a given provision.

Given the current work-from-home orders, it may be difficult to comply with all formal notice requirements in a contract, and clients may wish to propose alternative methods of providing notice with contract counterparties for so long as the current climate persists. Gibson Dunn may also be able to assist clients with mailings—either notices required to be given or responses to notices received—especially where the client does not have an operational mailroom.

____________________________

Step 1. Does COVID-19 trigger the force majeure clause?[23]

Does the force majeure clause specifically reference an “epidemic,” “pandemic,” “disease outbreak,” or “public health crisis”?	No ☐	Yes ☐	If yes, proceed to Step 2.
Does the force majeure clause refer specifically to “acts of civil or military authority” or “government order or regulation”?	No ☐	Yes ☐	If yes, proceed to Step 2.
Does the force majeure clause have a catchall provision that covers “any other cause whatsoever beyond the control of the respective party” (or similar) and contains an enumeration of specific events that otherwise do not cover the current situation?	No ☐	Yes ☐	If yes, the force majeure clause may not have been triggered because courts generally interpret force majeure clauses narrowly and will not construe a general catch-all provision to cover externalities that are unlike those specifically enumerated in the balance of the clause. But depending on the jurisdiction, if the failure to perform is caused by forces beyond the lessee’s control, a court may take into account traditional equitable principles in construing the lease provision in question or in applying some exception to it.

Step 2. Did COVID-19 effectively prevent performance by the lessee?

Does the force majeure clause require performance of obligations to be “prevented”, “delayed”, interrupted” or made “impossible” before contractual obligations are excused?

No ☐

Yes ☐

If yes, the force majeure clause may have been triggered if the current government regulations specifically prohibit the fulfillment of contractual obligations. Merely making performance more expensive or inconvenient, especially where the clause expressly requires performance to be made impossible, is likely insufficient. Proceed to Step 3.

Step 3. Does the force majeure clause contain any additional requirements (e.g., knowledge, control, due diligence)? If not, does your jurisdiction impose any additional requirements?

If the lease or applicable jurisdiction requires the force majeure event to not be within the lessee’s actual or presumed knowledge or reasonably expectable by the lessee, is this requirement satisfied?	No ☐	Yes ☐	If yes, and the answers to the other questions in Step 3 are yes, proceed to Step 4.
If the lease or applicable jurisdiction requires the condition alleged to constitute a force majeure event be beyond the lessee’s reasonable control, is this requirement satisfied?	No ☐	Yes ☐	If yes, and the answers to the other questions in Step 3 are yes, proceed to Step 4.
If the lease or applicable jurisdiction requires the lessee to exercise due diligence or explore all available options to overcome the condition prior to declaring an event a force majeure event, is this requirement satisfied?	No ☐	Yes ☐	If yes, and the answers to the other questions in Step 3 are yes, proceed to Step 4.

Step 4. Is the obligation or performance in question covered by the force majeure clause?

Is the obligation or performance in question covered by the force majeure clause?	No ☐	Yes ☐		If yes, and the answer to the other question in Step 4 is no, proceed to Step 5.
Is the obligation or performance in question covered another clause of the lease?	No ☐	Yes ☐		If yes, courts will generally refuse to excuse performance under the force majeure clause, and you will be expected to comply with the obligation or performance requirement set forth in the other clause of the lease. If no, and the answer to the other question in Step 4 is yes, proceed to Step 5.

Step 5. Are there contractual notice requirements?

Does the lease require notice?	No ☐	Yes ☐	If yes, timely notice must be provided in accordance with the notice provision, or termination may not be available even though a triggering event has occurred. Some notice provisions required notice in advance of performance due. Others required notice within a certain number of days of the triggering event.
Does the contract contain specific provisions for the method of notice?	No ☐	Yes ☐	If yes, notice provisions may specify the form of the notice, to whom it must be sent, and the manner in which it must be sent. Specific notice language may also be required.
Does the contract require specific language to give notice of a force majeure event?	No ☐	Yes ☐	If yes, determine whether required wording is present in any notice. Some leases may even have form of notices attached as exhibits to the contract.
Does the contract specify a specific method for delivery of such notice?	No ☐	Yes ☐	If yes, notice may be required by email, priority mail, or through use of a particular form addressed to specific people.

____________________

[1] Whether or not the lease contains a force majeure clause, if the failure to perform is caused by forces beyond the lessee’s control, a court may take into account traditional equitable principles in construing the lease provision in question or in applying some exception to it. See 4 Kuntz, Law of Oil and Gas § 53.5 (2019).

[2] See, e.g., Sun Operating Ltd. Partnership v. Holt, 984 S.W.2d 277, 283 (Tex. App. Amarillo 1988) (“[The] scope and application [of a force majeure clause], for the most part, is utterly dependent upon the terms of the contract in which it appears.”).

[3] See, e.g., Gilbert v. Smedley, 612 S.W.2d 270 (Tex. Civ. App. Fort Worth 1981).

[4] If the force majeure clause references “pricing fluctuation” or “market conditions”, then the lessee may be able to claim a force majeure event. See In Kodiak 1981 Drilling Partnership v. Delhi Gas Pipeline Corp., 736 S.W.2d 715, 721 (Tex. App.—San Antonio 1987) (holding that a force majeure clause that included “partial or total loss of gas supply or market” excused performance due to “an unprecedented combination of factors—a general economic recession, a plummeting crude oil price, weather conditions ….”). However, in our experience, the inclusion of such terms in oil and gas leases are rare.

[5] See, e.g., Logan v. Blaxton, 71 So.2d 675 (La. Ct. App. 1954); San Mateo Community College Dist. v. Half Moon Bay Ltd. Partnership, 65 Cal. Rptr. 2d 287 (Cal. App. 1st Dist. 1998).

[6] See Gilbert v. Smedley, 612 S.W.2d 270 (Tex. Civ. App. Fort Worth 1981).

[7] See, e.g., TEC Olmos, LLC v. ConocoPhillips Company, 555 S.W.3d 176, 185 (Tx. Ct. App. 2018) (“a ‘catch-all’ provision [in the force majeure clause] generally requires a showing of unforeseeability”); Gulf Oil Corp. v. Federal Energy Regulatory Comm., 706 F.2d 444, 454 (3d Cir. 1983) (“Even presuming that [the lessee’s] routine mechanical repairs were within the ambit of the force majeure clause, their frequent, almost predictable, occurrence takes them outside of a force majeure excuse to nonperformance.”); Baldwin v. Kubetz, 307 P.2d 1005 (Cal. Ct. Appeals 1957) (the lessee “acquired [the lease] with knowledge of the necessity of procuring a [drilling permit]” and “his failure to perform this obligation does not justify his falling back” on utilizing the force majeure clause).

[8] See, e.g., Frost National Bank v. Matthews, 713 S.W.2d 365 (Tex. App. Texarkana 1986); Gordon v. Crown Cent. Petroleum Co., 679 S.W.2d 192 (Ark. 1984).

[9] See, e.g., Goldstein v. Lindner, 648 N.W.2d 892 (Wis. Ct. App. 2002) (holding that parties to an oil and gas lease are presumed to know what laws and regulations will affect the lessee’s ability to win permits); Hughes v. Cantwell, 540 S.W.2d 742 (Tex. Civ. App. El Paso 1976) (holding that the force majeure clause did not operate to extend the lease where the railroad commission’s spacing rules for gas wells were presumably known to the parties at the time they entered into the lease).

[10] See, e.g., Valero Transmission Co. v. Mitchell Energy Co., 743 S.W.2d 658 (Tex. App. Houston 1987); Langham Hill Petroleum, Inc. v. S Fuels Co., 813 F.2d 1327 (4th Cir. 1987).

[11] See TEC Olmos, LLC v. ConocoPhillips Company, 555 S.W.3d 176, 184 (Tx. App. Houston 2018).

[12] See, e.g., Perlman v. Pioneer Ltd. Partnership, 918 F.2d 1244 (5th Cir. 1990) (holding that, notwithstanding new regulations by the state, the lessee made no effort whatsoever to take actions necessary to comply with state’s requirements); Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236 (Tex. App. Corpus Christi 1994) (holding that the lessee was not relieved of its duty to produce by virtue of the force majeure clause of the lease where the lessee’s own conduct in failing to timely file production reports with the railroad commission caused it to order the well sealed).

[13] See Sun Operating Ltd. Partnership v. Holt, 984 S.W.2d 277, 285 (Tex. App. Amarillo 1998) (holding that whether the occurrence of the listed force majeure event must be beyond the reasonable control of the lessee depends upon the language of the applicable force majeure clause).

[14] See, e.g., Wilson v Talbert, 535 S.W.2d 807 (Ark. 1976); Logan v. Blaxton, 71 So.2d 675 (La. App. 2d Cir. 1954); Woods v. Ratliff, 407 So.2d 1375 (La. App. 3d Cir. 1981).

[15] See Moore v. Jet Stream Investments, Ltd., 261 S.W.3d 412 (Tex. App. Texarkana 2008).

[16] See, e.g., Baldwin v. Kubetz, 307 P.2d 1005 (Cal. App. 2d. 1957).

[17] See, e.g., Hunter v. Vaughn, 46 So.2d. 735 (La. 1950); Illinois Mid-Continent Co. v. Tennis, 102 N.E.2d 390 (Ind. App. 1951); Huhn v. Marshall Exploration, Inc., 337 So.2d. 561 (La. App. 2d Cir. 1976).

[18] See Beardslee v. Inflection Energy, LLC, 31 N.E.3d 80 (N.Y.3d 2015). See also Illinois Mid-Continent Co. v. Tennis, 102 NE(2d) 390 (1951) (holding that a force majeure clause which specifically related to “drilling obligations” did not serve to extend the primary term of the lease where drilling was frustrated in the last year of the lease).

[19] See, e.g., Wilson v Talbert, 535 S.W.2d 807 (Ark. 1976) (holding that, notwithstanding the force majeure clause providing that the lease will not terminate as a result of a temporary cessation of production because a breakdown of equipment, the lease nevertheless terminated because the lessee failed to make the necessary repairs and restore production within a reasonable time).

[20] See Welsch v. Trivestco Energy Co., 221 P.3d 609 (Kan. App. 2009) (the unavailability of purchasing and transportation services did not prevent the lessee from paying shut-in royalties and the force majeure clause was therefore not triggered).

[21] See Trinidad Petroleum Corp. v. Pioneer Natural Gas Co., 416 So.2d 290 (La. Ct. App. 1982).

[22] See Toyomenka Pac. Petroleum, Inc. v. Hess Oil Virgin Is. Corp., 771 F. Supp. 63, 67–68 (S.D.N.Y. 1991) (noting that a force majeure notification outside the limits of a notice period may waive the applicability of the force majeure clause if the parties intended the notice period as a condition precedent to the clause).

[23] As noted above, if the lease does not have a force majeure clause, an analysis using traditional equitable principles, depending on the jurisdiction, may be warranted.

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

Authors: Shireen Barday, Michael Darden, Hillary Holmes, Louis Matthews and Nathan Strauss

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

On April 13, the Federal Trade Commission’s Bureau of Competition and the Justice Department’s Antitrust Division issued a joint statement announcing that both agencies are “on alert” for collusion or anticompetitive conduct in labor markets.[1] The joint statement acknowledges that the COVID-19 pandemic “may require unprecedented cooperation” between governments, private businesses, and individuals to address the needs of Americans. However, in keeping with the agencies’ recent focus on competition in labor markets, the joint statement warns employers, staffing companies, and recruiters that the agencies are closely monitoring labor markets for unlawful coordination that harms workers, particularly the “essential service providers on the front lines of addressing the crisis,” including doctors, nurses, first responders, and employees of grocery stores, pharmacies, and warehouses.

The joint statement provides several examples of conduct in labor markets that may subject employers to liability under the antitrust laws, including wage-fixing agreements, no-poach agreements, anticompetitive non-compete agreements, and the unlawful exchange of competitively sensitive employee information such as salary, wages, benefits, and compensation data. Wage-fixing and no-poach agreements, in particular, may be criminally prosecuted. Moreover, even in the absence of an agreement among competitors, the agencies warn that they may use their civil enforcement authority to challenge companies and individuals that invite others to collude or that engage in unilateral conduct that harms competition in a labor market.

Employers can take several practical steps to promote compliance with antitrust laws in employment decisions:

Review the Department of Justice and Federal Trade Commission’s Antitrust Guidance for Human Resources Professionals, which provides guidance on lawful and unlawful practices in labor markets.[2]
Review Gibson Dunn’s recent WebEx presentation discussing updates on antitrust enforcement concerning no-poach and non-compete agreements.[3]
Ensure that employees responsible for employment decisions receive antitrust training and understand that the antitrust laws may apply to their conduct, potentially subjecting the company and themselves as individuals to liability.
If you become aware of conduct that may implicate the antitrust laws, contact counsel immediately.

____________________

[1] Federal Trade Commission & Department of Justice, Joint Antitrust Statement Regarding COVID-19 and Competition in Labor Markets (Apr. 13, 2020), https://www.ftc.gov/system/files/documents/advocacy_documents/joint-statement-bureau-competition-federal-trade-commission-antitrust-division-department-justice/statement_on_coronavirus_and_labor_competition_04132020_final.pdf.

[2] Department of Justice & Federal Trade Commission, Antitrust Guidance for Human Resources Professionals (Oct. 2016), https://www.justice.gov/atr/file/903511/download; see also Gibson Dunn, Antitrust Agencies Issue Guidance for Human Resource Professionals on Employee Hiring and Compensation (Oct. 26, 2016), https://www.gibsondunn.com/antitrust-agencies-issue-guidance-for-human-resource-professionals-on-employee-hiring-and-compensation/.

[3] Gibson Dunn, Webcast: Antitrust Update on No-Poach and Non-Compete Agreement Enforcement (Feb. 27, 2020), https://www.gibsondunn.com/webcast-antitrust-update-on-no-poach-and-non-compete-agreement-enforcement/.

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

Authors: Rachel S. Brass, Kristen C. Limarzi and Charlotte A. Lawson

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

The European Securities and Markets Authority (“ESMA”) has published a public statement[1] detailing actions to mitigate fund managers’ reporting obligations. This client alert provides EU alternative fund managers (“AIFMs”), and non-EU AIFMs marketing their funds in the EU, with an overview of the impact of the public statement on the obligation to publish an annual report for the funds they manage.

Why has ESMA published the public statement?

The public statement is intended to promote coordinated action between EU national competent authorities (“NCAs”) in light of the coronavirus outbreak. Fund managers, including EU AIFMs and non-EU AIFMs marketing their funds in the EU, are subject to the requirement to publish annual reports with respect to the funds they manage.

ESMA states that fund managers are expected to exercise their best efforts to prepare the annual reports and publish them by the relevant deadline. However, ESMA acknowledges that fund managers (and their auditors) are subject to constraints which may substantially impair their ability to publish the annual reports in respect of their funds by the deadline. ESMA has, therefore, suggested that NCAs exercise regulatory forbearance when considering taking action against fund managers for failing to publish annual reports on time for certain reporting periods.

Which reporting periods does the public statement cover?

The public statement concerns the publication of reports for the reporting periods ending from 31 December 2019 to 30 April 2020 inclusive.

How does the public statement impact EU AIFMs?

EU AIFMs are required to publish an annual report with respect to each EU alternative investment fund (“AIF”) they manage and for each AIF they market in the EU, no later than six months following the end of the AIF’s financial year. For the financial year end of 31 December 2019, the latest publication date is 30 June 2020.

Does the public statement impact non-EU AIFMs?

To the extent that a non-EU AIFM manages an AIF that has been marketed in the EU via a member state’s national private placement regime under Article 42 of the AIFMD, it will be subject to the requirement to publish an annual report. This report is due no later than six months following the end of the AIF’s financial year. Again, for the financial year end 31 December 2020, the latest publication date is 30 June 2020.

What regulatory forbearance does ESMA suggest?

ESMA expects NCAs to act in accordance with national rules set out in their member states and not to prioritise supervisory actions against fund managers in respect of the upcoming deadlines with respect to:

annual reports referring to a year-end occurring on or after 31 December 2019 but before 1 April 2020 for a period of two months following the relevant deadline; and
annual reports referring to a year-end occurring on or after 1 April 2020 but before 1 May for a period of one month following the relevant deadline.

What steps should fund managers take now?

ESMA states that where fund managers reasonably anticipate that publication of annual reports will be delayed beyond the normal regulatory deadlines, they are expected to inform their NCA promptly of this and to inform investors as soon as practicable of the delay, the reasons for such a delay and to the extent possible the estimated publication date.

Fund managers should, therefore, assess now whether they will be in a position to publish the annual reports for the funds they manage by the relevant deadline. If your firm has any concerns regarding the publication of annual reports, or any of its other regulatory obligations during the current outbreak, we would be more than happy to discuss this with you.

[1] https://www.esma.europa.eu/sites/default/files/library/esma34-45-896_public_statement_on_publication_deadlines_in_fund_management_area.pdf

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

Authors: Michelle Kirschner, Martin Coombes and Chris Hickey

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

COVID-19 Update: Financial Reporting and Auditing Considerations for Corporate Management, Audit Committees, and Audit Firms

As the disruption caused by COVID-19 continues unabated, companies and their outside auditors are grappling with the financial reporting implications of the crisis. There are numerous, immediate regulatory responses to the crisis that issuers should consider, including, for example, the reporting relief recently announced by the Securities and Exchange Commission (principally a 45-day delay in certain filing requirements) or under the CARES Act (in the form of relief from certain accounting standards). Similarly, auditors should remain aware of the steps that the Public Company Accounting Oversight Board is taking to address the disruption in normal business activity, primarily permitting firms to request a 45-day delay in certain aspects of their PCAOB inspections.
Read more

FDA Round-Up: Overview of Emergency Actions to Expedite the Availability of Medical Products to Combat COVID-19

The COVID-19 crisis has prompted a barrage of legislative and regulatory activity affecting drug and device manufacturers. In addition to the CARES Act, one of the most sweeping pieces of legislation in recent memory, the U.S. Food & Drug Administration (FDA) has been releasing new policies and guidance documents on a nearly daily basis.

There are both opportunities and risks for companies trying to respond to the COVID-19 crisis. On the one hand, companies can bring new and newly-adapted products to market under FDA enforcement discretion and emergency pathways. On the other hand, companies are proceeding rapidly with incomplete information, and in an uncharted and evolving regulatory landscape.
Read more

NYSE Provides Temporary Waiver of Certain Shareholder Approval Requirements for Private Placements

On April 6, 2020, the Securities and Exchange Commission (“SEC”) announced (available here) that it has immediately approved the New York Stock Exchange’s (“NYSE”) proposed rule changes that temporarily waive certain shareholder approval requirements relating to private investments in public equity (PIPEs). The rule changes were proposed in light of the unprecedented disruption caused by COVID-19 and will apply through June 30, 2020. While these temporary waivers to Section 312.03 of the NYSE Listed Company Manual (the “Listing Manual”) (available here) provide companies added flexibility in conducting PIPEs more quickly, companies must still obtain shareholder approval if required under any other applicable rule, including the equity compensation requirements of Section 303A.08 or the change of control requirements of Section 312.03(d) of the Listing Manual. For more information, please see our recent client alert (available here) discussing key considerations for PIPE transactions.
Read more

SEC Chairman and Division of Corporation Finance Director Issue Joint Statement on COVID-19 Disclosures

On April 8, 2019, Securities and Exchange Commission (“SEC”) Chairman Jay Clayton and Division of Corporation Finance Director Bill Hinman issued a joint statement, available here (the “Statement”) stressing the importance of COVID-19 disclosures (particularly forward-looking disclosures), and urging companies to provide as much information as is practicable regarding their current financial and operational status, as well as operational and financial planning. The Statement notes that the COVID-19 pandemic has shifted the global economic landscape and that the SEC recognizes that workers and businesses are facing profound challenges.
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This round-up details the CARES Act provisions and recent FDA actions taken to expedite the availability of diagnostics, treatments, vaccines, medical devices, and personal protective equipment (PPE) to combat COVID-19. Gibson Dunn attorneys are advising companies on a daily basis with regard to these issues, and are here to assist with any questions you may have.

I.              CARES Act Provisions for Medical Product Development and Deployment
II.            Overview of FDA’s Approach to the COVID-19 Crisis
III.           Diagnostic Devices
IV.           Personal Protective Equipment (PPE)
V.            Ventilators and Other Respiratory Devices
VI.           COVID-19 Drugs and Vaccines
VII.         Other Medical Products to Prevent or Treat COVID-19
VIII.        Conclusion

I. CARES Act Provisions for Medical Product Development and Deployment

Several provisions of the CARES Act aim to promote the development and distribution of medical products needed to respond to COVID-19 and future public health emergencies. Below is an overview of key provisions.[1]

A. Bolstering Supply and Promoting Development of Medical Products

In response to the recognized shortfall of respirators, masks and other PPE, and diagnostic testing products, Section 3102 of the CARES Act requires the Strategic National Stockpile to include “personal protective equipment, ancillary medical supplies, and other applicable supplies required for the administration of drugs, vaccines and other biological products, medical devices, and diagnostic tests.”

Additionally, the CARES Act includes emergency appropriations to the Public Health and Social Services Emergency Fund for the development, procurement, and deployment of COVID-19 medical products.

