On 31 March 2020, the European Securities and Markets Authority (“ESMA”) issued a public statement[1] to clarify issues regarding the publication by execution venues and firms of best execution reports required by RTS 27 and RTS 28 of MiFID II. This client alert provides an overview of ESMA’s public statement and its consequences for execution venues and firms.

What are the best execution reporting requirements?

Execution venues are required to periodically published information in accordance with RTS 27. This information is intended to provide the public and firms with relevant data to measure the quality of execution on execution venues. Firms are also required to periodically publish information under RTS 28 to enable the public and investors to evaluate the quality of a firm’s execution practices by requiring publication of information about how and where the firm has executed client orders.

Why is ESMA suggesting regulatory forbearance in relating to best execution reporting obligations?

ESMA has stated it recognises that the exceptional circumstances created by the COVID-19 outbreak means that execution venues and firms may need to deprioritise efforts for the publication of RTS 27 and RTS 28 reports concerning 2019.

ESMA has decided to issue the public statement to promote co-ordinated action by national competent authorities (“NCAs”) and to provide clarity to execution venues and firms subject to the disclosure requirements. ESMA recommends that NCAs take into account the current climate by considering the possibility execution venues and firms can report in line with an amended reporting timetable.

What changes has ESMA suggested to best execution reporting deadlines?

Having regard to the coronavirus outbreak, ESMA’s public statement encourages NCAs not to prioritise supervisory action against execution venues and firms in relation to the latest best execution reporting deadlines. ESMA also encourages NCAs to adopt a risk-based approach in the exercise of their supervisory powers in enforcement of RTS 27 and RTS 28 concerning these deadlines.

Requirement	Original disclosure date	New suggested disclosure date
RTS 27 disclosure	For execution venues, 31 March 2020 in respect of RTS 27 reports on the quarterly information regarding the reporting period from 1 October to 31 December 2019.	Execution venues unable to publish RTS 27 reports due by 31 March 2020 may only be able to publish them as soon as reasonably practicable after that date and no later than by the following reporting deadline (i.e. 30 June 2020).
RTS 28 disclosure	For firms, 30 April 2020 in respect of RTS 28 reports on the annual information regarding the reporting period of 2019.	Firms may only be able to publish the RTS 28 reports due by 30 April 2020 on or before 30 June 2020.

What steps should execution venues and firms take now?

ESMA has recommended that execution venues and firms should keep records of any decision made in relation to any delay to the publication of RTS 27 or RTS 28 disclosures. ESMA’s public statement also reminds firms of their core obligations to achieve best execution for clients and to ensure fair order handling and allocations during current market volatility. Execution firms and firms should also take note of any further publications by their respective NCAs in relation to the best execution reporting obligations.

[1] https://www.esma.europa.eu/sites/default/files/library/esma35-36-1919_esma_statement_on_covid-19_and_best_execution_reports.pdf

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.

Authors: Michelle Kirschner and Martin Coombes

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

Paris associate Alexis Downe is the author of “The choice of French Law for the new ISDA Master Agreement: Part 2” [PDF] published by the Buttersworths Journal of International Banking and Financial Law in April 2020.

The UK Financial Conduct Authority (“FCA”) has made clarifications to its previous announcement on 16 March regarding the European Securities and Markets Authority’s (“ESMA’s”) decision concerning temporary amendments to short selling notification thresholds under the Short Selling Regulation (“SSR”). The FCA will now be ready to receive notifications at the lower threshold from 6 April 2020.

This client alert provides firms holding net short positions with an overview of the FCA’s new notification thresholds in light of the coronavirus outbreak.

What did the ESMA decision say?

The SSR requires holders of net short positions in shares trades on a European Union (“EU”) regulated market to notify notifying national competent authorities of their position.

ESMA published a decision on 16 March 2020 that it was temporarily amending the threshold of net short positions under the SSR from 0.2% of issued share capital to 0.1%. The decision applies until 16 June 2020.

ESMA stated that lowering the reporting threshold was a precautionary action that was essential for authorities to monitor developments in markets during the ongoing coronavirus outbreak.

What did the FCA’s statement on 17 March 2020 say?

The FCA confirmed that it would apply ESMA’s decision in the UK. However, the FCA noted that this would require changes to its technology to receive the data at the new threshold. The FCA stated that firms should continue to reporting in compliance with the existing thresholds until further notice.

When do the new notification thresholds apply?

On 31 March 2020, the FCA confirmed that it has made the required changes to its systems and will be ready to receive notifications at the lower threshold.

Firms must comply with the new thresholds from Monday 6 April 2020. However, firms are not required to amend and resubmit notifications submitted to the FCA between 16 March 2020 and 3 April 2020.

In line with the SSR, the new reporting obligation will apply to shares for which the FCA is the relevant competent authority and not to exempted shares where the principal venue for the trading of the shares is located outside of the EU.

What if a firm’s systems are unable to report at the new threshold?

The FCA states that firms should make best efforts to report at the lower threshold from 6 April 2020. However, the FCA appreciates that it may not be possible for some firms to amend their systems by this date. If a firm is unable to report at the new thresholds by 6 April 2020, they must contact [email protected] to discuss the matter further.

Authors: Michelle Kirschner and Martin Coombes

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

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

UNITED STATES

Federal Reserve Announces Delay in Effectiveness of New “Control” Framework

Responding to the effects of COVID-19 on the U.S. economy and the desire of banks and investors to consult with Federal Reserve staff about the effects of the Federal Reserve’s new “control” rule on existing investments and relationships, the Federal Reserve announced that it was delaying the effective date of its new framework for analyzing “control” under the Bank Holding Company Act by two quarters, to September 30, 2020. The Gibson Dunn Client Alert on the new framework may be found here.
Read more

Implications of COVID-19 Crisis for False Claims Act Compliance

Industries worldwide are confronting unprecedented challenges and uncertainties sparked by the novel coronavirus (COVID-19) public health crisis, which has shuttered businesses, disrupted travel, supply chains, and the financial markets, and threatened global economic stability. In response to the pandemic, the United States government has responded with a $2.2 trillion economic stimulus package—the largest in history. This massive new program comes on the heels of other local, state, and federal emergency measures, including significant spending on critical supplies and the federal government’s invocation (albeit on a limited basis) of a wartime statute to direct U.S. industry to manufacture needed medical supplies and equipment.
Read more

The CARES Act Decoded: A Primer for Real Estate Stakeholders & What to Focus on Next

On March 29, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“ CARES ACT”), a $2.2 trillion stimulus package designed to mitigate the effects of the novel coronavirus (“COVID-19”). The ACT provides, among other things, unprecedented economic assistance to millions of Americans and small and distressed businesses.

Most significantly for our real estate clients, the legislation (a) establishes certain forbearance, foreclosure and eviction limitations upon owners/lenders of certain properties secured by government-backed loans; (b) establishes a $349 billion loan guarantee program to help small businesses keep employees on the payroll and cover necessities (the “SBA Paycheck Protection Program”); and (c) extends $454 billion to businesses, states and cities especially impacted by the coronavirus and not receiving loans through any other provision in the Act (“Title IV Funding”).
Read more

State of California and City of Los Angeles Enact New Tenant Protections in Response to COVID-19 Pandemic

As state and local governments rapidly respond to the novel coronavirus (COVID-19) pandemic, in the previous 72 hours each of California Governor Gavin Newsom, the Los Angeles City Council, and Los Angeles Mayor Eric Garcetti has enacted significant new measures governing evictions for certain tenants who are unable to pay rent as a result of the pandemic. The statewide executive order by Governor Newsom applies only to residential tenants, while the City’s ordinance applies protections to both residential and smaller commercial tenants. Additionally, by Public Order of Mayor Garcetti, the City of Los Angeles has temporarily frozen rent increases on all rent-stabilized units in the City.
Read more

COVID-19 Resources for Non-Profits and Small Businesses (NJ, NY & CT)

We have received many questions about aid to small businesses and non-profit organizations in the New York tri-state area. Below please find a compilation of Federal and state-specific resources that are available to assist eligible small businesses and non-profit organizations in the New York tri-state area related to the COVID-19 pandemic. For your convenience, where applicable, we have included links to the relevant third party’s website so you can easily access more information about the resources being offered by that third party. This document provides you with a general outline of certain available resources, but please note that (i) this document does not purport to contain information on all Federal, state, and local resources available to small businesses and non-profits and (ii) there may be additional resources not listed below that are available to assist your small business or non-profit organization.
Read more

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

On March 31, 2020, the U.S. Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) issued new standards for automobile fuel economy and greenhouse gas (GHG) emissions for model year (MY) 2021 through MY 2026 vehicles. The final rule, the Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Model Years 2021-2026 Passenger Cars and Light Trucks, requires an annual 1.5% increase in the standards for passenger cars and light-duty trucks sold through MY 2026.[1]

Background

The regulatory landscape for fuel economy and tailpipe GHG emissions has experienced significant changes in recent years. In 1975, Congress passed the Energy Policy and Conservation Act (EPCA), which granted the Department of Transportation (DOT) the authority to regulate automobile fuel economy.[2] DOT delegated this authority to NHTSA, which regulates fuel economy through the Corporate Average Fuel Economy (CAFE) program.[3] Although state regulations of fuel economy are preempted by EPCA,[4] California and several other states moved to regulate tailpipe GHG emissions in the early 2000s. The EPA was also poised to begin regulating tailpipe GHG emissions at the federal level after the Supreme Court’s 2007 decision in Massachusetts v. EPA.[5]

Against this backdrop, the Obama Administration negotiated the “One National Program” agreement in 2009. Under the agreement, the EPA and NHTSA agreed to jointly issue fuel economy and GHG emissions regulations and California agreed to defer to the federal standards.

In 2012, the EPA and NHTSA issued joint regulations for vehicles sold in MYs 2017–2025, requiring a 5% annual increase in the stringency of the standards.[6] But the agencies also committed to conduct “a comprehensive midterm evaluation and agency decision-making process for MYs 2022–2025 standards” by April 1, 2018.[7] The final rule released today is the culmination of the Trump Administration’s midterm evaluation of the Obama Administration’s standards.[8]

The EPA and NHTSA announced this planned regulation via a notice of proposed rulemaking (NPRM), published on August 24, 2018. That NPRM had two primary components. First, the NPRM proposed freezing the federal CAFE and GHG standards at their MY 2020 levels through MY 2026.[9] Second, it proposed regulations that would make the federal government the sole regulator of fuel economy and tailpipe GHG emissions.[10] The latter rulemaking, determining that state GHG and zero-emission vehicle standards are preempted by federal law and withdrawing California’s separate authority to establish such standards under the Clean Air Act, was issued in September 2019.[11]

Part two of the joint rulemaking, released today, deals with the stringency of the fuel economy and tailpipe GHG emission standards and the applicable compliance mechanisms.

The New Standards

The final rulemaking includes several important developments of interest for the automotive industry, and departs in several ways from the action proposed in the August 2018 NPRM.

Stringency. The final rule requires an annual 1.5% increase in the stringency of fuel economy and tailpipe GHG emissions standards for vehicles sold in MYs 2021–2026. This is an increase from the standards proposed in the NPRM (0% annual increase), but a decrease from the Obama Administration’s 2012 standards (5% annual increase). The agencies project that the new standards will require automakers to achieve, on an average industry fleet-wide basis, 201 grams per mile (g/mi) of CO2 and 40.5 miles per gallon (mpg) by MY 2030.[12] Factoring in compliance flexibilities, however, the “real-world” requirement is expected to be 33.2 mpg.[13]
Compliance Flexibilities. The final rule includes several changes to the programs’ compliance mechanisms.
- First, the rule extends through MY 2026 a credit that classifies electric vehicles as zero-emissions vehicles, even if the charging sources for those vehicles are GHG-emitting.[14]
- Second, the rule continues to give automakers credits for reducing GHG leaks from air conditioning systems and for lowering methane and nitrous oxide emissions.[15]
- Third, the rule removes incentives for advanced technologies in full-size pickup trucks. Starting in MY 2022, automakers will no longer receive credits for producing hybrid, or otherwise over-performing, full-size pickup trucks.[16]
Cost-Benefit Analysis. The regulatory analysis published with the final rule projects a range of costs and benefits associated with the rule. In sum, the agencies project the societal net benefits of the rule to “straddle zero.”[17] Benefits from the new CAFE and GHG standards are projected to range between $16.1 billion to negative $13.1 billion and between $6.4 billion to negative $22 billion, respectively.[18] These figures use the projections for the existing 2012 standards as the baseline and project costs and benefits over the lifetime of vehicles sold through MY 2029.
- Cheaper vehicles. The agencies project that average per-vehicle purchase prices will be reduced by $977 to $1,083.[19]
- Increased fuel consumption. The agencies project that total fuel consumption will increase by 1.9 to 2.0 billion barrels.[20]
- Lower technology costs. The agencies project that required technology costs will decrease by $86 to $126 billion.[21]
- Safer vehicles. The agencies project that automakers will produce safer vehicles under the new standards, leading to as many as 3,244 fewer fatalities and approximately 400,000 fewer injuries.[22]
- Environmental costs. The agencies project that the new standards will increase CO2 emissions by 867 to 923 million metric tons.[23]

The rule will be published in the Federal Register in approximately one week and will become effective 60 days after its publication.

Litigation surrounding the final rule is a near certainty—indeed, California has already signaled its intent to challenge the rule in federal court.

_____________________

[1] The Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Model Years 2021-2026 Passenger Cars and Light Trucks (March 31, 2020) (Final Rule).

[2] Pub. L. No. 94-163, 89 Stat. 871 (1975).

[3] 49 U.S.C. § 32902(a).

[4] 49 U.S.C. § 32919.

[5] 549 U.S. 497 (2007).

[6] 2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards, 77 Fed. Reg. 62,624, 62,628 (Oct. 15, 2012).

[7] Id.

[8] Mid-Term Evaluation of Greenhouse Gas Emissions Standards for Model Year 2022–2025 Light-Duty Vehicles, 83 Fed. Reg. 16,077 (Apr. 13, 2018).

[9] The Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Model Years 2021–2026 Passenger Cars and Light Trucks, Notice of Proposed Rulemaking, 83 Fed. Reg. 42,986 (Aug. 24, 2018).

[10] Id.

[11] The Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule Part One: One National Program, 84 Fed. Reg. 51,310 (Sept. 27, 2019). The ONP Rule is currently being challenged in the U.S. Court of Appeals for the D.C. Circuit, where Gibson Dunn represents a coalition of automotive manufacturers as Intervenors in support of the rule. See Union of Concerned Scientists v. NHTSA, No. 19-1230 (D.C. Cir.).

[12] Final Rule at 7.

[13] Final Rule at 23.

[14] Final Rule at 51-55.

[15] Id.

[16] Id.

[17] Final Rule at 9.

[18] Final Rule at 8-9.

[19] Final Rule at 8.

[20] Id.

[21] Id.

[22] Final Rule at 15-16.

[23] Final Rule at 8.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Environmental Litigation and Mass Tort Group practice group, or the authors:

Raymond B. Ludwiszewski – Washington, D.C. (+1 202-955-8665, [email protected])
Rachel Levick Corley – Washington, D.C. (+1 202-887-3574, [email protected])

Environmental and Mass Tort Group:

Washington, D.C.
Stacie B. Fletcher (+1 202-887-3627, [email protected])
Raymond B. Ludwiszewski (+1 202-955-8665, [email protected])
Michael K. Murphy (+1 202-955-8238, [email protected])
Daniel W. Nelson – (+1 202-887-3687, [email protected])
Peter E. Seley – (+1 202-887-3689, [email protected])

Los Angeles
Matthew Hoffman (+1 213-229-7584, [email protected])
Thomas Manakides (+1 949-451-4060, [email protected])

New York
Andrea E. Neuman (+1 212-351-3883, [email protected])
Anne M. Champion (+1 212-351-5361, [email protected])

San Francisco
Peter S. Modlin (+1 415-393-8392, [email protected])

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

I. Financial Assistance – Resources and Information

A. Federal[1]

1. 1. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
    - Small Business Administration (“SBA”) Emergency Small Business Loans: Provides funding for special emergency loans (“Emergency 7(a) Loans”) for eligible nonprofits and small businesses, permitting them to cover costs of payroll, operations, and debt service, and provides that the loans be forgiven in whole or in part under certain circumstances. Other aspects of these loans include:
    - General Eligibility: Available to business concerns that existed on March 1, 2020 that employ not more than the greater of (i) 500 employees or (ii) if applicable, the size standard in number of employee established by the SBA for the industry in which the business concern operates.
    - Loan Use: Loan proceeds may be used to make payroll and associated costs, including health insurance premiums, facilities costs, and debt service.
    - Loan Forgiveness: Employers that maintain employment between February 15 and June 30 would be eligible to have their loans forgiven, essentially turning the loan into a grant. The loan forgiveness amount is excluded from taxable income.
    - Loan Limitation: The amount of an Emergency 7(a) Loan will typically equal the lesser of (i) $10 million and (ii) 5x the average monthly payroll costs[2].
    - Affiliation Rules: The CARES Act allows certain business concerns that previously did not qualify for an SBA loan because its affiliations caused the business concern to exceed the applicable employee thresholds to qualify for a covered loan.
    - Application Process: To apply for Emergency 7(a) Loans, please use the following resources to contact a participating SBA lender:
      - SBA Resources:
        
        SBA Lender Match Program: https://www.sba.gov/funding-programs/loans/lender-match
        
        List of 100 most active SBA 7(a) lenders: https://www.sba.gov/article/2020/mar/02/100-most-active-sba-7a-lenders
      - Wells Fargo SBA Program: https://www.wellsfargo.com/biz/sba/
      - JPMorgan Chase SBA Program: https://www.chase.com/business/loans/sba-loans
      - TD Bank SBA Program: https://www.td.com/us/en/small-business/sba-loan-programs/
    - Economic Injury Disaster Loans (“EIDL”): Eliminates creditworthiness requirements and appropriates an additional $10 billion to the EIDL program so that eligible nonprofits and other applicants with 500 or fewer employees can get checks for $10,000 within three days.
      - Please see Section I.A.2 below for more information on the application process for the EIDL program.
    - Self-Funded Nonprofits and Unemployment: Only reimburses self-funded nonprofits for half of the costs of benefits provided to their laid-off employees.[3]
    - Charitable Giving Incentive: Includes a new above-the-line deduction (universal or non-itemized deduction that applies to all taxpayers) for total charitable contributions of up to $300. The incentive applies to contributions made in 2020 and would be claimed on tax forms next year. The bill also lifts the existing cap on annual contributions for those who itemize, raising it from 60% of adjusted gross income to 100%. For corporations, the bill raises the annual limit from 10% to 25%. The deduction for donations of food from corporations would be available to 25%, up from the current 15% cap.
    - Employee Retention Payroll Tax Credit: Creates a refundable payroll tax credit of up to $5,000 for each employee on the payroll when certain conditions are met. The entity had to be an ongoing concern at the beginning of 2020 and had seen a drop in revenue of at least 50% in the first quarter compared to the first quarter of 2019. The availability of the credit would continue each quarter until the organization’s revenue exceeds 80% of the same quarter in 2019. For tax-exempt organizations, the entity’s whole operations must be taken into account when determining the decline in revenues. Notably, employers receiving emergency SBA 7(a) loans would not be eligible for these credits.
    - Industry Stabilization Fund: Creates a loan and loan guarantee program for industries like airlines to keep them solvent through the crisis. It sets aside $425 billion for “eligible business” which is defined as “a United States business that has not otherwise received economic relief in the form of loans or loan guarantees provided under” the legislation. It is expected that charitable nonprofits qualify under that definition for industry stabilization loans. Mid-sized businesses, including nonprofits, that have between 500 and 10,000 employees are expressly eligible for these loans. Although there is no loan forgiveness provision in this section, the mid-size business loans would be charged an interest rate of no higher than 2% and would not accrue interest or require repayments for the first six months. Nonprofits accepting the mid-size business loans must retain at least 90% of their staff at full compensation.
1. 1. SBA Economic Injury Disaster Loan Program

- - - SBA is providing targeted, low-interest working capital loans of up to $2 million to small businesses and non-profits affected by COVID-19. These loans carry an interest rate of 3.75% for small businesses and 75% for non-profits. Loan repayment terms vary by applicant, up to a maximum of 30 years.
    - Apply online at: https://www.sba.gov/page/disaster-loan-applications
      - Please use the following link for more information on the application process for the EIDL program: https://www.sba.gov/disaster/apply-for-disaster-loan/index.html. Alternatively, please call the SBA Disaster Assistance Customer Service Center at 1-800-659-2955 for additional information.
    - See:
      - https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
      - https://www.forbes.com/sites/advisor/2020/03/20/list-of-coronavirus-covid-19-small-business-relief-programs/#dbf7a71e89dd

1. 1. SBA Consultants:

- - - Please note that there are consultants who are willing to assist in the SBA filing/application process for a fee. We would be happy to connect you with a SBA loan consultant if so desired.

1. 1. Other Options to Consider:

- - - Develop a list of potential donors (grant-making organizations, family foundations, or major donors) that are known to support the same cause, and request a grant or donation. Consider requesting the donation as an interest-free loan.
    - Review force majeure clauses in the non-profit’s major contracts to see if those clauses exempt the non-profit from performing its obligations on the grounds of a government order not to operate or the occurrence of a disease or pandemic.
    - Even if there are no force majeure clauses in those contracts, ask the counterparties for a one or two month reprieve from making any obligated payments, or negotiate a payment plan that will result in the full amount being paid over time, after the pandemic.

B. New Jersey Specific

1. 1. New Jersey Government resources

- - - Small Business Fund (https://www.njeda.com/financing_incentives/programs/small_business_fund)
      - Amount: Up to $500,000 with 1.0x historical debt service coverage.
      - Uses: Fixed assets or working capital.
      - Eligibility: Small businesses must have been in operation for at least one full year, and non-profits for at least three full years.
    - Bond Financing (https://www.njeda.com/financing_incentives/programs/bond_financing)
      - Amount:
        
        $500,000 to $10 million in tax-exempt bonds for for-profit companies.
        
        $500,000 with no dollar limit in tax-exempt bonds for qualified non-profit organizations.
      - Uses: Capital improvements/expansions, working capital, debt refinancing, etc.
      - Eligibility: Borrowers must meet the eligibility requirements outlined in the Internal Revenue Code in order to qualify for tax-exempt bond financing.

1. 1. Emergency relief funds providing support for eligible non-profits

- - - New Jersey Pandemic Relief Fund (https://njprf.org/)
      - As of March 28, 2020, the New Jersey Pandemic Relief Fund has not provided any information regarding grant requirements, eligibility, etc. This fund expects to post application information to its website in the near future.
    - South Jersey COVID-19 Response Fund (https://www.communityfoundationsj.org/)
      - Amount: One-time support grants of at least $3,000.
      - Eligibility: Non-profit organizations aimed at assisting South Jersey residents that otherwise meet one of the following three criteria:
        
        Triage: Community-based non-profits that have increased demand for services from South Jersey residents due to COVID-19, including organizations that focus on providing economic security and related services to South Jersey residents.
        
        Treatment: Human service non-profits that are modifying their delivery modes due to COVID-19.
        