The Act appropriates $27 billion to the Public Health and Social Services Emergency Fund for the prevention, preparation, and response to COVID-19. This money is intended to fund the development of medical countermeasures and vaccines as well as the purchase of vaccines, therapeutics, diagnostics, and necessary medical supplies in accordance with Federal Acquisition Regulation (FAR) guidance. Medical products purchased by the appropriated funds may, at the discretion of the U.S. Department of Health and Human Services (HHS), be deposited in the Strategic National Stockpile. Up to $16 billion of the appropriation may be used to purchase products for the Strategic National Stockpile. Further, the Act calls for not less than $3.5 billion to go to the Biomedical Advanced Research and Development Agency (BARDA) within the HHS to fund the manufacturing, production, and purchase of vaccines, therapeutics, diagnostics, pharmaceuticals, and active pharmaceutical ingredients (APIs). The BARDA funding is also intended to scale up production of countermeasures by supporting “the development, translation, and demonstration at scale of innovations in manufacturing platforms.”
The Act calls for HHS to distribute, in the form of grants or other mechanisms, a separate $100 billion in appropriations to the Public Health and Social Services Emergency Fund to hospitals and other health care providers who “provide diagnoses, testing, or care for individuals with possible or actual cases of COVID-19.” The funds are intended to “prevent, prepare for, and respond to coronavirus, domestically or internationally,” and are to be available for, among other things, “medical supplies and equipment including personal protective equipment and testing supplies.” The Act defines “eligible health care providers” to mean public entities, Medicare and Medicaid enrolled suppliers and providers, and any other for-profit and not-for-profit entities specified by HHS that are in the United States and engaged in COVID-19 diagnosis, testing, or treatment. On April 10, 2020, HHS announced the immediate infusion of $30 billion into the health care system through the CARES Act Provider Relief Fund.[2] HHS is working rapidly on targeted distributions of the remaining $70 billion that will focus on “providers in areas particularly impacted by the COVID-19 outbreak, rural providers, providers of services with lower shares of Medicare reimbursement or who predominantly serve the Medicaid population, and providers requesting reimbursement for the treatment of uninsured Americans.” Additional HHS guidelines around eligibility for funding are expected soon.
The emergency appropriations also include extensive funding to various agencies for coronavirus research and medical product procurement, including the Centers for Disease Control and Prevention (CDC) and the National Institutes of Health (NIH). NIH received $945 million, the largest share of such funding, $706 million of which goes to the National Institute of Allergy and Infectious Diseases (NIAID), which is actively funding research on the development of vaccines, diagnostics, and treatments to combat COVID-19.

B. Anticipating and Preventing Critical Drug and Device Shortages

To better anticipate and prevent shortages of emergency drugs and medical devices, the CARES Act includes new and additional FDA reporting requirements for critical drugs and medical devices during a public health emergency. It also requires FDA to prioritize and expedite review of supplements to new drug applications (NDAs) and inspections of establishments that could help mitigate or prevent such drug shortages. The CARES Act supplemented these provisions with $80 million in funding to support FDA’s capacity to oversee “the development of necessary medical countermeasures and vaccines, advanced manufacturing for medical products, [and] the monitoring of medical product supply chains.”

Drug reporting. Section 3112 of the CARES Act amends Section 506C of the Federal Food, Drug, and Cosmetic Act (FDCA) to expand mandatory reporting on anticipated discontinuances or disruptions to the supply of certain drugs (“critical drugs”), including their APIs.[3]

First, it extends the categories of drugs covered by the reporting requirements to include drugs that are “critical to the public health during a public health emergency” declared by HHS.[4] Previously, the reporting requirements only applied to manufactures of “life-supporting” drugs, “life-sustaining” drugs, and drugs “intended for use in the prevention or treatment of a debilitating disease or condition.”

Second, manufacturers must now notify FDA of anticipated shortages of APIs used in a critical drug. Previously, drug manufacturers were only required to report the expected discontinuation or shortage of the critical drug itself. Because many finished drug products cannot be made without APIs and such APIs are often manufactured abroad, this added requirement ensures that FDA is notified in advance of anticipated shortages in key ingredients that could impact the supply of critical drugs in the United States.

Third, this mandatory reporting must now include information regarding the reasons for the discontinuation or disruption in supply, and, if an API is the cause of or risk factor in the disruption, the source of the API and any known alternative sources. Manufacturers also must describe the anticipated duration of the supply issue and whether it relates to any devices used in the preparation or administration of the drug.

Finally, Section 3112 requires manufacturers of critical drugs—as well as manufacturers of any API or associated device used for the preparation or administration of such drugs—to maintain a redundancy risk management plan identifying and evaluating risks to the supply of the drug. We expect that FDA will soon issue guidance elaborating on what these risk management plans should entail. In the meantime, manufacturers of critical drugs as well as of APIs or medical devices used in the preparation or administration of such drugs should review their existing risk management plans and prepare to update them in light of these new requirements.

Medical device reporting. Section 3121 of the CARES Act creates a new reporting framework for medical devices that requires manufacturers to report to FDA any discontinuation or anticipated disruption to the supply of covered medical devices, similar to that applicable to critical drugs discussed above. These reporting requirements apply to manufacturers of medical devices that are “critical to public health during a public health emergency, including devices that are life-supporting, life-sustaining, or intended for use in emergency medical care or during surgery,” as well as medical devices for which HHS determines that the reporting is needed for a public health emergency. As noted above, Section 3112 requires manufacturers of associated devices used in the production or administration of life-saving drugs to maintain risk management plans aimed at preventing or mitigating disruptions to the supply of the device that could cause or be a risk factor in disrupting supply of the drug.

This provision is significant because FDA previously did not have the authority to require medical device manufacturers to notify the agency when they became aware of a circumstance that could lead to a device shortage or meaningful disruption in the device supply.

C. Expedited Review of COVID-19 Product Applications

Section 1111 of the CARES Act further amends Section 506C of the FDCA to provide that FDA “shall, as appropriate,” prioritize and expedite (1) review of a supplement to an NDA, abbreviated NDA (ANDA), or a supplement to an ANDA for a drug candidate that could help mitigate or prevent shortages to critical drugs; and (2) inspection or re-inspection of an establishment that could help mitigate or prevent such a drug shortage. Previously, Section 506C provided that FDA “may” “expedite” such reviews and inspections.[5] These amendments clarify that FDA must, as appropriate, both expedite and prioritize such reviews and inspections when there is, or is likely to be, a shortage of a critical drug.

Section 3302 of the CARES Act also creates Section 512A of the FDCA, which provides for expedited review of animal drugs through the new Priority Zoonotic Animal Drug designation. The designation is intended to address diseases that spread from animals to humans. This is significant given that several recent epidemics and pandemics have been or are believed to have been zoonotic diseases, including Avian Flu, Swine Flu, Ebola, Severe Acute Respiratory Syndrome (SARS), and COVID-19.

D. Liability Protection Extended to Respiratory Protective Devices

The CARES Act expressly extends the targeted liability protection under the Public Readiness and Emergency Preparedness Act (PREP Act) to include respiratory protective devices that are approved by the National Institute for Occupational Safety and Health (NIOSH) and that the Secretary of HHS determines to be “a priority for use during a public health emergency.”[6] As discussed in a prior alert, a declaration by the HHS Secretary under the PREP Act immunizes manufacturers and distributors of “covered countermeasures” from liability under federal and state law with respect to all claims relating to the administration or use of the countermeasure under certain circumstances during a public health emergency. The PREP Act had defined “covered countermeasure” to include devices, drugs, and biologics as defined under the FDCA, in addition to other specifically enumerated countermeasures, but the provision did not contain language specific to respiratory protective devices until Section 3103 of the CARES Act.

E. Proposed Supplemental Legislation

Lawmakers are considering additional measures to supplement the CARES Act. Although Republicans and Democrats in Congress agree that more funding is needed, the parties continue to negotiate the details, including the scope of emergency funding through an interim bill. The Democrats have proposed an interim bill that would provide an additional $100 billion to bolster hospitals and health care providers, with funds targeting the production of COVID-19 diagnostic tests and protective medical equipment, and $150 billion to support state and local governments in fighting the COVID-19 pandemic—in addition to $250 billion in supplemental funding for small businesses. Republicans favor limiting interim relief to support for small businesses and addressing supplemental funding, including for hospitals and health care providers, later. The Senate officially reconvenes on April 20, 2020, and negotiations over the next stimulus package are likely to continue in the interim. We will monitor these negotiations and continue to provide updates on key developments.

II. Overview of FDA’s Approach to the COVID-19 Crisis

FDA is swiftly issuing new emergency guidance to address the pandemic. To date, FDA has issued more than a dozen substantive COVID-19 guidance documents, nearly all of which aim to expedite the availability of products to diagnose and treat COVID-19, primarily through the exercise of enforcement discretion.

During the public health emergency, FDA has modified its usual process to speed the availability of guidance. FDA is issuing periodic Notices of Availability (NOA) that provide a consolidated announcement of new guidance rather than issuing an NOA for each new COVID-19 guidance document. While FDA is implementing guidance immediately without prior public comment (which would not be feasible under Section 701(h)(1)(C)(i) of the FDCA and 21 C.F.R. § 10.115(g)(2)), FDA is also soliciting and reviewing all public comments received on the guidance documents. Like other guidance, the COVID-19 guidance documents represent FDA’s current thinking on a particular subject, and stakeholders may use alternative approaches if they satisfy applicable laws and regulations.[7] Furthermore, FDA emphasized in the guidance documents that certain exercises of enforcement discretion are limited to the duration of the public health emergency.

FDA is also engaged in an unprecedented effort to authorize medical products using its emergency powers. Under Section 564 of the FDCA, FDA may permit unapproved medical products or unapproved uses of approved medical products to be used in certain emergency circumstances after the HHS Secretary makes a declaration of an emergency or a threat that justifies authorization of emergency use. FDA’s Emergency Use Authorizations (EUAs) are distinct from the usual investigational product pathways, such as INDs, IDEs, and the expanded access pathways described in Section 561 of the FDCA. EUAs also are distinct from Section 564A emergency use, which allows FDA to facilitate the availability of FDA-approved products without first issuing an EUA. Products authorized under an EUA may be eligible for immunity protections under the PREP Act (42 U.S.C. § 247d-6d), which we discussed in a prior alert.[8] During the COVID-19 outbreak, FDA has issued EUAs covering a broad range of products, including in vitro diagnostic tests, complex molecular-based laboratory developed tests, PPE, ventilators and other medical devices, and therapeutics.

In the sections that follow, we discuss recent guidance and EUAs that FDA has issued during the course of the COVID-19 crisis. We first cover each of the product categories that have been receiving the bulk of attention—diagnostic devices, PPE, ventilators, COVID-19 therapies—and then address some of the other, more discrete topics and products where new FDA guidance and EUAs apply.

The table below summarizes the major actions by FDA to date. Each of these actions is generally limited to the duration of the COVID-19 public health emergency, and subject to conditions set forth in the guidance, as described in the sections that follow.

Impacted Product(s)	FDA Action
Diagnostic Testing	Exercise of enforcement discretion as to development and deployment of COVID-19 testing; issuance of EUAs
Personal Protective Equipment	Exercise of enforcement discretion as to manufacture and use of personal protective equipment; issuance of EUAs
Ventilators, Ventilator Accessories, and Other Respiratory Devices	Exercise of enforcement discretion on modifications to existing, cleared/approved devices and streamlined process to permit additional devices to be marketed; issuance of EUAs
COVID-19 Drugs & Vaccines	Coronavirus Treatment Acceleration Program (CTAP), and use of expedited pathways and expanded access; issuance of EUA
Alcohol Sanitizers	Exercise of enforcement discretion as to production of alcohol sanitizers, including by nontraditional manufacturers
Blood Purification Systems	EUA for certain blood purification systems
Extracorporeal Membrane Oxygenation and Cardiopulmonary Bypass Devices	Permission to use devices for longer than FDA-approved time limits
Remote Monitoring Devices	Exercise of enforcement discretion to enable increased development and use of noninvasive remote monitoring tools in hardware and software
Ophthalmic Assessment and Monitoring Devices	Exercise of enforcement discretion for remote ophthalmic assessments to minimize the need for in-person visits to nonessential medical facilities
Infusion Pumps and Accessories	Exercise of enforcement discretion as to modifications to FDA-cleared pumps and accessories
Clinical Electronic Thermometers	Exercise of enforcement discretion as to distribution of clinical electronic thermometers that are not currently FDA cleared
Sterilizers, Disinfectant Devices, and Air Purifiers	Relaxation of premarketing requirements; issuance of EUAs
Portable Cryogenic Containers	Exercise of enforcement discretion as to current good manufacturing practice (cGMP) requirements for portable gas containers
3D Printing	Facilitating development and production of needed medical products via 3D printing

III. Diagnostic Devices

Given the aggressive spread of COVID-19, on the one hand, and the Administration’s focus on re-opening the American economy, on the other, a rapid expansion of testing capabilities—including serological testing for past exposure—will continue to be crucial to the efforts to contain the pandemic. To that end, FDA (in conjunction with CDC) is actively promoting efforts to develop and bring to market new diagnostic tests.

The CDC labs developed a diagnostic assay for which FDA issued an EUA on February 4, 2020. On March 16, 2020, FDA expanded a prior guidance[9] to accelerate the development and use of new and additional COVID-19 diagnostic tests by labs and commercial manufacturers in hopes of quickly expanding the nation’s ability to detect the disease and control its spread. To date, FDA has worked with hundreds of test developers who have or will seek EUAs. FDA has, as of April 10, 2020, issued 33 EUAs for diagnostic tests, including an EUA for a serological test, and received notice from 170 labs that they have initiated testing under the guidance.

The diagnostic testing guidance addresses policies for (1) accelerating development of COVID-19 lab testing (resulting either in EUA submissions to FDA or, in certain states, testing developed under the oversight of state authorities), (2) facilitating distribution of COVID-19 diagnostics to labs for specimen testing after validation while the commercial manufacturer of the diagnostics prepare EUA submissions, and (3) using serological testing with an EUA. The expanded guidance also reflects FDA recommendations regarding validation of COVID-19 tests, given the significant impact of false testing results during the public health emergency.[10]

CLIA-Certified Labs and EUA Process. FDA does not intend to object to the use of COVID-19 testing by labs certified under the Clinical Laboratory Improvement Amendments (“CLIA”) program (and compliant with its requirements for high-complexity testing) for a “reasonable period of time after validation and while they are preparing their EUA requests.” Under the expanded guidance, labs should notify FDA (by email) that they have validated their assay and then follow up with the EUA submission within 15 days of validation. FDA asked that labs also submit information regarding their testing capacity to enable FDA and HHS to monitor testing availability nationwide. When providing results under this policy, labs should inform the recipient that the test has been validated but FDA’s independent review is pending; further, FDA noted that labs should immediately notify federal, state, and local public health agencies of positive COVID-19 tests (and confirm initial positive and negative testing results with a second lab).[11] The expanded guidance also provides information about the EUA request process, including steps FDA will take to collaborate with labs on analysis of the testing and validation data.[12]
CLIA-Certified Labs and State Oversight. FDA also does not intend to object to testing conducted by CLIA-certified labs authorized by a state or territory to perform COVID-19 testing, so long as the state or territory “takes responsibility” for testing by labs during the outbreak. Under the expanded guidance, FDA asked states or territories that intend to do so to notify FDA of that decision—and requested that labs operating under this policy inform FDA that they have started testing (and share information on their testing capacity).[13]
Commercial Manufacturers and Pre-EUA COVID-19 Testing. Further, FDA does not intend to object to the development and distribution of COVID-19 test kits by commercial manufacturers to clinical labs or health care workers for point-of-care testing, but FDA has not yet authorized a test for COVID-19 testing at home.[14] Again, the policy permits testing during a 15-day period post-validation while the manufacturer prepares an EUA submission (subject to similar obligations to notify FDA, report testing results with a caveat about FDA’s pending review, and submit an EUA with specified information).
Commercial Manufacturers and Serological Testing without an EUA. To hasten the availability of antibody testing, FDA does not intend to object to the development and distribution of validated serological tests for COVID-19, so long as the testing is not for home use, notice is provided to FDA, and the manufacturer discloses certain information to the test recipient (e.g., that FDA has not reviewed the test and negative results do not rule out COVID-19).[15]

In the expanded guidance, FDA also recommended that diagnostics developers implement certain minimum testing characteristics for COVID-19 molecular, antigen detection, and serological diagnostics.[16]

IV. Personal Protective Equipment (PPE)

In light of the ongoing public health emergency, FDA issued several guidance documents and EUAs to address the availability of PPE, including face masks, particulate filtering facepiece respirators, gowns, and gloves.

A. Enforcement Policies for PPE

On March 30 and April 2, 2020, FDA issued guidance aimed at expanding the availability of general-use face masks for the public, and particulate filtering facepiece respirators (including N95 respirators),[17] gowns, gloves, and other apparel[18] for health care professionals (HCPs). Because FDA does not exercise jurisdiction over protective apparel that is marketed to the general public for non-medical purposes, the guidance focuses on medical-grade equipment. To determine whether such products are intended for a medical purpose, FDA considers labeling (such as whether they are labeled or otherwise for use by an HCP or in a health care facility), and whether the products include any drugs, biologics, or anti-microbial/antiviral agents.

Unavailability of FDA-Approved Masks and Respirators. For the duration of the pandemic, when FDA- or NIOSH-approved N95 respirators are unavailable, FDA does not intend to object to the importation, distribution, and use of acceptable alternative respirators published on the CDC’s website. In such cases, FDA will not enforce compliance with the certain regulatory requirements, including (1) premarket notification under Section 510(k) of the FDCA and 21 C.F.R. § 807.81; (2) registration and listing under 21 C.F.R. Part 807; (3) Quality System Regulation under 21 C.F.R. § 820; (4) reports or corrections and removals under 21 C.F.R. Part 806; and (5) Unique Device Identification (“UDI”) under 21 C.F.R. Part 830 and 21 C.F.R. § 801.20. Additionally, the guidance makes explicit FDA’s position that when FDA-cleared masks or respirators are unavailable, individuals (but not companies), including HCPs, can improvise PPE. FDA does not intend to object to an individual’s use or distribution of improvised PPE when alternates are unavailable.

Face Masks Intended for a Medical Purpose. FDA does not intend to object to the distribution and use of face masks, with or without a face shield (not including respirators), by medical personnel or the general public that are intended for a medical purpose, without compliance with the above-listed regulatory requirements where the face mask does not create an undue risk in light of the public health emergency. Face masks intended for a medical purpose do not create an undue risk where: (1) the product is accurately labeled (for example, as a face mask as opposed to a surgical mark); (2) the labeling makes recommendations that would reduce sufficiently the risk of use (for example, recommendations against use in surgical settings); and (3) the product is not intended for any use that would create an undue risk in light of the public health emergency (for example, the product does not indicate it is meant for antiviral protection).

Face Shields Intended for a Medical Purpose. FDA does not intend to object to the distribution and use of face shields that are intended for a medical purpose (whether used by medical personnel or the general public) where the face shield does not create an undue risk in light of the public health emergency, without compliance with the above-listed regulatory requirements. Undue risk is assessed based on the accuracy of the product’s labeling, the shield’s flammability and related disclosures, as well as the product’s intended use.

Surgical Masks Intended to Provide Liquid Barrier Protection. FDA does not intend to object to the distribution and use of surgical masks without compliance with all of the above-listed regulatory requirements where the surgical mask does not create an undue risk in light of the public health emergency. These products do not create undue risk where they (1) meet fluid resistance testing consistent with federal standards; (2) meet flammability requirements under 16 C.F.R. § 1610; (3) are labeled accurately; and (4) not intended for any use that would create an undue risk in light of the public health emergency.

Nonsurgical Gowns and Minimal-to-Low Barrier Protection Surgical Apparel. FDA does not intend to object to the distribution and use nonsurgical gowns[19] and other low-to-minimal barrier protection surgical apparel[20] that do not comply with the above-listed regulatory requirements where the gowns and apparel do not create an undue risk in light of the public health emergency. These devices do not create an undue risk where: (1) the product is accurately labeled; (2) the labeling makes recommendations that would reduce sufficiently the risk of use (for example, recommendations against use in surgical settings); and (3) the product is not intended for any use that would create an undue risk in light of the public health emergency.

Moderate-to-High Barrier Protection Surgical Gowns. FDA does not intend to object to the distribution and use of moderate-to-high barrier protection surgical gowns (e.g., ANSI/AAMI PB70 barrier protection Level 3 or 4) that do not comply with the regulatory requirements related to premarket notification, registration and listing, and unique device identification, where such surgical gowns do not create an undue risk in light of the public health emergency. These devices do not create an undue risk where they meet required liquid barrier protection and flammability standards, are labeled accurately, and are not intended for any use that would create an undue risk in light of the public health emergency.

Patient Examination Gloves. FDA does not intend to object to the distribution and use of patient examination gloves[21] that do not comply with the above-listed regulatory requirements, where the gloves do not create an undue risk in light of the public health emergency. These devices do not create an undue risk where they are accurately labeled, and are not intended for any use that would create an undue risk in light of the public health emergency.

Surgeon’s Gloves. FDA does not intend to object to the distribution and use of surgeon’s gloves[22] that do not comply with the regulatory requirements related to premarket notification, registration and listing, and unique device identification, where the surgeon’s gloves do not create an undue risk in light of the public health emergency. These devices do not create an undue risk where they meet the standard specification for surgical gloves, are accurately labeled, and are not intended for any use that would create an undue risk in light of the public health emergency.

Nonstandard PPE Practices for Sterile Compounding by Pharmacy Compounders. FDA will not enforce Section 501(a)(2)(A) of the FDCA governing insanitary conditions with respect to the compounding of drugs intended to be sterile if the following requirements are met:

The compounder is unable to obtain sufficient supply of standard PPE to assure compliance with the insanitary conditions provision;
The drug is compounded in compliance with other applicable FDCA requirements;
The compounder employs (a) the mitigation strategies described in the guidance to reduce the risk of product contamination; or (b) terminal sterilization where standard PPE is not used, as long as basic garbing expectations (e.g., hairnet, clean garment, non-sterile gloves, other appropriate coverings) are followed; and
The compounder keeps records of all compounding performed without standard PPE and of all changes in the sterilization approach and documents mitigation strategies in a new or updated standard operating procedure.

The guidance also recommends modifications to a compounder’s practices when the PPE it relies on is in limited supply, including limiting the number of personnel conducting sterile compounding activities, reducing sterile compounding activities in consideration of the risks and need for the compounded product, and, if applicable, using other PPE that confers equivalent or better protection for the compounded product as outlined in FDA’s separate PPE guidance documents.

B. Emergency Use Authorizations (EUAs) for PPE

FDA has also issued several EUAs related to PPE, as summarized below.

NIOSH-Approved Air Purifying Respirators for Use in Health Care Settings During Response to the COVID-19 Public Health Emergency.[23] On March 28, 2020, FDA reissued the EUA for the following NIOSH-approved respirators in health care settings by HCPs when used in accordance with CDC’s recommendations, despite the fact that they do not meet certain requirements otherwise required by applicable federal law: (1) non-powered air-purifying particulate FFRs and reusable respirators (such as elastomeric half and full facepiece respirators); (2) certain powered air-purifying respirators (PAPRs); (3) expired FFRs that are not damaged, and have been held in accordance with manufacturers’ storage conditions in strategic stockpiles; and (4) authorized respirators under (1) or (3) above that have been decontaminated pursuant to the terms and conditions of an authorized decontamination.

Imported, Non-NIOSH-Approved Disposable Filtering Facepiece Respirators (FFRs).[24] On March 28, 2020, FDA reissued the EUA to allow for the use of (1) certain imported disposable FFRs that are not NIOSH-approved and (2) authorized respirators that have been decontaminated pursuant to the terms and conditions of an authorized decontamination system,[25] when used in accordance with CDC recommendations. Temporarily authorized imported disposable FFRs include those with acceptable product classifications and marketing authorizations in one of the following regulatory jurisdictions: European CE Marking; Australian Register of Therapeutic Goods (ARTG) Certificate of Inclusion; Health Canada License; Japan Pharmaceuticals and Medical Device (PMDA)/Ministry of Health Labour and Welfare (MHLW).

Non-NIOSH-Approved Disposable Filtering Facepiece Respirators Manufactured in China.[26] On April 3, 2020, FDA authorized the use of disposable non-NIOSH-approved respirators manufactured in China that meet one of the following criteria for authentication: (1) manufactured by an entity that holds one or more NIOSH approvals for other models of FFRs produced in accordance with the applicable standards of authorization in other countries that can be verified by FDA; (2) have regulatory authorization under a jurisdiction other than China that can be authenticated and verified by FDA; or (3) demonstrate acceptable performance to applicable testing standards as documented by test reports from a recognized independent test laboratory that can be verified by FDA.

Face Shields.[27] On April 9, 2020, FDA approved the use of certain face shields for use by HCPs as PPE in health care settings in accordance with CDC recommendations to cover the front and sides of the face and provide barrier protection during this public health emergency. FDA recognized that authorized face shields may be effective at preventing HCP exposure to fluid biological airborne particulates during face shield shortages by providing minimal or low barrier HCP protection to the wearer. The face shields must be labeled accurately, and not represent that use of the authorized face shield alone will prevent infection from microbes or viruses.

Sterilization Systems for Decontamination of N95 Respirators. FDA has issued three EUAs for sterilization systems used to decontaminate N95 or N95-equivalent respirators for single-user reuse by HCPs where there is otherwise insufficient supply due to the pandemic.[28] Each of the systems decontaminates using vaporized hydrogen peroxide, which is readily available in approximately 2,000 hospitals around the country. FDA estimates that the second EUA, for the STERIS Sterilization System, will support decontamination of approximately 750,000 N95 respirators per day,[29] and the third EUA, for the STERRAD Sterilization System, will support decontamination of approximately four million N95 or N95-equivalent respirators per day in the United States.[30]

FDA’s Future Approach to EUAs for Face Masks and Respirators.[31] FDA recently specified its willingness to issue further EUAs to increase availability of critical PPE. Specifically, FDA has expressed interest in interacting with manufacturers on (1) the decontamination of otherwise disposable face masks and filtering facepiece respirators to facilitate marketing authorization through an EUA for decontaminated devices; and (2) additional EUAs for face masks intended for a medical purpose, surgical face masks and N95 respirators, including for devices that are not currently legally marketed in the United States and from manufacturers who have not previously manufactured such devices.

V. Ventilators and Other Respiratory Devices

One of the most urgent needs to combat the COVID-19 pandemic has been for additional ventilators. While politicians and pundits debate just how dire the United States’ shortage of ventilators is, everyone agrees there is a shortage, and FDA has moved to relax requirements for the production, modification, and use of ventilators.

A. Enforcement Policy for Ventilators and Accessories and Other Respiratory Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

Ventilators were highly regulated by FDA coming into the COVID-19 crisis,[32] but FDA recognized the need to “expand the availability of devices that facilitate respiration, including ventilators and their accessories, as well as other respiratory devices.”[33] In its March 2020 enforcement guidance, FDA announced that it would not object to “limited modifications to the indications, claims, functionality, or to the hardware, software, or materials of FDA-cleared devices.” In practice, the FDA guidance provides flexibility in several key regards for existing devices.[34]

Ventilators may be used for non-cleared uses and outside cleared environments, for example through the use of “powered emergency ventilators and anesthesia gas machines for patients needing mechanical ventilation” or “use of a ventilator in a health care facility when it is only cleared for use at home or during transport.”

Manufacturers may make modifications to FDA-cleared hardware, software, or materials, without prior submission of a premarket notification, for example by making changes to components used in the devices or through the addition of software to allow for remote monitoring.
Ventilators and anesthesia gas machines may be used beyond their cleared durations of use and shelf life.

These relaxed requirements apply only to existing FDA-cleared devices, and are subject to the process outlined in the EUA governing ventilators (discussed below).

While relaxing the rules around ventilators, there are still important limitations on what manufacturers may do. First, all of these exceptions and permissions are subject to the requirement that they not be done in a manner that would “not create an undue risk in light of the public health emergency.” Second, FDA requires that manufacturers “document changes to their device in their device master record and change control records and make this information available to FDA, if requested.” And third, FDA requires that manufacturers clearly label the devices to help “users better understand the device modifications.”[35]

B. Emergency Use Authorizations (EUAs) for Ventilators and Other Respiratory Devices

In addition to relaxing regulations for existing FDA-cleared devices, FDA also has signaled a willingness to consider emergency authorizations for devices approved for use in other countries and work with manufacturers that had “not previously been engaged in medical device manufacturing but with capabilities to increase supply of these devices.”[36]

Ventilators, Ventilator Tubing Connectors, and Ventilator Accessories. On March 24, 2020, FDA issued an EUA to allow for the emergency use in health care settings of certain ventilators and related devices.[37] The EUA establishes a process for companies to submit abbreviated information to FDA about uncleared devices and modifications to FDA-cleared ventilators and related accessories. FDA has requested information about how the device has been designed and evaluated, whether it is approved in another jurisdiction, and whether the device is manufactured according to recognized quality systems.[38] The EUA also waives certain cGMP requirements, including the quality system requirements, and certain registration and listing requirements.[39] If a ventilator, ventilator tubing connector, or ventilator accessory meets the criteria established under the EUA, FDA will add it to Appendix B to the EUA, which it has been able to do on an extremely expedited timeframe. As of April 9, 2020, FDA had authorized submissions for 24 ventilators and one ventilator tubing connector.[40]

VI. COVID-19 Drugs and Vaccines

There are no FDA-approved drugs or vaccines to treat or cure COVID-19, but at the end of March, FDA launched the Coronavirus Treatment Acceleration Program (CTAP), a special emergency program to expedite the development of COVID-19 therapies. The CTAP program is using “every tool at the agency’s disposal” to provide “ultra-rapid, interactive input.”[41] FDA has turned around reviews on COVID-19 development plans within 24 hours and completed reviews of single-patient expanded-access requests within three hours. FDA has redeployed medical and regulatory staff to serve on review teams dedicated to COVID-19 therapies. FDA also has streamlined the process for developers and physicians to contact FDA with inquiries and to submit requests for the emergency use of investigational products. FDA is prioritizing these requests based on factors such as the product’s scientific merits and the stage of development. In addition to clinical studies, FDA is looking at real-world data sources to inform its evaluation of potential therapies, and FDA is leveraging scientific information being generated in China, Italy, Japan, and South Korea.

According to FDA, there are currently 10 therapeutic agents in active trials and 15 therapeutic agents in planning stages, and the Agency will publish updates as these therapies progress through the development process. Examples of potential therapies and vaccines include the following:

Remdesivir. Remdesivir is an investigational broad-spectrum antiviral treatment, which was previously tested to treat diseases caused by other coronaviruses, such as Ebola. FDA has been working with Gilead Sciences, Inc. to expedite the clinical studies of remdesivir in adults diagnosed with COVID-19 and to permit the emergency use of the drug through an expanded access program. In March, Gilead began enrolling patients in two Phase 3, randomized, open-label, multicenter clinical studies. One of the studies will evaluate the safety and efficacy of two dosing durations in addition to the standard of care for patients with severe COVID-19. The other study will evaluate the same dosing regimens in addition to the standard of care for patients with moderate COVID-19. Other ongoing studies of remdesivir include the NIAID Phase 2 adaptive, randomized, double-blind, placebo-controlled trial and studies in China and France.
Convalescent Plasma. Convalescent plasma, collected from individuals who have recovered from COVID-19, contains antibodies to severe acute respiratory syndrome coronavirus 2 or SARS-CoV-2 (the virus that causes COVID-19). Use of convalescent plasma as a therapeutic agent has been studied in prior outbreaks of respiratory infections, such as the H1N1 influenza pandemic. Earlier this month, FDA entered a collaboration with BARDA, the American Red Cross, and the Mayo Clinic to simplify the process for health care providers to collect, distribute, and use convalescent plasma in patients. As a result of this collaboration, FDA estimates that thousands of units of plasma will be available to patients within the coming weeks. FDA also is working with NIAID to coordinate a study of hyperimmune globulin, which is a biological product manufactured from convalescent plasma.

On April 8, 2020, FDA issued guidance on the administration and study of investigational convalescent plasma during the public health emergency.[42] Prior to this guidance, FDA had approved emergency INDs for the use of convalescent plasma in very ill COVID-19 patients. The guidance provides recommendations regarding the regulatory pathways for using investigational COVID-19 convalescent plasma, patient eligibility, the collection of COVID-19 convalescent plasma from donors, labeling, and record-keeping. In addition to the traditional IND pathway (21 C.F.R. Part 312), convalescent plasma may be permitted for investigational use through an expanded access IND for patients with serious or immediately life-threatening COVID-19 disease who are not eligible or who are unable to participate in randomized clinical trials (21 C.F.R. § 312.305) or through single patient emergency INDs following the request by a licensed physician (21 C.F.R. § 312.310). The convalescent plasma should be obtained from an FDA-registered blood establishment that follows the donor eligibility criteria and donor qualifications. Donors should have complete resolution of symptoms at least 28 days prior to donation or complete resolution of symptoms at least 14 days prior to donation and negative COVID-19 test results. FDA is relaxing requirements relating to the registration, licensure, and procedures of blood establishments that collect and distribute the convalescent plasma for investigational use.

Chloroquine. On March 28, 2020, FDA issued an EUA for the use of chloroquine phosphate and hydroxychloroquine in COVID-19 patients who cannot participate in a clinical trial. In laboratory testing, these drugs have been shown to prevent the growth of the virus that causes COVID-19, and there have been “a few reports” of patients who improved on these drugs, but “[i]t is not known whether it was the drug that led to the improvement or whether there were other factors involved,” according to FDA.[43] After being highlighted by some federal officials, including President Trump, as a potential treatment, there have been shortages of these drugs, which are FDA-approved for the treatment of malaria and autoimmune diseases, and a person died following consumption of chloroquine products that are sold to treat aquarium fish. FDA’s Center for Veterinary Medicine subsequently issued a letter stating that chloroquine aquarium products should not be used as a treatment for COVID-19 in humans.[44] On April 14, 2020, FDA published guidances on the generic development of chloroquine phosphate and hydroxychloroquine sulfate in order to address the increased demand for these drugs.[45]
Vaccine Candidates. According to the World Health Organization (WHO), there are three COVID-19 vaccine candidates in clinical trials and 67 vaccine candidates in preclinical phases of development.[46] CanSino Biologics is the furthest along and advancing to Phase 2 clinical trials in China for Ad5-nCoV, a genetically engineered vaccine candidate, which is based on a vaccine platform previously used for an Ebola vaccine. In March, Moderna, in collaboration with NIAID, launched a Phase 1 clinical trial of SARS-CoV-2 mRNA-1273, an experimental gene-based vaccine, which uses messenger RNA rather than inactive virus to trigger an immune response. Last week, FDA accepted the IND from Inovio Pharmaceuticals to start Phase 1 studies of INO-4800, a DNA vaccine candidate, while additional preclinical trials are conducted in parallel; the company previously tested a vaccine for the treatment of Middle East Respiratory Syndrome (MERS), which is caused by a coronavirus.

Experts estimate 12 to 18 months, at a minimum, for the commercial availability of a COVID-19 vaccine. We expect that FDA will consider, and developers may request, emergency or expedited availability of the vaccine candidates before FDA approval or licensure. FDA is poised to apply these pathways to vaccines: the Agency announced its intent “to use all of the regulatory flexibility granted to it by Congress to ensure the most efficient and timely development of vaccines to fight COVID-19.”[47]

FDA’s strategy to speed the development of COVID-19 therapies and vaccines is focused on providing “regulatory flexibility, advice, guidance, and technical assistance.”[48] Former FDA Commissioner Scott Gottlieb recently called on FDA “to step up its pace” and to apply the regulatory strategies used for rare and deadly cancers, such as conducting real-time reviews of clinical data from ongoing trials rather than waiting for the trial’s completion.[49] As the clinical trials on the investigational drugs and vaccines progress, a key issue to watch will be how FDA handles the regulatory assessment of these clinical data to balance the need for urgency with the evidence required to demonstrate safety and effectiveness.

VII. Other Medical Products to Prevent or Treat COVID-19

In addition to the enforcement policies, guidance, and EUAs released for diagnostics, PPE, ventilators, and COVID-19 therapies, FDA has also issued guidance and/or enforcement policies relating to other medical devices and products used in the treatment of COVID-19. We summarize each of these below.

A. Alcohol Sanitizers

Hand hygiene is an important part of the U.S. response to COVID-19. If soap and water are not readily available, the CDC recommends consumers use an alcohol-based hand sanitizer that contains at least 60 percent alcohol. To improve the availability of hand sanitizer products, FDA issued guidance, updated March 27, 2020, regarding three temporary policies for alcohol-based hand sanitizer products that are compounded by pharmacists, produced by over-the-counter (OTC) drug manufacturers, or produced by firms that are not currently regulated as drug manufacturers, e.g., manufacturers of alcohol for human consumption.[50]

Generally, FDA expects that hand sanitizers are manufactured consistent with WHO recommendations, unless produced by an alcohol manufacturer, and formulated with either (1) alcohol that is not less than 94.9% ethanol by volume, or (2) isopropyl alcohol, glycerin USP or food grade, hydrogen peroxide, and sterile water. Firms should not add other active in inactive ingredients and should prepare the products under sanitary conditions with appropriate equipment. For alcohol manufacturers, the guidance directs such firms to register their facility in the FDA Drug Registration and Listing System, at which point they may commence manufacturing and distribution of the alcohol product without needing to await further correspondence from FDA. The guidances also set forth the labeling that should accompany the hand sanitizers. Additional manufacturing, quality, registration, and record-keeping expectations may apply, depending on whether the producer is a pharmacist, OTC drug manufacturer, or alcohol manufacturer.

B. EUA for Blood Purification System

On April 9, 2020, FDA issued the first EUA for the use of a blood purification system to address the “cytokine storm” occurring in some COVID-19 patients. The EUA was issued to Terumo BCT Inc. and Marker Therapeutics AG for their Spectra Optia Apheresis System and Depuro D2000 Adsorption Cartridge devices. Under the EUA, these devices may be used to treat patients 18 years of age and older with confirmed COVID-19, who are admitted to the ICU with confirmed or imminent respiratory failure. The product works by filtering cytokines and other inflammatory mediators out of the patient’s blood. These inflammatory mediators are typically elevated during infections and can be associated with a “cytokine storm” that occurs in some patients with COVID-19, leading to severe inflammation, progressive shock, respiratory failure, organ failure, and death. The following day, April 10, 2020, FDA issued a second EUA to CytoSorbents, Inc. for its CytoSorb blood purification system.

C. Enforcement Policy for Extracorporeal Membrane Oxygenation and Cardiopulmonary Bypass Devices

On April 6, 2020, FDA released guidance on Extracorporeal Membrane Oxygenation (ECMO) and Cardiopulmonary Bypass (CPB) devices for the purpose of expanding the availability of devices that can be used for ECMO therapy.[51] The guidance is limited to ECMO devices and CPB devices that are intended to pump or oxygenate blood by: (1) moving the blood to a component that pumps/oxygenates blood; (2) controlling pump speed; (3) controlling or monitoring gas flow for the circuit; or (4) controlling the temperature of the blood. It does not apply to devices intended only for extracorporeal carbon dioxide removal; however, FDA noted that manufacturers of such devices may request an EUA.

The guidance recognizes that FDA-cleared or FDA-approved CPB devices, listed in Table 2 of the guidance, are technologically capable of being used for ECMO therapy—specifically, of providing extracorporeal oxygenation for longer than 6 hours—and allows these devices to make modifications to their indications and design to that effect without 510(k) premarket notification or a Premarket Approval Application (PMA) Supplement under Section 515 of the FDCA. In particular, the CPB devices in Table 2 of the guidance may change their indications to include use of the device in an ECMO circuit to treat patients who are experiencing acute respiratory failure and/or acute cardiopulmonary failure, as well as to include use of the device for longer than 6 hours in an ECMO circuit. Additionally, the ECMO devices in Table 1 of the guidance and the CPB devices in Table 2 of the guidance may make changes to the dimension(s) of cannulae, tubing, filters, connectors, or other accessories to support use in an ECMO circuit that do not affect the flow rate of blood throughout the circuit.

The modifications cannot create “an undue risk,” and are only allowed for the “duration of the public health emergency related to COVID-19.” FDA states that changes to the coating of the device and changes that might negatively impact the gas transfer/exchange properties are likely to create “undue risk.” FDA also recommends that labeling for modified devices include five elements that provide users with additional data and information on use, including a “prominent and exhaustive list of clinical signs . . . that suggest device change-out is necessary,” and “clear distinction delineating FDA-cleared or FDA-approved indications from those that are not FDA-cleared or FDA-approved.” Finally, FDA recommends that, when available, devices cleared by FDA for ECMO therapy, as listed under Table 1, are used in ECMO circuits; the CPB devices whose indications have been modified should be used when needed “for patients in need of ECMO in the United States for the duration of the public health emergency.”

D. Enforcement Policy for Remote Ophthalmic Assessment and Monitoring Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

FDA also has published guidance regarding remote ophthalmic assessment and measuring devices. The guidance covers a wide range of commonly used products, from standard visual acuity charts, to tonometers (devices that measure the eye’s pressure through a known force, such as a small puff of air, to check for ocular pathologies).[52] FDA’s goal in issuing the guidance is to “reduc[e] the need for in-person treatment during the COVID-19 public health emergency” and, in so doing, to “help reduce the risk of exposure for patients and health care providers” to the novel coronavirus. To facilitate the use of such devices for eye care outside of traditional settings, the guidance makes clear that FDA will not object to alterations such as:

Allowing devices previously cleared for use in health care facilities to change their indications such that they can be used in home settings;
Modifying previously non-portable (though FDA-approved) ophthalmic devices for portable or handheld use; or
Allowing “virtual reality or mobile technology” to be used to modify such devices to allow for remote assessment and monitoring by off-site HCPs.

The guidance permits a host of modifications to visual acuity charts, general-use ophthalmic cameras, and tonometers without complying with the full set of usual regulatory requirements. However, FDA does not intend to relax requirements with respect to devices “intended to determine when patients need immediate clinical intervention,” or for devices “intended . . . solely or primarily [to be] relied upon by the eye care provider or patient to make a clinical diagnosis or treatment decision.” The guidance provides resources for validating and evaluating modifications made pursuant to its terms, and includes recommendations on the labeling of such modified devices to ensure patients and providers can evaluate the modifications to determine if they are appropriate.

E. Enforcement Policy for Non-Invasive Remote Monitoring Devices Used to Support Patient Monitoring During the Coronavirus Disease-2019 (COVID-19) Public Health Emergency

During the COVID-19 pandemic, HCPs are using noninvasive remote monitoring data for a range of purposes, from predicting spread of the virus to caring for patients who are sheltering in place.[53] On March 20, 2020, FDA issued a guidance document intended to facilitate the use of noninvasive remote monitoring devices to enable and expand patient monitoring while limiting direct contact between patients and HCPs.[54] The guidance applies to devices such as electronic thermometers, cardiac monitors, and pulse oximeters, and specifies that FDA will not object to certain modifications to the indications, claims, or functionality of such devices during the duration of the COVID-19 public health emergency, as declared by HHS.

By removing the specter of potential FDCA enforcement, FDA has encouraged device manufacturers to explore innovative solutions to facilitate patient care while minimizing direct patient-HCP interactions. Given the extent to which COVID-19 symptoms can be measured by the types of devices included in this guidance, this guidance is particularly important.