        Recovery: Non-profits facing extreme difficulty because of lost revenue due to closures and cancellations, as well as other business model challenges resulting from the pandemic.
      - COVID-19 Rapid Response Fund (https://www.nnjcf.org/2020/03/covid-19-rapid-response-fund/)
        
        As of March 28, 2020, the COVID-19 Rapid Response Fund has not provided any information regarding grant requirements, eligibility, etc. This fund expects to post application information to its website in the near future.
      - Princeton Area Community Foundation COVID-19 Relief & Recovery Fund (https://pacf.org/the-princeton-area-community-foundation-covid-19-relief-recovery-fund/)
        
        Amount: This fund is accepting requests for unrestricted support, although the fund also states on its website that non-profits should be “realistic in the amount of [its] request. While fundraising efforts are continuous, [the fund has] limited resources, and [it is] trying to meet as many needs as possible.”
        
        Eligibility: No specific criteria is listed, but information located on the fund’s website suggests that this fund is aimed at assisting non-profits servicing the local community (i.e., Princeton, NJ and surrounding areas).
      - OceanFirst Foundation Rapid Response Grants and Good Neighbor Grants (http://www.oceanfirstfdn.org/covid-19-information-updates/)
        
        Amount: Up to $5,000.
        
        Eligibility: Non-profits are only eligible for these grants.
      - PHL COVID-19 Fund (https://www.phlcovid19fund.org/covid-19/)
        
        Amount: Grant amounts will be calculated based on an organization’s operating budget.
        
        Eligibility: Non-profits operating in Bucks, Chester, Delaware, Montgomery and Philadelphia counties in Pennsylvania and Atlantic, Burlington, Camden, Cape May, Cumberland counties in New Jersey.

C. New York Specific

1. 1. New York Government resources

- - - NYC Employee Retention Grant Program (https://www1.nyc.gov/site/sbs/businesses/covid19-business-outreach.page)
      - Amount: Grant amounts will cover 40% of payroll costs for two months.
      - Uses: Retention of employees.
      - Eligibility:
        
        Be located within the five boroughs of New York City.
        
        Demonstrate that the COVID-19 outbreak caused at least a 25% decrease in revenue.
        
        Employ 1-4 employees in total across all locations.
        
        Have been in operation for at least 6 months.
        
        Have no outstanding tax liens or legal judgements.
      - NYC Small Business Continuity Loan Fund (https://www1.nyc.gov/site/sbs/businesses/covid19-business-outreach.page)
        
        Amount: Interest-free loan in an amount up to $75,000.
        
        Eligibility:
        
        Be located within the five boroughs of New York City.
        
        Demonstrate that the COVID-19 outbreak caused at least a 25% decrease in revenue.
        
        Employ 99 employees or fewer in total across all locations.
        
        Demonstrate ability to repay the loan.
        
        Have no outstanding tax liens or legal judgements.
        
        New York State Nonprofit Security Grant Program (http://www.dhses.ny.gov/grants/nonprofit/nsgp.cfm)
        
        Amount: Up to $100,000.
        
        Eligibility: Non-profit organizations who are prequalified in the NYS Grants Management system.

1. 1. Emergency relief funds providing support for eligible non-profits

- - - NYC COVID-19 Response & Impact Fund – Grants (https://www.nycommunitytrust.org/covid19/)
      - Amount: No specific amounts are specified on the fund’s website.
      - Eligibility: Non-profits that generally meet the governance and financial standards of the Better Business Bureau, including a board of directors with at least five members, and no more than one paid board member.
    - Nonprofit Finance Fund (NFF) – NYC COVID-19 Response & Impact Fund – Loans (https://nff.org/nyc-covid-19-recovery-fund)
      - Amount: Unsecured loans ranging from $100,000 to $3 million.
      - Eligibility:
        
        501(c)(3) nonprofit organization.
        
        Based in New York City.
        
        Annual non-governmental revenue of $20 million or less.
        
        Receive New York City or New York State government funding.
        
        History of delivering effective programs and services equitably for New York City residents.
      - North Star Fund (https://northstarfund.org/apply/)
        
        Amount: Grants typically range from $5,000 to $10,000.
        
        Eligibility: Non-profits that are:
        
        Located in at least one of the five boroughs of New York City, or in Westchester, Rockland, Putnam, Orange, Dutchess, Ulster, Sullivan, Columbia, Greene, Delaware, Rensselaer, Albany and Schoharie counties.
        
        Operating with a budget of less than $800,000.
        
        Northern New York Community Foundation: Community Support Fund for COVID-19 (http://www.nnycf.org/recent-news/community-support-fund/)
        
        Amount: The fund’s website does not specify the amount that will be awarded for each grant, but the amount of the entire fund is $50,000.
        
        Eligibility: Non-profits that are located in Jefferson, Lewis and St. Lawrence counties and that work to support essential needs the local community.
        
        Robin Hood Relief Fund (https://www.robinhood.org/relief-fund-application/)
        
        Amount: The average grant will equal $45,000.
        
        Eligibility: Non-profits that provide services to low-income communities in New York City.
        
        Adirondack Foundation: COVID-19 Special and Urgent Needs Fund (https://www.adirondackfoundation.org/press/special-and-urgent-needs-fund-activated-help-adirondack-communities-respond-covid-19)
        
        Amount: Up to $10,000, but the fund reserves the right to provide grants in excess of $10,000.
        
        Eligibility: Non-profits that are located in the Adirondack region, which includes all of Clinton, Essex, Franklin and Hamilton counties as well as the parts of Herkimer, St. Lawrence, Warren, and Washington counties within the Adirondack Park boundary and the Saint Regis Mohawk Reservation.
        
        Central New York Community Foundation: COVID-19 Community Support Fund (https://cnycf.org/covid19#.XnKELahKg2w)
        
        Amount: Up to $50,000.
        
        Eligibility: Non-profits that are located in Central New York and that are working with communities who are disproportionately impacted by COVID-19 and the economic consequences of this outbreak.

D. Connecticut Specific

1. 1. Connecticut Government resources

- - - Connecticut Recovery Bridge Loan Program (https://portal.ct.gov/DECD/Content/Coronavirus-Business-Recovery/CT-Recovery-Bridge-Loan-Program)
      - Amount: The lesser of (i) $75,000 and (ii) three months of operating expenses.
      - Uses: Working capital.
      - Eligibility:
        
        Have no more than 100 employees.
        
        Be in good standing with the Department of Revenue Services & Department of Economic and Community Development.
        
        Have been profitable prior to March 10, 2020— with no adverse personal credit reports 60 days past due the past six months.
        
        Not be involved in real estate, multi-level marketing, adult entertainment, cannabis or firearms; nor be a state elected public official or state employee.

1. 1. Emergency relief funds providing support for eligible non-profits

- - William Caspar Graustein Memorial Fund (http://www.wcgmf.org/home)
    - Amount: The fund website does not specify the typical amount of each grant.
    - Eligibility: Non-profits located in Connecticut.
  - Community Foundation of Eastern Connecticut: Neighbors for Neighbors Fund (https://www.cfect.org/Our-Initiatives/Response-to-COVID-19)
    - Amount: The fund website does not specify the typical amount of each grant.
    - Eligibility: Non-profits that serve communities in Eastern Connecticut.
  - Hartford Foundation for Public Giving: COVID-19 Response Fund (https://www.hfpg.org/nonprofits)
    - Amount: The fund website does not specify the typical amount of each grant.
    - Eligibility: Non-profits that serve communities in the Hartford, Connecticut region.

II. Other Guidance

A. New Jersey Specific

1. 1. Center for Non-Profits – COVID-19 Resource Center (https://www.njnonprofits.org/COVID-19.html)

- - - Free webinars addressing non-profit governance, operations, and fundraising during the COVID-19 pandemic.
    - Links to emergency relief funds for eligible non-profits and others.
    - Access to other resources, including information related to: insurance, fundraisers, payroll/employee matters, telecommuting, etc.

1. 1. Invest Newark – COVID-19 Resource Center (https://investnewark.org/covid-19/)

- - - Free webinar and other resources devoted to helping small businesses and non-profits address the current pandemic.
    - Access to local, state, and national resources designed to assist small businesses during the COVID-19 outbreak.

B. New York Specific

1. 1. New York Council of Nonprofits – COVID-19 Resources (https://www.nycon.org/resources/covid-19-resources-for-nonprofits)

- - - Registrations to participate in weekly webinars to discuss pertinent topics.
    - Access to other state and national resources designed to assist non-profits during the COVID-19 outbreak.

C. Connecticut Specific

1. 1. Connecticut Non-Profit Alliance – COVID-19 Response Resource Center (http://ctnonprofitalliance.org/)

- - - Links to federal and state resources that have been established in connection with the COVID-19 outbreak.

D. General

1. 1. Navigating Non-Profit Leadership During COVID-19 Webinar (https://www.youtube.com/watch?v=8fiRE6nutr0)

- - - Webinar designed to provide insights for non-profit leaders leading their organizations during the COVID-19 pandemic.
    - Topics include:
      - Donor Engagement
      - Remote Staffing
      - Financial Strategy & Planning
      - Technology Tools
      - Virtual Events & Fundraising
      - Program Impact
      - Communications Strategy
      - Self-Care
    - Webinar (short-hand) notes available at: https://theideationinc.app.box.com

1. 1. Miller Center for Social Entrepreneurship – Crisis Management Resources (https://www.millersocent.org/covid19/)

- - - Navigating the Crisis – A Survival Checklist for Your Enterprise.
    - COVID-19 Webinars.
    - Links to relief funds for eligible non-profits and others.

1. 1. To assist with staff working remotely, Zoom Discount Program at TechSoup provides discounted video and web conferencing as well as webinar software to eligible non-profits. (https://www.techsoup.org/zoom)

[1] The SBA is expected to issue additional regulations on some of the topics discussed below. Once available, please review those materials as they will provide further guidance on the implementation of the provisions referenced in this section.

[2] Payroll costs are defined to include payments for salary, wage, commission, or similar compensation; payments for cash tips or equivalent; payments for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits; payment of any retirement benefit; payment of state or local tax assessed on the compensation of employees; payments of any compensation or income of a sole proprietor or independent contractor that is an amount not more than $100,000 in one year, as prorated for the covered period. “Payroll costs” do not include the compensation of an individual employee in excess of an annual salary of $100,000, as pro-rated for the covered period; taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code; compensation of an employee whose principal place of residence is outside of the United States; and qualified sick leave wages or qualified family leave wages for which a credit is already allowed under the Families First Coronavirus Response Act.

[3] For more information on Self-Funded Nonprofits and Unemployment, please refer to the following article: https://www.councilofnonprofits.org/thought-leadership/self-insured-nonprofits-and-unemployment-insurance.

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.

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. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Public Policy Group, or the authors:

Richard J. Birns – New York (+1 212-351-4032, [email protected])
Eric B. Sloan – New York, Washington, D.C. (+1 212-351-2340, [email protected])
Stefan G. dePozsgay – New York (+1 212-351-2368, [email protected])
Sean McFarlane – New York (+1 212-351-3878, [email protected])

Attorney Advertising: The enclosed materials have

Following the publication of our 4-Step Checklist and Flowchart to review and assess force majeure clauses in the context of the COVID-19 pandemic, Gibson Dunn’s London office has prepared a companion 4-Step Checklist & Flowchart to assist with the analysis of force majeure clauses under English law.

STEP 1: Does COVID-19 trigger the force majeure clause? The first step is to consider whether the COVID-19 pandemic falls within the scope of the force majeure clause. It should be noted that the force majeure event does not have to be the COVID-19 pandemic itself; the consequences of it and the impact of those consequences on the parties are also relevant.

A force majeure clause in a commercial contract will be construed in each case on its own terms.[1] The Court must ascertain the objective meaning of the language based on the wording of the clause and the contract as a whole. Depending on the nature, formality and quality of drafting of the contract, the Court will give more or less weight to elements of the wider context in reaching its view as to that objective meaning.[2] Market practice may also be relevant to the exercise of interpretation, provided that it is clearly evidenced.[3]

A typical force majeure clause will stipulate that it is triggered by the occurrence of certain events beyond the reasonable control of the parties. The clause may list, by way of example or exhaustively, such events (e.g. an “act of God”, war or industrial action). If the clause specifically references an “epidemic”, “pandemic”, “disease outbreak”, “public health crisis”, or similar, the current situation relating to COVID-19 will almost certainly fit within that clause. In the absence of a reference to disease or public health crisis, COVID-19 might still be caught by a reference to government action as a force majeure event, including, “acts of civil or military authority”, “acts, regulations, or laws of any government”, or “government order or regulation”. Where such references are present, recently adopted laws regulating, among other things, the size of gatherings or mandating the closure of certain establishments may qualify as force majeure events.

The COVID-19 pandemic may also fall within the scope of a catch-all provision in respect of, for example, “events, circumstances or causes beyond the reasonable control of the parties”. This will depend on the language employed: the Court will consider the catch-all provision in the context of the entire clause[4] but will not be bound to limit its application to events similar to those specifically listed in the clause.[5]

STEP 2: What is the required impact on performance? The second step is to review what performance is excused by the force majeure clause.

A force majeure clause will commonly cover events that “prevent” a party from performing its obligations. With such clauses, performance must be physically or legally impossible; it is not sufficient for performance to be merely more difficult or unprofitable.[6] It is a question of fact as to whether alternative means of performance are open to a party that claims performance has been rendered impossible.[7]

By contrast, clauses excusing a party where performance is “hindered” by a force majeure event impose a lower standard than that of preventing performance. Words such as “impeded”, “impaired” and “interfered with” will likely be construed in the same way as “hindered”.[8] Where a clause refers to “delay” caused by a force majeure event, this is also likely to be given its plain meaning and not construed so as to give rise to the impossibility standard.[9] Changes in economic circumstances which affect the profitability of a contract will not, without more, constitute hindrances or interference sufficient to trigger a force majeure clause.[10]

STEP 3: Has the party taken all reasonable steps to mitigate the event? The third step is to consider whether the party can prove that it had taken all reasonable steps to avoid or mitigate the event or its consequences.

The force majeure clause may expressly require the party to mitigate the circumstances or effects of force majeure.[11] Even if there is no such express term in the force majeure clause, there is an implied obligation on the party to demonstrate that it took reasonable steps to avoid or mitigate the effects of the force majeure event.[12] If a contract provides that a party’s obligation may be performed in a number of ways and that party seeks to rely upon a force majeure (or other exclusion) clause which bars one method of performance, the party has a duty to perform its obligation in one of the alternative permitted ways.[13] The fact that a step to avoid or circumvent the force majeure event may be unprofitable does not necessarily lead to it being deemed unreasonable.[14]

STEP 4: When must notice be given and are there requirements for the form of notice? The fourth step is to review the contractual requirements, if any, for notice, including whether the contract requires a specific form of notice.

Force majeure clauses may require the giving of notice and the provision of notice could be a condition precedent to reliance upon the clause; the failure to provide timely notice may prohibit a party from obtaining the benefit of a force majeure clause.[15] 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 certain provision in a contract. Mandatory requirements in a notice provision, including those as to timing, will typically be applied strictly by the courts. Given the current work-from-home orders affecting very many businesses, 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; it should be noted that some notice provisions may also contain deeming provisions pursuant to which compliance with certain criteria may result in deemed notice, even where actual delivery or “service” of notice is impossible. Gibson Dunn can advise on and assist clients with such correspondence – either notices required to be given or responses to notices received – especially where the client does not presently have an operational mailroom.

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

Does the force majeure clause specifically reference an “epidemic”, “pandemic”, “disease outbreak”, or “public health crisis” (or similar)?	No ☐	Yes ☐	If yes, proceed to Step 2.
Does the force majeure clause refer specifically to government action (including “acts of civil or military authority”, “acts, regulations, or laws of any government”, or “government order or regulation”?	No ☐	Yes ☐	If yes, proceed to Step 2.
Does the force majeure clause have a catch-all provision?	No ☐	Yes ☐	If yes, the force majeure clause may have been triggered, but this is not guaranteed. Whether the COVID-19 pandemic falls within the scope of the clause will depend on its precise wording, which the Court will interpret in the context of the entire clause and the contract as a whole.
Does the contract contain no force majeure clause or one that is too narrowly drafted to capture COVID-19?	No ☐	Yes ☐	If yes, there may be other legal theories available to discharge or excuse performance of the contract, including frustration, supervening illegality, or material adverse change/effects.

Step 2. What is the required impact on performance?

Does the force majeure clause require only that performance be “hindered”, “delayed”, “impaired” or otherwise made more difficult?	No ☐	Yes ☐		If yes, the force majeure clause may have been triggered due to the extreme disruptions caused by COVID-19. Proceed to Step 3.
Does the force majeure clause require performance of obligations to be “prevented” or “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. Proceed to Step 3.

Step 3. Has the party taken all reasonable steps to mitigate the event?

Does the contract require the party to mitigate the circumstance or effects of the force majeure?

No ☐

Yes ☐

If yes, the party must take reasonable steps to mitigate the force majeure event or its consequences.

Inquiries should be made as to what steps have been taken by the party, and whether it is possible to demonstrate that they are “reasonable”.

Proceed to Step 4.

Even if there is no express term in in the contract to mitigate, can the party demonstrate that it has taken reasonable steps to mitigate the force majeure event or its consequences?

No ☐

Yes ☐

If yes, proceed to Step 4.

Inquiries should be made as to what steps have been taken by the party, and whether it is possible to demonstrate that they are “reasonable”.

Step 4. When must notice be given? Are there requirements for the form of notice?

Does the contract require notice?	No ☐	Yes ☐	If yes, timely notice must be provided in accordance with the notice provision. Some notice provisions require notice in advance of performance due. Others required notice within a certain number of days of the triggering event. If the notice provision requires a prompt submission or a submission within a definite time period, compliance with the notice provision would be considered as a condition precedent.
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 contracts may have a form of notice attached as an exhibit 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, registered mail, or through use of a particular form addressed to specific people.

[1] Classic Maritime Inc v Limbungan Makmur Sdn Bhd and another [2019] EWCA Civ 1102.

[2] Wood v Capita Insurance Services Limited [2017] UKSC 24.

[3] Crema v Cenkos Securities Plc [2010] EWCA Civ 1444.

[4] Tandrin Aviation Holdings Ltd v Aero Toy Store LLC and others [2010] EWHC 40.

[5] Chandris v Isbrandtsen-Moller Co Inc [1951] 1 K.B. 240.

[6] Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd [1917] AC 495.

[7] Bremer Handelsgesellschaft m.b.H. v Westzucker G.m.b.H. [1989] 1 Lloyd’s Rep. 582.

[8] Chitty on Contracts (33^rd Ed.), § 15-158.

[9] Fairclough Dodd & Jones v Vantol (JH) [1957] 1 W.L.R. 136.

[10] Tandrin Aviation Holdings Ltd and Aero Toy Store LLC and others [2010] EWHC 40 (Comm); Thames Valley Power Ltd v Total Gas & Power Ltd [2005] EWHC 2208 (Comm); Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd [1917] AC 495.

[11] Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm).

[12] Chitty on Contracts (33^rd Ed.), § 15-155. See also Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd’s Rep 323, where it was held that a party must not only bring himself within the force majeure clause but must show that it has taken all reasonable steps to avoid its operation, or mitigate its results.

[13] Reardon Smith Line v Ministry of Agriculture, Fisheries and Food [1963] AC 691.

[14] Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm).

[15] See Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil [2002] EWHC 2210(Comm); Bremer Handelsgesellschaft m.b.H. v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109.

Authors: Patrick Doris, Doug Watson, Piers Plumptre, Jonathan Cockfield, Jack Crichton, Arpan Gupta

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

Authors: Arthur S. Long and James O. Springer

Please also feel free to contact the Gibson Dunn lawyer with whom you usually work or the following leaders and members of the Financial Institutions Group:

Arthur S. Long, Matthew L. Biben, Michael D. Bopp, Stephanie Brooker, M. Kendall Day, Michelle M. Kirschner, Jeffrey L. Steiner, James O. Springer

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

These measures are summarized below, and add to a growing list of local measures across jurisdictions throughout California that are intended to protect tenants impacted by the COVID-19 pandemic, including ordinances and emergency orders in Culver City, Santa Monica, West Hollywood and others. Because of these diverse local actions, and the fact that the Governor’s statewide executive order does not preclude local jurisdictions from adopting their own measures, each jurisdiction may have slightly different rules governing these matters.

Statewide-Eviction Protections Ordered by Governor Newsom

On March 27, 2020 Governor Newsom issued Executive Order N-37-20 (the “Executive Order”) that enacted two new statewide protections for residential tenants. Notably, this Executive Order goes further than an earlier order issued on March 16, 2020, which had allowed local governments to enact eviction restrictions, but had not independently created any statewide eviction restrictions.

The Executive Order extends the period for a tenant to respond to an unlawful detainer action for an additional sixty (60) days beyond the current statutory periods. Such extension applies to any tenant who is served with a complaint while the Executive Order is in effect that seeks to evict the residential tenant for non-payment of rent. Accordingly, this Executive Order would not apply to an unlawful detainer action for which the complaint was served prior to March 27, 2020. In addition, a tenant eligible for this protection must satisfy the following three criteria:

(a) the tenant paid rent prior to March 27, 2020 pursuant to an agreement with the landlord (the Executive Order does not specify that the agreement must be in writing);

(b) the tenant notifies the landlord in writing before rent is due, or within a reasonable period (not to exceed seven (7) days) thereafter, that the tenant needs to delay all or some of the rent payment due to an inability to pay for reasons related to the COVID-19 pandemic; and

(c) the tenant retains verifiable documentation, such as termination notices, payroll checks, pay stubs, bank statements, medical bills, or signed letters from an employer or supervisor, explaining the tenant’s changed financial circumstances. The documentation must be provided to the landlord no later than the time back-due rent is paid.

The Executive Order also prohibits enforcement of a writ to evict a tenant from a residence or dwelling unit due to non-payment of rent if the residential tenant meets the same criteria set forth above.

The Executive Order makes clear that it does not prevent a tenant who is able to pay all or a some of the rent due from paying the rent in a timely manner, nor does it relieve a tenant from liability for unpaid rent. Unlike the City of Los Angeles’ ordinance discussed below, the Executive Order does not expressly prohibit landlords from imposing late fees or charging interest on late payments.

City of Los Angeles Enacts an Eviction Protection Ordinance for Residential Tenants and Some Commercial Tenants

On March 27, 2020, the Los Angeles City Council unanimously approved a far-reaching urgency ordinance (the “City Ordinance”) that, amongst other tenant protections, prohibits landowners from evicting many residential and commercial tenants for the non-payment of rent during the City’s declared coronavirus (COVID-19) local emergency. The City Ordinance codifies many of the tenant protections already provided by previous Public Orders issued by Mayor Garcetti since the March 4, 2020 declaration of a local emergency, and Mayor Garcetti has since rescinded those previous Public Orders to avoid conflict with the City Ordinance. The new City Ordinance goes farther, however, and contains additional tenant protections, including an obligation on residential landlords to provide affirmative written notice to residential tenants about the protections provided by the City Ordinance. Mayor Garcetti signed the ordinance on March 31, 2020, and the Ordinance took effect immediately upon publication.