The guidance applies to a wide variety of devices that may transmit physiological measurements directly to HCPs or a monitoring entity via a wireless or cellular connection, in the following categories: (1) clinical electronic thermometers, (2) electrocardiograph devices (ECGs), (3) cardiac monitors, (4) electrocardiograph software for OTC use, (5) pulse oximetry, (6) noninvasive blood pressure measurement devices, (7) respiratory rate and breathing frequency, and (8) electronic stethoscopes.[55]

In light of the demand on HCPs and the risk of exposure associated with in-person visits, “FDA does not intend to object to limited modifications to the indications, claims, functionality or hardware or software of FDA-cleared non-invasive remote monitoring devices” during the public health emergency. By obviating 510(k) premarket notification requirements, FDA intends to enable device companies to refer to monitoring for COVID-19 or associated conditions, allow devices cleared for use in health care facilities to be used at home, and update hardware or software to enhance remote monitoring capabilities.[56]

In balancing safety with the demands of the COVID-19 crisis, FDA articulated that “modifications do[] not create . . . undue risk” where subject devices provide physiological parameter data to HCPs or patients, and those individuals can independently review the basis for any diagnostic or treatment recommendations. By contrast, a modification would trigger undue risk—and thus potential enforcement activity—if, for example, the device is intended to alert patients to a need for “immediate clinical intervention” or to be relied upon by HCPs or patients “to make a clinical diagnosis or treatment decision pertaining to COVID-19 or co-existing conditions.”[57]

FDA recommended that the labeling for modified devices:

Clearly describe the device’s new indications, claims, or functions relating to COVID-19 or related conditions, including “[p]otential risks” and “use conditions” (e.g., periodic testing or continuous monitoring);
Admonish patients and HCPs that the device’s recommendations are intended to support clinical decision-making rather than serve as the sole or primary driver of decisions;
Differentiate the device’s FDA-cleared indications and claims from the new ones; and
Instruct patients adequately on in-home use of devices previously cleared for use in health care facilities.[58]

Subject to the risk balancing and labeling guidance described above, FDA also does not intend to object to efforts to modify hardware or software to enable or enhance remote monitoring, so long as the alterations do not impact the physiological parameter measurement algorithms. FDA emphasized that modifications should reflect “appropriate cybersecurity controls” and recommended that changes accord with specified FDA-recognized technical standards.[59]

The guidance document underscores that mobile apps can facilitate monitoring of patients with COVID-19 or coexisting conditions. A provision of the CURES Act excluded certain software functions from the FDCA’s definition of device, such as software for an HCP that pairs a patient’s diagnosis with treatment guidelines for COVID-19 patients (along with the guidelines’ source) or software that compares patient physiological signs, symptoms, or results against guidelines and recommendations for condition-specific diagnostic tests, therapies, or triage strategies.[60]

F. Enforcement Policy for Infusion Pumps and Accessories During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

On April 5, 2020, FDA published guidance regarding FDA’s enforcement policy toward infusion pumps and accessories during the COVID-19 emergency.[61] This guidance is aimed at increasing the “availability and remote capabilities of infusion pumps,” as well as related accessories, for the duration in which the “declaration of public health emergency related to COVID-19,” as declared by HHS, remains in effect.

Infusion pumps represent a broad category of medical devices that are designed to “deliver[] fluids, such as nutrients and medications, into a patient’s body in controlled amounts.”[62] The guidance does not purport to cover all infusion devices. For instance, it expressly does not apply to the implementation of “closed loop control systems” (i.e., a setup combining infusion pumps with other technologies, such as electronic medical records, barcode medical administration, and drug libraries to create a semiautonomous, integrated drug distribution system). Nor does it extend to modifications that impact infusion pump usage within a magnetic resonance environment. However, the guidance does relax regulations on a host of other infusion pumps and related accessories, including the pumps themselves (21 C.F.R. § 880.5725); infusion line filters (21 C.F.R. § 880.5440); and electronic intravascular infusion controllers (21 C.F.R. § 880.5725).

Although whenever possible “health care facilities should use FDA-cleared infusion pumps” during the public health emergency, FDA “does not intend to object” to various modifications to FDA-cleared pumps and accessories that implemented without compliance with the premarket notification requirements (21 C.F.R. § 807.81). Such permissible modifications include, among others:

Changes to an infusion pump’s motor to allow for an alternate power supply;
Allowing or activating remote monitoring capabilities of infusion pumps so that a patient’s care can be managed without needing to enter her or his room (thus mitigating the risk of infection);
The transfer of electronic drug library information—which is used to automatically program infusion pumps—over a wireless network;
The use of infusion pumps that are otherwise FDA-certified for use while a patient is being transported, even if the device has not specifically been approved for use while in transit; and
The use of otherwise-approved pumps for populations “not explicitly referenced in the device labeling” (i.e., using a pump for children even if not labeled for pediatric use).

Additionally, the guidance makes clear that FDA will not object to hardware or software modifications aimed at increasing a pump’s battery capacity, to allow for the monitoring of multiple pumps from one location, or to better allow for remote, off-site monitoring.

Reflecting the strain on the medical supply chain caused by COVID-19, the guidance makes clear that FDA will not object to the use of infusion pump accessory devices beyond their design life. The guidance further clarifies that it will not view such extended uses as a legally actionable “undue risk” if, for instance, the devices are used according to a health care institution’s protocols, or if the device is taken out of use once it is visibly soiled or malfunctioning.

In light of these changes, the guidance also recommends that any devices modified as permitted above be clearly labeled to reflect these changes. And finally, to build a more robust pipeline for infusion pumps, FDA is interested in working with manufacturers, both foreign and domestic, to authorize the use of currently unauthorized infusion pumps under the EUA process.

G. Enforcement Policy for Clinical Electronic Thermometers

On April 4, 2020, FDA released guidance on clinical electronic thermometers, which are generally required to submit a premarket notification under Section 510(k) of the FDCA.[63] Recognizing the importance of maintaining an adequate supply of these “important screening and diagnostic tool[s] to assist in the identification of those individuals who may be infected with COVID-19,” FDA states that it does not intend to object to the distribution of clinical electronic thermometers that are not currently 510(k)-cleared.

As with other guidance released by FDA for the COVID-19 pandemic, this guidance is valid for the duration of the pandemic and as long as the devices do not create “undue risk.” For the purposes of this guidance, FDA explains that a device does not create undue risk where: (1) The device is manufactured consistent with 21 C.F.R. Part 820, ISO 13485:2016, or equivalent system approach; (2) the device has a marketing authorization in another regulatory jurisdiction (Europe, Australia, Canada, Japan) or device confirms to certain thermometer, electrical, software, and biocompatibility standards; (3) the device labeling includes a clear description of available data on device’s indications or functions, including performance, method of determining temperature, potential risks, and cleaning and reprocessing instructions; and (4) the device labeling includes clear identification that the device is not FDA approved or cleared.

H. Enforcement Policy for Sterilizers, Disinfectant Devices, and Air Purifiers

In its Enforcement Policy for Sterilizers, Disinfectant Devices, and Air Purifiers During the COVID-19 Public Health Emergency, FDA states that it will not enforce its premarketing requirements in certain circumstances to help “expand the availability and capability of sterilizers, disinfectants devices, and air purifiers” during the public health emergency.[64]

Because the coronavirus is a type of virus that is the least resistant to germicidal chemicals, the application of sterilization, disinfection, and air purifiers should minimize the viability of the coronavirus, and thereby “facilitate rapid turnaround of sterilized or disinfected medical equipment and reduce the risk of viral exposure for patients and health care providers.” But sterilizers, disinfectants, and air purifiers are generally categorized as class II devices and, as such, typically must comply with FDA’s 510(k) or PMA requirements—requirements that could hamper availability of new devices, or modifications or labeling changes to existing devices.

Accordingly, the guidance provides that FDA will not pursue enforcement of the 510(k) and PMA requirements as to “limited modifications to the indications or functionality” of already-cleared or approved devices, and as to devices that are “intended to be effective” at killing the novel coronavirus but do not yet have marketing authorization, provided certain performance and labeling elements are met for each category of device. FDA also made clear, however, that the guidance does not apply to items that are “intended to prevent or reduce the risks of hospital acquired infections or COVID-19.”

The guidance enumerates a number of performance elements that should be met for a device to fall within the FDA enforcement discretion. First, the guidance states that sterilizers (or modifications to sterilizers) should be designed, evaluated and validated in accordance with certain listed FDA-recognized standards, such as relevant AAMI and ANSI standards, and device changes should be documented consistent with quality system regulation requirements. Second, disinfectants similarly should meet certain listed AAMI or AOAC standards and changes to devices should be documented under the QSR, and the guidance recommends the use of certain specific performance levels for evaluating whether the product meets low-, intermediate-, or high-level disinfection, consistent with its labeling. Third, the guidance recommends manufacturers of air purifiers evaluate or perform certain specific measures such as particulate reduction or effectiveness against a representative virus of the coronavirus.

Finally, in the guidance FDA also recommends that these devices include certain labeling to aide users, such as: a clear description of the data on the device’s coronavirus-related indications or functions; a clear distinction of which indications are not FDA-cleared or -approved; for disinfectant devices, a clear statement about the level of disinfection; and various cautions pertaining to the limits and hazards of UV disinfectants.

I. Policy for the Temporary Use of Portable Cryogenic Containers Not in Compliance With 21 C.F.R. § 211.94(e)(1) For Oxygen and Nitrogen

During the COVID-19 pandemic, there has been an increased demand for oxygen and nitrogen, which are used for resuscitation, inhalation therapy, and in drug development settings, as well as the low supply of portable cryogenic medical gas containers for these gases. On April 9, 2020, FDA released a guidance on the use of gas containers for these gases.[65] Medical gases and medical gas containers are generally subject to cGMP requirements. One of the cGMP requirements sets out that portable cryogenic medical gas containers that are not manufactured with permanent gas-use outlet connections (e.g., those that have been silver-brazed) have tamper-resistant outlet connections; the outlet connections cannot be readily removed or replaced without making the valve inoperable (“211.94(e)(1)-compliant containers”). Industrial gas containers, which are not compliant with 211.94(e)(1), have tamper-evident connections; they indicate that removal was attempted or accomplished.

Effective immediately and for the duration of the pandemic, FDA “does not intend to take enforcement action against firms that fill and distribute oxygen and nitrogen intended for medical use in portable cryogenic medical gas containers that are not in compliance with [21 C.F.R. §] 211.94(e)(1)” provided certain circumstances are met. The circumstances include, among other things: (1) 211.94(e)(1)-compliant containers are not available; (2) the manufacturing and labeling of the gas itself is in compliance with all other requirements, including cGMP; (3) the valve has a prominent tag on or near the valve directing users not to tamper with or remove the connection; and (4) manufacturers remove the containers that are not 211.94(e)(1)-compliant “as soon as practicable, during or at the end of the public health emergency.”

J. 3D Printing

On March 26, 2020, FDA entered into a Memorandum of Understanding (MOU) with the Department of Veterans Affairs (VHA) and NIAID to facilitate connections between patients and health care providers, local manufacturers with capabilities, and designs for needed medical products.[66] The MOU provides a “framework for collaboration intended to facilitate regulatory and basic science innovation with 3D printing technologies to respond to COVID-19.”

The MOU, which remains in effect for two years, does not specify what types of 3D printing projects it covers; it is not limited only to particular items, such as masks or ventilator parts. Instead, the MOU states that the goal generally is to “help the Parties proactively work to promote treatment and prevent the spread of the virus known as SARS-CoV-2.” Each of the Parties has particular responsibilities set out in the MOU, including that FDA will provide a point of contact for the public to address questions about 3D printable medical devices and products such as PPE; NIAID will provide digital files for fabrication of products such as PPE through 3D printing and provide infectious disease expertise in evaluating printable designs; and VHA will host an external-facing website for individuals and health care entities to support 3D printed medical supplies or those with 3D printing capabilities wishing to provide those services. All Parties are expected to provide consultation on models, testing, and practices related to 3D printing and to help connect health care organizations seeking 3D printed supplies with manufacturers willing to print 3D parts.

VIII. Conclusion

Rapid changes to the legal landscape for drug and device companies are far from over. As Congress, FDA, and other federal agencies continue to respond to the COVID-19 crisis, there will no doubt be additional, important changes and clarifications. We will continue to update you and, as always, are available to answer any questions you may have.

[1] For a full overview of the CARES Act, please see our prior Client Alert: Gibson Dunn, Senate Advances the CARES Act, the Largest Stimulus Package in History, to Stabilize the Economic Sector During the Coronavirus Pandemic (Mar. 26, 2020), https://www.gibsondunn.com/senate-advances-the-cares-act-to-stabilize-economic-sector-during-coronavirus-pandemic/.

[2] U.S. Dep’t of Health & Hum. Servs, CARES Act Relief Fund, https://www.hhs.gov/provider-relief/index.html.

[3] 21 U.S.C. § 356c(a).

[4] CARES Act, Section 3112.

[5] 21 U.S.C. § 356c(g).

[6] 42 U.S.C. § 247d-6d. Please see our recent Client Alert for additional details about Secretary Azar’s PREP Act Declaration for COVID-19: Gibson Dunn, The PREP Act Provides Limited Liability Protection for Certain Coronavirus Countermeasures (Apr. 6, 2020), https://www.gibsondunn.com/the-prep-act-provides-limited-liability-protection-for-certain-coronavirus-countermeasures/

[7] Process for Making Available Guidance Documents Related to Coronavirus Disease 2019, 85 Fed. Reg. 16949-16950 (Mar. 25, 2020).

[8] Gibson Dunn, The PREP Act Provides Limited Liability Protection for Certain Coronavirus Countermeasures (Apr. 6, 2020), https://www.gibsondunn.com/wp-content/uploads/2020/04/the-prep-act-provides-limited-liability-protection-for-certain-coronavirus-countermeasures.pdf.

[9] U.S. Food & Drug Administration, Policy for Diagnostic Tests for Coronavirus Disease-2019 during the Public Health Emergency (Mar. 16, 2020), https://www.fda.gov/media/135659/download.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] U.S. Food & Drug Administration, Enforcement Policy for Face Masks and Respirators During the Coronavirus Disease (COVID-19) Public Health Emergency (Revised) (Apr. 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-face-masks-and-respirators-during-coronavirus-disease-covid-19-public-health.

[18] U.S. Food & Drug Administration, Enforcement Policy for Gowns, Other Apparel, and Gloves During the Coronavirus Disease (COVID-19) Public Health Emergency (Mar. 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-gowns-other-apparel-and-gloves-during-coronavirus-disease-covid-19-public-health.

[19] Examples of nonsurgical gowns include gowns that are intended to protect the wearer from the transfer of microorganisms and bodily fluids in low- or minimal-risk patient isolation situations and that are not intended for use during surgical procedures, invasive procedures, or when there is a medium or high risk of contamination. Id. at 6.

[20] Minimal-to-low barrier protection surgical apparel includes shoe covers, caps, and surgical suits. Id. at 6.

[21] A non-powdered patient examination glove is a disposable device intended for a medical purpose that is worn on the examiner’s hand or finger to prevent contamination between patient and examiner. Id. at 10.

[22] A non-powdered surgeon’s glove is a device intended to be worn on the hands of operating room personnel to protect a surgical wound from contamination. Id. at 11.

[23] U.S. Food & Drug Admin., NIOSH-Approved Air Purifying Respirators for Use in Health Care Settings During Response to the COVID-19 Public Health Emergency (Mar. 28, 2020). https://www.fda.gov/media/135763/download. FDA issued this EUA on March 2, 2020 and reissued it on March 27 and March 28, 2020.

[24] U.S. Food & Drug Admin., Imported, Non-NIOSH-Approved Disposable Filtering Facepiece Respirators (Mar. 28, 2020), https://www.fda.gov/media/136403/download. FDA issued this EUA on March 24, 2020 and reissued it on March 28, 2020.

[25] An “authorized decontamination system” means any decontamination system that has been issued an EUA. Id. Authorized decontamination systems can be found on FDA’s Emergency Use Authorization webpage, https://www.fda.gov/emergency-preparedness-and-response/mcm-legal-regulatory-and-policy-framework/emergency-use-authorization.

[26] U.S. Food & Drug Admin., Non-NIOSH-Approved Disposable Filtering Facepiece Respirators Manufactured in China (Apr. 3, 2020), https://www.fda.gov/media/136664/download.

[27] U.S. Food & Drug Admin., Face Shields Emergency Use Authorization (Apr. 9, 2020), https://www.fda.gov/media/136842/download.

[28] U.S. Food & Drug Admin., Battelle Decontamination System (Mar. 29, 2020), https://www.fda.gov/media/136529/download; U.S. Food & Drug Admin., STERIS Sterilization Systems for Decontamination of N95 Respirators (Apr. 9, 2020), https://www.fda.gov/media/136843/download; U.S. Food & Drug Administration, Coronavirus (COVID-19) Update: FDA Issues Emergency Use Authorization to Decontaminate Millions of N95 Respirators (Apr. 12, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-issues-emergency-use-authorization-decontaminate-millions-n95.

[29] U.S. Food & Drug Admin., Coronavirus (COVID-19) Update: FDA Issues Second Emergency Use Authorization to Decontaminate N95 Respirators (Apr. 10, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-issues-second-emergency-use-authorization-decontaminate-n95.

[30] U.S. Food & Drug Admin., Coronavirus (COVID-19) Update: FDA Issues Emergency Use Authorization to Decontaminate Millions of N95 Respirators (Apr. 12, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-issues-emergency-use-authorization-decontaminate-millions-n95.

[31] U.S. Food & Drug Admin., Enforcement Policy for Face Masks and Respirators During the Coronavirus Disease (COVID-19) Public Health Emergency (Revised) (Apr. 2020); https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-face-masks-and-respirators-during-coronavirus-disease-covid-19-public-health.

[32] See 21 C.F.R. §§ 868.5895, 868.5925, 868.5160, 868.5905, 868.5454.

[33] U.S. Food & Drug Admin., Enforcement Policy for Ventilators and Accessories and Other Respiratory Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency (Mar. 22, 2020), https://www.fda.gov/media/136318/download.

[34] Id.

[35] Id.

[36] Id.

[37] U.S. Food & Drug Admin, Coronavirus (COVID-19) Update: FDA takes action to help increase U.S. supply of ventilators and respirators for protection of health care workers, patients (Mar. 27, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-takes-action-help-increase-us-supply-ventilators-and-respirators.

[38] Id.

[39] Id.

[40] U.S. Food & Drug Admin., Appendix B: Authorized Ventilators, Ventilator Tubing Connectors, and Ventilator Accessories (Apr. 9, 2020), https://www.fda.gov/media/136528/download.

[41] U.S. Food & Drug Administration, Coronavirus Treatment Acceleration Program (CTAP) (Mar. 31, 2020), https://www.fda.gov/drugs/coronavirus-COVID-19-drugs/coronavirus-treatment-acceleration-program-ctap.

[42] U.S. Food & Drug Administration, Investigational COVID-19 Convalescent Plasma (Apr. 2020), https://www.fda.gov/media/136798/download.

[43] U.S. Food & Drug Admin., Frequently Asked Questions on the Emergency Use Authorization (EUA) for Chloroquine Phosphate and Hydroxychloroquine Sulfate for Certain Hospitalized COVID-19 Patients, https://www.fda.gov/media/136784/download.

[44] U.S. Food & Drug Admin., Letter to Stakeholders: Do Not Use Chloroquine Phosphate Intended for Fish as Treatment for COVID-19 in Humans (March 27, 2020), https://www.fda.gov/animal-veterinary/product-safety-information/fda-letter-stakeholders-do-not-use-chloroquine-phosphate-intended-fish-treatment-covid-19-humans.

[45] U.S. Food & Drug Admin., Product-Specific Guidances for Chloroquine Phosphate and Hydroxychloroquine Sulfate (Apr. 2020).

[46] World Health Organization, Draft Landscape of COVID-19 Candidate Vaccines (April 11, 2020), https://www.who.int/blueprint/priority-diseases/key-action/Novel_Coronavirus_Landscape_nCoV_11April2020.PDF

[47] FDA News Release, “Coronavirus (COVID-19) Update: FDA Continues to Facilitate Development of Treatments” (Mar. 19, 2020).

[48] U.S. Food & Drug Admin., Coronavirus (COVID-19) Update: FDA Continues to Facilitate Development of Treatments (Mar. 19, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-continues-facilitate-development-treatments.

[49] Scott Gottlieb, “Bet Big on Treatments for Coronavirus,” The Wall Street Journal (Apr. 5, 2020).

[50] U.S. Food & Drug Admin., Temporary Policy for Manufacture of Alcohol for Incorporation Into Alcohol-Based Hand Sanitizer Products During the Public Health Emergency (Mar. 2020), https://www.fda.gov/media/136390/download; U.S. Food & Drug Admin., Temporary Policy for Preparation of Certain Alcohol-Based Hand Sanitizer Products During the Public Health Emergency (Mar. 2020), https://www.fda.gov/media/136289/download; U.S. Food & Drug Admin., Policy for Temporary Compounding of Certain Alcohol-Based Hand Sanitizer Products During the Public Health Emergency (Mar. 2020), https://www.fda.gov/media/136118/download.

[51] U.S. Food & Drug Admin., Enforcement Policy for Extracorporeal Membrane Oxygenation and Cardiopulmonary Bypass Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency (Apr. 2020), https://www.fda.gov/media/136734/download.

[52] U.S. Food & Drug Admin., Enforcement Policy for Remote Ophthalmic Assessment and Monitoring Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency (Apr. 6, 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-remote-ophthalmic-assessment-and-monitoring-devices-during-coronavirus-disease.

[53] C. Hale, Companies roll out remote COVID-19 monitoring tools to free up hospital space, FierceBiotech, Apr. 3, 2020, https://www.fiercebiotech.com/medtech/companies-roll-out-remote-covid-19-monitoring-tools-to-free-up-hospital-space.

[54] U.S. Food & Drug Admin., Enforcement Policy for Non-Invasive Remote Monitoring Devices Used to Support Patient Monitoring During the Coronavirus Disease-2019 (COVID-19) Public Health Emergency (Mar. 20, 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-non-invasive-remote-monitoring-devices-used-support-patient-monitoring-during.

[55] Id. at 5–6.

[56] Id. at 6.

[57] Id. at 7.

[58] Id. at 7–8.

[59] Id. at 8.

[60] Id. at 9–10.

[61] U.S. Food & Drug Admin., Enforcement Policy for Infusion Pumps and Accessories During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency, (Apr. 5, 2020), https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-infusion-pumps-and-accessories-during-coronavirus-disease-2019-covid-19-public.

[62] U.S. Food & Drug Admin., Infusion Pumps (Aug. 22, 2018), https://www.fda.gov/medical-devices/general-hospital-devices-and-supplies/infusion-pumps.

[63] U.S. Food & Drug Admin., Enforcement Policy for Clinical Electronic Thermometers During the Coronavirus Disease 2019 (COVID19) Public Health Emergency (Apr. 2020), https://www.fda.gov/media/136698/download.

[64] U.S. Food & Drug Admin., Enforcement Policy for Sterilizers, Disinfectant Devices, and Air Purifiers During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency (Mar. 29, 2020) https://www.fda.gov/regulatory-information/search-fda-guidance-documents/enforcement-policy-sterilizers-disinfectant-devices-and-air-purifiers-during-coronavirus-disease.

[65] U.S. Food & Drug Admin., Policy for the Temporary Use of Portable Cryogenic Containers Not in Compliance With 21 CFR 211.94(e)(1) For Oxygen and Nitrogen During the COVID-19 Public Health Emergency (Apr. 2020), https://www.fda.gov/media/136830/download.

[66] Mem. of Understanding: Rapid Response to COVID-19 Using 3D Printing Between Nat’l Institutes of Health within U.S. Dep’t of Health and Human Servs. and U.S. Food & Drug Admin., U.S. Dep’t of Health and Human Servs., and Veterans Health Admin. within the U.S. Dep’t of Veterans Affairs, MOU 225-20-008, available at https://www.fda.gov/about-fda/domestic-mous/mou-225-20-008.

Gibson Dunn regularly counsels clients on issues raised by this pandemic in the commercial context. For additional information, please contact the Gibson Dunn lawyer with whom you usually work or the authors:

Authors: Marian J. Lee, John D.W. Partridge, Jonathan M. Phillips, Sarah Erickson-Muschko, Reid Rector, Yamini Grema, Maya Nuland, and Daniel Rauch

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

As the disruption caused by COVID-19 continues unabated, companies and their outside auditors are grappling with the financial reporting implications of the crisis. There are numerous, immediate regulatory responses to the crisis that issuers should consider, including, for example, the reporting relief recently announced by the Securities and Exchange Commission (principally a 45-day delay in certain filing requirements) or under the CARES Act (in the form of relief from certain accounting standards).[1] Similarly, auditors should remain aware of the steps that the Public Company Accounting Oversight Board is taking to address the disruption in normal business activity, primarily permitting firms to request a 45-day delay in certain aspects of their PCAOB inspections.[2]

Beyond those process developments, there are also areas of substantive financial reporting that issuers and their auditors should consider as they prepare for annual or quarterly periodic reporting. As management and audit committees undertake to see that their financial statements are fairly presented in this fast-paced and ever-changing environment, and as auditors audit or conduct review procedures on these financials, they should not lose sight of the potential reaction that regulators may have in the future to accounting judgments and disclosure decisions, or to the prospect that those decisions may be scrutinized through the lens of twenty-twenty hindsight in future private shareholder litigation. Simply put, this is not business as usual for anyone. It is more important than ever that corporate management and audit committees focus on certain key financial reporting and accounting issues in these unsettling times. Similarly, auditors should consider these issues and evaluate how those and other considerations will affect their audits and reviews of upcoming financial statements.

Issuer Considerations: Potential Legal Exposure Related to Select Accounting and Financial Reporting Areas

The impact of COVID-19 on companies across all facets of the economy cannot be underestimated, and many companies will likely be confronted by significant employee layoffs and financial losses in the months to come. Although this environment remains wildly unpredictable even for the most sophisticated analysts, there are certain areas of financial reporting for which there is heightened potential for second-guessing by regulators and private plaintiffs. Those areas include (i) management estimates, including goodwill and asset impairment, (ii) lease accounting, (iii) going concern evaluations, (iv) internal controls over financial reporting, and (v) the use and disclosure of non-GAAP measures and performance metrics.

Estimates and Impairment

In recent decades, financial reporting has relied more and more on management estimates concerning the fair values of assets and the potential impairment of those assets, including goodwill and intangible asset impairment. Even in the most stable of times, fair value estimates and impairment assessments can present a minefield of difficult questions, as evidenced by the fact that goodwill and intangible asset valuation is the most frequent subject of critical audit matters identified in external auditors’ reports, according to the PCAOB.[3]

The recent turmoil wrought by the pandemic has added exponentially to the difficulty of reaching reasonable and supportable accounting judgments in this area. Both the SEC and PCAOB have acknowledged in their recent public statements that estimate and impairment accounting will be one of the areas most affected by the interruption of normal business activity during the crisis.[4] Although these statements highlight that regulators are well aware of these challenges and sound a note that the regulatory community will exercise caution before second-guessing well-reasoned judgments,[5] management and audit committees should not let their guard down and should appreciate that after-the-fact scrutiny of estimation and impairment processes and determinations likely will be intense. This holds true across numerous circumstances, from the estimation of insurance loss reserves to the analysis of goodwill from recent acquisitions for potential impairment.

As issuers prepare their upcoming periodic reports—whether they include disclosures concerning annual impairment testing or potential disclosure of a triggering event requiring an interim impairment—management and audit committees should keep in mind that potential legal exposure accompanies both the decision to write down or impair assets and the decision not to do so.

For example, an issuer that takes a conservative view regarding the impact that the crisis will have on its operations and the value of its assets going forward might announce a significant write-down or impairment. However, if the company or its industry recovers quickly following the crisis, a regulator or private plaintiff may claim the company used the COVID-19 crisis as a cover to write down the value of assets to mask earlier mismanagement of the enterprise.
On the other hand, an issuer that predicts the current crisis will be short-lived or that business will soon recover to pre-crisis levels may elect to reflect no or minimal asset write-downs and impairments. That decision could be subject to second-guessing should the company’s forecast prove optimistic and a long economic slump ensue. Even a subsequent write-down or impairment charge could expose the company to claims that it intentionally delayed the inevitable.

In light of this dilemma, issuers should consider what steps to take to help ensure that their valuation estimates and impairment decisions are reasonable in light of all facts that are presently known. For material estimates and impairments, companies should strongly consider obtaining objective and independent assessments and updating those analyses on a quarterly basis going forward. And the entire process should be well documented, including written assessments that explain the process, the critical assumptions, the timing of any write-down or change in estimate, and an explanation of why the estimate is well supported and reasonable in the circumstances in the period recorded.

Lease Accounting

In 2019, issuers began to implement the revised accounting standard ASC 842 to bring operational leases onto their financial statements, which for many represented a significant change to their accounting.[6] Barely a year into that change, companies will now have to grapple with the accounting implications of a worldwide economic interruption which is reportedly leaving large numbers of companies unable to meet the financial obligations under lease agreements.[7] As with impairment and valuation considerations, issuers will need to determine whether and how to restructure their lease relationships in a period of significant uncertainty, knowing that regulators and private plaintiffs will scrutinize those decisions with the benefit of hindsight.

On April 8, 2020, the Financial Accounting Standards Board provided some relief for companies applying ASC 842 when it voted to relax the requirement that leases be individually reviewed as potential modifications. Recognizing that many changes to normal leasing relationships are being implemented through existing provisions in the leases, such as force majeure clauses, rather than by modifying the lease contract, FASB determined that it would be unduly burdensome for issuers to conduct an individualized analysis concerning whether each change in lease payments constituted a modification.[8] As a result, FASB will now allow companies to temporarily account for lease concessions related to the impacts of COVID-19 consistent with how those concessions would have been accounted for had enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations explicitly exist in the contract). Consequently, for concessions related to the impacts of the ongoing crisis, an entity will not have to analyze each individual contract.[9] FASB’s recent action will provide short-term relief to issuers in preparing financial statements in accordance with GAAP. However, Companies will need to take steps to see that their categorization decisions and modification analysis are reasonable, and that those determinations are well documented.

Other potential areas of lease accounting for which issuers can expect scrutiny include:

The content of any risk factors they include in upcoming filings related to the COVID-19 crisis. Companies for which modifications to leases could materially affect their accounting and financial results should consider explicitly noting leases as an aspect of their risk factor disclosures about the impact of the pandemic on business operations.
Right of Use (ROU) accounting. A ROU asset is a lessee’s right to hold, operate, or occupy the leased property over the lease term. Lessees that have recognized an ROU asset on the balance sheets will have to consider whether changes to their leasing relationships as a result of the crisis affect the recognition of ROU assets, including the amortization of those assets.

Going Concern

With so many companies experiencing unprecedented financial turmoil due to the pandemic, an aspect of that issuers should not overlook is the GAAP requirement that “an entity’s management at the date the financial statements are issued should evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.”[10] In light of both the significant economic trauma that the COVID-19 crisis has caused and the uncertainty regarding how long it will last, issuers may find that their going concern analysis now requires different considerations than it would in normal times.

Of course, as with other issues discussed in this update such as goodwill and asset impairment, regulators and private plaintiffs will have the benefit of hindsight in making allegations against companies that do not survive the current crisis, and might assert that substantial doubt about the company’s continuation clearly existed, or should have been recognized by the company, at the time that the financial statements were issued. Issuers can protect themselves in part against such claims by considering whether the documentation of their going-concern analysis is sufficiently robust.

Internal Controls

Management, audit committees, and auditors also need to recognize that perceived violations of GAAP or disclosure requirements could lead to subsequent regulatory scrutiny or allegations by private plaintiffs that an issuer’s internal control over financial reporting was not effective. For example, regulators or plaintiffs may later allege that the furlough or termination of certain employees or the challenges created by a newly remote work force degraded a company’s internal controls, leading directly to improper accounting or disclosure in one of the above areas.

It is therefore important that issuers focus on risks to the design and operation of internal control during this period of disruption. Among the circumstances that could arise during the crisis and that could interfere with the normal operation of the internal-control system are:

The closure of business facilities and off-site work arrangements may prevent certain controls, including periodic and compensating controls, from operating;
Staff furloughs, illnesses, and remote work may cause managers to modify workstreams to the detriment of the segregation of duties; and
The uncertainty, business disruptions, and market turmoil caused by the crisis may interrupt the normal flow of information, including information from third-party sources, on which certain controls rely.

Management and audit committees should therefore consider what steps they can take to buttress their internal controls during this time, to protect themselves internally and externally.

Non-GAAP Financial Measures

The use of non-GAAP financial measures has been the subject of recent regulatory scrutiny as the SEC has examined whether companies use non-GAAP financial measures to present an overly optimistic picture of their business performance. At this point, most companies are well aware of the SEC’s extensive guidance in the past few years designed to promote robust and careful use of non-GAAP financial measures in issuer disclosures.[11]

The SEC’s enforcement of this guidance has included not only policing the formulation and consistency of the metrics themselves but also, in late 2018, an enforcement order alleging that an issuer inappropriately gave a non-GAAP financial measure equal prominence with the analogous GAAP measure.[12]

Scrutiny on the use of non-GAAP financial measures also has been subject of recent criminal prosecution. For example, on August 1, 2019, the same day that the SEC charged a real estate investment trust with improperly adjusting a non-GAAP measure allegedly to mislead investors about the company’s growth,[13] the U.S. Attorney’s Office for the Southern District of New York announced criminal securities fraud charges against the company’s former chief executive officer and chief financial officer.[14]

Given the level of scrutiny currently being applied to non-GAAP financial measures by regulators and prosecutors, issuers should consider whether additional attention to their processes to calculate and present any non-GAAP financial measures is warranted in this environment.

Auditor Considerations: Potential Legal Exposure Related to Current Audit Work

It should come as no surprise to external auditors that the accounting and disclosure challenges faced by their clients also have potential implications for the auditors’ own regulatory or litigation exposure. The PCAOB’s statements during the crisis and its enforcement actions arising out of the 2008 financial crisis provide a guide to some of the points of potential scrutiny that PCAOB-registered firms can anticipate.

On April 2, 2020, the PCAOB released a Spotlight document entitled, “COVID-19: Reminders for Audits Nearing Completion.”[15] Consistent with the PCAOB’s focus on risk assessment and response as a foundation of the audit, the document discusses at length the effect that the current crisis may have on an auditor’s risk-assessment process:

As part of the evaluation of whether sufficient appropriate audit evidence has been obtained, auditors are required to evaluate the appropriateness of their initial risk assessments. In light of the economic effects of the COVID-19 crisis, new risks may emerge, or the assessments of previously identified risks may need to be revisited because the expected magnitude and likelihood of misstatement has changed. Changing incentives or increased pressures on management, especially when taken together with changes in internal controls or increased ability for management override of controls, may result in new risks of material misstatement due to fraud or changes to the auditor’s previous assessment of risks of material misstatement due to fraud. Similarly, increased pressure on, and changes in, management processes, systems, and controls may give rise to increased risk of error. Initial responses to assessed risks may not be adequate given the revised risk assessments, or planned procedures may not be practical or possible to perform under current circumstances.[16]

As the PCAOB notes, the response to a modified risk assessment may itself be affected by the interruption of normal business activity, including that the nature and form of audit evidence may need to change as certain evidence relied upon in the past may no longer be available.[17]

The PCAOB’s Spotlight document also addresses other potential effects of the present crisis on the planning and performance of the audit, including:

Financial statement areas that may be affected by the current economic turmoil, including several of those noted above;
Changes that may need to occur in audit committee communications or in the auditor’s report, including the identification of any new critical audit matters; and
The potential need to modify the operation of certain quality-control processes, including the engagement quality review, in light of current business restrictions.[18]

The PCAOB notes in the Spotlight that certain of its publications issued during the most recent financial crisis and recession may provide a guide to relevant audit considerations in the present.[19] The PCAOB’s enforcement actions related to that financial crisis also provide a useful guidepost to the areas of scrutiny that auditors can expect as they emerge from this present crisis.

Perhaps the most high-profile PCAOB enforcement action related to the previous financial crisis was its proceeding against an engagement partner related to a mortgage lender’s restatement of its financial statements based on revised loan asset valuations. The matter concerned two of the financial statement areas that we discuss above as being potentially relevant to the current crisis—management estimates concerning asset valuation, and evaluation of an entity’s ability to continue as a going concern. In that matter, the PCAOB charged the engagement partner with a failure to exercise due professional care, including professional skepticism; a failure to obtain sufficient audit evidence; and an inappropriate reliance on management representations, all related to both her procedures related to the value of the lender’s mortgage assets and her consideration of the lender’s ability to continue as a going concern.[20]

Although the SEC later overturned the PCAOB’s sanction of the engagement partner,[21] we expect that the case remains a reliable guide to the types of allegations the PCAOB may bring in the future concerning auditing decisions made today. That matter, therefore, along with the April 3 Spotlight document, highlights areas to which auditors should remain attentive as they perform audit and review procedures in this difficult environment, including: (i) exercising adequate professional care, including professional skepticism; (ii) obtaining sufficient appropriate audit evidence and not becoming overly reliant on management representations; and (iii) properly identifying and assessing the risks of material misstatement, as well as fashioning an appropriate response to those risks in light of the current difficulty in carrying out business operations. As always, the likelihood of an enforcement action by the SEC or PCAOB may depend in part on whether an auditor’s judgments on these and other relevant issues is adequately documented in the written work papers.

* * * *

Issuers and external auditors have already recognized that the accounting and auditing judgments that they make today during the COVID-19 crisis could be the target of litigation and regulatory investigations down the road. It is important that companies and auditors assess which aspects of their financial reporting, disclosure, and audit processes are most likely to be subject to scrutiny during and after the present crisis, and to take steps now to help ensure that decisions on those points are reasonable and defensible.

In its April 3, 2020 statement, the SEC Office of Chief Accountant emphasized the availability of its consultation process for issuers facing especially challenging financial reporting questions during this time.[22] When confronted with particularly complex financial reporting issues, management should consider using this invitation for consultation. Gibson Dunn’s lawyers also stand ready to assist with any questions you may have regarding these or other financial reporting developments related to the COVID-19 crisis, or assisting in the consultation process. For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors in Washington, New York, Denver, and Palo Alto.

____________________

[1] The SEC’s filing relief is discussed in more detail in Gibson Dunn’s Securities Regulation Monitor blog, available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=402, and our April 9, 2020 Client Update, Perspectives from One Month into the COVID-19 U.S. Outbreak: Public Company Disclosure Considerations, available at https://www.gibsondunn.com/perspectives-from-one-month-into-the-covid-19-u-s-outbreak-public-company-disclosure-considerations/. A Gibson Dunn summary of the CARES Act is located at https://www.gibsondunn.com/senate-advances-the-cares-act-to-stabilize-economic-sector-during-coronavirus-pandemic/. On April 3, 2020, SEC Chief Accountant Sagar Teotia clarified that the SEC Office of the Chief Accountant will consider a company’s decision to structure its financial reporting consistent with the CARES Act accounting provisions to be compliant with GAAP. See Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 (Apr. 3, 2020) (Teotia Statement”), available at https://www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03.

[2] See “In Light of COVID-19, PCAOB Provides Audit Firms with Opportunity for Relief from Inspections” (Mar. 23, 2020), available at https://pcaobus.org/News/Releases/Pages/In-Light-of-COVID-19-PCAOB-Provides-Audit-Firms-with-Opportunity-for-Relief-from-Inspections.aspx.

[3] See “Spotlight – Critical Audit Matters” (Dec 10, 2019), available at https://pcaobus.org/Documents/CAMs-Spotlight.pdf.

[4] See Division of Corporation Finance, CF Disclosure Guidance: Topic No. 9 (Mar. 25, 2020), available at https://www.sec.gov/corpfin/coronavirus-covid-19; “Spotlight – COVID-19: Reminders for Audits Nearing Completion” (Apr. 2, 2020) (“PCAOB Spotlight”), available at https://pcaobus.org/Documents/COVID-19-Spotlight.pdf.

[5] See Teotia Statement (“OCA has consistently not objected to well-reasoned judgments that entities have made [concerning judgments and estimates], and we will continue to apply this perspective”).

[6] See FASB Accounting Standards Update 2016-02, Leases (Topic 842) (Feb. 25, 2016).

[7] See “Businesses Can’t Pay Rent. That’s a Threat to the $3 Trillion Commercial Mortgage Market,” wsj.com (Mar. 24, 2020).

[8] See Gibson Dunn’s Client Update concerning force majeure clauses, available at https://www.gibsondunn.com/force-majeure-clauses-a-4-step-checklist-and-flowchart/.

[9] See FASB Staff Q&A—Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic.

[10] ASC 205-40-50-1.

[11] See “Non-GAAP Financial Measures,” available at https://www.sec.gov/divisions/corpfin/guidance/ nongaapinterp.htm.

[12] See, e.g., ADT, Inc., Rel. No. 34-84956 (SEC Dec. 26. 2018).

[13] Brixmor Property Group Inc., Rel. No. 34-86538 (SEC Aug. 1, 2019).

[14] “Former Chief Executive Officer And Chief Financial Officer Of Publicly Traded Company Charged With Accounting Fraud” (Aug, 1, 2019), available at https://www.justice.gov/usao-sdny/pr/former-chief-executive-officer-and-chief-financial-officer-publicly-traded-company.

[15] See PCAOB Spotlight.

[16] Id. at 2 (emphasis added).

[17] Id. at 2-3.

[18] Id. at 3-5.

[19] Id. at 6 (citing PCAOB Staff Audit Practice Alert No. 9, “Assessing and Responding to Risk in the Current Economic Environment” (Dec. 6, 2011); PCAOB Staff Audit Practice Alert No. 3, “Audit Considerations in the Current Economic Environment” (Dec. 5, 2008)).

[20] Cynthia C. Reinhart, CPA, Rel. No. 34-85964, at 15 (SEC May 29, 2019).

[21] See generally id. The SEC disagreed in part with the PCAOB’s factual findings and also overturned the PCAOB’s analysis concerning what constituted “repeated instances of negligent conduct” sufficient to support the imposition of heightened sanctions pursuant to section 105(c)(5)(B) of the Sarbanes-Oxley Act of 2002, as amended. See 15 U.S.C. § 7215(c)(5)(B).

[22] Teotia Statement (“We remain available for consultation and encourage stakeholders to contact our office with questions they encounter as a result of COVID-19”).