The City Ordinance amends Chapter IV of the Los Angeles Municipal Code (“LAMC”) by adding Article 14.6, which provides: (1) a prohibition on evictions of residential and some commercial tenants for failure to pay rent due to COVID-19; (2) a prohibition on no-fault evictions of residential tenants during the local emergency period; and (3) a suspension on the withdrawal of occupied residential units from the rental market under the Ellis Act (codified at California Government Code Section 7060 et seq. and LAMC Section 151.22). These protections will remain in place until the end of the local emergency period as declared by the Mayor.

Effective Date and Retroactivity

The City Ordinance was enacted pursuant to the City Council’s urgency ordinance power and thus became effective immediately upon publication. The provisions retroactively apply starting on March 4, 2020 (the date on which the local emergency was first proclaimed). Thus, at least in Los Angeles, the restrictions would apply to evictions that were in process, before the State’s March 27 Executive Order.

Prohibition on Specified Commercial Evictions

Owners of commercial real property are prohibited from evicting commercial tenants if the tenant is unable to pay rent due to circumstances related to the COVID-19 pandemic. Commercial tenants subject to the City Ordinance’s protections will have up to three (3) months following the expiration of the local emergency period to repay any past due rent. Owners are prohibited from charging any interest or late fees on unpaid rent. Because the expiration of the local emergency period may be extended from time to time, the precise time period in which owners of real property can expect payment of any past due rent is not yet known.

The City Ordinance only applies to commercial tenants who are not any one or more of the following: (1) a multi-national company, (2) a publicly traded company, and (3) a company that employs more than five hundred (500) employees. Accordingly, any commercial tenant that falls within these three categories does not receive the protections provided by the City Ordinance.

Prohibition on Residential Evictions

Owners of residential real property are prohibited from evicting any residential tenant if the tenant is unable to pay rent due to circumstances related to the COVID-19 pandemic. Residential tenants will have a period of up to twelve (12) months following the expiration of the local emergency period to pay any past due rent, and owners are again prohibited from charging any interest or late fees on unpaid rent. Further, owners of residential real property are prohibited from exercising no-fault evictions during the local emergency period. Moreover, owners may not evict a tenant based on the presence of unauthorized occupants, pets, or any nuisance related to COVID-19.

Finally, owners of residential property are required to provide affirmative written notice to residential tenants of the protections afforded by the City Ordinance. Such notice must be provided within thirty (30) days of the effective date of the City Ordinance, and failure to provide this notice may result in monetary penalties.

Notably, the City Council narrowly declined to adopt an amendment to the City Ordinance that would have broadly prohibited all evictions during the pendency of the local emergency. Supporters of the failed amendment expressed concern that, as drafted and approved, the City Ordinance would allow landlords to initiate evictions for a myriad of reasons unrelated to payment of rent, and force tenants to assert as an affirmative defense that the real cause of the eviction was non-payment of rent related to the COVID-19 pandemic. To partially address this perceived loophole, the City Council added the prohibitions noted above on eviction due to the presence of unauthorized occupants, pets, or any nuisance related to COVID-19.

Additionally, the City Ordinance expressly contemplates that the City’s Housing and Community Investment Department (HCID) will promulgate options to help landlords and residential tenants mutually agree upon a repayment plan within ninety (90) days of the first missed rent payment or expiration of the local emergency period. This creates the opportunity for landlords to proactively reach out to tenants to encourage a mutually agreed-upon repayment plan.

Prohibition on Removal of Occupied Residential Units

Owners of residential real property are prohibited from removing any occupied unit from the rental market under the Ellis Act for a period of sixty (60) days following the expiration of the local emergency period.

City of Los Angeles Public Order of March 30, 2020 Freezing Rent Increases for Residential Units Subject to the City’s Rent Stabilization Ordinance

On March 30, 2020, Mayor Garcetti issued a Public Order prohibiting property owners from increasing rents on occupied rental units that are subject to the Los Angeles Rent Stabilization Ordinance (also known as the “RSO”) beginning on the date of the Public Order, and extending through sixty (60) days after the expiration of the local emergency period. Because the expiration of the local emergency period may be extended from time to time, the precise duration of the March 30, 2020 Public Order is not yet known.

Los Angeles’ RSO applies to residential rental units first constructed prior to October 1, 1978, as well as certain “replacement” housing units, as specified in the RSO. City records provide that approximately 624,000 apartments fall under the RSO. Normally, the RSO allows owners of affected apartment buildings to increase rents by 3% or 4% every year. Single-family rentals and most newer apartments, neither of which are subject to rent control, will remain unaffected by the March 30, 2020 Public Order.

Authors: Amy R. Forbes, Douglas M. Champion, Benjamin Saltsman and Matthew Saria

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Industries worldwide are confronting unprecedented challenges and uncertainties sparked by the novel coronavirus (COVID-19) public health crisis, which has shuttered businesses, disrupted travel, supply chains, and the financial markets, and threatened global economic stability. In response to the pandemic, the United States government has responded with a $2.2 trillion economic stimulus package—the largest in history. This massive new program comes on the heels of other local, state, and federal emergency measures, including significant spending on critical supplies and the federal government’s invocation (albeit on a limited basis) of a wartime statute to direct U.S. industry to manufacture needed medical supplies and equipment.

In the midst of this crisis, companies that do business with the government, including entities in the health care industry and a range of government contractors, have prioritized the public and raced to meet government needs. The fast-paced corporate decisions and actions that this effort has required may not be scrutinized in detail today, in the heat of the moment. But if history is any indicator, today’s responses to the COVID-19 crisis will be scrutinized in the years to come, and could lead to future legal action under the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq. In the aftermath of past crises, the U.S. Department of Justice (“DOJ”) and qui tam relators have vigorously pursued FCA claims targeting entities that benefited from government spending—efforts contributing heftily to the nearly $40 billion that the federal government has recovered under the FCA in the last decade alone.

There is no reason to believe that the COVID-19 crisis will be any different. DOJ already announced it will “prioritize the investigation and prosecution of Coronavirus-related fraud schemes” and established a national hotline for whistleblowers to report suspected fraud. Accordingly, any company receiving government funds would do well to take steps today to protect against the risk of potential future FCA liability. Below, we summarize these developments, identify potential areas of likely COVID-19-related FCA enforcement, and offer tips for managing risks and other mitigation efforts.

I. Background

The FCA has served as the principal tool for combatting fraud in government programs for more than 150 years. FCA enforcement has been particularly robust when emergency government spending ramps up, giving opportunists the chance to exploit the public fisc, even when lives are at stake. The FCA itself is the product of such a national crisis: Congress enacted the statute during the Civil War in 1863 in response to unscrupulous suppliers defrauding the Union Army,[1] providing defective goods such as “spavined beasts and dying donkeys” in place of healthy horses, sand instead of sugar, and “experimental failures of sanguine inventors” instead of working firearms.[2]

Flurries of FCA activity also have followed more recent crises, particularly those that involve significant emergency government spending. This includes, for example, the wars in Iraq and Afghanistan, natural disasters such as Hurricane Katrina, the 2008 financial crisis and Troubled Asset Relief Program (“TARP”), and the ongoing national opioid epidemic. In addition to DOJ’s enforcement activities, private plaintiffs’ attorneys representing qui tam relators have, in the wake of past crises, enthusiastically pursued FCA actions against all types of government contractors and industries receiving government funds.

In connection with the 2008 financial crisis, for example, a DOJ task force charged with rooting out fraud in federally insured mortgage and lending programs was the vanguard of aggressive FCA enforcement. The task force’s efforts, focused primarily on lenders participating in government programs and other institutions receiving government funds, led to record-setting annual FCA recoveries upwards of $6 billion in the years that followed, and their effects still linger more than a decade later. And even just the most recent of these crises proves the point. In the last few years, DOJ has boldly pursued FCA claims against manufacturers, prescribers, health systems, and others involved in the opioid distribution chain, recovering more than $1.5 billion last year alone.

The COVID-19 crisis has prompted federal action that may well dwarf expenditures on prior crises. Just days ago, for example, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law. The CARES Act, the largest emergency stimulus package in history, will devote $2.2 trillion worth of government funds to mitigate the effects of COVID-19.[3] As we reported in detail earlier this week, several key provisions in the Act provide relief for businesses, industries, individuals, employers, and states, including as follows:

Establishment of a Small Business Administration (“SBA”) loan program offering up to $350 billion in loans forgivable under certain conditions, with relaxed eligibility requirements relative to existing law;
Provisions for direct rebates and other tax relief for individuals and employers;
Provisions for hundreds of billions of dollars in funding and other resources for the health care industry, education sector, defense contractors, and lending institutions; and
Establishment of a $500 billion economic stabilization program to provide loans and loan guarantees for eligible businesses, states, and municipalities.

In addition to passage of the CARES Act, the government’s efforts have included the following steps, on which we reported last week:[4]

Enacting legislation appropriating more than $8 billion dollars in government spending for supplies, vaccines, tests, isolation and quarantine costs, sanitization of public areas and more;
Declaring a state of emergency authorizing the release of up to $50 billion in spending in government efforts to combat the virus;
Invoking the wartime-era Defense Production Act to direct U.S. industries to manufacture critical medical supplies, including respirator masks and ventilators; and
Announcing intended partnerships with the private sector to expand COVID-19 testing.

These steps, and others that are sure to follow as the crisis develops, will set the stage for potential COVID-19-related FCA enforcement activity in years to come.

II. DOJ Prioritizes COVID-19 Fraud Cases and Whistleblower Attorneys Gear Up

DOJ has already confirmed that it will focus resources on COVID-19-related fraud. In a March 16 memorandum to all U.S. Attorneys and a March 20 press release, Attorney General William Barr announced that DOJ will prioritize the investigation and prosecution of coronavirus-related fraud schemes.[5] In addition, Attorney General Barr directed U.S. Attorneys to appoint a “Coronavirus Fraud Coordinator” in each district—responsible for coordinating enforcement and conducting public outreach and awareness—and also established a national system for whistleblowers to report suspected fraud.[6] DOJ further affirmed in a March 17 public statement that it is “committed to pursuing” violations of the FCA “especially during this critical time as our nation responds to the outbreak of COVID-19.”[7] Although still in their infancy, DOJ’s efforts harken to similar government actions in past times of crisis.

DOJ’s efforts will be complemented by the CARES Act’s creation of a new oversight committee called the Pandemic Response Accountability Committee (“PRAC”) to promote transparency and oversight of CARES Act appropriated funds.[8] The Act’s emergency appropriations included $80 million for the PRAC, which will be comprised of various agency Inspectors General to “(1) prevent and detect fraud, waste, abuse, and mismanagement; and (2) mitigate major risks that cut across program and agency boundaries.”[9]

In addition to potentially drawing scrutiny from DOJ and agency Inspectors General, companies contracting with or receiving government funds are likely to see a slew of future qui tam whistleblower complaints in connection with the COVID-19 crisis and economic downturn. The plaintiffs’ bar has already signaled its willingness to begin this effort, including a widely publicized request by a whistleblower attorney and national whistleblower advocacy group for DOJ to form a task force “to monitor and investigate” COVID-19-related FCA cases,[10] and numerous firms issuing calls for would-be relators to come forward and pursue qui tam actions relating to COVID-19.[11]

III. Potential FCA Pitfalls in Responding to the COVID-19 Crisis

Entities in the following industries are most exposed to the risk of future COVID-19-related FCA enforcement actions.

A. Life Sciences and Health Care Industries

Given the nature of the COVID-19 crisis, companies in the life sciences and health care industries—including drug and device manufacturers and suppliers, diagnostic companies, health care providers, and insurers—are perhaps the most likely to have their decisions and conduct scrutinized through the lens of the FCA in the future.

In its recent announcement prioritizing COVID-19-related enforcement actions, DOJ specifically targeted fraud in treatment by providers, such as “obtaining patient information for COVID-19 testing and then using that information to fraudulently bill for other tests and procedures.”[12] This echoed DOJ officials’ comments from February, which focused on the practice of Medicare Advantage insurers indiscriminately billing the government for “every possible patient diagnosis,” including “unsupported diagnosis codes” ineligible for reimbursement. Entities billing federal programs (as well as state programs) for treatment of those affected by COVID-19 should exercise particular care in selecting diagnostic codes when seeking reimbursement.

Other activities that fall within the types of buckets that resulted in FCA actions in the past (whether successful or not)—and could serve as the basis of COVID-19 related FCA actions—could potentially include:

“upcoding” for testing or treatments of different types or amounts than those actually provided;[13]
billing for treatment or testing that is not medically necessary, especially treatment whose safety or efficacy is unsupported and may even cause harm;
billing for treatment, testing, or medical supplies that do not comply with regulatory requirements;
billing for treatment that is grossly and materially substandard; and
making false or misleading statements in connection with marketing drugs or devices.

The bar for pursuing frontline health care providers under the FCA is likely to be higher when it comes to the COVID-19 crisis, given the critical need to provide treatments to patients during this crisis. Notably, the CARES Act provides immunity to many treatment providers for claims under federal or state laws relating to emergency health care services provided with respect to COVID-19.[14] Further, the CARES Act recognizes liability immunity for certain respiratory protective devices that HHS has deemed a priority for use during this public health emergency. Nevertheless, frontline providers may still face situations where the government or qui tam whistleblowers allege after the fact that the emergency care provided was not undertaken in good faith and instead was to profit off of the crisis.

B. Other Industries Receiving COVID-19 Relief Funding

FCA liability is a potential risk even for entities that do not directly conduct business with the government, but nevertheless accept government funding in some manner, including in the form of loans, grants, or other programs.

1. Loan Programs. The CARES Act injects nearly a trillion dollars’ worth of loan and loan guarantee programs into the economy. This aid is partially specific to certain industries, such as the passenger airline and air cargo sectors, but the bulk is more widely available to a range of domestic-based businesses. Further, the Act makes SBA loans available to any business that qualifies as a “small business” under eligibility requirements more inclusive than existing law.[15] Any participant in these programs, or similar government relief programs, will be subject to certain required conditions of participation and/or payment, which can be complex and may create a potential minefield from an FCA perspective.

With respect to the $500 billion CARES Act loan program, some portions of funding are restricted to passenger air carriers ($25 billion), cargo air carriers ($4 billion), and any “businesses critical to maintaining national security” ($17 billion). As to the eligibility requirements for the remainder of the fund,[16] while the CARES Act does specify some requirements—such as that a business be domiciled and have significant operations and a majority of its employees in the United States—the complete terms and conditions for eligibility remain to be determined, as the legislation directs the Secretary of the Treasury to promulgate the full requirements no later than 10 days after enactment, i.e., the first week of April.[17]

Although the CARES Act does provide clearer standards of eligibility for the SBA loan program (i.e., any company with no more than 500 employees may be eligible), the Act also contains numerous exceptions that expand its reach. For example, the CARES Act’s limited waiver of existing SBA affiliation rules—affecting whether or how the head count for certain affiliates are included in calculating the number of employees when determining eligibility for the program—will allow certain businesses in the accommodation and food services industries to still qualify for loans depending on their classification and the number of employees per physical location.[18] But outside the Act’s enumerated exceptions, businesses must still abide by the requirement to aggregate their employee headcounts or revenues with those of their affiliates to determine whether they are eligible for the SBA loan program. Although the CARES Act provides an expanded avenue for relief to some businesses seeking financial assistance, companies (including those with private equity ownership) should familiarize themselves with both the SBA affiliation rules and the CARES Act’s limited exceptions before seeking to obtain SBA loans.

2. Grants. The CARES Act includes emergency appropriations providing funding to the CDC, NIH, and other agencies for research, health surveillance programs, and other resources to respond to the COVID-19 crisis, as well as prepare for future public health emergencies.[19] In addition, as relief efforts continue, the government may provide future funding for charitable or research grant programs, or similar types of funding—all of which implicate the FCA.

In recent years, a variety of entities, including private companies, universities, and even municipalities, have faced FCA claims alleging violations in connection with obtaining or performing federal grants, ranging from a failure to comply with regulations and grant conditions, to falsifying grant applications or fabricating study data. In one case, a private university paid more than $100 million to settle qui tam claims that it violated the FCA by submitting applications and progress reports that contained falsified research data.[20] In another case, a national energy company paid nearly $30 million to resolve allegations it received inflated payments by misrepresenting its eligibility for federal grant funds.[21]

And while it might be natural to think that the government would be more forgiving when charitable or good causes are involved, such as this, history counsels otherwise. For example, a children’s hospital paid nearly $13 million to resolve FCA claims alleging that the hospital misreported its available bed count when seeking grant funding from HHS for pediatric resident training.[22] And certain courts have upheld, in FCA cases, the award of treble damages on the entire amount of the research grants at issue, including in cases based on alleged false statements made in grant renewal applications.[23] Companies receiving federal funds in the future, whether charitable relief, or in connection with COVID-19 research grants, should be mindful of these pitfalls.

3. Other Government Programs. As we covered in our report, the CARES Act also impacts rules and requirements relating to numerous government programs and revenue streams, including appropriations for national defense, debt restructuring, lending by financial institutions, and federally-backed mortgages.[24] The Act therefore has implications for a wide range of industries, including defense contracting, the education sector, and banks and other lending institutions, among others, that receive government funding or relief and are all potential targets for FCA relators and their attorneys.

IV. Guidance for Minimizing FCA Risks in Government Procurement and Relief Programs

As the government expands spending to address the COVID-19 crisis, any entity receiving government funding or taking advantage of government-backed or guaranteed loans should consider the practices outlined below to mitigate the risk of future FCA legal action:

Stay informed:
- Ensure that you understand government contracting regulations detailing what you are required to do and when.
  - Know when you are contractually required to notify the government of your right to an equitable adjustment of a contract price, delivery schedule, or both. For example, FAR 52.243-1 requires notification to the Contracting Officer within 30 days.
  - Track and understand the complex requirements imposed by regulations specific to your industry, e.g., Medicare and Medicaid requirements.
- Monitor announcements by the government and agencies appropriately to ensure that you remain informed of waivers, modifications, and other developments in regulatory requirements, or guidance for industry, which may change as the crisis unfolds.
  - CMS and HHS-OIG, for example, have begun providing blanket waivers and made broadly applicable modifications to provider requirements aimed at permitting hospitals to operate with fewer restrictions and maximize the treatment of COVID-19 patients.[25]
- Remember that even unintentional or implied misrepresentations of regulatory compliance can lead to FCA enforcement actions, if material to payment and done with “reckless disregard.”
Adopt best practices for ensuring compliance with government requirements:
- Continue to implement effective risk management and auditing procedures during the COVID-19 crisis to minimize the risk of such liability.
  - Keep in mind that while some risks of FCA liability are readily apparent even in a time of crisis—such as in the case of providing substandard or defective equipment or services to the government—it can be easier to lose sight of other, less obvious pitfalls during an emergency, such as billing the government for goods or services that do not strictly comply with all regulatory requirements. This could include, for example, billing for work performed by unqualified personnel, or for work done by personnel other than those represented to the government as having performed the work.
- Implement effective procedures and controls around any required certifications regarding what the government is paying for.
  - Account for any requirements imposed by statute, regulation, rules, or contract, whether generally applicable, or that apply to your industry and/or the specific goods or services provided—which, for example, could include ADA requirements, the Buy American Act, or the Trade Agreements Act.
  - Document your compliance with any such requirements and/or the bases of any required certifications.
- Avoid unilaterally deciding to forego or not complete any government requirements (e.g., skipping mandated procedures, tests, certifications, and so forth) even if intended to fast track production given the urgency involved, unless there is explicit and clear (and written) government authorization to do so, as outlined further below.
  - Remember that efforts that involve cutting corners might appear entirely reasonable to anyone in the midst of a crisis, but may well appear hasty, ill-advised, or even wasteful when viewed in hindsight months or years later.
  - Claims for payment that involve misrepresentations of compliance with government requirements have resulted in significant FCA liability—even when those claims were made during times of past crises. For example, a telecommunications company that designed and built Iraq’s national 911 emergency communications system during the height of the Iraq War settled FCA claims based on allegations the company had certified completion of certain testing and validation that it had not actually performed.[26] Similarly, a company constructing urgently needed housing for first responders following Hurricane Katrina settled FCA claims alleging that it failed to abide by the specific requirements in its contract.[27]
  - Be aware that FCA liability requires more than a “bare assertion that defendants delivered goods that did not conform to contractual specifications.”[28] And even in cases where the government pays for what it later discovers to be defective, for example, “ineffective vaccines,” courts have dismissed FCA claims for lack of scienter.[29]
- Exercise care when participating in any COVID-19 loan, grant, or other relief program to ensure that any government requirements are met, and that any representations made to the government as part of the funding process are accurate.
- Be aware of the risks posed to those directors and officers responsible (directly or through private equity ownership) for a company availing itself of government funding, such as through the CARES Act’s SBA loan program, particularly those who certify compliance with government requirements. If the individual is found to have caused the submission of a false claim, they may face arguments that their conduct satisfies the falsity element of FCA liability.
  - If the director or officer is found to have proceeded in good faith, however, it would be difficult for a plaintiff to satisfy the scienter element. It is thus important to document the rationale and bases underlying the good faith belief (including, for instance, communications with the government, or others in the industry, or counsel, etc.). Advice of counsel, in particular, can constitute very strong evidence on scienter for the officer or director (but, of course, likely would result in waiver of privilege as to the relevant subject matter). To the extent that you believe that an insurance policy could be applicable, consult your insurance counsel about potential coverage issues.
Document any governmental modification or waiver of requirements:
- Ensure that any such waivers or modifications are authorized by a government official or agency with sufficient authority to act (i.e., by the Contracting Officer, or by an authorized government agency), and are thoroughly and adequately documented in writing.
  - Be aware that in past FCA cases, defendants have faced arguments that government officials who modified requirements lacked the “unilateral authority” to amend requirements, and that therefore defendants should still be subject to liability.[30]
- Seek confirmation regarding changes in government requirements, even if you already believe them to be clear.
  - Keep in mind that the fluid nature of the COVID-19 situation has reportedly created confusion and apparent inconsistencies in guidance from federal agencies.[31]
- Compile in real time written evidence or documentation of the modifications or waivers and their purpose to meet government or public needs.
  - Understand that memories are likely to be treated as less reliable than documentation, and what may seem obvious today may not be in the future when the crisis has abated. Adequately-documented decisions by authorized officials are likely to provide a strong defense on scienter and materiality elements.
  - Evidence of this “government knowledge” will be a key issue with respect to materiality and scienter, as courts have acknowledged that such evidence can “negate both of these elements,”[32] although in some instances, have held that scienter is negated only if the government communicates its knowledge and approval back to the contractor.[33]
  - Do not assume that you are in the clear simply because the government is aware of your actions. Rather, it is critical to document a communication from the government expressing approval, under the line of cases requiring the government’s knowledge and approval be communicated back to the contractor to negate scienter.
- Consider publicly announcing any government approved waivers or modifications to existing requirements, as well as your reliance on such actions.
  - For example, as noted above, CMS and HHS-OIG have waived or modified certain requirements with respect to hospitals to maximize the availability of COVID-19 treatment. Similarly, FDA has modified or waived certain regulatory requirements with respect to respirator masks for use by health care personnel to encourage manufacturers to make additional masks available.[34]
  - Making public your reliance on the government’s actions serves not only to highlight a lack of scienter, but may also bolster future arguments that FCA claims are subject to the statute’s “public disclosure” bar. If the key elements of the alleged fraud are published in the news media, this can support dismissal unless the whistleblower is an “original source” that materially adds to the information in the public domain.
Ensure that you have effective reporting systems in place to discover potential compliance issues and then take them seriously:
- Know that many whistleblowers are current and former employees. With the increased furloughs and layoffs brought on by the COVID-19 crisis, there may be a significant rise in whistleblowing activity. In addition to compliance and reporting systems, you should ensure that you pay close attention to any allegations or issues raised as part of exit interviews.
- Statistics show the overwhelming majority of whistleblowers first report their allegations internally and are willing to wait for the internal investigation process.[35] If you become aware of any claims of misconduct or fraud in connection with requests for or receipt of government funding involving your company, ensure that your response is handled by appropriate compliance or legal personnel and treat allegations seriously, including by conducting a thorough, well-documented investigation.
- By taking these steps, you may be able to satisfactorily resolve the concerns raised internally, and avoid escalation to outside agencies or counsel. Studies have shown that a company’s internal whistleblower report volume is associated with fewer and lower amounts of government fines and material lawsuits.[36]
Steer clear of anti-competitive conduct:
- Be mindful of DOJ’s recently announced focus on enforcement of antitrust laws—violations of which may form the basis of related FCA claims—in connection with COVID-19.
  - As we have reported recently, on March 9, DOJ warned that it will be on “high alert” for collusive practices, including fixing prices or rigging bids for personal health equipment such as face masks, respirators, and diagnostic equipment, especially by companies selling to federal, state, and local agencies.[37]
  - DOJ has in the past brought enforcement actions under the FCA against companies—for instance, generic drug manufacturers—on the grounds that claims for government program reimbursement of drugs allegedly tainted by price-fixing conspiracies were false or fraudulent.[38]

If you have any doubts about the propriety of any action when it comes to government contracts, funding, or government loans, stop and seek guidance of counsel. We are all working through this crisis together, and Gibson Dunn’s lawyers are available to assist with any questions you may have regarding FCA and government contracting developments related to the COVID-19 outbreak.