Authors: Michael Scanlon, Lee Dunst, Lawrence Zweifach, Monica Loseman, David Ware, and Chris Trester

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

New York Empire State Development Corporation Further Updates Guidance on Businesses Deemed Essential Under Governor Andrew Cuomo’s “New York State on PAUSE” Executive Order

On April 9, 2020, the New York State Development Corporation (“ESD”) further updated its guidance for determining whether businesses are “essential” and therefore exempt from the in-person workforce restrictions established in Governor Cuomo’s March 20, 2020 “New York State on PAUSE” Executive Order (EO 202.8). That March 20 order required all non-essential businesses keep 100 percent of their workforce at home. These updates, which we review in this alert, demonstrate that ESD is continuing to evolve the breadth and depth of its guidance on what constitutes an essential business. It is therefore critical that businesses continue to stay apprised of the latest developments.
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On April 9, 2020, the New York Empire State Development Corporation (“ESD”) further updated its guidance for determining whether businesses are “essential” and therefore exempt from the in-person workforce restrictions established in Governor Cuomo’s March 20, 2020 “New York State on PAUSE” Executive Order (EO 202.8). That March 20 order required all non-essential businesses keep 100 percent of their workforce at home. These updates, which we review in this alert, demonstrate that ESD is continuing to evolve the breadth and depth of its guidance on what constitutes an essential business. It is therefore critical that businesses continue to stay apprised of the latest developments.

The ESD’s April 9 version of the guidance contains four primary updates to its previous guidance, which was last updated on April 8.[1]

First, the new guidance adds two new essential business categories—“Recreation” and “Professional services with extensive restrictions”—which together set forth social distancing and workplace restrictions regarding parks and open public spaces, legal and real estate services, and houses of worship.
Second, the updated guidance provides further detail on what constitutes essential construction in the context of affordable housing and the energy industry, and clarifies that essential construction also includes construction necessary to protect the health and safety of occupants of a structure as well as construction for existing projects of an essential business.
Third, the updated guidance incorporates new examples of essential businesses in the preexisting healthcare, manufacturing, retail, and essential services industry categories.
Fourth, the updated guidance broadens the list of businesses deemed non-essential and therefore prohibited from requesting a designation as an essential business under the guidance.

These four primary updates to the guidance are reviewed below in further detail.

I. The Updated Guidance Incorporates Two New Essential Business Categories

The updated guidance now includes two additional essential business categories: “Recreation” and “Professional services with extensive restrictions.” According to the guidance, recreation includes parks and other open public spaces—except for golf courses, the use of boat launches and marinas for recreational vessels, and “playgrounds and other areas of congregation where social distancing cannot be abided.”

The new professional services category is largely directed to legal and real estate services, as well as houses of worship. With respect to legal services, the guidance clarifies that lawyers may provide in-person services, but only in support of essential businesses. Even so, the guidance recommends that such work be conducted “as remotely as possible,” while mandating that the remainder of all legal work shall be performed remotely. With respect to real estate services, the guidance permits services necessary to complete a transfer of real property to occur in person “only to the extent legally necessary and in accordance with appropriate social distancing and cleaning/disinfecting protocols.” Otherwise, all real estate transactions should be conducted remotely. Finally, with respect to houses of worship, the revised guidance allows individuals to enter them only where six feet of distance can be maintained between persons. That permission notwithstanding, the guidance cautions that individuals should not be gathering in houses of worship until the end of the COVID-19 public health emergency, and encourages religious leaders to hold virtual religious services.

II. The Updated Guidance Provides Further Detail Concerning What Constitutes Essential Construction

The ESD’s prior guidance on construction, which Gibson Dunn reviewed in a prior alert, provided that all non-essential construction must cease, except for emergency construction such as projects “necessary to protect health and safety of the occupants” or projects for which it would be unsafe to allow them to remain incomplete. The prior guidance also noted that essential construction included that of roads, bridges, transit facilities, utilities, hospitals or health care facilities, affordable housing, and homeless shelters. And it provided that essential and non-essential emergency construction must adhere to social distancing and safety best practices, to be enforced by state and local authorities, with up to $10,000 fines for a violation. All that remains in effect in the updated guidance.

The updated guidance, however, affords new detail on what constitutes “essential” construction with respect to affordable housing and the energy industry. Construction of affordable housing is now defined as construction work where: “either (i) a minimum 20% of the residential units are or will be deemed affordable and are or will be subject to a regulatory agreement and/or a declaration from a local, state, or federal government agency or (ii) where the project is being undertaken by, or on behalf of, a public housing authority.” And certain construction in the energy industry is now expressly included as “essential” construction which may continue, as set forth in greater detail in the response to Question 14 of the ESD’s FAQs.[2] The updated guidance also categorizes as essential construction that which is “necessary to protect the health and safety of occupants of a structure” and construction for “existing (i.e. currently underway) projects of an essential business.”

III. The Updated Guidance Incorporates New Examples into Several Other Essential Business Categories

The revised guidance sets forth additional examples of essential businesses among several of the original 12 categories of businesses provided in the prior guidance and narrows the scope of one example in the financial institutions category. These essential business categories and their new examples are set forth below.

Essential Health Care Operations: Emergency chiropractic services; physical therapy, prescribed by a medical professional; occupational therapy, prescribed by a medical professional.
Essential Manufacturing: Any parts or components necessary for essential products that are referenced within the guidance, such as sanitary and personal care products regulated by the Food and Drug Administration.
Essential Retail: Telecommunications to service existing customers and accounts; and delivery for orders placed remotely via phone or online at non-essential retail establishments—provided that only one employee is physically present at the business location to fulfill orders.
Essential Services: Marine vessel repair and marinas, but only to support government or essential commercial operations, and not for recreational purposes; landscaping, but only for maintenance or pest control and not cosmetic purposes; designing, printing, publishing and signage companies to the extent that they support essential businesses or services; remote instruction or streaming of classes from public or private schools or health/fitness centers—provided that no in-person congregate classes are permitted.
Financial Institutions: The prior example of “services related to financial markets” has been narrowed to exclude debt collection services.

IV. The Updated Guidance Provides Further Examples of Businesses Deemed Non-Essential

The ESD’s updated guidance broadens the types of businesses deemed non-essential and therefore ineligible to request a designation as an essential business. The prior guidance provided that non-essential businesses included those that were previously ordered to close due to prior restrictions on gatherings with 50 or more participants, such as bars, restaurants, gyms, movie theatres, casinos, auditoriums, concerts, conferences, worship services, sporting events, and any physical fitness centers.[3]

The revised guidance now also specifically enumerates certain additional businesses as “non-essential.” These include “[a]ny indoor common portions of retail shopping malls with 100,000 or more square feet of retail space available for lease,”; “[a]ll places of public amusement, whether indoors or outdoors,” such as amusement rides, aquariums, bowling alleys, and children’s play centers, among others; and barbershops, hair salons, tattoo or piercing parlors, and related personal care services like nail technicians, and laser hair removal services. The new restrictions further note that restaurant take-out or delivery for off-premise consumption do not fall within the scope of restaurants deemed non-essential, which are now more clearly specified as those offering dine-in restaurant or bar services.

* * *

In sum, as ESD continues to help businesses navigate the effects of Governor Cuomo’s “New York State on PAUSE” Executive Order, its guidance on what constitutes essential businesses continues evolving as to the breadth and depth of the types of business and activities covered. Gibson Dunn will continue to track these updates and will report on important developments.

Prior client alerts providing an overview of the Governor Cuomo’s “New York State on PAUSE” executive order’s in-person workforce restrictions and ESD’s guidance on essential businesses exempt from the order may be accessed here, here, and here. As noted in Gibson Dunn’s March 24, 2020 alert, New York Attorney General Letitia James has urged employees who believe their employers to be acting in violation of Governor Cuomo’s executive order to file a complaint with the New York State Office of the Attorney General’s Labor Bureau.

[1] The April 8 guidance removed the following sentence that was present in earlier versions: “Houses of worship are not ordered closed however it is strongly recommended not to hold congregate services. If held, social distance must be maintained and compliance with DOH guidance, which can be found at https://coronavirus.health.ny.gov/ information-providers.”

[2] The answer to Question 14 in the ESD’s FAQs explains (among other things) that utility operations and maintenance for existing power generation, fuel supply, and “[t]ransmission and distribution infrastructure,” are examples of essential construction “necessary to respond to the COVID-19 state emergency or to provide basic human services” like food, shelter, and safety.

[3] See Governor Andrew M. Cuomo, E.O. 202.3 (March 16, 2020).

Mylan Denerstein – New York (+1 212.351.3850, [email protected])

Lauren Elliot – New York (+1 212.351.3848, [email protected])

Stella Cernak – New York (+1 212.351.3898, [email protected])

Lee Crain – New York (+1 212.351.2454, [email protected])

Doran Satanove – New York (+1 212.351.4098, [email protected])

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

Los Angeles partner Abbey Hudson, Los Angeles associate Dione Garlick and Orange County associate Mark Tomaier are the authors of “Calif. Organic Waste Regs Mean Sweeping Changes For Cos.” [PDF] published by Law360 on April 9, 2020.

GLOBAL OVERVIEW

Treasury and Fed Release High-Level Terms of Main Street and Paycheck Protection Lending Facilities

Today, the Board of Governors of the Federal Reserve System (“Federal Reserve”) announced that, as part of the “programs or facilities” the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) directs the Federal Reserve to establish to provide “liquidity to the financial system that supports lending to eligible businesses, States, or municipalities,” it would establish two new facilities to promote lending to businesses with up to 10,000 employees or up to $2.5 billion in 2019 annual revenue. The Federal Reserve also announced a lending facility for depository institutions that originate loans under the CARES Act’s Paycheck Protection Program (“PPP”). This alert discusses these three facilities.
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Analysis of Small Business Administration Memorandum on Affiliation Rules and FAQs on Paycheck Protection Program

The U.S. Small Business Administration (“SBA”) recently published a memorandum (the “Memorandum”) and new Frequently Asked Questions (“FAQs”) (available here) clarifying the size standards and affiliation rules applicable to the Paycheck Protection Program (the “Program” or “PPP”). As described in greater detail in our previous client alerts, SBA “Paycheck Protection” Loan Program Under the CARES Act, Small Business Administration and Department of Treasury Publish Paycheck Protection Program Loan Application Form and Instructions to Help Businesses Keep Workforce Employed, Small Business Administration Issues Interim Final Rule and Final Application Form for Paycheck Protection Program, and Small Business Administration Issues Interim Final Rule on Affiliation, Summary of Affiliation Tests, Lender Application Form and Agreement, and FAQs for Paycheck Protection Program, the Program provides $349 billion to help small businesses impacted by COVID-19 keep their employees on the payroll and their businesses solvent.
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Considerations for PIPE Transactions

Given the current volatility of the capital markets and uncertain outlook for stability, one attractive option for public companies seeking to raise capital quickly is a “PIPE” transaction – or private investment in public equity. This article highlights some key considerations that a company should consider in connection with a PIPE transaction, including information on waivers of certain rules of the New York Stock Exchange (NYSE) recently approved by the SEC in connection with the COVID-19 pandemic.
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COVID-19 UK Weekly Webinar Series – April 14, 2020

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

Emergency Lending: Federal Reserve Expands Primary Market Corporate Credit Facility, Secondary Market Corporate Credit Facility and Term Asset-Backed Lending Facility

Today, the Board of Governors of the Federal Reserve System (Federal Reserve) announced that it was expanding three of the facilities created earlier this spring in reaction to the economic dislocation caused by COVID-19: the Primary Market Corporate Credit Facility (PMCCF), the Secondary Market Corporate Credit Facility (SMCCF) and the Term Asset-Backed Securities Loan Facility (TALF).

The PMCCF and SMCCF will be upsized significantly and will be able to purchase certain non-investment grade securities. Although the size of the TALF remains the same, it will now purchase highly rated asset-backed securities where the underlying instruments are equipment leases, leveraged loans and commercial mortgages. The expansion for commercial mortgage backed securities (CMBS) is for “legacy” CMBS, those issued before March 23, 2020.
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Perspectives from One Month into the COVID-19 U.S. Outbreak: Public Company Disclosure Considerations

The COVID‐19 outbreak is creating a great deal of uncertainty in the global economy and in our daily lives. Companies worldwide are facing unique legal and operational challenges related to the outbreak and the downturn in the economy. In the midst of this constantly evolving landscape, U.S. publicly traded companies must continue to consider how the situation impacts their disclosure. One month into the outbreak in the United States, Gibson Dunn has been tracking disclosure among public companies as practices develop. This client alert provides observations and guidance for companies preparing disclosure in areas that are influenced by the COVID-19 outbreak. (This client alert does not address disclosures in proxy statements or shareholder meetings, which present their own set of issues.)
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ISS Provides Policy Guidance in Light of COVID-19 Pandemic

On April 8, 2020, Institutional Shareholders Services (“ISS”) released guidance regarding the application of its policies amid the COVID-19 pandemic (available here). In the guidance, ISS discusses various governance issues in light of the COVID-19 pandemic and states that it will be flexible in its application of its policies, while requiring disclosure of the rationale for certain actions that companies may take. Four main topics are covered in the guidance for companies in the United States.
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To Our Clients and Friends:

I. Purpose of This Client Alert

One month into the outbreak in the United States, Gibson Dunn has been tracking disclosure among public companies as practices develop. This client alert provides observations and guidance for companies preparing disclosure in areas that are influenced by the COVID-19 outbreak. (This client alert does not address disclosures in proxy statements or shareholder meetings, which present their own set of issues.)

This client alert is intended to serve only as a starting point for appropriate analysis, and each company’s disclosure should be tailored to its particular circumstances. Given the rapidly changing landscape, disclosure should be assessed and, if necessary, revised shortly before it is made. We encourage you to reach out to Gibson Dunn’s Securities Regulation and Corporate Governance and Capital Markets teams to discuss specific questions as they arise.

Significant areas of disclosure that public companies should continuously consider during the course of the COVID-19 outbreak include the following:

SEC Guidance and Questions to Ask
Earnings Guidance
Disclosure in Periodic Reports
Non-GAAP Supplemental Measures
Forward-Looking Statement Disclaimers
Regulation FD and Insider Trading Laws
Capital Markets Disclosure
Form 8-K Triggers

With this framework in mind, the following are some of the key takeaways from this client alert:

Language used when issuing, updating, or withdrawing earnings guidance should be carefully drafted with an eye toward the dynamic nature of the COVID-19 outbreak.
Consider the direct and indirect impact of the COVID-19 outbreak when drafting MD&A, including the discussion of historical results and information about known trends and uncertainties.
When drafting risk factors, think comprehensively and creatively about potential risks of the COVID-19 outbreak and its direct and indirect impacts on the company.
Ensure that financial statement disclosures, including subsequent event notes, appropriately reflect material impacts of the COVID-19 outbreak on financials.
Be mindful of the disclosure requirements and prohibitions associated with non-GAAP financial measures.
Disclosure of forward-looking information should be accompanied by a disclaimer with meaningful language tailored to the circumstances and the disclosure.
Information relating to the impact of the COVID-19 outbreak may be material nonpublic information, so care should be taken to comply with Regulation FD and insider trading policies with respect to such information.
Ensure that documents related to capital markets activities do not contain any material omissions by filing any material information not yet disclosed before the offering commences.
Be mindful of Form 8-K triggers, including Item 2.02, which is triggered not only by planned earnings releases, but also by any disclosure of material information regarding results of a completed quarterly or annual fiscal period, and Item 5.02 in connection with changes in an executive officer’s duties.

II. SEC Guidance and Questions to Ask

In a press release on March 4, 2020, SEC Chairman Jay Clayton stated, “We…remind all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments. How companies plan and respond to the events as they unfold can be material to an investment decision, and I urge companies to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.”[1] On March 25th, Chairman Clayton reiterated a point made in the public statement on March 4th: “We encourage public companies to provide current and forward-looking information to their investors.”[2]

Also on March 25th, the staff of the SEC’s Division of Corporation Finance (the “Division”) issued Disclosure Guidance Topic No. 9,[3] providing the staff’s current views regarding disclosure and other securities law obligations that companies should consider with respect to the COVID-19 outbreak and related business and market implications. The Division recognizes that assessing the evolving effects of COVID-19 and related risks is a facts and circumstances analysis. Disclosure about these risks and effects should be specific to a company’s situation. The Disclosure Guidance encourages timely reporting while recognizing that it may be difficult to assess or predict with precision the broad effects of the COVID-19 outbreak on industries or individual companies.

The Disclosure Guidance sets forth a non-exhaustive list of questions companies should consider about how COVID-19 has impacted and will continue to impact the company’s present and future operations. These questions include:

How has COVID-19 impacted the company’s financial condition and results of operations?
How has COVID-19 impacted the company’s capital and financial resources, including its overall liquidity position and outlook?
How the company expects COVID-19 to affect its balance sheet assets and its ability to timely account for those assets?
Whether the company anticipates any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets and investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on the company’s financial statements?
Whether COVID-19-related circumstances such as remote work arrangements adversely affected the company’s ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures?
Whether the company has experienced challenges in implementing its business continuity plans or whether it foresees requiring material expenditures or material resource constraints to do so?
Whether COVID-19 is expected to materially affect demand for the company’s products and services?
Whether COVID-19 is anticipated to have a material adverse impact on the company’s supply chain or the methods used to distribute its products or services?
Whether the company’s operations will be materially impacted by any constraints or other impacts on the company’s human capital resources and productivity?
Whether travel restrictions and border closures are expected to have a material impact on the company’s ability to operate and achieve its business goals?

The Division encourages companies to provide disclosure that is tailored and provides material information about the impact of COVID-19 to investors that allows investors to evaluate the current and expected impact of COVID-19 through the eyes of management and that companies proactively revise and update disclosures as facts and circumstances change.

The Disclosure Guidance also provides the following instructions:

Refrain from engaging in securities transactions. Where a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and discourage directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk. To the extent the registrant or insiders are engaged in transactions, or circumstances otherwise warrant it, the registrant should consider what disclosures are required in order to inform the public of its financial condition.
Avoid selective disclosures. When companies do disclose material information related to the impacts of the coronavirus, they are reminded to take the necessary steps to avoid selective disclosures and to disseminate such information broadly. Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.
Use the Forward-Looking Statement Safe Harbor. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding the coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for such information.

As companies begin filing periodic reports and earnings releases for the first quarter of 2020, on April 8th, Chairman Clayton and William Hinman, the Director of the Division of Corporation Finance, issued a joint statement.[4] The statement asked that companies provide “as much information as is practicable” regarding their current operating status and future operating plans as they attempt to combat the effects of the COVID-19 outbreak. Specifically, the statement referenced as items of particular interest efforts to protect the health and safety of workers and customers and whether a company is receiving financial assistance under the CARES Act.

In addition to guidance on disclosure and compliance, the SEC has issued two orders that provide relief to companies that are unable to meet a filing deadline due to circumstances related to the COVID-19 outbreak from SEC filing deadlines for certain filings.[5] More detail is provided in our client alert available at this link. Companies should be mindful of the due dates for their filings and plan accordingly given that personnel and advisors are working remotely in most states.[6] The SEC will continue monitoring the current situation and may, if necessary, extend the time period during which the relief applies.

Companies and advisors should closely monitor SEC developments by subscribing to its announcements at www.sec.gov.

III. Earnings Guidance

Many companies provide guidance regarding future earnings or operational results as part of their regular disclosure practices. In many cases, the instability brought on by the COVID-19 outbreak has made it difficult, if not impossible, to forecast future results. Whether publicly issued guidance should be updated or withdrawn in light of recent developments is a very company-specific determination. Questions companies should ask themselves include, but are not limited to: Did the company explicitly say its guidance excluded any impact of the coronavirus? Did the company state assumptions about the coronavirus impact that are no longer reasonable given new developments? Did the company commit to providing updates (e.g., by stating “we are monitoring the situation and will keep you updated”)? Is the company meeting with investors or analysts where questions about the impact of the outbreak may be discussed such that updating the guidance through a Reg. FD-compliant method might make sense?

In withdrawing previously issued guidance or issuing an earnings release that does not include guidance, companies should also consider the following questions, among others: Should the company make a statement that it is not, at this time, prepared to issue new guidance? Will the market expect the company to preview when new guidance is expected to be issued? Should the company make an affirmative public statement that it is suspending guidance?

In the event that a company issues guidance in a time of such uncertainty, the company should augment its disclaimers regarding the guidance to incorporate COVID-19-related factors. The company should make clear that the information and assumptions underlying guidance are based on information available at the time, and information and assumptions underlying the guidance could change or emerge as the situation evolves. The company should also consider the following questions, among others: Are there key assumptions about the outbreak that underlie the guidance? Has the company made clear the tentative nature of such assumptions? Would it be prudent to shorten the period of time covered by guidance, citing the lack of visibility into future conditions?

Of course, if a company does not have an established practice of issuing periodic guidance, it is under no legal obligation to commence the practice.

IV. Disclosures in Periodic Reports

Companies must consider the implications of the COVID-19 outbreak when preparing disclosure for their upcoming periodic reports. Key sections that will likely be affected include Management’s Discussion and Analysis of Results of Operations (“MD&A”), Risk Factors and Financial Statements.

A. MD&A

In annual reports on Form 10-K, Item 303(a) of Regulation S-K requires a company to, among other things, discuss its “financial condition, changes in financial condition and results of operations” and to “identify any known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material way.” In quarterly reports on Form 10-Q, Item 303(b) requires MD&A to “include a discussion of material changes in those items” required to be discussed under Item 303(a). The SEC has made clear that MD&A must include information that, in management’s view, is necessary to understand the financial condition, changes in financial condition, and results of operations of the company. The discussion and disclosures made by a company in the MD&A are intended to provide a narrative explanation of the company’s financial statements, to enhance the overall financial disclosure and to provide information about the company’s earnings and cash flow. MD&A provides an opportunity for the investor to see the company through the eyes of management.