[1] Office of Pub. Affairs, U.S. Dep’t of Justice, The False Claims Act: A Primer (2011), https://www.justice.gov/sites/default/files/civil/legacy/2011/04/22/C-FRAUDS_FCA_Primer.pdf.

[2] U.S. ex rel. Newsham v. Lockheed Missiles & Space Co., 722 F. Supp. 607, 609 (N.D. Cal. 1989) (citing Tomes, Fortunes of War, 29 Harper’s Monthly Mag. 228 (1864)).

[3] See Gibson, Dunn & Crutcher LLP, Senate Advances the CARES Act, the Largest Stimulus Package in History, to Stabilize the Economic Sector During the Coronavirus Pandemic (Mar. 26, 2020) (“CARES Alert”), https://www.gibsondunn.com/senate-advances-the-cares-act-to-stabilize-economic-sector-during-coronavirus-pandemic/.

[4] See Gibson, Dunn, & Crutcher LLP, Emergency Federal Measures to Combat Coronavirus (Mar. 18, 2020), https://www.gibsondunn.com/emergency-federal-measures-to-combat-coronavirus/.

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

Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (Mar. 20, 2020), https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud.

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

[7] Lydia Wheeler, Bloomberg News, Coronavirus False Claims Task Force Urged at Justice Department (Mar. 17, 2020), https://news.bloomberglaw.com/health-law-and-business/coronavirus-false-claims-task-force-urged-at-justice-department.

[8] Gibson, Dunn & Crutcher LLP, CARES Alert, Section IV.

[9] Id.

[10] Lydia Wheeler, Bloomberg News, Coronavirus False Claims Task Force Urged at Justice Department (Mar. 17, 2020), https://news.bloomberglaw.com/health-law-and-business/coronavirus-false-claims-task-force-urged-at-justice-department.

[11] See, e.g., https://www.kkc.com/news/what-laws-protect-coronavirus-whistleblowers-whistleblower-attorneys-publish-faqs-for-coronavirus-whistleblowers-and-qui-tam-relators/, https://www.fcacounsel.com/false-claims-act-whistleblower-blog, https://www.beasleyallen.com/news/whistleblower-advocate-urges-formation-of-coronavirus-task-force/, https://www.whistleblowerllc.com/coronavirus_fraud/.

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

[13] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Healthcare Service Provider to Pay $60 Million to Settle Medicare and Medicaid False Claims Act Allegations (Feb. 6, 2017), https://www.justice.gov/opa/pr/healthcare-service-provider-pay-60-million-settle-medicare-and-medicaid-false-claims-act.

[14] Gibson, Dunn & Crutcher LLP, CARES Alert, Section III.

[15] Id., Section I and IV.

[16] Id., Section IV.

[17] Id.

[18] Id., Section I and IV.

[19] Id.

[20] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Duke University Agrees to Pay U.S. $112.5 Million to Settle False Claims Act Allegations Related to Scientific Research Misconduct (Mar. 25, 2019), https://www.justice.gov/opa/pr/duke-university-agrees-pay-us-1125-million-settle-false-claims-act-allegations-related.

[21] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, SolarCity Agrees to Resolve Alleged False Claims Act Violations Arising From Renewable Energy Grant Claims to Treasury (Sep., 22, 2017), https://www.justice.gov/opa/pr/solarcity-agrees-resolve-alleged-false-claims-act-violations-arising-renewable-energy-grant.

[22] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Children’s Hospital to Pay $12.9 Million to Settle False Claims Act Allegations (Jun. 15, 2015), https://www.justice.gov/opa/pr/childrens-hospital-pay-129-million-settle-false-claims-act-allegations.

[23] See U.S. ex rel. Feldman v. van Gorp, 697 F.3d 78, 81 (2d Cir. 2012).

[24] See Gibson, Dunn & Crutcher LLP, CARES Alert, Section IV.

[25] See Rich Daly, Health Care Legal, Hospitals seek legal cover amid their coronavirus responses (Mar. 24, 2020), https://www.hfma.org/topics/news/2020/03/hospitals-seek-legal-cover-amid-their-coronavirus-responses.html.

[26] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Alcatel-lucent Subsidiary Agrees to Pay U.S. $4.2 Million to Settle False Claims Act Allegations (Sep. 21, 2012), https://www.justice.gov/opa/pr/alcatel-lucent-subsidiary-agrees-pay-us-42-million-settle-false-claims-act-allegations.

[27] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Hurricane Katrina Contractor Accepts $4 Million Judgment Under the False Claims Act (Apr. 24, 2009), https://www.justice.gov/opa/pr/hurricane-katrina-contractor-accepts-4-million-judgment-under-false-claims-act.

[28] U.S. ex rel. Hutchins v. DynCorp Int’l, Inc., 342 F. Supp. 3d 32, 52 (D.D.C. 2018).

[29] Id. at 52.

[30] Id. at 55.

[31] Dorothy Atkins, Law360, Top DOJ Atty Spotlights Main FCA Target Areas For 2020 (Mar. 24, 2020), https://www.law360.com/articles/1255991/coronavirus-fallout-leaves-gov-t-contractors-scrambling.

[32] See U.S. ex rel. Hunt v. Cochise Consultancy, Inc., 887 F.3d 1081, 1092 n.10 (11th Cir. 2018); see also Kelly v. Serco, Inc., 846 F.3d 325, 334 (9th Cir. 2017) (finding that relator “failed to establish a genuine issue of material fact regarding materiality” on FCA claim where the government continued to make payment after learning of alleged noncompliance).

[33] See U.S. ex rel. Becker v. Westinghouse Savannah River Co., 305 F.3d 284, 289 (4th Cir. 2002).

[34] See U.S. Food and Drug Admin., Coronavirus (COVID-19) Update: FDA and CDC take action to increase access to respirators, including N95s, for health care personnel (Mar. 2, 2020), https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-and-cdc-take-action-increase-access-respirators-including-n95s.

[35] See Dana Gold, et. al., Government Accountability Project, Why Whistleblowers Wait, https://www.whistleblower.org/wp-content/uploads/2018/12/GAP_Report_Why_Whistleblowers_Wait.pdf.

[36] Stephen Stubben, et. al., University of Utah, Evidence on the Use and Efficacy of Internal Whistleblowing Systems (Mar. 3, 2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3273589.

[37] Gibson, Dunn & Crutcher LLP, Antitrust Implications of COVID-19 Response (Mar. 12, 2020), https://www.gibsondunn.com/coronavirus-antitrust-implications-of-covid-19-response/.

[38] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Admits to Price Fixing in Violation of Antitrust Law, Resolves Related False Claims Act Violations (May 31, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-admits-price-fixing-violation-antitrust-law-resolves-related-false; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Second Pharmaceutical Company Admits to Price Fixing, Resolves Related False Claims Act Violations (Dec. 3, 2019), https://www.justice.gov/opa/pr/second-pharmaceutical-company-admits-price-fixing-resolves-related-false-claims-act.

Gibson Dunn attorneys regularly counsel clients on issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please also feel free to contact the Gibson Dunn attorney with whom you usually work, any member of the False Claims Act Group, or the authors:

Authors: John D.W. Partridge, Jonathan M. Phillips, James L. Zelenay Jr. and Sean S. Twomey

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

This application of the CARES Act to real estate specific issues was prepared as of March 30, 2020.

This analysis is designed to educate real estate stakeholders in order to maximize their ability, and that of their tenants, to access available stimulus funds, in particular, to identify and explain the provisions of the SBA Paycheck Protection Program and Title IV Funding; enable real estate stakeholders to determine their own eligibility for relief under the Act and that of their tenants; and to highlight issues requiring further clarity in the real-estate applied space, which the industry can and should consider in formulating any collective response/comment to implementing regulations.

The authors note that the Act addresses several additional topics relevant to real estate clients, including, among them, compensation and benefit, labor and employment and tax matters, which are not included in this analysis. The author refers the reader to the CARES Act Client Alert available at www.gibsondunn.com/category/publications for such broader analysis, and to the list of Gibson Dunn practice group leaders contained therein, who may be contacted at any time with questions.

What eviction and/or foreclosure relief for borrowers and tenants are included in the Act?

Forbearance, Not Foreclosure Moratorium, for Multi Family Borrowers of Federally Backed Mortgage Loans. Section 4023 of the CARES Act provides that, during the “covered period” a “multi-family borrower” with a “federally backed multifamily mortgage loan” that was current on its payments as of February 1, 2020, may submit an oral or written request for forbearance under Section 4023(a) to the borrower’s servicer affirming that the multifamily borrower is experiencing a financial hardship during the COVID-19 emergency. For this purpose, the Act defines (1) the “covered period” as the period beginning on the date of enactment and ending upon the sooner of (A) the termination date of the national emergency concerning COVID-19 declared by President Trump under the National Emergencies Act or (B) December 31, 2020, (2) “multi-family borrower” as a borrower of a residential mortgage loan that is secured by a lien against a property comprising 5 or more dwelling units (this would include traditional multifamily, student housing and senior housing), and (3) a “federally backed mortgage loan” as any loan, other than temporary financing (such as a construction loan) that is secured by a first or subordinate lien on a multi-family property and is made, in whole or in part, or insured, guaranteed, supplemented or assisted in any way by any officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by any other such officer or agency, or is purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

Upon receipt of an oral or written request from a multi-family borrower, a servicer shall (A) document the financial hardship and (B) provide the forbearance for up to 30 days; and (C) extend the forbearance for up to 2 additional 30 day periods upon the request of borrower, provided that the borrower’s request for an extension is made during the covered period and, at least 15 days prior to the end of the initial forbearance period.

Eviction Restriction on Multi-Family Landlords/Borrowers of Federally Backed Mortgage Loans. Section 4024 imposes a temporary moratorium on eviction filings for a 120 day period beginning on the date of the enactment of the Act. 4024(b) provides, in pertinent part, that “the lessor of a covered dwelling may not: (1) make or cause to be made, any filing with the court of jurisdiction to initiate a legal action to recover possession of the covered dwelling from the tenant for nonpayment of rent or other fees or charges; (2) charge any late fees, penalties or other charges to a tenant described at clause (1) for late payment of rent; (3) require a tenant to vacate a dwelling unit located in or on the applicable property before the date that is 30 days after the date on which the borrower provides the tenant with a notice to vacate; and (4) may not issue a notice to vacate until after the expiration of the forbearance (Section 4023(d) and (e)). In addition, Section 4023 prohibits any multi-family landlord/borrower who is receiving mortgage forbearance relief from taking any of the foregoing actions for the duration of the forbearance.

As compared to borrowers owning residential real property designed principally for the occupancy of 1-4 families (who are the beneficiaries of greater relief), the Act does not impose a blanket moratorium on foreclosures by lenders upon multi-family or other commercial borrowers, or impose any restrictions on the eviction by commercial landlords of commercial tenants; these measures are generally being implemented on state and local levels. As of the date of this writing, the authors note various statewide and/or local initiatives to this effect which may apply outside of the Act to any particular property and to a broader range of financing and leasing transactions (i.e., not just federally backed). This includes, among others in California, Governor Newsom’s (i) most recent executive order (E.O. 37-20) suspending statewide evictions of residential tenants until May 31, and (ii) request that any financial institution holding residential or commercial mortgages, equity loans, lines of credit or business loans, implement a process to work with the mortgagors or loan holders to avoid foreclosure or default arising out of financial hardship caused by the COVID-19 pandemic, or by any local, state or federal government response to COVID.[1]

What is the SBA Paycheck Protection Program? Who is Eligible?

The SBA Paycheck Protection Program (the “PPP”) is a $349 billion loan guarantee program to help small businesses keep employees on the payroll and cover necessities such as rent and utilities, and is found in Title I of the Act. If certain conditions are met, the loans are forgivable. Prior to the Act’s passage, in order to qualify as an eligible recipient for a loan from the Small Business Administration (the “SBA”), the size of a “business concern” was determined by both employee count – no more than 500 employees – and revenue – no more than $35 million.

Due to the COVID-19 pandemic, the Act removes the revenue restriction, and provides that any business concern is eligible to receive an SBA loan if the business concern employs not more than the greater of (I) 500 employees or (II) if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern operates. The size standard established by the SBA can be found here.[2] It appears that this alternative was designed to give particular sectors of the economy (transportation, supply chain security, etc.) the benefit of a higher employee count, but for most F&B, general retail and lodging uses, there appears to be either no size standard in number of employees, (i.e., only size standards in millions of dollars, which is no longer relevant where the revenue restriction has been removed under the Act) or size standards in number of employees that are less than 500. As a result, for most real estate owners/tenants, 500 will be the relevant number for this purpose.

The Act does not change the SBA definition of “business concern,” which is defined broadly to include any business entity organized for profit, with a place of business located in the U.S., which operates primarily in the U.S. or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor. Thus, most real estate asset classes, and most real estate owners, landlords, tenants and borrowers based or operating primarily in the U.S. will constitute “business concerns” for purposes of this prong of SBA loan eligibility. The authors note that the spotlight focused on hotel owners and landlords to tenants who operate in the lodging and F&B sectors is a function of certain affiliate restriction waivers that apply, in particular, to these industries, making such assets the most likely beneficiaries of funding under the SBA PPA. Owners and lessees of other real estate asset classes, such as traditional multifamily, general retail and office properties are not categorically barred from accessing these funds, however meeting the employee test for eligibility may be more difficult, as more particularly described below.

Note that under existing federal regulations, a business concern specifically states that “where the form is a joint venture, there can be no more than 49% participation by foreign business entities in the joint venture” (13 CFR 121.105). Entities utilizing foreign capital and looking to take advantage of an SBA loan should carefully review structure with counsel to determine at what level of the org chart the “joint venture” sits, and whether “participation” has been triggered (guidance around how “participation” might compare to a traditional “control” definition remains to be seen).

How is the Employee Count Determined? What is the relevance of the “affiliate waiver”?

Prior to the passage of the Act, the SBA would ordinarily count the employees of a business concern’s affiliates when determining whether the business concern qualifies as a small business. This would typically include affiliates or other parties with the ability to directly or indirectly control. Thus, prior to the Act’s passage, a hotel owned by a single member LLC and employing 400 employees, may not have qualified by employee size standard if ultimate beneficial ownership rolled up to a private equity fund that owned a portfolio of hotels through similar SPE structures – i.e., each SPE hotel owner/potential SBA loan recipient would have to aggregate both the subject hotel’s employees with the employees of all other hotels owned by the parent. Similarly, an owner of an retail strip mall or office building using the same structure would be aggregated with its affiliates for purposes of the employee count. (The SBA, prior to the Act, would have treated each of these assets and their respective owners in the same way; the practical difference is that the hotel owner would have been much less likely to qualify on an aggregated basis under the prior rules given the number of employees any given hotel employs relative to a retail mall or office building.)

The Act removes the affiliate aggregation for purposes of determining employee count in certain circumstances. It is worthwhile to pause here to ask two basic questions – (1) who is the employer and (2) how is affiliate defined?

With respect to (1), for tenants applying for an SBA loan, the answer is fairly straightforward – most commercial tenants will be operating businesses of some kind – restaurants and other food and beverage tenants, retailers, professional services companies, etc. – employing their employees directly in one form or fashion.

For real estate owners looking to apply for SBA loans, the answer may be more complicated. In most real estate transactions, for liability and other reasons, the single purpose borrower/owner is decidedly not the employer, and is frequently prohibited from acting in such a capacity. An office building owner, owner of a retail strip mall or shopping center, residential or student housing complex, would typically engage a property management company, which property management company, in turn, constitutes the employer for all legal, and all other intents and purposes. The property manager receives a fee and, perhaps, some additional compensation for overhead, but for all purposes, all payroll, benefits, etc. associated with employment stays with the property manager and is not directly passed through to the real estate owner. Does this mean that particular real estate owner actually has zero employees? Does that analysis change depending on whether the asset is more operationally based, such as a hotel or a senior housing asset, where management agreements typically transfer all payroll, benefits and other employment costs to the owner, stopping short only of calling the owner the “employer” for labor and employment liability more broadly? Assigning a hotel SPE owner an employee count of zero (on account of the way real estate deals are typically structured for employment liability purposes) would seem to destroy the average hotel owner’s eligibility under the program with no employees to support, where the purpose of the Act is to specifically enable the hospitality industry to keep employees on the payroll. However, the answers to these questions are not yet clear. This is not surprising given the types of businesses that were typically receiving SBA loans prior to the passage of the Act.

The Act defines employees as “employees that are employed on a full time, part-time, or other basis”. It is not yet clear whether this is intended to cover independent contractors, such as the employees of, say, a parking or other vendor, or subs or employees under a general contractor, each of whom the property contracts with as an independent contractor. The language includes a reference to “other basis” but independent contractors are not typically described as employees. It is also unclear, if hotel owners are being charged with the employees of their hotel managers, whether this includes the entirety of that hotel management company’s employees, or only those dedicated to, or proportionally allocated to the specific business concern. It would seem logical that the former would apply if the hotel manager is the SBA loan recipient, and the latter if the hotel owner is the SBA loan recipient, directly or indirectly, but this will need to be fleshed out in further guidance.

With respect to (2), the Act does not define “affiliates.” We anticipate that the implementing regulations will address this question specifically, but it is not clear whether the regulations will defer to existing law and SBA’s present application of this definition, or whether the implementing regulations will apply a different, broader or narrower definition.

For the balance of this analysis, then, the authors assume that real estate owners will be charged for purposes of employee count with the employees who are employed directly or indirectly by the subject property, irrespective of legal designation as the “employer” and that, as a result, the relaxation of the affiliate waiver will be most relevant to hotel assets, casino assets, skilled nursing/memory care (as opposed to independent living senior housing) and other real estate assets with heavy labor/operations components. The authors further assume that affiliates will be defined by a generic common control standard, where narrowing the definition of affiliate would only serve to limit the relief Congress seems intent upon directing to particular industries through Title I, namely, hospitality and food and beverage. Gibson Dunn is continuing to monitor developments in this area and will update this memo accordingly.

The Act provides that the affiliate aggregation rule is waived with respect to eligibility for an SBA loan for: (1) any business concern with not more than 500 employees that is assigned a NAICS Code beginning with 72; (2) any business concern operating as a franchise that is assigned a franchise identifier code by the SBA or (3) any business concern that receives financial assistance from a company licensed under Section 301 of the Small Business Investment Act of 1958.

The NAICS Code 72 industries are as follows: Hotels and Motels; Casino Hotels; Bed-and-Breakfast Inns; All Other Traveler Accommodation; RV Parks and Campgrounds; Recreational and Vacation Camps; Rooming and Boarding Houses, Dormitories, and Workers’ Camps; Food Service Contractors; Caterers; Mobile Food Services; Drinking Places (Alcoholic Beverages); Full-Service Restaurants; Limited-Service Restaurants; Cafeterias, Grill Buffets, and Buffets; Snack and Non-Alcoholic Beverage Bars.

In addition to owners of hospitality/lodging and restaurant/F&B assets, it seems this might cover student housing and/or possibly, senior housing assets. For shopping mall/retail owner/landlords, this would cover many of tenants operating in these sectors as well, but purely retail tenants, or landlords of purely retail or residential properties would not appear be covered. Query as to whether temporary housing, such as WeLive and similar flex/temporary living space arrangements would qualify under rooming and boarding houses. It also appears that the 72-code industries stop short of industries supporting food and beverage, such as warehousing, logistics, cold storage facilities, etc.

The business concerns with franchise identifier codes appear to relate to specific businesses that have already applied and received franchises through the SBA, as opposed to what might otherwise be commonly understood. The franchise identified code table as of March 2020 can be found here[3]. This list includes some household names (Applebee’s, Baskin Robbins), a range of hotel/motel chains that operate on a franchise basis (e.g. AC hotels by Marriott) and various other business (primarily, although not exclusively F&B or lodging). This would not appear to categorically include e.g., national retailers or so-called “chains” unless specifically listed. The authors note there does not appear to be any particular strategic value in getting licensed as a franchise for the purpose of qualifying, where the licensing agency is the same agency that will be inundated with SBA loan applications and is unlikely to act quicker on franchise applications; however, this could theoretically be a potential strategy to be analyzed on a case by case basis.

This analysis, for the time being, assumes that clause (3) will not apply to most commercial real estate owners, who are not receiving venture capital from investment firms formed exclusively for the purpose of supporting “small business” and licensed specifically as such, as the meaning was given to such term prior to the Act’s relaxation of SBA eligibility requirements (i.e., both the employee and the revenue restriction). However, this may apply to certain tenants, and landlords could consider informing tenants of this exception, who may be at risk for exceeding the 500 maximum employee count due to aggregation with affiliates.

What does it mean if my property, or my tenant’s business, does not have an NAICS code beginning with 72 or does not qualify as a franchise? To be sure, this does not mean the owner or the tenant does not qualify for SBA loan eligibility. It simply means that for purposes of determining whether the 500 or less employee test is met, that particular owner or tenant will not be exempted from the affiliate rule, and employees will be aggregated across that owner or tenant’s affiliates. This seems consistent with Congress’ desire to push maximum relief towards the hotel and food/beverage sectors as the most distressed (and which are not independently receiving relief under Title IV, such as airlines and transport).

How much is the PPP Loan Amount and how can such loan proceeds be used?

Each eligible recipient can receive one covered loan. Generally, the maximum loan amount is the lesser of (1) 2.5x the average total monthly payments by the applicant for payroll costs incurred during the one year period before the date the loan is made[4] and (2) $10 million.

In the case of a portfolio hotel company owning 20 hotels, if each individual LLC is an eligible recipient, meeting the employee threshold either because it has no employees or because it is free from any aggregation with affiliates, this could mean that a single parent company has access to potentially $200M in SBA loan funds. Nor, would it appear, that a mezzanine borrower and a mortgage borrower, or an opco/propco or operating lease structure frequently seen in hotel transactions, on the same hotel are prohibited from obtaining the maximum amount of SBA loans available, where each is, legally, an independent business concern, owning and operating legally distinct assets. It stands to reason that neither outcome represents congressional intent, however the text of the Act on its face would not appear to prohibit this.

The Act provides that proceeds of such loans may be used for: payroll costs; continuation of group healthcare benefits during periods of paid sick, medical or family leave or insurance premiums, salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities and interest on other outstanding debt.

This language appears intentionally broad, and would cover employee costs such as payroll even if paid indirectly through the manager, traditional rent and ground lease rent (where many hotels, including Hawaii, are held as ground leasehold interests), and interest on traditional mortgage, as well as mezzanine and “other” debt (the Act does not specify that the interest must be paid on any particular basis, i.e. current vs. deferred). Notably, the text of the Act does not state whether these expenses are paid directly or indirectly. This may impact the structure of the SBA Loan, and in particular, where in the capital stack is most appropriate for injection of these funds, as more particularly described below.

Is the SBA Loan secured and Under What Circumstances can the SBA Loan be Forgiven?

No collateral or personal guarantee is required for an SBA loan.

The Act allows for covered loan forgiveness under certain conditions. The loan forgiveness amount, which is excluded from taxable income, is equal to the payroll costs, mortgage interest payments, rent, and utility payments incurred or paid by a recipient during the period from February 15, 2020 to June 30, 2020 (the “covered period”).

The loan forgiveness amount is reduced if the recipient: (1) reduces the average number of full-time equivalent employees per month during the covered period below the lesser of (a) the average number of full-time equivalent employees per month from February 15, 2019 to June 20, 2019 or (b) the average number of full-time equivalent employees per month from January 1, 2020 to February 29, 2020, or (2) reduces the salary or wages of any employee in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period. Many hotel assets have furloughed significant portions of their workforce on account of social distancing measures, travel restrictions and other impacts of the COVID-19 crisis. This will impact the portion of the loan forgiveness for which any given SBA loan recipient is eligible. Furthermore, it is not yet clear whether the numbers of employees is tested at the time loan forgiveness is applied for, or tested as of June 30, 2020, by which time the industry hopes to have independently recovered enough to return to normal workforce levels. The authors note that this requirement speaks to eligibility for loan forgiveness as distinct from eligibility for loan funds.

If an SBA loan has a remaining balance after the forgiveness described above, it will have a maximum maturity of 10 years and an interest rate not exceeding 4 percent. Lenders must defer payments under the loan for at least six (6) months and up to one (1) year.

If my business, or my tenant’s business, does not qualify for an SBA loan through the PPP, is other relief available through Title IV?

If a potential applicant employs more than 500 employees and therefore, cannot access relief under Title I, (e.g., either because the operation itself is sufficiently large, or because it does not qualify for an exemption from the affiliate aggregation requirements, perhaps a retail asset not included in the 72-code sectors), there may be relief available pursuant to Title IV. As it stands, the act establishes $500 billion for federal loans for sectors particularly distressed by COVID-19. $46 billion has been specifically appropriated to passenger air carriers, cargo air carriers and the like. The remaining $454 billion is generally reserved to support the Federal Reserve’s lending facilities to “eligible” businesses, states and municipalities. The Act does not define this term, and intentionally leaves this broad, leaving further definition to the Secretary of the Treasury in furtherance of directing these economic stabilization funds (“ESF”) to particularly distressed sectors of the economy. Therefore, specific requirements for eligibility for receipt of funds under Title IV will remain uncertain until such date.

Still, the Act does enumerate certain requirements for borrowers of ESF funds. Among them, these borrowers have to be based in the U.S. with employees primarily in the U.S., credit is not “otherwise reasonably available” (which may or may not be a disqualifying event for many entities that are ineligible for Title I funds due to the size and scale of their operations to begin with). In addition, such businesses may not be receiving relief elsewhere under the Act. In other words, a business concern cannot obtain relief under the SBA PPP and Title IV. What constitutes a business concern for this purpose remains to be seen in further guidance. If a hotel portfolio companies owns one hotel that employs 250 employees and another that employs 800, will they be treated independently in the same way that they are for purposes of aggregating employees, such that the larger hotel can benefit from Title IV and the smaller hotel can benefit from Title I? Or will they be aggregated for purposes of determining whether they are double dipping for purposes of relief under the Act? Are multifamily assets backed by Fannie/Freddie mortgage loans obtaining forbearance relief under Sections 4022-4024 of the Act prevented from accessing ESF?

Further, Title IV imposes significant restrictions, obligations and regulatory oversight of businesses that borrow these funds. These include restrictions, among others, on reducing employment levels, increasing compensation of highly compensated employees, and stock buy backs, and impose a variety of additional reporting obligations to facilitate greater oversight by Treasury of ESF funds, as compared to SBA PPP funds.

The authors note a third pool of economic disaster relief funds under the Act, if business concerns are able to demonstrate substantial economic injury on account of COVID-19. Such loans may not exceed $2,000,000, but come with the pleasant bonus of a $10,000 check within three days upon mere application for same. These funds may supplement either of Title IV or Title I (but not both, where relief under both is prohibited), however, the loan amount under the larger sections will be reduced dollar for dollar by such additional disaster relief. Pending further guidance around qualifications, this could constitute supplemental assistance to many real estate stakeholders struggling with eligibility for, or collecting upon, business interruption insurance for the gap period prior to accessing Title I or Title IV funds.

What potential tax relief exists under the Act?

Advance Tax and Employee Retention Credits for Employers. Facing difficult decisions about closures, employers should be aware that, under Section 2301, they may be eligible for a refundable payroll tax credit for 50 percent of “qualified wages” paid by employers to employees during the COVID-19 crisis. This credit is available to employers whose (1) operations were fully or partially suspended because of a COVID-19-related shut-down order, or (2) gross receipts have declined by more than 50 percent when compared to the same quarter in 2019, until the business recovers to 80 percent of gross receipts relative to the same quarter. Like the tax credits created in Families First Coronavirus Response Act, signed into law on March 18, 2020, excess credits are refundable. The calculation of “qualified wages” depends on the number of employees (determined by taking the average number of employees in 2019), and is subject to an aggregate $10,000 cap per employee for all calendar quarters, including health benefits, paid to an eligible employee. Under the prior Families First Coronavirus Response Act, certain employers are entitled to tax credits for Paid Sick and Paid Family and Medical Leave. Section 2301 will amend these provisions to allow the refundable portion of these credits to be advanced, subject to regulation and guidance. Certain employer payroll taxes for the period of the date of enactment until the end of the year would be deferred by the CARES Act. 50% of those taxes could be deferred until December 31, 2020 and the remaining 50% could be deferred until December 30, 2022. Owners of hotels should seek employment counsel to the extent they are seeking to benefit from such credits, including implications of an employer characterization in other contexts.

Modifications for Net Operating Losses The Act temporarily suspends a number of the business loss limitations established by the tax reform law commonly known as the Tax Cuts and Jobs Act (“TCJA”). Under current law, net operating losses (“NOLs”) are subject to limitations based on taxable income and cannot be carried back to prior tax years. The Act would modify current law to allow a taxpayer to carry back NOLs from tax years beginning in 2018, 2019, or 2020 up to five years. The NOLs cannot be carried back to offset the untaxed foreign earnings transition tax added to the Code in 2017; however, taxpayers can elect to exclude any tax years in which the foreign earnings are included into gross income from the calculation of the five-year carryback period. In addition, for taxable years beginning before January 1, 2021, the CARES Act removes a limitation on NOLs that prevents taxpayers from offsetting in excess of 80 percent of taxable income with NOLs. Notably Real estate investment trusts (“REITs”) will not be able to carry back losses, and losses may not be carried back to any REIT year (regardless of whether the taxpayer incurring the loss is currently a REIT).

Refundable AMT Credit Modification. The corporate alternative minimum tax (“AMT”) was repealed by the TCJA. However, corporate AMT credits were made available as refundable credits over several years, ending in 2021. Section 2305 of the Act accelerates the ability of companies to recover those AMT credits, permitting companies to claim a refund now and obtain additional cash flow during the COVID-19 emergency.

Are there other specific forms of relief for particular types of real estate businesses and/or tenants?

Under Title II of the Act, a federal excise holiday would apply to alcohol and distilled spirits in the production of hand sanitizer. This could be meaningful for owners and tenants of restaurants, bar space and other food and beverage operations.

Title III of the Act provides an extensive program to support the health care system in its immediate response to COVID-19. This will be particularly relevant for any hospital tenants, medical office or other tenants in the health care space.

The Act provides key emergency appropriations of interest to government contractors as well as businesses that supply, or may begin supplying, products and services that support the national defense in response to the COVID-19 pandemic. In particular, the Act provides $1 billion for purchases under the Defense Production Act. This may be relevant for any number of industries including industrial logistics, warehousing, cold food storage and similar assets involved in maintaining supply chain security. This may also involve contractual arrangements with government agencies for purposes of converting unoccupied hotels, universities, student dormitories, conference centers, or even large swaths of vacant land, for purposes of setting up triage tents and spillover hospital space in hotspots where cases have overwhelmed current resources.

Who are the lenders making SBA and Title IV Loans?

The SBA’s website has a list of designated qualifying lenders, but it is outdated. It is also expected that, compared to its historical role, the SBA will need to quickly build a significant network of lenders, and with capacity for a much greater volume of loans, to administer this program effectively than the banking institutions that historically implemented the SBA loan program in its form prior to the Act. There does not appear to be any particularly lengthy or rigorous qualification process, and if there were, the SBA is likely to expedite (or waive) where the demand will nearly immediately outpace the agency’s resources. There is no stated date by which the SBA will formally release a form of application and begin to open the program for application. Many banks, whether on the list or not, are already launching their own SBA loan platforms.

The authors have received multiple requests for referrals to expediters or consultants to assist potential recipients as part of this process. The authors are unaware of any specific cottage industry of experts in this area, although it stands to reason this may develop. However, this may be an avoidable expense for would be borrowers, as the process itself is not particularly complicated (and where the basic infrastructure already exists). The issue is less likely to be one of need for advisory services and more about getting to the front of the line, which borrowers may just as easily do themselves by leveraging banking relationships early. As such borrowers are actively encouraged to reach out to their lenders IMMEDIATELY to begin this process.

When will additional guidance/regulation pertaining to the Act be released.

The Act directs the Secretary of the Treasury to publish implementing regulations within fifteen (15) days of the Act’s enactment. The government may publish draft regulations and solicit comment from stakeholders in preparing revisions. Alternatively, the government may issue guidance and defer the implementing regulations to a later date, which may or may not involve stakeholder calls for “Q&A”, or other opportunities to present the government with specific hypotheticals for evaluation. The government may also adopt a hybrid of the two, circulating draft regulations for the implementation of particularly critical/time sensitive sections, and issuing guidance as to others, with regulations to follow. What is certain is that the government is under tremendous pressure to act quickly given the circumstances. It is worthwhile to note that, unlike the Act itself, which required bipartisan, bicameral support, the regulations will be promulgated by the Trump Administration. To that end, they may ultimately reflect – and this may be an opportunity for industry to voice – a more commercially favorable tone, closer to the Republican favored version of the Act which did not include many of the individual/consumer focused protections that ultimately made their way into the Act upon Democratic insistence.

How do I apply for an SBA loan?

As noted above, borrowers are encouraged to reach out through their banking relationships immediately. The application process for the loan itself ought to be relatively straightforward, and will presumably be modeled on the existing application for the program that existing prior to the Act. Gibson Dunn has prepared an application checklist for purposes of enabling potential recipients of SBA loans to gather the necessary information early. However, the author notes that, inevitably, the application process/forms will need to be modified for the unprecedented breadth of borrowers and business concerns now having access to SBA loans, and the issues that come with their application to larger transactions and much more sophisticated structures. Among these questions are some of the most basic, such as, who should apply for the SBA loan? Should this be the manager, the owner, and indirect constituent of the owner? Applicants should consult with counsel in making these determinations to ensure that applications are made in accordance with restrictions on permitted debt under existing loan documents (which may be triggered by the mere application for same) and characterize ownership of employees in a manner that is sufficient to demonstrate eligibility without having inadvertent consequences for employer characterization in other contexts.

What are steps that borrowers/landlords should be taking to ensure they can quickly access SBA funds during this limbo period?

There will be a period of inevitable uncertainty until further guidance or draft regulations are provided. As of the date of this writng the authors believe that guidance from both Treasure and SBA may be distributed as early as Friday, April 3, 2020. It is impossible to know the contours of such guidance, but given the sheer scale of topics this will need to address in the short time period provided, stakeholders should be prepared for such guidance to address some issues, to leave many practical questions unanswered and to perhaps, introduce a new set of questions. Stakeholders will likely have to make decisions based on imperfect information, and to be prepared to weigh in as industry stakeholders over the course of a more formalized notice and comment process, ultimately leading to the publishing of final implementing rules at a future point in time once there is greater stabilization.

In the meantime, borrowers/landlords can and should do the following:

Engage with counsel on an interdisciplinary basis to analyze organizational/corporate structure, perform various employee count analyses, determine eligibility for funds, assess tax and labor/employment impacts and determine where in the organizational chart the SBA loan should sit.
Review loan documents to analyze permitted indebtedness and transfer requirements/restrictions as well as cash management provisions to ensure the SBA loan is made at a level unencumbered by same, or that conversations with lenders happening in parallel around forbearance and/or loan modifications are taking these issues into account.
Start discussing SBA loans with all lenders.
Work with counsel to establish user friendly information materials, form notices and property management protocol to educate and provide maximum value-add to your tenants while protecting the landlord from liability.
Leverage existing banking relationships with potential SBA qualifying lenders.
Consult with counsel familiar with SBA procedures to complete as much of the application as possible in advance, including gathering all supporting data for eligibility.
Consult with industry and public policy counsel to develop a list of industry “must haves” for any notice/comment period following the circulation of draft regulations.
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[1] Gibson Dunn is independently tracking such foreclosure/eviction laws (and what alternative remedies may or may not be permissible in residential and/or commercial contexts), along with other key guidance and directives around essential services and lockdown requirements. We will continue to share with and update our clients and friends as we monitor ongoing developments.

[2] https://www.ecfr.gov/cgi-bin/text-idx?SID=b919ec8f32159d9edaaa36a7eaf6b695&mc=true&node=pt13.1.121&rgn=div5#se13.1.121_1201

[3] https://www.sba.gov/sites/default/files/2020-03/FrnchsTbl_03232020_UPLOAD.pdf

[4] This period may vary depending upon whether the employer is a seasonal employer, and is shortened/adjusted pursuant to the Act if the business concern was not operating for particular periods throughout early/mid 2019. This would not appear to implicate hotels that were shut down in the very recent wake of the COVID-19 pandemic.

As always, 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, any member of the Real Estate or Public Policy Group, or the following authors:

Danielle Katzir – Los Angeles (+1213-229-7630, [email protected]) (Real Estate)
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected]) (Public Policy/SBA)
Roscoe Jones, Jr.* – Washington, D.C. (+1 202-887-3530, [email protected]) (Public Policy)

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

UNITED STATES

COVID-19 and Life Sciences Companies – 10 Actions to Consider

The COVID-19 outbreak has caused major disruptions in global economies, including in particular to life sciences companies that are conducting clinical trials and manufacturing and marketing pharmaceutical products. We provide ten actions that are among those that life sciences companies may wish to consider in light of current events.
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Online Dispute Resolution: An Option for Times of Crisis and Calm

Courts around the world have responded to the COVID-19 outbreak by delaying or suspending proceedings. While some courts have attempted to use technological solutions such as remote appearances by videoconference to mitigate delays, others have opted to postpone all proceedings deemed non essential. The status of matters pending before courts is changing on a daily basis, in most cases providing little clarity about when or how they will be addressed.
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The COVID-19 outbreak has caused major disruptions in global economies, including in particular to life sciences companies that are conducting clinical trials and manufacturing and marketing pharmaceutical products. The following ten actions are among those that life sciences companies may wish to consider in light of current events:

SEC Disclosures	– Update disclosures regarding clinical trials – Update (or suspend) earnings guidance
Material Contracts	– Review in-licenses and collaboration agreements – Review debt covenants
Governance and Operations	– Consider virtual annual meetings for 2020 – Revisit succession and contingency plans – Be prepared to (re)assess status as an “essential business” – If financially stressed, acknowledge broader fiduciary duties
Finance and M&A	– Assess alternate sources of capital and risk-sharing arrangements – Consider the need for a poison pill

Discussion

SEC Disclosures

Update disclosures regarding clinical trials. In light of the expected impact of the pandemic on clinical trials, many companies are suspending the commencement of clinical trials, pausing ongoing trials and/or modifying study protocols.[1] Even if trials remain ongoing, there may be significant delays, dropouts and a greater number of adverse events (even if unrelated to the study drug). For studies that are now expected to be completed with fewer patients, the statistical power of the study will be reduced and may increase the likelihood that an otherwise successful study will be unable to demonstrate a statistically significant benefit. As a result of these considerations, we are seeing many companies update disclosures regarding timelines for commencement and anticipated completion, as well as updating risk factors and forward-looking statement disclosures regarding clinical trials. For one example of such an update, the March 23, 2020 announcement from Eli Lilly suspending their clinical trials can be found here.

Update (or suspend) earnings guidance. For companies with marketed pharmaceutical products, many sales representatives are currently unable to access physicians and the expected impact in sales will be hard to project. Additionally, supply-chain disruptions may lead to drug shortages. In this environment, companies are considering updating or simply suspending revenue and earnings guidance until there is greater clarity on current events. For companies that last provided guidance prior to the spread of the pandemic in the United States, we expect to see an increased trend in suspending earnings guidance as Q1 results are announced starting in April.

Material Contracts

Review in-licenses and collaboration agreements. Certain foundational in-licenses and collaboration agreements may have “diligence” milestones relating to the development and commercialization of drugs and drug candidates, which, if not satisfied, may result in reduction or loss of rights for licensor or licensee. Additionally, other contracts with third parties (e.g., CROs) may also have performance-based milestones that could be in jeopardy of not being met. In light of potential extended delays in the ability to operate in the ordinary course, consideration should be given to any such performance requirements and whether force majeure or similar clauses can be invoked to excuse any missed deadlines. (Gibson Dunn checklist and flowchart on force majeure clauses can be found here)

Review debt covenants. Companies with debt facilities may have various financial and non-financial covenants that could be impacted by decreased revenue or liquidity. Companies should consider the impact of these covenants on operations and public disclosures and begin forbearance discussions with lenders as soon as a potential issue is apparent. For those companies planning to access a small business SBA-backed loan under the CARES Act (described below), consideration should also be given to covenants that limit additional indebtedness; lenders should be willing to accommodate requests for waivers given the forgivable nature of these loans.

Additionally, venture debt facilities frequently provide for the ability of borrowers to draw down on the facility in tranches as certain milestones are met within given timeframes. If applicable, borrowers should assess whether COVID-related disruptions will make the timely achievement of such milestones unlikely or impossible. Depending on the expected impact of these disruptions, companies may wish to negotiate for extensions and liquidity disclosures in SEC filings may need to be updated.

Governance and Operations

Consider virtual annual meetings for 2020. The COVID outbreak comes at annual meeting and proxy season time for companies with a December 31 fiscal year end. Given the shelter-in-place orders and limits on gatherings of large groups, companies should consider making annual meetings “virtual.” For companies that have already mailed proxy statements, consideration should be given to changing to virtual meetings, while being certain to comply with the notice requirements under state law. In moving to a virtual meeting, companies should consider how they will handle shareholder questions and engagement. Companies should also expect that providers of virtual meeting platforms, such as Broadridge, may be overwhelmed with requests, which means that: (i) there may be no capacity to host the virtual meeting on a desired date, and (ii) it may take longer than normal to have the necessary infrastructure set up to host a meeting online.

Revisit succession and contingency plans. In light of the risk of a senior member of management falling ill, Boards should be certain that they have contingency plans in place for management succession. Additionally, Companies should consider the possibility of not being able to convene a quorum of the Board of Directors. Delaware law permits the inclusion of an “emergency” provision in the corporate bylaws, which allows for the conduct of business with less than a quorum present. Boards should also consider the formation of an Executive Committee (with delineated powers of the Board), with alternate members in the event that one member is unable to serve.

Be prepared to (re)assess status as an “essential business.” As shelter-in-place orders are expanding and possible stricter quarantine orders are considered, life sciences companies should be prepared to (re)assess the status of their operations as “essential” businesses. Many of the shelter-in-place orders issued so far have specifically identified healthcare-related companies as “essential,” including biotechnology, pharmaceutical and diagnostic companies. However, not all orders have had this degree of clarity and stricter orders may be forthcoming, which could further limit permissible business activities. To the extent that companies are manufacturing and distributing marketed products, these operations will undoubtedly continue to be permitted. However, for other activities not related to supplying pharmaceutical products (and unrelated to COVID research and development), contingency plans should be considered.

If financially stressed, acknowledge broader fiduciary duties. For a solvent corporation, the board of directors acts as a fiduciary for the benefit of stockholders. However, for a company that is insolvent or in the zone of insolvency, the duties of the board shift to run the enterprise for the benefit of all stakeholders (which includes creditors). In this rapidly evolving environment, boards of directors should be mindful of the financial position of the corporation and to whom duties are owed. Companies should also document due consideration of these expanded duties, if applicable.

Finance and M&A

Assess alternate sources of capital and risk-sharing arrangements. For companies looking to strengthen their balance sheets, the capital markets to be too choppy for equity financings. In this environment, companies should consider alternate sources of capital, including forgivable SBA-guaranteed loans provided for under the newly adopted CARES Act, as well as royalty-based financing (whether selling rights to existing royalty streams or selling a “synthetic royalty” on sales of an approved or to-be-marketed product). Additionally, companies with clinical programs may wish to consider collaboration arrangements where a third party assumes the performance of late-stage clinical trials and absorbs a portion of their costs (and risks) in return for shared upside.