In the discussion of historical results in MD&A, companies should, if material, discuss how the COVID-19 outbreak or actions taken by governments, companies and individuals in response to the outbreak impacted their results of operations for the most recently completed fiscal period, including their impact on revenue and operating expenses, and how they compare to the comparable prior period’s results. Even if results of operations have not yet been materially impacted by the COVID-19 outbreak, disclosure may be appropriate if the outbreak or related events and conditions are reasonably likely to have such a material effect on revenues or income from continuing operations. Additionally, in light of the SEC guidance on liquidity disclosures, companies should carefully evaluate whether it is necessary to revise their liquidity and capital resources section to reflect the historical and expected impact to the COVID-19 outbreak. This might include the impact on budgets, access to capital and cost of financing. Further, if there has been an impact on liquidity based on additional company action between the end of the fiscal period and the filing date (e.g., covenant compliance issues or material borrowings), companies should consider providing this update.

The MD&A disclosure relating to known trends and uncertainties that are reasonably likely to have a material impact on results can be particularly difficult during periods of economic distress and uncertainty. Those challenges are compounded by the increased scrutiny of periodic filings that often occurs during periods of economic difficulty and by the heightened after-the-fact examination that the public disclosure might receive from the SEC or in private litigation. The COVID-19 outbreak has made it difficult for many companies to clearly identify trends and outlook for the company’s business, as there are too many unknown variables. In light of this challenge, companies should consider whether it is appropriate to include statements regarding the fluidity of the current market situation and the uncertainty with respect to the impact that the COVID-19 outbreak may have or is expected to have on future results. Companies should also discuss the macro factors that drive the company’s results so as to identify the variables for the investor. For example, a company might describe the potential impact of the outbreak on the industry, supply and demand trends or the global or local economy in which the company operates.

In addition to the topics discussed above, the COVID-19 outbreak will likely affect MD&A disclosure in other ways. While each company’s situation will be different, some questions companies should be asking regarding their MD&A disclosure include, but are not limited to: Do the operational disruptions caused by the outbreak indicate a change in circumstances that might trigger asset impairment? Does the company need to revisit its accounting estimates, such as the amount of variable consideration it expects to be entitled to? What effect might the outbreak have on the company’s hedging relationships, compensation agreements, leases and income taxes?

B. Risk Factors

Item 105 of Regulation S-K requires companies to provide “a discussion of the most significant factors that make an investment in the registrant or offering speculative or risky.” In addition, a Form 10-Q is required to set forth any material changes from risk factors as previously disclosed in the last Form 10-K. Events and conditions relating to the COVID-19 outbreak and actions taken in response to the outbreak, to the extent they become one of these significant factors, should be considered for discussion under Risk Factors in upcoming periodic reports, including Form 10-Q.

Currently, the risk disclosures relating to the COVID-19 outbreak fall predominately into three baskets: (1) risks relating to the outbreak that directly impact a company; (2) risks relating to the outbreak that impact a company’s suppliers or customers; and (3) ancillary risks, including a decline in the capital markets, a recession, a decline in employee relations or performance, governmental regulations, an inability to complete transactions, and litigation.

The SEC has reiterated that risk factors should not use hypotheticals to address events that are actually impacting the company’s operations.

In drafting disclosure, the company should consider what events or circumstances relating to the COVID-19 outbreak present significant risk to the company–whether currently or potentially in the future. Companies should be specific in providing examples of risks that have already manifested themselves. Even if a company’s results of operations or liquidity is being affected by the COVID-19 outbreak, there are likely to remain risks, uncertainties, and consequences that have not yet had a material impact, manifested themselves, or even been identified. Given the fast-paced developments and the uncertainty as to the long-term impacts of the outbreak, companies should err on the side of caution in disclosing potential risks. For example, companies should consider (i) not focusing on only one or two specific impacts caused by the COVID-19 outbreak, as there are likely many other impacts that may become material, (ii) noting that the unpredictable and unprecedented nature of the current situation makes it impractical to identify all potential risks and estimate the ultimate adverse impact on the business, and (iii) adding a broad statement that all risk factors disclosed in the Form 10-K may be amplified by the COVID-19 outbreak and its unpredictable nature.

Additionally, risk factor discussion of the impact of the COVID-19 outbreak should include language that makes clear that the risk factor disclosure speaks only as of the filing date and is subject to change without notice as the company cannot predict all risks relating to this quickly evolving set of events.

C. Financial Statements and Internal Controls

Financial statements are required to be disclosed in accordance with Regulation S-X. The COVID-19 outbreak and the global instability associated with its spread will affect the operations of a multitude of companies, which in turn will affect company financial performance and condition and disclosures in the financial statements. The Office of the Chief Accountant (the “OCA”) issued a statement on April 3, 2020 regarding the importance of financial reporting. The OCA recognized that many of the judgments and estimates that companies will need to make are “challenging in an environment of uncertainty.”[7] With that being said, the OCA still urged “all participants in the financial reporting system to continue to work together to provide investors with the high-quality financial information they need to make decisions amidst uncertainty.”

As a general matter, the COVID-19 outbreak can be expected to affect the balance sheets of numerous companies in the form of changes to debt, goodwill, and impairments. In addition, for some companies, a reporting period will end before the material impact of the COVID-19 outbreak on the company is clearly discernable. These companies may be required to reflect the impact of the outbreak as a subsequent event in the notes to the financial statements. Companies should seek input from their auditors in identifying and evaluating company-specific issues relevant to their financial statement disclosures that are brought on by the crisis. Audit committees also should engage in active dialogue on this topic with the auditors and management.

Companies that are aiming to file their annual reports on Form 10-K should also consider how the COVID-19 outbreak may affect their year-end testing for management’s conclusion on the effectiveness of internal control over financial reporting and where required, the auditor’s evaluation of the company’s internal control. In addition, to the extent any changes in internal control over financial reporting have been made to address company-specific issues in light of these unprecedented conditions, a company should consider whether any disclosure of a material change to internal control is needed in a periodic report under Item 308(c) of Regulation S-K.

V. Non-GAAP Financial Measures

Given the unusual nature of the COVID-19 outbreak, particularly in the United States, companies may consider presenting non-GAAP financial measures for historical periods impacted by the outbreak that reflect adjustments from the required GAAP measures. In doing so, the disclosure should be clear and the rationale for the presentation explained. Management may articulate the position that these adjustments are critical in order for investors to be able to compare the performance of the business period over period. For example, a company might quantify the impact of identified COVID-19-related events on both its GAAP net income and its non-GAAP Adjusted EBITDA (as historically presented).

In doing so, companies should be mindful of the rules relating to non-GAAP supplemental measures under Regulation G and Item 10(e) of Regulation S-K. In its recent guidance,[8] the SEC Division of Corporate Finance reminded companies that “we do not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company.” For example, companies should note Item 10(e)(ii)(B) of Regulation S-K, which forbids companies from adjusting a non-GAAP measure to eliminate or smooth items identified as nonrecurring, infrequent or unusual when that item is reasonably likely to recur within two years. Given the uncertainty around the duration of the outbreak or its effects, a careful assessment should be made as to whether adjustments are appropriate. Additionally, companies should be mindful of Non-GAAP Financial Measures CD&I 100.02, which states that non-GAAP measures can be misleading if presented inconsistently between periods, and CD&I 100.03, which states that non-GAAP measures can be misleading if they exclude charges, but do not exclude any gains. In addition, to the extent a company discloses any key performance metrics and changes have been made to such metrics to exclude items related to the crises or address such items in a different manner, the company should be clear to call out such changes and provide updated comparable prior period information to the extent practicable.

VI. Forward-Looking Statement Disclaimer

When making forward-looking statements, whether in Risk Factors, MD&A or as guidance, companies should avail themselves of the safe harbor in Section 21E of the Exchange Act. As a result of lessons learned from securities litigation, companies know to include in the forward-looking statement disclaimer specific factors that could cause actual results to differ from those indicated in forward-looking statements. The ongoing pandemic will also affect how companies discuss topics, such as plans and expectations for operations, budgets, growth, financing, working capital and more. As such, companies should consider mentioning the impact of pandemics (including the COVID-19 outbreak) in the forward-looking statement disclaimers.

In its recent statement regarding the need for robust, forward-looking disclosure, the SEC acknowledged the challenges presented to companies in crafting forward-looking statements in times of such uncertainty, especially as any efforts taken to combat the effects of the COVID-19 outbreak will be in their infancy.[9] Even with that in mind, however, the statement still urged companies to provide as much information as practicable about their current status and their plans for addressing the effects of the COVID-19 outbreak. The SEC encouraged companies to make use of the safe harbor referenced in the preceding paragraph, and took further steps to assure companies that it “would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.”

VII. Considerations under Regulation FD and Insider Trading Laws

Management and company counsel should continuously assess whether developments relating to the COVID-19 outbreak constitute material information for the company. Compliance officers may need to close windows or deny preclearance of trading in the company’s securities under the company’s insider trading policy in light of new developments or changes in the company’s plans or outlook as a result of the impact of the outbreak. Companies should also evaluate their ability to implement new stock buyback programs or continue buyback programs outside of a previously established 10b5-1 plan. In addition, when making disclosures regarding the impact of the COVID-19 outbreak, management must avoid making selective disclosures that could violate Regulation FD, including during meetings with analysts who are revising models. Given that trading activity and selective disclosures will be judged with the benefit of hindsight and the situation is evolving quickly, companies should implement additional protective controls relating to trading and the content of management meetings with covered persons under Regulation FD.

The SEC has recently taken steps to remind companies of their obligations under Regulation FD. On March 23, 2020, the Co-Directors of the SEC’s Division of Enforcement issued a statement on the COVID-19 outbreak and market integrity,[10] emphasizing many of these points:

We wish to emphasize the importance of maintaining market integrity and following corporate controls and procedures. For example, in these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access – including, for example, directors, officers, employees, and consultants and other outside professionals – should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading. Trading in a company’s securities on the basis of inside information may violate the antifraud provisions of the federal securities laws.

We similarly urge public companies to be mindful of their established disclosure controls and procedures, insider trading prohibitions, codes of ethics, and Regulation FD and selective disclosure prohibitions to ensure to the greatest extent possible that they protect against the improper dissemination and use of material nonpublic information.

The SEC also reminded companies about compliance with Regulation FD in guidance recently issued by the Division of Corporation Finance.[11]

VIII. Capital Markets Disclosure

As companies continue to access the capital markets, it is important to understand that a securities offering will accelerate considerations regarding updates to disclosure in light of the COVID-19 outbreak. As always, it is imperative that offering disclosure packages not contain any material omissions. When preparing the prospectus or offering memorandum, the issuer and underwriters should review any existing disclosures made before the offering and supplement or amend them as necessary. An issuer should consider whether it is necessary to file an Item 8.01 Form 8-K with amendments or supplements to the MD&A and Risk Factors included in the most recent periodic reports, which Form 8-K is then incorporated into the offering document. Companies may also consider adding disclosure to the “Recent Developments” section in the prospectus, which may refer the reader to the Form 8-K for information about developments related to the COVID-19 outbreak that the investor should consider before making an investment in the securities offered. For private placements, a supplemental Item 7.01 or 8.01 Form 8-K may be necessary to make FD-compliant disclosure of updated information provided in connection with the exempt offering.

In addition to public disclosures, issuers should be prepared to respond to novel diligence questions from underwriters and investors centered around the COVID-19 outbreak.

IX. Form 8-K

A. Results of a Completed Period – Item 2.02 of Form 8-K

Item 2.02 of Form 8-K applies to more than a company’s earnings release, and instead is triggered by any public disclosure of material nonpublic information regarding a company’s results of operations or financial condition for a completed quarterly or annual fiscal period. Thus, any disclosures regarding material effects of the COVID-19 outbreak that relate to a completed fiscal period could trigger a required Item 2.02 Form 8-K. This disclosure might be made in connection with an interim update via press release or presentation or information disclosed in connection with a securities offering, as discussed above.

B. Credit Drawdowns – Item 2.03 of Form 8-K

Instruction 3(ii) to Item 2.03 of Form 8-K requires disclosure of a material drawdown of an existing credit agreement. SEC rules do not specify when a drawdown triggers an Item 2.03 Form 8-K. The factors that affect the materiality analysis in regards to a drawdown can include the reasoning behind the drawdown (e.g., if there are concerns about the company’s liquidity due to a significant decrease in collection of accounts receivable), the size of the drawdown relative to the company’s balance sheet, and whether the drawdown significantly increases the company’s long-term debt. Companies should conduct both a quantitative and qualitative analysis of a drawdown when considering its materiality. In order to provide assurances to the market, if a drawdown triggers an Item 2.03 Form 8-K, companies should consider briefly disclosing the reasoning for the drawdown. For example, the explanation of the rationale for the drawdown by certain companies might include maintaining flexibility in the context of the COVID-19 outbreak or placing cash on the balance sheet if the company anticipates it will not be able to access the capital markets as planned.

C. Additional Considerations for Disclosure on Form 8-K

As the impacts of the COVID-19 outbreak continue to broaden, companies should also consider the requirements under other items of Form 8-K. Item 2.04 requires companies to disclose events that trigger an increase or acceleration of a direct financial obligation or off-balance sheet arrangement. Item 2.05 requires disclosure of costs associated with a definitive exit or disposal plan. Item 2.06 requires disclosure when a company determines that there exists any material impairment in regard to its assets. Item 5.02(b) requires disclosure of a departure, even if temporary, of certain executive officers.[12]

____________________

[1] SEC Provides Conditional regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19), available at https://www.sec.gov/news/press-release/2020-53.

[2] SEC Extends Conditional Exemptions from Reporting and Proxy Delivery Requirements for Public Companies, Funds and Investment Advisers Affected by the Coronavirus Disease 2019 (COVID-19), available at https://www.sec.gov/news/press-release/2020-73.

[3] See CF Disclosure Guidance: Topic No. 9, available at https://www.sec.gov/corpfin/coronavirus-covid-19.

[4] See The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19, available at https://www.sec.gov/news/public-statement/statement-clayton-hinman.

[5] See Order Under Section 36 of the Securities Exchange Act of 1943 Granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules Thereunder, Exchange Act Release No. 34-88318 (March 4, 2020), available at https://www.sec.gov/rules/other/2020/34-88318.pdf; Order Under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, Exchange Act Release No. 34-88465 (March 25, 2020), available at https://www.sec.gov/rules/exorders/2020/34-88465.pdf.

[6] The Gibson Dunn website has a calendar outlining SEC filing dates for companies with a fiscal year ending December 31, 2019, available at https://www.gibsondunn.com/wp-content/uploads/2019/08/SEC-Filing-Deadline-Calendar-2020.pdf.

[7] See Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19, available at https://www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03.

[8] See Footnote 3, supra.

[9] See Footnote 4.

[10] See Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Division of Enforcement, Regarding Market Integrity, available at https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity.

[11] See Footnote 3, supra.

[12] For more information, please refer to our client alert available at this link.

The following Gibson Dunn lawyers prepared this client alert:

Authors: Hillary Holmes, Michael Titera, James Moloney, Michael Scanlon, Lori Zyskowski, William Bald and David Korvin.

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

Governing Regulations for Affiliation

Borrowers of PPP loans must apply SBA’s affiliation rules as spelled out in 13 CFR § 121.301(f), which apply to SBA’s 7(a) program and were adopted for the PPP through the CARES Act.[1] But there is a catch: borrowers have to look at the 2019 version of § 121.301 (see 81 Fed. Reg. 41423) because Section 1102(e) of the CARES Act permanently rescinded the SBA’s February 2020 amendment to § 121.301. SBA’s 2020 amendment would have included a “totality of the circumstances” test (as currently is part of 13 CFR § 121.103), affiliation based on a newly organized concern in the same industry under the same management, and additional bases for affiliation based on identity of interest, including common investments and economic dependence.

Under the CARES Act and applicable guidance and regulations, an applicant must aggregate its own number of employees or revenue with that of all of its affiliates for the purposes of determining eligibility for a PPP loan. The applicant is eligible if: (1) it qualifies as a small business concern as defined in section 3 of the Small Business Act, 15 U.S.C. 632; (2) it and its affiliates have 500 or fewer employees whose principal place of residence is in the United States; (3) it and its affiliates meet the SBA employee-based size or revenue standards for the industry in which they operate, (including the “alternative standard” detailed below); or (4) it is a nonprofit organization, veterans organization, or Tribal business concern as outlined in Section 1102(a)(i) of the CARES Act.[2]

The applicable (2019) version of § 121.301(f) lays out four principles that may establish an affiliate relationship between a PPP borrower and another entity: (1) equity ownership; (2) stock options, convertible securities, and agreements to merge; (3) management; and (4) identity of interest.

Affiliation Based on Equity Ownership

Any entity that owns or has the power to control more than 50 percent of the borrower’s voting equity is considered an affiliate of the borrower.[3] Further, SBA will deem that a minority shareholder exercises “negative control” if it has the ability, under the borrower’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.[4] (See below.) If no such entity owns 50 percent of the equity, SBA will deem the Board of Directors, President, or CEO (or other officers, managing members, or partners who control the management of the concern) to be in control of the borrower.[5]

Affiliation Based on Stock Options, Convertible Securities, and Agreements to Merge

For purposes of determining whether an entity owns 50 percent of the borrower, SBA will consider stock options, convertible securities, and agreements to merge as though the rights granted have been exercised.[6]

Affiliation Based on Management

Affiliation arises where the President or CEO (or other officers, managing members, or partners who control the management of the concern) of the applicant also controls the management of one or more other concerns. Affiliation also arises where a single individual, concern, or entity that controls the Board of Directors or management of one concern also controls the Board of Directors or management of one of more other concerns.[7] Thus far, SBA guidance does not further elaborate on what constitutes control over the Board of Directors, so we recommend that applicants disclose their interpretation of ”control,” in light of their own facts, in an addendum to the PPP loan application.

Additionally, affiliation arises where a single individual, concern, or entity controls management of the borrower through a management agreement.[8]

Affiliation Based on Identity of Interest

Where close relatives share identical or substantially identical business or economic interests (such as where the close relatives operate concerns in the same or similar industry in the same geographic area), those concerns are affiliated.[9]

Waivers to Affiliation Rules

The CARES Act waives SBA’s affiliation rules for an applicant’s eligibility for a PPP loan for: (1) any business concern with not more than 500 employees that is assigned a North American Industry Classification System (“NAICS”) code beginning with 72;[10] (2) any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and (3) any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958.

The SBA’s existing affiliation exclusions, including the exclusions under 13 CFR 121.103(b)(2), also apply to the PPP. These exclusions include: (1) business concerns owned in whole or substantial part by investment companies licensed, or development companies qualifying, under the Small Business Investment Act of 1958 are not considered affiliates of such investment companies or development companies; (2) business concerns which lease employees from concerns primarily engaged in leasing employees to other businesses or which enter into a co-employer arrangement with a Professional Employer Organization (“PEO”) are not affiliated with the leasing company or PEO solely on the basis of a leasing agreement; and (3) additional exclusions delineated in 13 CFR § 121.103(b)(2).[11]

Negative Control

As discussed above, negative control over a concern exists when a “minority shareholder . . . has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.”[12] The Memorandum notes that there is SBA Office of Hearings and Appeals’ (“OHA”) case law “interpreting the rule.”[13] We would note that OHA case law on negative control interprets 13 CFR § 121.103, not § 121.301. That said, § 121.103(a)(3) states that negative control exists where a minority shareholder “has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders,” which is language identical to § 121.301(f)(1). Hence, while the SBA’s interim final rule on affiliations states that “the detailed affiliation standards contained in section 121.103 currently do not apply to PPP borrowers,” OHA precedents interpreting negative control under the aforementioned language found in both § 121.103 and § 121.301 is instructive and should be viewed by applicants as likely controlling.[14]

SBA Office of Hearings and Appeals Case Law

OHA case law describes two sets of actions for the purposes of determining whether a minority shareholder can exercise negative control over an entity: “extraordinary” actions and “essential” actions. “Extraordinary” actions are actions that a minority shareholder may be given the power to block in order to protect its investment, but do not interfere with the day-to-day operations of the company.[15] OHA case law indicates that the ability to block extraordinary actions will not result in a finding of negative control.[16] These actions include:

Amending the bylaws;[17]
Issuing additional capital stock;[18]
Changing the amount or character of the concern’s contribution to capital;[19]
Entering into any substantially different business;[20]
Changing the character or business of the concern;[21]
Committing any act that would make it impossible to carry on ordinary business;[22]
Selling all or substantially all of a firm’s assets;[23]
Mortgaging or encumbering all or substantially all of a concern’s assets;[24]
Committing any act in contravention of the operating agreement;[25]
Approving the addition of new members or withdrawing old members;[26]
Increasing or decreasing the size of the Board;[27]
Increasing or decreasing the number of authorized interests;[28]
Reclassifying interests;[29] or
Filing for bankruptcy.[30]

OHA case law also indicates that, if a minority owner has the power to block actions that are “essential to the daily operation of the company,” the minority owner will be found to have negative control over the company. These essential actions include:

Controlling the budget;[31]
Hiring and firing officers;[32]
Setting employee compensation;[33]
Borrowing money or creating debt;[34]
Encumbering assets;[35]
Paying dividends;[36]
Purchasing equipment;[37]
Making changes to a budget;[38]
Incurring expenses over a threshold limit;[39] or
Amending or terminating leases.[40]

If a minority shareholder holds negative control over the PPP loan applicant, the borrower will be considered an affiliate of the minority shareholder and an affiliate of any concern that the minority shareholder controls.