For companies that may be considering arrangements that involve partnering or collaborating with a competitor, the FTC and DOJ have announced that they will be issuing guidance on collaborations that will be permitted during the pandemic. (Gibson Dunn client alert on the FTC/DOJ guidance can be found here)

Consider the need for a poison pill. With depressed share prices, many companies are concerned about being undervalued and a possible hostile takeover threat. In response, many companies are adopting short-term COVID pills, often with terms between 6-12 months. Goldman Sachs reports that these are being widely adopted, which suggests that the expected criticism from proxy advisory firms such as ISS may be blunted if the pills are short-term in nature. At a minimum, companies should consider maintaining a poison pill “on the shelf” so that it can be quickly deployed if a hostile threat emerges. (Gibson Dunn client alert on the adoption of COVID poison pills can be found here)

* * *

[1] Recognizing the impact of COVID-19 on clinical trials, the National Institutes of Health and the U.S. Food and Drug Administration recently released guidance regarding the conduct of clinical trials during the COVID-19 pandemic. This guidance included accommodations for patient visits and changes in protocols. The NIH guidance can be found here and the FDA guidance can be found here.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding developments related to the COVID-19 outbreak. For additional information, please visit the Gibson Dunn COVID-19 Resource Center or contact any member of the firm’s Life Sciences Practice, including the following:

Michael Bopp | CARES Act SBA Loan Program
(+1 202.955.8256 | [email protected])

Eduardo Gallardo | Shareholder Activism; M&A
(+1 212.351.3847 | [email protected])

Robert Klyman | Bankruptcy and Restructuring
(+1 213.229.7562 | [email protected])

Marian Lee | FDA and Healthcare
(+1 202.887.3732 | [email protected])

Ryan Murr | SEC Reporting, Capital Markets and M&A
(+1 415.393.8373 | [email protected])

Karen Spindler | Licensing & Collaborations, M&A and Royalty Financing
(+1 415.393.8298 | [email protected])

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

Courts around the world have responded to the COVID-19 outbreak by delaying or suspending proceedings. While some courts have attempted to use technological solutions such as remote appearances by videoconference to mitigate delays,[1] others have opted to postpone all proceedings deemed non‑essential.[2] The status of matters pending before courts is changing on a daily basis, in most cases providing little clarity about when or how they will be addressed.

Yet, disputes continue to arise, including disputes relating to the disruption and delays caused or exacerbated by the COVID-19 crisis.[3] To minimize further disruption in an increasingly uncertain economic climate, many parties may seek avenues to resolve such disputes immediately and efficiently. Though not a panacea, these parties may consider entering post-dispute arbitration or mediation agreements that tend to provide greater flexibility to the parties to resolve disputes remotely and in an expedited manner. Last week, Gibson Dunn published certain best practices to consider when entering such agreements.[4] In this client alert, we outline key features of online arbitration and mediation options which are particularly attractive not only for times of calm, but particularly in times of crises such as this. In this regard, many arbitration institutions have expressly confirmed that they remain open for business despite the global pandemic.

I. Considerations for Online Dispute Resolution

Online Dispute Resolution (“ODR”) broadly refers to dispute resolution practices that take advantage of the convenience and efficiency of the internet and online communications. The term encompasses everything from the electronic filing of submissions and exchange of documents to online hearings.

Like any avenue for dispute resolution, companies must weigh a number of considerations to determine whether ODR is appropriate for their situation. With respect to filing and exchanging documents, electronic filing is generally more efficient, economical, environmentally friendly, and less burdensome. Moreover, remote hearings, which avoid travel time, expenses, and other fees associated with in-person hearings, should typically be more efficient to schedule and less costly for the parties.

ODR also allows parties to present their case from anywhere in the world, including from their homes or offices. This option is particularly important given that COVID-19 has currently reached more than 150 countries in the world, many of which have placed their citizens on lock down and/or have temporarily shut down the courts leaving little recourse for parties requiring immediate assistance. Of course, companies and counsel may have concerns about whether they will be able to effectively present their case without in-person interactions with the arbitrators, witnesses, experts, opposing parties, and even members of their own party.[5] But as a growing number of legal practitioners develop experience with ODR, advocates are growing increasingly comfortable with conducting oral arguments remotely. There are also studies which raise doubts as to the extent to which face-to-face contact actually assists in assessing credibility.[6]

There are other potential risks and downsides associated with ODR. Electronic document exchange and communication are not error‑proof and may present technical problems and cybersecurity risks. However, these issues are capable of management, as shown by the robust cybersecurity measures recommended for use in international arbitration by the International Council for Commercial Arbitration, the New York City Bar Association and the International Institute for Conflict Prevention and Resolution.[7] Similar technological and cybersecurity concerns, and remedies, exist for remote hearings.

Crucially, the successful use of ODR requires access to a basic modern technological infrastructure, including a reliable internet connection and computers, which may not always be available to parties, particularly in less developed economies. Many of these issues are, however, being addressed by technological innovations and creative procedures.

In the context of arbitration proceedings, Gibson Dunn has successfully conducted cross-examination of witnesses, participated in procedural conferences and emergency application hearings virtually. While there is likely to be a learning curve for all participants using new technology, the potential benefits may prove well-worth the effort and many new technologies have developed user-friendly interfaces.

Of course, in many instances, in-person hearings will be preferable to remote hearings. But companies should know that in-person hearings are not always necessary, or—as we have come to appreciate in recent weeks—possible.

II. Arbitration and ODR

While any ODR proceeding, whether in court or in arbitration, can face the challenges described above,[8] international arbitration practitioners have developed particular expertise in resolving these issues and using technology to their advantage.[9] This is because arbitrators and practitioners have long dealt with international parties, often separated by large geographical distance, for whom travel may not always be convenient or even possible. For example, it is relatively common for witnesses to provide testimony over videoconference if that witness is unable to attend the hearing as a result of visa regulations, government restrictions, or even for business or convenience purposes. Additionally, for cost and efficiency reasons, sessions involving procedural or interlocutory issues are often held over telepresence or videoconference rather than in‑person.

As a result, arbitral institutions have adopted procedural rules and guidelines that allow parties to rely on technological solutions that reduce or even eliminate the need for paper filings and in‑person hearings. And the international arbitration community has developed specific guidelines and protocols to manage ODR that are available for parties to use in any dispute. Venues for arbitration hearings, particularly in the international context, often provide assistance with technology and are well-versed in assisting parties to conduct virtual aspects of their arbitrations.[10] We describe some of these features below.

A. Arbitration Institutions and ODR

As a general matter, arbitral institutions’ rules, particularly international ones, have long provided for a great degree of flexibility that allows hearing and procedural conferences to be conducted virtually. Several major arbitration institutions have developed rules and platforms to better enable online or remote arbitrations. Some have developed platforms enabling arbitration proceedings that can be fully remote—i.e., where submissions are filed exclusively by electronic means and no in‑person hearings are required. Alongside arbitral institutions, specialized service providers have developed virtual platforms that enable remote hearings and other sessions.[11] For instance, the procedural rules of the International Chamber of Commerce (“ICC”) enable expedited and emergency arbitration proceedings to be held by “videoconference, telephone or similar means of communication.”[12]

In response to the COVID-19 crisis in particular, the ICC, the American Arbitration Association (“AAA”), the AAA’s international division, the International Centre for Dispute Resolution (“AAA‑ICDR”),[13] JAMS,[14] the International Center for the Settlement of Investment Disputes (“ICSID”),[15] and the Singapore International Arbitration Centre (“SIAC”)[16] have all issued guidance on the use of videoconferencing for remote participation in hearings. These institutions have highlighted the growing number of online hearings even before the crisis began, and have therefore developed robust systems and staff who are trained to handle such processes.[17]

In addition to videoconferencing, arbitral institutions such as the Stockholm Chamber of Commerce (“SCC”)[18] and the London Court of International Arbitration (“LCIA”),[19] have also recently issued guidance on using fully digitized case management systems.[20]

A recent ICC arbitration between J&F Investimentos SA and Paper Excellence demonstrates the flexibility offered by arbitration institutions to resolve disputes online. The hearing in that arbitration was originally scheduled to start this month in São Paulo, Brazil and take place for two weeks.[21] After the first week of in-person hearings, guidance from authorities in various countries prohibited further in-person hearings due to the COVID-19 outbreak. Instead of delaying the remainder of the hearing, the parties chose to hold their second week of hearings on the online video platform Zoom with all 70 participants, located in Spain, Singapore, London, and New York, as well as Brazil.[22] This immediate transition from in-person to online hearings during the midst of the COVID-19 outbreak demonstrates the capacity and benefits of choosing a dispute resolution option that has robust and developed ODR capabilities.

B. ODR Guidance and Protocols

In addition to arbitration institutions that have developed the technological capabilities to conduct proceedings online, there are at least two sets of salient protocols available for use by arbitration practitioners in ODR proceedings.

First, the Seoul Protocol on Video Conference in International Arbitration (“Seoul Protocol”)—developed with input from a broad number of arbitration users—offers guidelines on videoconferencing in international arbitrations.[23] While the Seoul Protocol focuses on witness testimony, its guidelines are informative for remote arbitrations generally. The Seoul Protocol provides detailed provisions on, among other matters, the conditions under which witnesses must provide testimony, which services are used, technical requirements, troubleshooting and planning, cybersecurity, presentation of documents, and use of interpretation services.[24]

Second, the Protocol on Cybersecurity in International Arbitration (“Cybersecurity Protocol”) provides guidance on reasonable information security measures that the parties and arbitrators can take, particularly in light of increasingly virtual hearings and paperless document transfer.[25] The Cybersecurity Protocol was developed by a working group, established by the International Council for Commercial Arbitration, the New York City Bar Association and the International Institute for Conflict Prevention & Resolution, which recently released the 2020 edition of the Protocol. The Cybersecurity Protocol includes procedural and practical guidance on how to assess security risks and identify appropriate solutions.

III. Online Mediation Procedures

In addition to arbitration, businesses may also look to mediation[26] as an alternative dispute resolution mechanism that offers many of the same technological advantages as arbitration—either as an independent or initial step in the dispute resolution process. Online mediation is already popular for a host of disputes, especially in circumstances where the parties are located in different geographic areas, the dispute originated in an online transaction, or the parties have other reasons to avoid meeting in person.[27] The process offers significant flexibility as mediations may be conducted exclusively through email or chat rooms, subject to the parties’ preferences, where mediators can communicate with the parties, separately and simultaneously, and where documents can be shared only by electronic means.[28]

IV. Next Steps

In light of the current crisis, parties may wish to consider ODR options to resolve their disputes. A number of considerations, including the type of dispute, amount in dispute, the opposing parties, and the urgency for resolution will need to be considered. While most dispute resolution mechanisms employed today will inevitably involve some online element, the relevant question for the parties may be to what extent the proceeding can take place online in the interest of saving time and cost.

Assuming a party determines it is necessary and feasible to resolve a dispute through ODR, it need not already have a pre-existing arbitration agreement. Rather, it can enter into a post-dispute ODR agreement, tailored to the specific requirements of the parties and the dispute. Companies not currently facing a dispute may also consider whether to add ODR clauses for future disputes in their contracts. Such clauses can preserve the option not just for any future crises but also for disputes that can more efficiently be resolved by virtual means. As today’s reality has shown, businesses are becoming increasingly comfortable, as they must, to the use of online tools to manage their day-to-day operations. In the same way, parties should consider the potential for using these same online tools as viable platforms for resolving disputes.

* * *

[1] For example, on March 24, 2020, the highest appeals court in the United Kingdom conducted a case entirely by video link for the first time in its history, following the imposition of a nationwide lockdown as a result of the COVID-19 pandemic. Richard Crump, Top UK Court Hears Cases Via Video As Country Locked Down, Law360UK, Mar. 24, 2020, https://www.law360.co.uk/commercial-litigation-uk/articles/1256347/top-uk-court-hears-cases-via-video-as-country-locked-down?nl_pk=d9ba0ccc-104a-4e48-92db-314cec1778be&utm_source=newsletter&utm_medium=email&utm_campaign=commercial-litigation-uk.

[2] Debra Cassens Weiss, SCOTUS delays arguments while other courts suspend trials or close over COVID-19 concerns, Aba Journal, Mar. 16, 2020, https://www.abajournal.com/news/article/supreme-court-delays-arguments-while-other-courts-through-country-suspend-trials-or-close. Likewise, US state courts have largely responded to the COVID-19 outbreak by restricting or ending jury trials, and generally suspending in-person proceedings. National Center for State Courts, State courts are responding to the coronavirus to protect the public, while maintaining access to justice, National Center for State Courts, Mar. 24, 2020, https://www.ncsc.org/Newsroom/Public-health-emergency.aspx. For example, on March 23, 2020, the New York Supreme Court issued an administrative order putting a stop to all filings, both electronic and paper, deemed non-essential. Chief Administrative Judge of the Courts, Administrative Order AO/78/20 (N.Y., Mar. 22, 2020), http://nycourts.gov/whatsnew/pdf/AO-78-2020.pdf; Chief Administrative Judge of the Courts, Administrative Order AO/71/20 (N.Y., Mar. 19, 2020), http://nycourts.gov/whatsnew/pdf/AO71-20.pdf.

[3] See e.g. Gibson Dunn, Coronavirus and Force Majeure: Addressing Epidemics in LNG and Other Commodities Contracts, Gibson, Dunn & Crutcher (Feb. 12, 2020), https://www.gibsondunn.com/coronavirus-and-force-majeure-addressing-epidemics-in-lng-and-other-commodities-contracts/.

[4] See Gibson Dunn, Practical Solutions to Resolving Commercial Disputes When the Courthouse Is Closed, Gibson, Dunn & Crutcher (Mar. 25, 2020), https://www.gibsondunn.com/practical-solutions-for-resolving-commercial-disputes-when-the-courthouse-is-closed/.

[5] Remote hearings can also be more difficult to enforce protocols such as witness sequestration.

[6] See, e.g., Malcolm Gladwell, Talking to Strangers: What we Should Know about the People We Don’t Know (Little Brown and Co. 2019) (discussing studies that challenge the notion that person-to-person contact is actually as informative as it is perceived to be).

[7] CPR, CyberInsecurity: A New Protocol to Counter Cyberattacks in International Arbitration, International institute for conflict prevention and resolution, (July 5, 2018), https://www.cpradr.org/news-publications/articles/2018-07-05-cyberinsecurity-a-new-protocol-to-counter-cyberattacks-in-international-arbitration.

[8] Ering Coe, Technical Difficulties: Courts Face COVID-19 Learning Curve, Law360, Mar. 23, 2020, https://www.law360.com/articles/1256124/technical-difficulties-courts-face-covid-19-learning-curve?nl_pk=e3a36347-a2b9-4d09-8c33-c3067f41fcc6&utm_source=newsletter&utm_medium=email&utm_campaign=special.

[9] See e.g. Ihab Amro, Online Arbitration in Theory and In Practice: A Comparative Study in Common Law and Civil Law Countries, Kluwer Arbitration Blog, Apr. 11, 2019, http://arbitrationblog.kluwerarbitration.com/2019/04/11/online-arbitration-in-theory-and-in-practice-a-comparative-study-in-common-law-and-civil-law-countries/ (noting that the 2017 Rules of the International Commercial Arbitration Court of the Chamber of Commerce and Industry of the Russian Federal allows for any party to request to participate in a hearing through videoconferencing); Program on Negotiation, Using E-Mediation and Online Mediation Techniques for Conflict Resolution, Harv. L. Sch. Program on Negot., Jan. 27 2020, https://www.pon.harvard.edu/daily/mediation/dispute-resolution-using-online-mediation/ (noting that e-mediation and online mediation services have been offered since the late 1990s).

[10] See, e.g., Arbitration Place, Arbitration Place Virtual: Dispute Resolution for the Digital Age (Mar. 25, 2020), https://mcusercontent.com/5b67e063012fb13aa8dff852a/files/904c774e-5f58-408c-91c5-2071d197d2ee/APV_Fact_Sheet_20_03_2020.pdf.

[11] Id.

[12] ICC Rules of Arbitration, App’x VI, art. 3(5) and App’x V, art. 4(2); see also App’x VI(f), available at https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration.

[13] AAA-ICDR, COVID-19 Update, American Arbitration Association- International Centre for Dispute Resolution (Mar. 20, 2020), https://go.adr.org/covid19.html?_ga=2.128862348.1686453586.1584112272-260696787.1566227680.

[14] JAMS, Coronavirus (COVID-19) Advisory for JAMS Visitors, JAMS Mediation, Arbitration, ADR Services (Mar. 17, 2020), https://www.jamsadr.com/news/2020/coronavirus-(covid-19)-advisory-for-jams-visitors.

[15] ICSID, A Brief Guide to Online Hearings at ICSID, ICSID News Release (Mar. 24, 2020), https://icsid.worldbank.org/en/Pages/News.aspx?CID=362.

[16] SIAC, COVID-19 Information for SIAC Users, Singapore International Arbitration Centre (No Date), https://www.siac.org.sg/images/stories/press_release/2020/[ANNOUNCEMENT]%20COVID-19%20Information%20for%20SIAC%20Users.pdf.

[17] See e.g., ICSID, A Brief Guide to Online Hearings at ICSID, ICSID News Release (Mar. 24, 2020), https://icsid.worldbank.org/en/Pages/News.aspx?CID=362 (“Year-on-year, ICSID has seen a steady uptick in its number of online hearings. In fact, last year about 60 per cent of the 200 hearings and sessions organized by ICSID were held by videoconference.”)

[18] Arbitration Institute of the Stockholm Chamber of Commerce, COVID-19: How the SCC is Responding, Stockholm Chamber of Commerce (Mar. 18, 2020), https://sccinstitute.com/about-the-scc/news/2020/covid-19-how-the-scc-is-responding/.

[19] LCIA, LCIA Service Update: COVID-19, London Court of International Arbitration (Mar. 18, 2020), https://www.lcia.org/lcia-services-update-covid-19.aspx.

[20] Certain less-utilized institutions are now exclusively online. Though not widely used outside of China, the China Guangzhou Arbitration Commission (“CGAC”), founded in 1995, transformed itself into an online arbitration institution in October 2015 by launching a proprietary arbitration cloud platform and associated procedural rules to run arbitrations entirely online. See Chen Zhi, The Path of Online Arbitration: A Perspective on Guangshou Arbitration Commission’s Practice, Kluwer Arbitration Blog, Mar. 4, 2019, http://arbitrationblog.kluwerarbitration.com/2019/03/04/the-path-for-online-arbitration-a-perspective-on-guangzhou-arbitration-commissions-practice/ (highlighting the China Guangzhou Arbitration Commission as an online arbitration institution with a proprietary cloud-based arbitration platform for all portions of the arbitration, including filing, delivery of material, hearings, and rendering awards). Domain name disputes handled by the World Intellectual Property Organization and the Hong Kong International Arbitration Center’s (“HKIAC”) are also dealt with exclusively online. See Internet Corp. for Assigned Names & Numbers (“ICANN”), Uniform Domain Name Dispute Resolution Policy (2015), https://www.icann.org/resources/pages/udrp-rules-2015-03-11-en (note these are promulgated by ICANN and adopted by HKIAC).

[21] Graziella Valenti, A Pandemia na maior arbitragem societária do país, a disputa pela Eldorado, Exame, Mar. 22, 2020, https://exame.abril.com.br/negocios/a-pandemia-na-maior-arbitragem-societaria-do-pais-a-disputa-pela-eldorado/.

[22] Id.

[23] KCAB International, Seoul Protocol on Video Conference in International Arbitration is Released, Mar. 18, 2020, http://www.kcabinternational.or.kr/user/Board/comm_notice_view.do?BBS_NO=548&BD_NO=169&CURRENT_MENU_CODE=MENU0025&TOP_MENU_CODE=MENU0024.

[24] The full text of the Seoul Protocol on Video Conference in International Arbitration can be found here: http://www.kcabinternational.or.kr/user/Board/comm_notice.do?BD_NO=172&CURRENT_MENU_CODE=MENU0015&TOP_MENU_CODE=MENU0014.

[25] The full text of the Protocol on Cybersecurity in International Arbitration (2020) can be found here: https://www.arbitration-icca.org/media/14/76788479244143/icca-nyc_bar-cpr_cybersecurity_protocol_for_international_arbitration_-_print_version.pdf.

[26] Mediation, as opposed to litigation and arbitration, provides a mechanism for private parties to discuss and resolve a dispute with the guidance of a neutral third person.

[27] Derric Yeoh, Is Online Dispute Resolution the Future of Alternative Dispute Resolution?, Kluwer Arbitration Blog, Mar. 29 2018, http://arbitrationblog.kluwerarbitration.com/2018/03/29/online-dispute-resolution-future-alternative-dispute-resolution/; Program on Negotiation, Using E-Mediation and Online Mediation Techniques for Conflict Resolution, Harv. L. Sch. Program on Negot., Jan. 27 2020, https://www.pon.harvard.edu/daily/mediation/dispute-resolution-using-online-mediation/.

[28] Id.

Gibson Dunn lawyers have extensive experience in alternative dispute resolution, including drafting alternative dispute resolution clauses, and conducting arbitrations and mediations, both online and through traditional means. If you have any questions about how your company can formulate a creative procedural mechanism to resolve an ongoing or future dispute, we would be pleased to assist you.

Authors: Rahim Moloo, Ankita Ritwik, Patrick Taqui, Kelly Tieu* and Bethany Saul*

Please also feel free to contact any of the following leaders and members of the International Arbitration Group:

US: Rahim Moloo, Lindsey Schmidt, Victoria Orlowski, Charline Yim, Ankita Ritwik

London: Cy Benson, Penny Madden, Jeff Sullivan, Sarah Wazen

Dubai: Graham Lovett

* – Not admitted to practice in New York; currently practicing under the supervision of Gibson, Dunn & Crutcher LLP.

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

UNITED STATES

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Internal Revenue Service (“IRS”) Notice 2020-18, issued March 20, 2020 (the “Notice”), provides updated guidance on the extension of the April 15, 2020 U.S. federal income tax return filing and payment deadlines for individuals and corporations to July 15, 2020 as a result of the Coronavirus pandemic. The extension does not require that the taxpayer be impacted by the Coronavirus pandemic. Additionally, on March 24, 2020, the IRS issued FAQs to answer various questions relating to the Notice.
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SBA “Paycheck Protection” Loan Program under the CARES Act

On March 25, 2020, the Senate passed (96-0) the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a $2.2 trillion stimulus package providing aid for individuals, States, small businesses, and businesses impacted by the coronavirus pandemic. It is expected that the House will swiftly pass the CARES Act, which the President, in turn, will promptly sign into law.

The CARES Act, through a proposal authored by Senators Susan Collins (R-ME) and Marco Rubio (R-FL), authorizes the Small Business Administration (“SBA”) to provide loan guarantees for up to $349 billion in loan commitments under the SBA’s 7(a) program, through a new “paycheck protection” program under which loans may be forgiven. This client alert discusses how the SBA provisions in the CARES Act will impact businesses.
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EUROPE

Coronavirus: EU Economic and Fiscal Measures

The coronavirus (“COVID-19”) pandemic is having a deep impact on businesses across all sectors.