Waiver of Negative Control

Minority shareholders may irrevocably waive or relinquish negative control over the applicant in order to avoid affiliation, so long as affiliation does not exist under a different provision.[41] While SBA/Treasury FAQs refer to waiving “existing rights specified in 13 CFR 121.301(f)(1),” the application of OHA’s negative control precedent to § 121.301(f) suggests that minority shareholders may also irrevocably waive rights that OHA precedent recognizes as conferring negative control to avoid affiliation.[42]

PPP Loan FAQs

In addition to the Memorandum and FAQs related to affiliation, the recently-issued FAQs provided the following new information regarding the PPP:

Eligibility.[43] Small business concerns can be eligible borrowers even if they have more than 500 employees, as long as they satisfy the existing statutory and regulatory definition of a “small business concern” under section 3 of 15 U.S.C. 632. A business can qualify if it meets the SBA employee-based or revenue-based size standard corresponding to its primary industry. A business can also qualify for the PPP as a small business concern if it and its affiliates met both tests in SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.[44]
Seasonal Businesses.[45] In evaluating a borrower’s eligibility, a lender may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019.
Professional Employer Organizations.[46] SBA recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wage and other data on the Employer Identification Number (“EIN”) of the PEO or other payroll provider. In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS by the payroll provider for the borrower’s employees will be considered acceptable PPP loan payroll documentation. Relevant information from a Schedule R (“Form 941”), Allocation Schedule for Aggregate Form 941 Filers, attached to the PEO’s or other payroll provider’s Form 941, Employer’s Quarterly Federal Tax Return, should be used if it is available; otherwise, the eligible borrower should obtain a statement from the payroll provider documenting the amount of wages and payroll taxes. In addition, employees of the eligible borrower will not be considered employees of the eligible borrower’s payroll provider or PEO.
Lender Forms.[47] Lenders may use their own online systems and a form they establish that asks for the same information (using the same language) as the Borrower Application Form. Lenders are still required to send the data to SBA using SBA’s interface.
Number of Employees.[48] Borrowers may use their average employment over the previous 12 months or from calendar year 2019 (or the period between February 15, 2019, or March 1, 2019, and June 30, 2019 for seasonal employers; or the period January 1, 2020 through February 29, 2020 for borrowers not in business from February 15, 2019 to June 30, 2019) to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months).
Accounting for Federal Taxes.[49] Payroll costs are calculated on a gross basis without regard to (e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (“FICA”) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.[50]
Updated Applications.[51] Borrowers and lenders who have already submitted applications may rely on the laws, rules, and guidance available to them at the time of the relevant application. If an application has not yet been processed, borrowers may revise their application based on the guidance in the FAQs.
FinCen Rule CDD.[52] If the PPP loan is being made to an existing customer of the lender and the necessary information was already verified, the lender does not need to re-verify the information. Additionally, if federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to BSA compliance.
Promissory Notes.[53] Lenders may use their own promissory note or an SBA form of promissory note.
Eight-Week Forgiveness Period.[54] For the purposes of PPP loan forgiveness, the borrower must calculate its payroll costs over an eight-week period. That eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.

The FAQs also clarify certain provisions of the guidance already released by the SBA and Treasury Department.

Application Certification.
- Since borrowers attest to the accuracy of their calculation of payroll costs on the application, lenders are only required to conduct a good faith review, in a reasonable time, of the borrower’s calculations and supporting documents. As stated in the PPP Interim Final Rule, lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs. If the lender identifies errors in the borrower’s calculation or a material lack of substantiation in the borrower’s supporting documents, the FAQs state that the lender should work with the borrower to remedy the issue.[55]
- It is the responsibility of the borrower to determine which entities (if any) are the borrower’s affiliates and determine the employee headcount of the borrower and its affiliates. Lenders are permitted to rely on borrowers’ certifications.[56]
- Lenders may accept and rely on signatures from a single individual who is authorized to sign on behalf of the borrower. Borrowers should be aware that an individual’s signature is a representation to the lender and to the U.S. government that the signer is authorized to make the certifications, including with respect to the applicant and each owner of 20 percent or more of the applicant’s equity, contained in the application.[57]
Eligibility.[58] Borrowers are not required to qualify as a small business concern as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP. The FAQs state that in addition to small business concerns, a business is eligible for a PPP loan if it has 500 or fewer employees whose principal place of residence is in the United States, or meets the SBA employee-based size or revenue standards for the industry in which it operates, or the alternative standard described above. If the applicant is a tax-exempt nonprofit organization, a tax-exempt veterans organization, or a Tribal business concern with 500 or fewer employees whose principal place of residence is in the United States, or meets the SBA employees based size standards for the industry in which it operates, it is also eligible for a PPP loan.[59]
Payroll Cost Calculations.
- The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits.[60]
- Payroll costs include costs for employee vacation, parental, family, medical, and sick leave. Payroll costs do not include qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.[61]
Felonies.[62] Businesses are only ineligible if an owner of 20 percent or more of the equity of the applicant is presently incarcerated, on probation, on parole; subject to an indictment, criminal information arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or, within the last five years, for any felony, has been convicted; pleaded guilty; pleaded nolo contendere; been placed on pretrial diversion; or been placed on any form of parole or probation (including probation before judgment).
Independent Contractors.[63] Because independent contractors and sole proprietors are themselves eligible for a PPP loan, eligible borrowers should not include any amounts paid to independent contractors or sole proprietors when calculating the borrower’s payroll costs.

____________________

[1] PPP Loan FAQs, No. 5. While § 121.103 governs the SBA’s general principles of affiliation, § 121.103(a)(8) states that “applicants in SBA’s Business Loan [including the PPP], Disaster Loan, and Surety Bond Guarantee Programs” are to use “the size standards and bases for affiliation . . . set forth in § 121.301.”

[2] PPP Loan FAQs, No. 3. Our understanding of FAQ No. 3 is that it does not expand eligibility beyond the basic eligibility requirements for all applicants for SBA business loans outlined in 13 CFR § 120.100, but we await further guidance clarifying this point.

[3] 13 CFR § 121.301(f)(1).

[4] Id.

[5] Id.

[6] 13 CFR § 121.301(f)(2).

[7] 13 CFR § 121.301(f)(3).

[8] Id.

[9] 13 CFR 121.301(f)(4).

[10] Industries with an NAICS code beginning with 72 are considered “accommodation and food services” industries, which include hotels, casinos, caterers, restaurants, and drinking places (alcoholic beverages).

[11] These other exclusions include: (1) business concerns owned and controlled by Indian Tribes, or other Native American organizations are not affiliates of such entities; (2) business concerns owned and controlled by Indian Tribes, or other Native American organizations are not affiliates of the affiliates such entities; (3) Business concerns which are part of an SBA approved pool of concerns for a joint program of research and development or for defense production as authorized by the Small Business Act are not affiliates of one another because of the pool; (4) Business concerns which lease employees from concerns primarily engaged in leasing employees to other businesses or which enter into a co-employer arrangement with a Professional Employer Organization (“PEO”) are not affiliated with the leasing company or PEO solely on the basis of a leasing agreement; (5) For financial, management or technical assistance under the Small Business Investment Act of 1958, as amended, an applicant is not affiliated with investors including venture capital operating companies, employee benefit or pension plans, charitable trusts, foundations or endowments, and other investment companies; (6) firms with mentor-protégé agreements are not affiliates by virtue of the agreement; and (7) members of a small agricultural cooperative are not affiliates with each other by virtue of the cooperative.

[12] 13 CFR § 121.301(f)(1). Section 121.103(a)(3) also states that “negative control includes . . . instances where a minority shareholder has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.”

[13] Memorandum, pg. 6.

[14] § 121.301 does not include a “totality of the circumstances” affiliation test, while § 121.103 does. To the extent negative control is found under the totality of the circumstances and not under affiliation by ownership under § 121.301(f)(1), OHA precedent would not control.

[15] Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (collecting cases).

[16] Id.

[17] Appeal of Carntribe-Clement 8AJV # 1, LLC, SBA No. SIZ-5357 (2012).

[18] Id.

[19] Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011).

[20] Appeal of Carntribe-Clement 8AJV # 1, LLC, SBA No. SIZ-5357 (2012).

[21] Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011)).

[22] Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011).

[23] Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011); Size Appeal of Dooleymack Government Contracting, LLC, SBA No. SIZ-5086 (2009)).

[24] Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011)).

[25] Size Appeal of Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of McLendon Acres, Inc., SBA No. SIZ-5222 (2011)).

[26] Size Appeal of DHS Systems, LLC, SBA No. SIZ-5211 (2011).

[27] Id.

[28] Id.

[29] Id.

[30] Size Appeal of Dooleymack Government Contracting, LLC, SBA No. SIZ-5086 (2009).

[31] Size Appeal of Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017); Carntribe-Clement 8AJV # 1, LLC, SBA No. SIZ-5357 (2012); DHS Systems, LLC, SBA No. SIZ-5211 (2011).

[32] Size Appeal of Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017); DHS Systems, LLC, SBA No. SIZ-5211 (2011).

[33] Size Appeal of Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017); Carntribe-Clement 8AJV # 1, LLC, SBA No. SIZ-5357 (2012); DHS Systems, LLC, SBA No. SIZ-5211 (2011).

[34] OHA found negative control even when the minority shareholder could only veto the creation of debt over a certain dollar threshold. See Size Appeal of Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017) (citing BR Construction, LLC, SBA No. SIZ-5303 (2011).

[35] Carntribe-Clement, SBA No. SIZ-5357 (2012).

[36] Team Waste Gulf Coast, LLC, SBA No. SIZ-5864 (2017); Carntribe-Clement, SBA No. SIZ-5357 (2012); Size Appeal of Eagle Pharmaceuticals, Inc., SBA No. SIZ-5023 (2009).

[37] Carntribe-Clement, SBA No. SIZ-5357 (2012).

[38] Id.; BR Construction, LLC, SBA No. SIZ-5303 (2011).

[39] BR Construction, LLC, SBA No. SIZ-5303 (2011).

[40] Carntribe-Clement, SBA No. SIZ-5357 (2012).

[41] PPP Loan FAQs, No. 6.

[42] Id.

[43] PPP Loan FAQs, No. 2.

[44] We do not understand this provision to expand the eligibility of businesses under the PPP beyond the CARES Act or other guidance released by the SBA.

[45] PPP Loan FAQs, No. 9.

[46] PPP Loan FAQs, No. 10.

[47] PPP Loan FAQs, No. 13.

[48] PPP Loan FAQs, No. 14.

[49] PPP Loan FAQs, No. 16.

[50] The definition of “payroll costs” in the CARES Act, excludes “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period,” defined as February 15, 2020, to June 30, 2020. As described above, the SBA interprets this statutory exclusion to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages. Unlike employer-side payroll taxes, such employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of payroll costs means payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages. Further, because the reference period for determining a borrower’s maximum loan amount will largely or entirely precede the period from February 15, 2020, to June 30, 2020, and the period during which borrowers will be subject to the restrictions on allowable uses of the loans may extend beyond that period, for purposes of the determination of allowable uses of loans and the amount of loan forgiveness, this statutory exclusion will apply with respect to such taxes imposed or withheld at any time, not only during such period.

[51] PPP Loan FAQs, No. 17.

[52] PPP Loan FAQs, No. 18.

[53] PPP Loan FAQs, No. 19.

[54] PPP Loan FAQs, No. 20.

[55] PPP Loan FAQs, No. 1.

[56] PPP Loan FAQs, No. 4.

[57] PPP Loan FAQs, No. 11.

[58] PPP Loan FAQs, No. 3.

[59] As noted above, we do not understand this FAQ to expand eligibility beyond the basic eligibility requirements for all applicants for SBA business loans outlined in 13 CFR § 120.100, but we await additional guidance on this point.

[60] PPP Loan FAQs, No. 7.

[61] PPP Loan FAQs, No. 8.

[62] PPP Loan FAQs, No. 12.

[63] PPP Loan FAQs, No. 15.

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

Authors: Michael D. Bopp, Roscoe Jones, Jr.*, Alisa Babitz, Courtney Brown, Alexander Orr, William Lawrence and Samantha Ostrom

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

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Primary Market Corporate Credit Facility

The Federal Reserve issued updated term sheets for the PMCCF and the SMCCF. In an expansion of these facilities, the Department of the Treasury will make a $75 billion equity investment in the facilities’ special-purpose vehicles (SPVs), initially split with $50 billion for the PMCCF and $25 billion for the SMCCF. The Federal Reserve will lend to the SPVs to increase the size of the facilities to a maximum size of $750 billion.

The PMCCF may purchase eligible corporate bonds as the sole investor in a bond issuance, and also portions of syndicated loans or bonds of eligible issuers at issuance. The types of instruments to be purchased are unchanged; they must have a maturity of 4 years or less.

The updated term sheet defines the “eligible issuers” that may make use of the facility. Such issuers are limited to:

A business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States. (Here, the term sheet repeats the language of the CARES Act without any elaboration.)
The issuer was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (NRSRO). If rated by multiple major NRSROs, the issuer must have been rated at least BBB-/Baa3 by two or more NRSROs as of March 22, 2020. Issuers that were rated at least BBB-/Baa3 as of March 22, 2020, but are subsequently downgraded, must be rated at least BB-/Ba3 at the time the Facility makes a purchase. If rated by multiple major NRSROs, such issuers must be rated at least BB-/Ba3 by two or more NRSROs at the time the Facility makes a purchase.
The issuer is not an insured depository institution or depository institution holding company, as such terms are defined in the Dodd-Frank Act.
The issuer has not received specific support pursuant to the CARES Act or any subsequent federal legislation.
The issuer must satisfy the conflicts-of-interest requirements of section 4019 of the CARES Act relating to companies controlled by government personnel.

The updated term sheet revises the per-issuer limits that will apply to the PMCCF. It states that eligible issuers may approach the PMCCF to refinance outstanding debt, from the period of three months ahead of the maturity date of such outstanding debt. In addition, issuers may approach the PMCCF at any time to issue additional debt, provided their rating is reaffirmed at BB-/Ba3 or above with the additional debt by each major NRSRO with a rating of the issuer.

The maximum amount of outstanding bonds or loans of an eligible issuer that borrows from the Facility may not exceed 130 percent of the issuer’s maximum outstanding bonds and loans on any day between March 22, 2019 and March 22, 2020. Furthermore, the maximum amount of instruments that the PMCCF and the SMCCF combined will purchase with respect to any eligible issuer is 1.5% of the combined potential size of the PMCCF and the SMCCF.

Pricing for the PMCCF will be issuer-specific, informed by market conditions, plus a 100 basis point facility fee. If the loans or bonds are syndicated, the PMCCF will receive the same pricing as other syndicate members, plus a 100 bps facility fee on the PMCCF’s share of the syndication.

As in the original term sheet, the PMCCF will cease purchasing eligible corporate bonds and extending loans on September 30, 2020, unless the Federal Reserve extends the program.

The revised terms of the PMCCF are available here.

Secondary Market Corporate Credit Facility

The updated SMCCF term sheet uses the same definition of “eligible issuers” of debt securities as the PMCCF. In a change from the original term sheet, the SMCCF will purchase some ETFs that are U.S.-listed and intended to provide exposure to a broad section of the high-yield corporate bond market, in addition to those intended to provide broad exposure to the investment grade bond market. No change was made with respect to the types of bonds that may be purchased by the SPV – they must have a remaining maturity of 5 years or less.

In addition, the SMCCF will purchase only from “eligible sellers”: a business that is created or organized in the United States or under the laws of the United States with significant U.S. operations and a majority of U.S.-based employees. Such “eligible sellers” must also satisfy the conflicts-of-interest requirements of section 4019 of the CARES Act.

The revised terms of the SMCCF are available here.

Term Asset-Backed Lending Facility

Like the PMCCF and the SMCCF, the revised TALF term sheet restricts participation in the facility to businesses “created or organized in the United States or under the laws of the United States and that ha[ve] significant operations in and a majority of its employees based in the United States” (U.S. Companies). The TALF remains sized at $100 billion and continues to offer three-year loans to eligible borrowers on a non-recourse basis to holders of certain AAA-rated asset-backed securities (ABS). From the revised term sheet, it appears that the TALF currently does not make use of CARES Act funds.

Significantly, the revised term sheet expands the types of credit exposures underlying the ABS to include equipment leases, leveraged loans and commercial mortgages, and eliminates “servicing advance receivables.” The result is an expanded definition of “eligible collateral” for the TALF loans:

U.S. dollar denominated cash (that is, not synthetic) ABS that have a credit rating in the highest long-term or, in the case of non-mortgage backed ABS, the highest short-term investment-grade rating category from at least two eligible NRSRO and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. All or substantially all of the credit exposures underlying eligible ABS must have been originated by a U.S. Company, and the issuer of eligible collateral must be a U.S. Company. With the exception of commercial mortgage-backed securities (CMBS), eligible ABS must be issued on or after March 23, 2020. CMBS issued on or after March 23, 2020, will not be eligible. For CMBS, the underlying credit exposures must be to real property located in the United States or one of its territories.

In addition, the revised TALF term sheet states that single-asset single-borrower (SASB) CMBS and commercial real estate collateralized loan obligations will not be eligible collateral, and that only static CLOs will be eligible collateral. The TALF includes a collateral haircut schedule, reproduced as Appendix 1, that the Federal Reserve states is consistent with the haircut scheduled used for the TALF established in 2008.

In term of pricing, loans secured by CLOs will bear an interest rate of 150 basis points over the 30-day average secured overnight financing rate (SOFR). Loans secured by SBA Pool Certificates will bear an interest rate of the top of the federal funds target range plus 75 basis points. For loans backed by SBA Development Company Participation Certificates, the interest rate will be 75 basis points over the 3-year fed funds overnight index swap (OIS) rate.

For loans secured by all other eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 125 basis points over the 2-year OIS rate for securities with a weighted average life less than two years, or 125 basis points over the 3-year OIS rate for securities with a weighted average life of two years or greater.

The revised terms of the TALF are available here.

APPENDIX 1

Haircut Schedule:

		ABS Average Life (years)*
Sector	Subsector	0-<1	1-<2	2-<3	3-<4	4-<5	5-<6	6-<7
Auto	Prime retail lease	10%	11%	12%	13%	14%
Auto	Prime retail loan	6%	7%	8%	9%	10%
Auto	Subprime retail loan	9%	10%	11%	12%	13%
Auto	Motorcycle/ other recreational vehicles	7%	8%	9%	10%	11%
Auto	Commercial and government fleets	9%	10%	11%	12%	13%
Auto	Rental fleets	12%	13%	14%	15%	16%
Credit Card	Prime	5%	5%	6%	7%	8%
Credit Card	Subprime	6%	7%	8%	9%	10%
Equipment	Loans and Leases	5%	6%	7%	8%	9%
Floorplan	Auto	12%	13%	14%	15%	16%
Floorplan	Non-Auto	11%	12%	13%	14%	15%
Premium Finance	Property and casualty	5%	6%	7%	8%	9%
Small Business	SBA Loans	5%	5%	5%	5%	5%	6%	6%
Student Loan	Private	8%	9%	10%	11%	12%	13%	14%
Leveraged Loans	Static	20%	20%	20%	20%	20%	21%	22%
Commercial Mortgages	Legacy, Conduit	15%	15%	15%	15%	15%	16%	17%

* For auto, credit card, equipment, floorplan, and premium finance ABS, the weighted average life must be five years or less. For other new-issue eligible collateral, haircuts will increase by one percentage point for each additional year (or portion thereof) of average life beyond five years. For legacy CMBS with average lives beyond five years, base dollar haircuts will increase by one percentage point of par for each additional year (or portion thereof) of average life beyond five years. No securitization may have an average life beyond ten years.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 pandemic. For additional information, please contact any member of the firm’s Coronavirus (COVID-19) Response Team.

Gibson Dunn’s Capital Markets and Financial Institutions practice groups also are available to answer questions about these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, or the following:

Authors: Andrew L. Fabens, Arthur S. Long and James O. Springer

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3. Closing Gaps – COVID-19 and the Modifications of the National Investment Control Regimes

4. Anti-Trust and Merger Control in Times of COVID-19

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Table of Contents

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A. Bolstering Supply and Promoting Development of Medical Products

B. Anticipating and Preventing Critical Drug and Device Shortages

C. Expedited Review of COVID-19 Product Applications

D. Liability Protection Extended to Respiratory Protective Devices

E. Proposed Supplemental Legislation

II. Overview of FDA’s Approach to the COVID-19 Crisis

III. Diagnostic Devices

IV. Personal Protective Equipment (PPE)

A. Enforcement Policies for PPE

B. Emergency Use Authorizations (EUAs) for PPE

V. Ventilators and Other Respiratory Devices

A. Enforcement Policy for Ventilators and Accessories and Other Respiratory Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

B. Emergency Use Authorizations (EUAs) for Ventilators and Other Respiratory Devices

VI. COVID-19 Drugs and Vaccines

VII. Other Medical Products to Prevent or Treat COVID-19

A. Alcohol Sanitizers

B. EUA for Blood Purification System

C. Enforcement Policy for Extracorporeal Membrane Oxygenation and Cardiopulmonary Bypass Devices

D. Enforcement Policy for Remote Ophthalmic Assessment and Monitoring Devices During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

E. Enforcement Policy for Non-Invasive Remote Monitoring Devices Used to Support Patient Monitoring During the Coronavirus Disease-2019 (COVID-19) Public Health Emergency

F. Enforcement Policy for Infusion Pumps and Accessories During the Coronavirus Disease 2019 (COVID-19) Public Health Emergency

G. Enforcement Policy for Clinical Electronic Thermometers

H. Enforcement Policy for Sterilizers, Disinfectant Devices, and Air Purifiers

I. Policy for the Temporary Use of Portable Cryogenic Containers Not in Compliance With 21 C.F.R. § 211.94(e)(1) For Oxygen and Nitrogen

J. 3D Printing

VIII. Conclusion

New York Empire State Development Corporation Further Updates Guidance on Businesses Deemed Essential Under Governor Andrew Cuomo’s “New York State on PAUSE” Executive Order

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