While the primary focus of many businesses will be on ensuring the health and wellbeing of staff, businesses are facing an increasing number of challenges that need to be addressed and mitigated.
Read more

COVID-19: UK Financial Support for Businesses through Purchases of Commercial Paper and Lending to SMEs

The UK Government has launched two funding mechanisms to assist firms with the potential impact of COVID-19 on their businesses:

1. a joint lending facility between the UK HM Treasury and the Bank of England (“BoE”) designed to support liquidity among larger firms through the purchase of commercial paper, the Covid Corporate Financing Facility (“CCFF”); and

2. financial support for smaller businesses by giving lenders a government-backed guarantee for loan repayments, the Coronavirus Business Interruption Loan Scheme (“CBILS”).
Read more

European Commission Authorisation of State Aid to Support the Economy Amid the Current COVID-19 Outbreak

As already described in Gibson Dunn’s client alert of 20 March 2020, the European Commission (Commission) has announced that it will authorize the grant of State aid to the real economy for liquidity shortages and financial losses resulting from the COVID-19 outbreak in at least two ways.
Read more

U.K. Employment Law Considerations for Companies Responding to COVID-19 – Update

In this alert we summarise key developments in UK employment law over the past week in response to the novel coronavirus (COVID-19). The UK government response to the outbreak evolves daily, and we encourage employers in the UK to monitor UK government and National Health Service guidance and legislative developments over the coming days and weeks.
Read more

“…whatever it takes” – German Parliament Passes Far-Reaching Legal Measures in Response to the COVID-19 Pandemic

On March 25, 2020, the German Parliament (Bundestag) passed a far reaching rescue package to respond to the COVID-19 pandemic and its dramatic economic effects. The full text of the package can be found here.
Read more

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

The coronavirus (“COVID-19”) pandemic is having a deep impact on businesses across all sectors.

While the primary focus of many businesses will be on ensuring the health and wellbeing of staff, businesses are facing an increasing number of challenges that need to be addressed and mitigated.

Governments of many EU Member States – as well as the European Commission – have announced special measures to support businesses affected by the COVID-19 pandemic. This client alert identifies some of the key fiscal measures being put in place by the governments of the UK, France and Germany to help companies manage their cash flows during these times.

Of course, the tax implications for businesses will go much further than the measures currently being put in place. In these exceptional times, people will be stuck not just in their home jurisdiction but literally at home when they would otherwise be conducting activity in another jurisdiction. The physical location of people is a critical factor in determining where tax should be paid for cross-border businesses and affects transfer pricing, corporate residence, individual residence and more. If you have specific concerns in this regard, please contact the Gibson Dunn contacts at the end of this alert.

For measures being put in place in the United States, please click here.

For a discussion of UK government measures to provide financial support for businesses through purchases of commercial paper and lending to SMEs, please click here.

For a discussion on the European Commission’s initiatives to support the economy amid the COVID-19 pandemic (including a discussion on State Aid), please click here.

If the COVID-19 related tax measures of another jurisdiction are relevant to your business and you require further information, please reach out to the Gibson Dunn contacts at the end of this alert, or your usual Gibson Dunn contact, and we will be delighted to assist.

This client alert is correct as at 27 March 2020.

UNITED KINGDOM

VAT PAYMENT DEFERRAL

- VAT payments (other than VAT MOSS payments) due to HMRC in the period from 20 March 2020 until 30 June 2020 are eligible for deferral. If a UK VAT registered business chooses to defer payment of VAT to HMRC for this period, the VAT due will have to be accounted for on or before 31 March 2021.
- The deferral does not need to be notified to HMRC, but taxpayers that have a direct debit mandate in place to pay their VAT (and still wish to defer payment) will need to contact their bank to cancel that mandate.
- UK VAT refunds and reclaims will be paid by HMRC as normal.
- UK VAT registered businesses should continue to file their UK VAT returns by the normal due date.

INCOME TAX PAYMENT DEFERRAL

- The next payment date for self-assessed income tax on account may be deferred from 31 July 2020 to 31 January 2021.
- After some initial confusion, HMRC has confirmed this applies to all taxpayers.
- This measure applies automatically, without a requirement to apply to HMRC, but the deferment is optional (i.e. taxpayers may still elect to make payment on 31 July 2020).
- Self-assessment income tax returns should still be filed by the normal due date, and can be filed online.

UK TAX RESIDENCE OF INDIVIDUALS

- One of the factors the UK’s statutory residence test considers is the number of days an individual spends in the UK. It is possible to exclude a maximum of 60 days spent in the UK in any tax year as a result of “exceptional circumstances”. HMRC has issued guidance indicating that presence in the UK owing to COVID-19 may constitute “exceptional circumstances” for these purposes.
- However, whether days spent in the UK can be disregarded due to “exceptional circumstances” will depend on the facts and circumstances of each individual case.

TIME TO PAY ARRANGEMENTS

- HMRC sometimes agrees specific tax payment arrangements with taxpayers on a case-by-case basis (ordinarily for those in significant financial distress). HMRC has expanded its Time to Pay offer to all taxpayers in temporary financial distress as a result of COVID-19.
- HMRC has not indicated the extent to which a business would need to be affected by COVID-19 to qualify for a Time to Pay arrangement.

BUSINESS RATES RELIEF

- Businesses based in England in the retail, hospitality and leisure sectors will pay no business rates for the 2020/2021 tax year. This has also been extended to estate agents, lettings agencies and bingo halls that have closed as a result of COVID-19 measures.

OTHER MEASURES AND DEVELOPMENTS

- Coronavirus Job Retention Scheme Any employer (small or large) will be eligible for a grant equaling 80% of wages of employees who are unable to work but are kept on payroll. This measure is capped at £2,500 per month per employee, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage. It is not clear yet whether the £2,500 limit is net or gross of PAYE and NICs.
- Coronavirus Self-Employment Income Support Scheme Self-employed individuals will be able to claim a taxable grant worth 80% of average monthly income taken over the last three years, capped at £2,500 per month. The scheme is only open to anyone with trading profits less than £50,000 and to those who earn the majority of their income from self-employment.
- Statutory Sick Pay Employers with less than 250 employees (as of 28 February 2020) may be reimbursed for up to two weeks’ statutory sick pay for each employee absent due to self-isolation as a result of COVID-19. Details as to whether employee headcount applies on a group or company basis are yet to be confirmed.
- Conduct of tax tribunals and courts All proceedings in the Tax Chamber of the First Tier Tribunal are stayed for a period of 28 days from 24 March 2020 and all time limits in any current proceedings will be extended by the same period. The Court of Appeal will only be covering urgent work as of 27 March 2020.
- Stamp Duty on share transfers New procedures have been put in place so that the process for stamping stock transfer forms following share transfers is carried out by email (and not by post). Company secretaries will be able to update company shareholder registers upon receipt of an electronic verification letter from HMRC (rather than on receipt of duly stamped stock transfer forms). Stamp duty relief applications must be sent by email.
- Off-payroll working rules (IR35) New rules designed to mitigate tax avoidance by workers, and the companies hiring them, who supply their services via intermediary companies (but who would be employees if the intermediary was not used) have been deferred for 12 months until April 2021.

FRANCE

1. SOCIAL SECURITY PROVISIONS ([1])

The French government has introduced a series of measures to amend the social security regime in light of COVID-19. They come in addition to measures taken more broadly by the French government in respect of employment (in particular the “partial unemployment” scheme funded by the French government).

1.1 3-month payment extension for social security contributions

Employers, whose due date for social security contributions falls on the 15^th of each month, may postpone (without penalty) all or part of the payment of both their employee and employer contributions which are due on 15 March 2020 .
Employers, whose due date for social security contributions falls on the 5^th of each month, may postpone (without penalty) all or part of the payment of both their employee and employer contributions which are due on 5 April 2020. It is nevertheless imperative for employers to declare and file their social security “DSN” notification before Monday, 6 April 2020 at 12:00 noon.
A similar 3-month extension applies for certain other taxes (see section 2.1 below).

1.2 Potential reduction in social security contributions

Instead of postponing the due date of social security contributions, employers may choose to reduce the amount in order to adapt their monthly contributions depending on their commercial needs.
For employers with a due date on the 15th of the month, the reduction depends on the date on which their February “DSN” notification has been filed. Employers with a due date of the 5th of the month, and in particular, employers who pay their contributions via the “DSN” portal, must transmit the March 2020 notification by Monday 6 April 2020 at 12:00 noon, and may adapt their SEPA payment with this “DSN” filing.
Employers that do not pay their contributions through the “DSN” portal, but do so by wire transfer, may adapt their monthly contribution depending on their commercial needs.

1.3 Payment extension for supplementary pension contributions

An extension to the normal payment period is available for supplementary pension contributions. Employers are invited to contact their supplementary pension institution in this respect.

2. TAX PROVISIONS

2.1 3-month payment extension for certain other taxes

Relevant taxes include corporate income tax, payroll tax and business tax (“CFE” and “CVAE”).
A 3-month payment extension is available for all advance payments on request by companies or their accountant on presentation of a valid tax form available here.
In respect of payments already made in March 2020:
companies may refuse the SEPA direct withholding payment with their online bank if they still have the possibility to do so; and
where this is not possible, companies may request a reimbursement from their tax office.
Notably, VAT, withholding tax on salary (“PAS”), special tax on insurance contracts and income tax are, in principle, excluded from the deferral. However, VAT may be deferred within the context of the Commission of Chief Financial Officers (“CCSF”) – (or Interministerial Committee for Industrial Restructuring, “CIRI”) cases (see section 3 below).

2.2 Potential tax rebate in the event of “material difficulties which a payment extension is not sufficient to overcome”

A potential tax rebate may be available in respect of relevant taxes under section 2.1 above. Eligibility however is not automatic and any tax rebate will need to be applied for. The following factors will be relevant to the tax authorities according to the tax form provided:
- a significant drop in turnover;
- the existence of other outstanding debts; and
- the cash flow situation or any other element likely to justify the rebate.
Failing rebate, payment extension of more than 3 months may be granted by tax authorities on a case-by-case basis.

2.3 Accelerated payment of outstanding State bills

Any request referred to under sections 2.1 or 2.2 above must be supplemented by the amount of bills awaiting payment by the French State (or equivalent) in order to facilitate payment by way of set-off.

3. OTHER EXISTING TOOLS REGARDING TAX AND SOCIAL CHARGES (REMINDER)

3.1 In case of financial difficulties: referral to the CCSF

The CCSF may, in complete confidentiality, grant companies in financial difficulties extensions to payment deadlines in respect of their tax and social security debts (employer’s part).
The CCSF may be approached by the debtors themselves or by their ad hoc representatives.
To be admissible, the company must be up to date with the filing of its tax and social security returns, the payment of employee contributions and withholding tax on salary and must not have been convicted of concealed work.
The debts referred to above are, in particular, taxes and social security contributions but exclude employee parts and withholding tax on salary.
The referral should be made by mail sent to the permanent secretariat of the competent CCSF with a standard form to be filled in which can be accessed here.

3.2 Carryback of net operating loss (reminder)

Carryback of net operating loss (“NOL”) makes it possible, as an option, to post the NOL result of a fiscal year to the profits of the previous fiscal year.
Although of limited interest under the current rules, it is possible for the legislator to render once again the applicable rules more flexible as it did during the 2008 economic crisis. For this reason, we summarize below the main features of the applicable rules.
Currently, the carryback mechanism is limited in time and amount:
- In time: carryback is possible only with respect to the previous fiscal year;
- In amount: carryback is limited to €1million of tax losses (or to the amount of the profit of the previous fiscal year if it is lower), i.e. a refundable tax credit of c. €310,000 maximum.
Where losses are carried back, the company recognizes a non-taxable tax credit from the tax authorities. This receivable is used to pay the corporate income tax due during the five fiscal years following the fiscal year in which the loss is incurred. It can also be used to pay VAT, payroll tax, etc. or reimbursed in advance in the event of insolvency proceedings.
The receivable may also be refinanced by a bank at any time.
To date, this mechanism will therefore only be useful for companies that incur a tax loss of up to €1 million during their fiscal year ending in 2020 and which were profit-making during the previous financial year.

GERMANY

The Federal Ministry of Finance (Bundesfinanzministerium) has unveiled a tax relief programme for companies that have run into liquidity problems due to COVID-19. In a decree issued on 19 March 2020, the Federal Ministry of Finance announced the following measures in order to provide liquidity aid for companies:

1. Facilitated Tax Deferrals:

For taxes that are or will be due by 31 December 2020, the German tax authorities will allow deferral of taxes upon application if their collection would constitute a “considerable hardship” for the company.
- In this respect, the German tax authorities have been instructed not to impose strict requirements on the existence of considerable hardship necessary for the deferral. Companies applying for a deferral may still be considered even if the damage they incurred cannot be explicitly quantified or detailed.
Interest on deferred taxes may be waived until 31 December 2020.

2. Adjustment of Tax Prepayments:

For the tax period ending 31 December 2020, tax prepayments are to be reduced as soon as it becomes apparent that a company´s income in the current year will decline in relation to the previous year. This applies to income, corporate and trade taxes. As with the deferral, the losses incurred need not to be proven in explicit detail.

3. Waiver of Enforcement Measures and Late Payment Surcharges:

If a company is unable to pay income or corporate tax on time, a late payment surcharge of 1% for each month or part thereof is payable. For companies directly affected by COVID-19, such late payment surcharges and other enforcement measures (e.g. account seizures) are suspended from 19 March 2020 until 31 December 2020.

From a tax perspective, further assistance measures are also currently being discussed at all levels. These include, for example, adjustments to tax filing deadlines (in particular with regard to advance VAT returns), the expansion of depreciation options, the early abolition of the solidarity surcharge and a more extensive crediting of trade tax. Whether, and to what extent, the legislator will take up corresponding measures is still open. In any case, the Federal Government in Germany has made it clear that it is ready and willing to provide companies with any kind of support.

——————–

[1] https://www.urssaf.fr

***

Sandy Bhogal – London (+44 (0) 20 7071 4266, [email protected])
Ben Fryer – London (+44 (0)20 7071 4232, [email protected])
Jérôme Delaurière – Paris (+33 (0) 1 56 43 13 00, [email protected])
Hans Martin Schmid – Munich (+49 89 189 33-110, [email protected])
Panayiota Burquier – London (+44 (0)20 7071 4259, [email protected])
Fareed Muhammed – London (+44(0)20 7071 4230, [email protected])

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

IRS Notice 2020-18 and IRS FAQs

Internal Revenue Service (“IRS”) Notice 2020-18, issued March 20, 2020 (the “Notice”),[1] provides updated guidance on the extension of the April 15, 2020 U.S. federal income tax return filing and payment deadlines for individuals and corporations to July 15, 2020 as a result of the Coronavirus pandemic.[2] The extension does not require that the taxpayer be impacted by the Coronavirus pandemic. Additionally, on March 24, 2020, the IRS issued FAQs[3] to answer various questions relating to the Notice.

The Notice and FAQs provide the following relief and guidance:

Tax year 2019 income tax return filing and payment deadlines for all taxpayers that otherwise would be required to file income tax returns and pay income taxes on April 15, 2020 are extended to July 15, 2020 (the “Extension”).[4]
The Extension applies to both payments of tax on self-employment income and estimated income tax payments for the first quarter of tax year 2020 that are due on April 15, 2020. However, estimated income tax payments for the second quarter of tax year 2020 are still due on June 15, 2020.
No dollar limit applies to the Extension.
No interest, penalties, or additions to tax will accrue as a result of a failure to either file income tax returns or pay income (or self-employment) taxes otherwise due on April 15, 2020 during the period from April 15, 2020 to July 15, 2020.
The new July 15, 2020 deadline also applies to installment payments due on April 15, 2020 under section 965(h),[5] as well as to estimated payments for a corporation required to make Basis Erosion and Anti-Abuse Tax payments under section 59A.
The Notice extends to July 15, 2020 the deadline for making contributions to an Individual Retirement Account or Health Savings Account.
Notably, the Notice and FAQs provide that the following relief is not available:
No extension is available for information return filings as the Extension only applies to income (or self-employment) tax returns due on April 15. It is unclear how or whether information returns that ordinarily would be attached to U.S. federal income tax returns, such as Form 8621 (related to ownership of interests in a “passive foreign investment company”), Form 8865 (related to ownership of interests in a foreign partnership), and Form 5471 (related to ownership of interests in a foreign corporation), are affected by the Notice.
Taxpayers whose income tax return filing deadlines have already passed (e.g., returns due on March 16, 2020, such as Form 1065, Form 1065-B, Form 1066, and Form 1120-S for calendar year taxpayers) are not granted relief by the Extension.
The Notice does not provide relief for estimated income tax payments required to be paid in (or for any related estimated tax penalty assessed for) tax year 2019.
Taxpayers with income tax filing or payment due dates on any date other than April 15 are not granted relief with respect to those deadlines.
The Notice does not apply to payroll, excise, estate, or gift taxes. Additional legislation is expected to apply to payroll and other excise taxes, continue to follow Gibson Dunn’s updates and client alerts for additional information.
The Extension does not extend any applicable U.S. state tax filing or payment deadlines. However, a number of states conform to federal filing deadlines. See below for state extensions applicable to payment and filing deadlines.

U.S. State-Level Action

Income Taxes

A number of states have already extended their respective income tax filing and payment deadlines for the 2019 tax year, either automatically through linkage to the IRS’s extended deadlines or through separate action. Below is a list of states that assess income tax and have extended (or, where indicated with an asterisk, announced their intention to extend) their income tax filing and payment deadlines. States that have extended their deadlines for the payment of estimated taxes are explicitly noted with parentheticals below. The date listed in front of the state is the extended due date. State guidance is evolving, and we intend to supplement the below with additional updates as appropriate.

May 15:

Mississippi (deferred Q1 estimated tax payments).

June 1:

Virginia (extended payment due date only, filing deadline remains unchanged and is currently still April 15 for corporations and May 1 for individuals).

June 15:

Connecticut (business returns only, see July 15 for individual returns) and
Idaho.

July 15:

Alabama,
Arizona,
California (deferred Q1 & Q2 estimated tax payments for individuals, Q1 estimated tax payments for corporations),
Colorado (payments due July 15, but filing deadline now October 15) (deferred Q1 & Q2 estimated tax payments),
Connecticut* (individuals only) (deferred Q1 & Q2 estimated tax payments),
Delaware (deferred Q1 estimated tax payments),
District of Columbia,*
Georgia (deferred Q1 estimated tax payments),
Indiana* (deferred Q1 estimated tax payments),
Kansas,
Kentucky* (interest still accrues on deferred payments),
Louisiana,
Maryland (deferred Q1 estimated tax payments),
Minnesota,
Missouri (deferred Q1 estimated tax payments),
Montana (individuals only) (deferred Q1 estimated tax payments),
New Mexico (interest still accrues on deferred payments),
North Carolina (interest still accrues on deferred payments),
North Dakota,
Oklahoma (deferred Q1 estimated tax payments),
Pennsylvania (individuals only) (deferred Q1 & Q2 estimated tax payments),
Rhode Island,*
South Carolina (deferred Q1 estimated tax payments),
Utah,*
Vermont,* and
Wisconsin (deferred Q1 estimated tax payments).

July 20:

Hawaii.

July 31:

Iowa.

New Jersey has passed legislation that would match U.S. federal income tax extensions, but this legislation has not yet been signed into law. The New York State Assembly has announced that New York State tax filing deadlines will be extended to July 15, but this is not yet reflected in legislation or formal guidance issued by the New York State Department of Taxation and Finance.
At the local level, New York City has waived penalties for business taxes (including the unincorporated business tax, or “UBT”) due between March 16, 2020 and April 25, 2020, but as of now interest will still be assessed on all applicable tax payments received after the original due date.

Sales and Use Tax

Several states have also either deferred the payment deadline for sales and use taxes or waived penalties for late payments, though a number of these provisions are either limited to small businesses or to businesses in certain sectors. States that have taken action on sales and use taxes so far include: Alabama (waiving penalties for small businesses), California (deferred payment by 60 days), Colorado (governor directed D.O.R. to choose an extended deadline), District of Columbia (waiving penalties and interest), Illinois (waiving penalties and interest limited to certain businesses), Louisiana (deferred payment until May 20), Maryland (deferred payment until June 1), Massachusetts (deferred payment for certain taxpayers), Minnesota (deferred payment for certain businesses), Michigan (deferred payment for small businesses), New York (waiving penalties and interest limited to certain taxpayers), Pennsylvania (waiving some penalties), and South Carolina (deferred payment until June 1). For specific state sales and use tax questions, please consult your state and local tax advisor.

[1]	The Notice is available on the IRS website at https://www.irs.gov/pub/irs-drop/n-20-18.pdf.
[2]	The Notice expressly supersedes in its entirety recently released IRS Notice 2020-17, which also provided certain guidance related to extensions of income tax return filing and payment deadlines for individuals and corporations.
[3]	The FAQs are available on the IRS website at https://www.irs.gov/newsroom/filing-and-payment-deadlines-questions-and-answers.
[4]	The Extension applies to the following tax year 2019 returns that otherwise were due on April 15, 2020: Form 1040, 1040-SR, 1040-NR, 1040-NR-EZ, 1040-PR, 1040-SS; Form 1041, 1041-N, 1041-QFT; Form 1120, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC, 1120-SF; Form 8960; Form 8991; and Form 990-T (but only if that form otherwise was due on April 15 and not May 15).
[5]	Unless indicated otherwise, all “section” references are to the Internal Revenue Code of 1986, as amended.

The Gibson, Dunn & Crutcher Tax Practice Group is able to assist with all U.S. federal return questions and many of these state and local tax matters. Clients should also continue to consult their specific state and local tax advisor with questions pertaining to such state and local tax matters. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the Tax Practice Group, or the following authors:

Benjamin Rippeon – Washington, D.C. (+1 202-955-8265, [email protected])
Evan M. Gusler – New York (+1 212-351-2445, [email protected])
Jennifer Fitzgerald – New York (+1 212-351-5262, [email protected])

Please also feel free to contact any of the following leaders and members of the Tax group:

Jeffrey M. Trinklein – Co-Chair, London/New York (+44 (0)20 7071 4224 /+1 212-351-2344), [email protected])
David Sinak – Co-Chair, Dallas (+1 214-698-3107, [email protected])
James Chenoweth – Houston (+1 346-718-6718, [email protected])
Brian W. Kniesly – New York (+1 212-351-2379, [email protected])
Eric B. Sloan – New York (+1 212-351-2340, [email protected])
Edward S. Wei – New York (+1 212-351-3925, [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])
Dora Arash – Los Angeles (+1 213-229-7134, [email protected])
Paul S. Issler – Los Angeles (+1 213-229-7763, [email protected])
Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])
Scott Knutson – Orange County (+1 949-451-3961, [email protected])

On Friday, March 27, 2020, Congress passed and President Donald Trump signed into law the third major piece of legislation intended to address the economic impact of the coronavirus (COVID-19) outbreak. The bill, titled the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), provides for a number of temporary and permanent changes to the Code.[1] This alert addresses the provisions of the CARES Act most relevant to the business community.

Modifications of rules applicable to the use of business losses, including net operating losses (“NOLs”). The CARES Act temporarily suspends a number of the business loss limitations that were added to the Code in 2017 as part of the legislation colloquially known as the “Tax Cuts and Jobs Act” (the “2017 Act”).[2] The 2017 Act eliminated the ability of taxpayers to carry back NOLs to previous taxable years, and, although the 2017 Act provided for the indefinite carry forward of NOLs, it in general limited the use of NOLs carried forward to 80 percent of a taxpayer’s current-year taxable income.[3]

The CARES Act modifies the Code provisions applicable to NOLs in two significant respects. First, under the CARES Act, a taxpayer may carry back NOLs from tax years beginning in 2018, 2019, or 2020 up to five years. NOLs cannot be carried back to offset foreign subsidiary earnings deemed repatriated under section 965. However, taxpayers can elect to exclude any tax years in which the foreign earnings were included in gross income from the calculation of the five-year carryback period, effectively allowing taxpayers to “skip” prior taxable years and reach back to taxable years past the five-year cutoff. Real estate investment trusts (“REITs”) will not be able to carry back losses, and losses may not be carried back to any REIT year (regardless of whether the taxpayer incurring the loss is currently a REIT).

Second, for taxable years beginning before January 1, 2021, the CARES Act removes the limitation on NOLs that prevents taxpayers from offsetting in excess of 80 percent of a taxpayer’s current taxable income, temporarily allowing NOLs to offset up to 100 percent of a taxpayer’s current taxable income.[4]

The CARES Act also modifies the excess business loss limitation applicable to noncorporate taxpayers for 2018, 2019, and 2020, which limited the ability to offset business losses against other income to $250,000, providing a benefit for these taxpayers by temporarily allowing such business losses to offset up to 100 percent of other taxable income.

Modifications of limitations on deductibility of business interest expense. Generally, the amount of a taxpayer’s business interest expense allowable as a deduction is limited under section 163(j) to 30 percent of the taxpayer’s adjusted taxable income (“ATI”), which currently is calculated in a manner similar to EBITDA, subject to certain modifications. The CARES Act would, for tax years beginning in 2019 and 2020, increase this limit from 30 percent to 50 percent of ATI.[5]

Further, taxpayers may elect to use their 2019 ATI in place of their 2020 ATI for purposes of determining business interest deductibility in 2020.

This 50 percent limit on ATI does not apply to partnerships. Instead, any interest disallowed at the partnership level is passed on to its partners, and is suspended at the partner level under the 2017 Act rules. In 2020, however, 50 percent of this suspended interest “frees up,” and will be fully deductible, while the other 50 percent will remain suspended until the partnership allocates excess taxable income or excess interest income to the partner (or until the partnership is no longer subject to section 163(j)).

Employer payroll tax extension. Certain employer payroll taxes (generally, the 6.2 percent Social Security employer payroll taxes imposed under section 3111(a)) for the period beginning on the date of enactment until the end of the year are deferred.[6] Fifty percent of those taxes are deferred until December 31, 2021, and the remaining 50 percent are deferred until December 31, 2022.[7]

Exclusion of employer-funded student debt relief from employee taxable income. The CARES Act would add employer payments made before January 1, 2021 to an employee or lender for student loan principal and interest to the list of employee education assistance programs that an employee can exclude from his or her taxable income.[8] The total amount of payments from employee education assistance programs that an employee can exclude from income remains capped at $5,250 per calendar year.[9] These employee education assistance exclusions are unavailable for (i) programs that discriminate in favor of highly compensated employees or (ii) programs under which more than 5 percent of amounts paid are provided to 5 percent or greater owners.

Refundable employee retention credit up to $5,000 per employee. The CARES Act would add an employment tax credit for each calendar quarter equal to 50 percent of qualified wages paid to each eligible employee for that calendar quarter, up to $10,000 of wages per employee for all calendar quarters.[10] This credit can be used by businesses (i) the operations of which are fully or partially suspended by a COVID-19 governmental order limiting commerce, travel or group meetings or (ii) that suffer a 50 percent loss in gross receipts in a fiscal quarter in 2020 relative to the same quarter in 2019, until the business recovers to 80 percent of gross receipts relative to the same quarter of 2019.[11]

The qualifications differ for employers of different sizes. For employers with more than 100 full-time employees, qualified wages are only those wages paid to employees during the period that the employees are not providing services due to certain COVID-19-related circumstances. For employers with 100 or fewer full-time employees, all employee wages paid during the applicable period qualify for the credit, whether or not the employee is providing services to the employer.[12]

The credit is effective for wages paid after March 12, 2020 and before January 1, 2021.

Refundable AMT credit modification. The corporate alternative minimum tax (“AMT”) was repealed by the 2017 Act. However, corporate AMT credits were made available as refundable credits over several years, ending in 2021. The CARES Act accelerates the ability of companies to recover those refundable AMT credits.[13]

Qualified improvement property fixes. The CARES Act makes technical corrections to the 2017 Act to treat qualified improvement property as 15-year property for depreciation purposes, and makes it eligible for bonus depreciation. These corrections are retroactive to the effective date of the 2017 Act (January 1, 2018).

Refundable tax credit for individuals. The CARES Act would provide up to a $1,200 refundable tax credit for individual returns ($2,400 for joint returns), with additional amounts of $500 per child in certain cases.[14] The bill requires the Internal Revenue Service to refund or credit these amounts “as rapidly as possible,” but in no event will any such refund or credit be allowed after December 31, 2020.[15]

These amounts are reduced for taxpayers with $75,000 or more in adjusted gross income for individual filers ($150,000 or more for joint filers), and completely phased out above $99,000 for individual filers ($198,000 for joint filers).[16]

Retirement fund distributions. Consistent with previously passed disaster-related relief, the CARES Act provides that qualifying individuals can withdraw up to $100,000 from retirement plans in 2020 without application of the 10 percent early withdrawal penalty.[17] A taxpayer may re-contribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions,[18] and income attributable to such distributions would be subject to tax ratably over three years unless the taxpayer elects otherwise.[19]

An individual qualifies for this purpose if the individual or his or her spouse or dependent is diagnosed with COVID-19, the individual experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual, or other factors as determined by the Secretary of the Treasury.[20]

Excise tax holidays. Under the CARES Act, a federal excise tax holiday would apply to: (i) federal taxes applicable to aviation kerosene, including at the refineries, terminals, or importation facilities[21] and (ii) alcohol and distilled spirits in the production of hand sanitizer.[22]

SBA loan forgiveness income exclusion. The CARES Act allows certain small business loan forgiveness necessary to maintain payroll or pay mortgages, rent or utilities, and would exclude income resulting from that forgiveness from taxable income.[23]

Charitable deduction of $300. The CARES Act allows an “above the line” charitable deduction of up to $300 for individuals who do not itemize deductions on their tax returns.[24]

[1] Unless indicated otherwise, all “section” references are to the Internal Revenue Code of 1986, as amended (the “Code”).

[2] Pub. L. 115-97.

[3] See sections 172(a)(2), (b)(1)(A).

[4] CARES Act, section 2303(a)(1).

[5] CARES Act, section 2306(a).

[6] CARES Act, section 2302.

[7] CARES Act, section 2302(d)(3).

[8] CARES Act, section 2206.

[9] Section 127(a)(2).

[10] CARES Act, section 2301.

[11] CARES Act, section 2301(c)(2). All 501(c)(3) exempt organizations qualify, regardless of COVID-19-related suspension of operations or loss in gross receipts. CARES Act, section 2301(c)(2)(C).

[12] The number of employees used for this purpose is the average number of employees in 2019. CARES Act, section 2301(c)(3)(A)(i).

[13] CARES Act, section 2305.

[14] CARES Act, section 2201(a).

[15] CARES Act, section 2201(a).

[16] CARES Act, section 2201(a). Amounts are based on the taxpayer’s 2019 tax return if filed, or, in the alternative, the taxpayer’s 2018 tax return.

[17] CARES Act, section 2202(a).

[18] CARES Act, section 2202(a)(3)(A).

[19] CARES Act, section 2202(a)(5)(A).

[20] CARES Act, section 2202(a)(4)(A).

[21] CARES Act, section 4007.

[22] CARES Act, section 2308.

[23] CARES Act, section 1102.

[24] CARES Act, section 2204.

The availability of the tax relief in the CARES Act to any specific business or individual is subject to a number of qualifications and conditions. 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, any member of the Tax Practice Group, or the following authors:

Mark Dreschler – Orange County (+1 949-451-4342, [email protected])
Virginia Blanton – Washington, D.C. (+1 202-887-3587, [email protected])

Please also feel free to contact any of the following leaders and members of the Tax group:

Jeffrey M. Trinklein – Co-Chair, London/New York (+44 (0)20 7071 4224 /+1 212-351-2344, [email protected])
David Sinak – Co-Chair, Dallas (+1 214-698-3107, [email protected])
James Chenoweth – Houston (+1 346-718-6718, [email protected])
Brian W. Kniesly – New York (+1 212-351-2379, [email protected])
Eric B. Sloan – New York (+1 212-351-2340, [email protected])
Edward S. Wei – New York (+1 212-351-3925, [email protected])
Benjamin Rippeon – Washington, D.C. (+1 202-955-8265, [email protected])
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])
Dora Arash – Los Angeles (+1 213-229-7134, [email protected])
Paul S. Issler – Los Angeles (+1 213-229-7763, [email protected])
Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])
Scott Knutson – Orange County (+1 949-451-3961, [email protected])

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

In our alert of 17 March 2020, we identified some of the key considerations for UK-based businesses working to reduce the risk of employee exposure. We also outlined key steps to take when an employee tests positive for COVID-19 or must care for someone with the virus. In our alert of 20 March 2020, we summarised the UK government’s Coronavirus Job Retention Scheme which will remain in place for a minimum of three months, covering wages backdated, from 1 March 2020.

Further clarity on Coronavirus Job Retention Scheme

The UK government has provided further practical guidance in relation to the Coronavirus Job Retention Scheme. This guidance states that employers can use a portal to claim for 80% of furloughed employees’ usual monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions. Employees hired after 28 February 2020 cannot be furloughed in accordance with this scheme. Further, in order to qualify for the payment, an employee must be furloughed for a minimum period of three weeks.

The guidance states that employees must be paid the lower of 80% of their regular wage or £2,500 a month, and employers can choose to “top up” the pay of a furloughed employee to 100% of their contractual pay, but are not obliged to under the scheme.

Separate guidance to employees indicates that employers will “discuss” with employees placing them on furlough, then accessing the scheme. This calls into question whether an employer can unilaterally place employees on furlough and reduce pay to the amount recoverable by way of grant. Employers should therefore seek to agree with employees their placement onto, and how they will be paid during, furlough. In the absence of agreement, an employer may be forced to make those employees, who would otherwise be furloughed, redundant instead.

Emergency Volunteering Leave

The Coronavirus Act 2020 contains a new statutory right for workers to take emergency volunteering leave (“EVL”) in blocks of two, three or four weeks during government-designated “volunteering periods”. The initial volunteering period will be 16 weeks beginning on the day the legislation comes into force, which will be achieved by regulations made by a government Minister. EVL will be unpaid, but a UK-wide compensation fund will compensate volunteers for loss of earnings, travel and subsistence.

To take EVL, the worker must give their employer three working days’ notice and produce a certificate confirming that they have been approved as an emergency volunteer by a local authority, the NHS Commissioning Board or the Department of Health. Employers cannot refuse EVL; however, certain workers will be ineligible (for example, workers engaged by businesses with fewer than 10 staff and employees in the police service). Employees taking EVL remain entitled to all employee benefits other than remuneration and will be entitled to return from leave into their former job on terms and conditions which are no less favourable than those which applied before leave commenced.

Proposed Protection for Self-Employed and Freelancers

In a television address on 26 March 2020, the UK government has outlined details of new Self-Employment Income Support Scheme. The scheme will pay self-employed people a taxable grant worth 80% of average monthly income taken over the last three years, capped at £2,500 per month. The scheme is only open to anyone with trading profits less than £50,000 and to those who earn the majority of their income from self-employment. The scheme is unlikely to be up and running before the start of June 2020, so it will not help self-employed individuals with immediate cash flow issues. Unlike the Coronavirus Job Retention Scheme, an eligible self-employed person can continue to work while claiming the grant.

Travelling To and From Work During the Lockdown

In a television address on 23 March 2020, Prime Minister Boris Johnson announced a minimum three-week lockdown in the UK to curb the spread of COVID-19. Government guidance states that it is important for business to carry on where possible, with the exception of certain non-essential businesses. The vast majority of individuals should be able to work from home and employers should take every step to facilitate employees to do so.

Guidance has confirmed that individuals should only be travelling to a workplace if the work cannot be done at home, provided that individuals are well and neither the individual nor any of their household are self-isolating, and if the workplace is permitted to remain open. Cabinet Office guidance which is somewhat ambiguous suggests that “Businesses that continue to contravene the measures will be forced to close down.” It is not clear whether this statement is intended to refer only to those businesses which have been ordered to close, or extends to cover businesses that require people to attend the workplace unnecessarily.

Managing vacation

Employees in the UK are entitled to a minimum of 5.6 weeks paid vacation, to be taken in each holiday year. Many employees have seen their usual vacation plans disrupted by the COVID-19 pandemic and associated travel restrictions. As a consequence, many employees are not utilizing their annual vacation allowance as they usually would. Left unchecked, UK employers may face unmanageable requests from employees wishing to take substantial periods of paid vacation once the current restrictions have been lifted, and at a time when businesses are seeking to recover from the crisis. In order to avoid this situation, employers may wish to agree and, if necessary and appropriate, require employees who are not being furloughed to take periods of paid vacation before the restrictions are lifted. At the time of publication, it has been announced that the Government will bring out regulations to allow up to 4 weeks of unused holiday to be carried over into the next two leave years if it has not all been taken due to COVID-19.

Off-payroll Working Rules Change Postponed to April 2021

We have reported previously on changes proposed to UK legislation known as IR35 which governs the payroll tax arrangements for certain individuals who supply services through an intermediary, usually a personal service company (“PSC”). These changes, which were due to take place in April 2020, have now been postponed until April 2021 in recognition of the disruption caused by the COVID-19 outbreak.

Gender Pay Gap Reporting Suspended for April 2020

The Government Equalities Office and the Equality and Human Rights Commission (EHRC) has announced the suspension of the enforcement of the gender pay gap deadlines for this reporting year, which had required reporting of organisations’ April 2019 data by 4 April 2020.

***

Gibson Dunn attorneys regularly counsel clients on the compliance issues raised by this pandemic, and we are working with many of our clients on their response to COVID-19. Please contact the Gibson Dunn attorney with whom you work in the Employment Group, or the following members of the UK employment team:

James Cox – London (+44 (0)20 7071 4250, [email protected])

Sarika Rabheru – London (+44 (0) 20 7071 4267, [email protected])

Heather Gibbons – London (+44 (0)20 7071 4127, [email protected])

Georgia Derbyshire – London (+44 (0)20 7071 4013, [email protected])

Charlotte Fuscone – London (+44 (0)20 7071 4036, [email protected])

The COVID-19 outbreak has caused major disruptions in global economies, including merger and acquisition activity. In response to the pandemic, we are seeing changes to the representation and warranty insurance (“RWI”) market. Specifically, RWI insurers are currently proposing certain exclusions from coverage with respect to COVID-19 risk and are requiring buyers to conduct focused diligence regarding the impact of COVID-19 on the target’s business. Market dynamics are fluid and changing on a daily basis, and it remains to be seen (i) whether coverage limitations regarding COVID-19 or broader pandemic risk reflect a temporary change in the market or a long-term trend and (ii) how the current market dynamics will affect short- and long-term utilization of RWI in both distressed and non-distressed M&A transactions.

Areas of Heightened Risk and Policy Exceptions

At the front-end of every transaction involving RWI, the insurer will identify certain “heightened” diligence areas that are driven by specific concerns regarding the target or the industry in which it operates. While the insurer will expect the buyer to conduct a customary, thorough diligence process on the target as a whole, it will pay particular attention in its underwriting process to those heightened diligence areas. To the extent that the buyer is unable to diligence those particular areas to the insurer’s satisfaction, the RWI policy will exclude coverage for some or all of the relevant subject areas. Further, any known issues identified in the course of the buyer’s pre-signing diligence, or that arise and are identified between signing and closing, will be excluded from coverage under the RWI policy as a matter of course.

For RWI policies that are being underwritten in today’s environment, insurers are universally flagging the impact of COVID-19 on the target’s business as a heightened area of diligence. The rigor by which RWI insurers will stress-test buyers’ COVID-19 diligence will differ greatly across industries, with those that rely on strained supply chains or that are hampered by “social distancing” efforts receiving a more strenuous review. In addition, insurers are focused on understanding the effects of the pandemic on the target’s customers and employees, as well as the target’s and its counterparties’ ability to perform under existing contracts in light of the current pandemic. For example, insurers may focus on whether “material adverse effect,” force majeure and termination provisions in customer and supplier contracts could potentially excuse performance by the target’s counterparties. Additionally, we expect that insurers will be particularly focused on certain representations in acquisition agreements (and the related disclosure schedules) that are more likely to be impacted by the pandemic—such as representations regarding customer and supplier relationships, accounts receivable, absence of changes to the target’s business, undisclosed liabilities, financial statements adequately presenting the target’s financial condition, employees, compliance with laws and adequacy of insurance—and insurers will expect to see that buyers have tailored their diligence to confirm the accuracy of those representations. Insurers have also focused on how the parties have allocated COVID-19 related risks in the acquisition agreement (either explicitly or implicitly) between signing and closing and the related closing conditions. Prior to the pandemic, buyers had largely accepted very narrow closing conditions under which they could only terminate in the event of a “Material Adverse Effect” (which itself was narrowly defined). Insurers are particularly sensitive to efforts of the parties to shift this deal risk to the insurers and generally prefer to see the issue explicitly addressed.

In addition to the focus on diligence, we are generally seeing proposed exclusions for coverage for certain COVID-19 related risks even if specific issues arising from COVID-19 are not identified in the buyer’s diligence at the time of signing. The breadth of the proposed exclusions is currently changing on a daily basis and varies from insurer to insurer, and we expect to see continued movement in coverage terms as the impact of the pandemic is better understood and there is more deal volume. Currently, some insurers are fully excluding all losses arising from or related to the pandemic, whereas other insurers are willing to consider narrowing (although not necessarily eliminating) the exclusion under certain circumstances based on the nature of the target’s business and the results of diligence.

For the most part, these changes have appeared in newly submitted indications of interests, and insurers have not broadly sought to renegotiate their non-binding commitments on existing transactions, perhaps because the insurers recognize the reputational damage that could result.

Re-Evaluating the Benefits of RWI Policies in Current Environment

Prior to the pandemic, in the United States, we had seen a maturation of the RWI market. Specifically, competitive forces driven, in part, by an ever-growing number of RWI insurers led to a vast increase in the use of RWI on private-company transactions, with insured-friendly policy terms, including lower policy retentions (i.e., deductibles) and limited coverage exclusions. With a robust seller-friendly M&A market, buyers became more comfortable relying primarily or exclusively on RWI, which allowed sellers to limit or even eliminate the traditional seller indemnity structure entirely on private company deals.

The growth in usage of RWI policies can be attributed to, among other things, the numerous benefits that accrue to the buyer policyholder, including the following:

the ability to obtain a larger indemnity (clients can purchase as much insurance as they feel necessary) and a longer survival period than the buyer would otherwise obtain in a traditional seller indemnity construct;
the elimination of seller post-closing credit/collection risk (e.g., in transactions involving multiple sellers, foreign sellers or insolvent sellers);
the availability of certain coverage enhancements such as a full materiality scrape and the potential recovery of consequential damages and diminution of value;
the elimination of the need to consider bringing claims against management sellers; and
the ability to obtain recourse when no seller indemnity is otherwise possible (e.g., in public company sales, bankruptcy or distressed situations).

Moreover, where the seller’s liability for breaches of representations and warranties is limited or eliminated, buyers are often able to negotiate a more comprehensive suite of representations and warranties as compared to a traditional seller indemnity transaction.

With the expected near-term increase in restructuring activity, RWI may continue to increase in popularity in distressed sales as it provides a source of recovery where one may not otherwise be available, particularly in the bankruptcy context where seller indemnities are generally not an option. In distressed transactions outside of a formal bankruptcy process, buyers may understandably be concerned about a seller’s ability to stand behind its indemnity obligations, and the use of an RWI policy can serve as a tool to mitigate credit/collection risk (especially with respect to larger indemnity obligations that may be necessitated by the crisis), notwithstanding any additional uncertainty in coverage terms that COVID-19 related exceptions may introduce.

It remains to be seen how the current market dynamics will affect short- and long-term utilization of RWI in non-distressed M&A transactions. Undoubtedly, RWI will continue to provide the benefits outlined above, which we expect will continue to attract many buyers to use the product as the primary or exclusive source of post-closing indemnity coverage. Nevertheless, the competitive forces driven by a seller-friendly market (where sellers could dictate terms) were also a meaningful factor in certain buyers’ using RWI out of necessity. For example, with respect to companies sold in auction processes, bid instruction letters routinely required potential bidders to agree to look solely to a RWI policy for post-closing recourse. To the extent that buyers’ leverage increases in the near term, the buyers that reluctantly agreed to use RWI in prior deals may push for a traditional seller indemnity structure backed by a fulsome escrow in future deals, particularly in an environment where broad COVID-19 exclusions and the lack of visibility regarding what may occur between signing and closing may render the buyer’s prospects of successful recovery under a RWI policy uncertain. We expect to see more clients conducting a thoughtful analysis to determine whether the numerous benefits of RWI outweigh the enhanced risks of using the product in this market.

Necessity of Assessing the RWI Insurer

We expect that current market conditions may result in an increased number of claims being made under outstanding RWI policies. Anecdotally, we know that certain RWI insurers experienced sizable claims in 2019 that have caused the underwriters (and their investors) to scrutinize their underwriting process, policy pricing and certain of their coverage positions. A meaningful increase in the number of claims may lead to an increased scrutiny of those positions and cause additional stress on the insurers. Some insurers may even exit the market, and unburdened by reputational constraints, focus on limiting the payment of claims. At a minimum, buyers should look to counsel and brokers to help assess creditworthiness and claims history when selecting their insurer.

Looking Forward – Post-Pandemic

With the current state of the US economy and the uncertainty of deal-making in the immediate future, it is impossible to gauge at this early stage what the post-pandemic RWI market will look like, but we have some initial data that is encouraging. Most importantly, RWI insurers are generally well-funded and the RWI market remains competitive, so we expect, post-pandemic, for the RWI coverage to revert to pre-pandemic terms. It is possible that COVID-19 (or more generally pandemic-type concerns) may become a standard stand-alone exclusion, at least under the basic policy terms and perhaps with some layer of protection available for additional premium with risk-sharing between the insurer and insured.

Conclusion

The crisis presented by the COVID-19 pandemic is unprecedented, and we expect continued evolution in the means by which insurers will treat the pandemic through the use of virus-related policy exclusions in the coming weeks. Counsel should ensure that potential policyholders closely scrutinize the impact of COVID-19 on the target’s business in their diligence so that they are prepared to negotiate virus-related policy exclusions with their insurers. Further, while we expect that RWI will continue to remain a viable and valuable tool for buyers to utilize in the right circumstances, buyers should critically evaluate the appropriate post-closing recourse structure on a deal-by-deal basis.

Matthew B. Dubeck – Los Angeles (+1 213-229-7622, [email protected]
Andrew M. Herman – Washington, D.C. (+1 202-955-8227, [email protected])
Louis J. Matthews – Dallas (+1 214-698-3318, [email protected])
Pavel A. Shaitanoff – New York (+1 212-351-2446, [email protected])
Jonathan M. Whalen – Dallas (+1 214.698.3196, [email protected])

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