There are only 18 days left until the California Consumer Privacy Act of 2018 becomes effective on January 1, 2020, but many questions still remain. The California Attorney General’s office just recently closed its comment period on its highly anticipated regulations, with several arguing that the regulations go beyond the scope of the CCPA. Companies are still grappling with whether—and to what extent—the law applies to their personal information practices, and news of additional privacy-related laws similar to CCPA raises further anxieties. As the effective date looms, we provide an update on the current status of the draft regulations and the recent hearings, priority compliance measures leading into the new year, and what to keep an eye out for in 2020 relating to CCPA.

For a more in-depth look at the CCPA, see our previous client alerts summarizing the statute (here), amendments from October 2018 (here), additional proposed amendments (here), the Attorney General’s draft regulations (here), and the final amendments signed in October 2019 (here).

Draft Regulations and Hearings

From December 2, 2019, to December 5, 2019, the Attorney General’s office held four public hearings designed to provide the public an opportunity to comment in person on the Attorney General’s draft regulations released on October 10, 2019. The Attorney General will publish transcriptions of the hearing comments, and has already published many written comments submitted, available here. The window for public comments closed on December 6, 2019 (45 days after publication of the draft regulations) and there are no further public hearings scheduled at this time.

The Attorney General’s representatives heard from many members of the public at the hearings, including on behalf of law firms, advertisers, technology companies, and credit unions. Many comments focused on the regulations’ over-breadth compared with the CCPA, and the commenters spanned industries. Points of discussion included sector-specific issues, concern with § 999.315(c)’s alleged requirement for websites to honor do-not-track browser settings as an opt-out, the lack of a model opt-out button, the conflicting and potentially onerous verification standards, and the need for solutions for smaller and mid-sized companies collecting information solely for employment and legitimate business purposes.

Although the hearings are over, and the comment period has concluded, we do not expect the regulations to be finalized until well into the new year, including because there are various additional steps in California’s regulatory process. The public must have at least 15 days to comment following changes to the draft regulations if any changes are made, and that period may be longer depending on the extent of the revisions. The Attorney General’s office must then prepare a summary of and response to each comment submitted orally or in writing, and that package must be submitted to the Office of Administrative Law for approval. The Office of Administrative Law has thirty (30) working days to approve the regulations, which will then be published.

We are keeping a close eye on any changes to the regulations based on the public comment period, and will update accordingly.

Priority CCPA Compliance Measures

While the regulations are not yet final, the statute itself becomes effective January 1, 2020 by its terms; practically, however, there are limits on what this may mean for companies. The Attorney General—largely responsible for enforcing the CCPA—will not start enforcing the statute or any regulations until July 1, 2020, and even then, may choose not to enforce all aspects of the regulations, if companies have little time to comply following the regulations’ final release.[1] Nonetheless, the private right of action for certain data breaches begins January 1, 2020, and compliance with the statutory provisions is still expected by that date. As a result, we suggest that any compliance considerations begin with the following efforts as highest priority:

Analyze whether CCPA applies to your company as a “business.” Given the definition of “business,” your company may not be covered by various of the obligations under CCPA, even if you collect personal information from California residents. This could be because of your size (measured by revenue, the number of consumers whose information your company has, and/or how your company uses such information), or because you solely operate as a service provider on behalf of a “business.” The distinctions can lead to different obligations and compliance requirements.
Analyze whether CCPA applies to your company’s personal information collection practices. This could include analyzing whether the information falls under various exemptions based on sector-specific laws (e.g., GLBA, HIPAA), and whether the personal information falls under temporary and incomplete exemptions added to the CCPA by amendment (e.g., employment-related data, personal information collected in business-to-business transactions). Even if certain of the personal information collected falls into these categories, there may still be requirements (e.g., certain disclosures to employees are still required starting January 1, 2020).
Revise or draft privacy notices to relevant California residents. Arguably most importantly, CCPA requires covered businesses to disclose information to California residents about the categories of personal information they collect, the purposes and uses of that information, whether they share and/or sell that information (and to whom), what rights California residents are granted under the statute, and how residents can exercise those rights (through two methods, one of which must include a toll-free number, unless the business operates wholly online). Provision of these key disclosures should be a business’s number one priority, given that compliance with certain of the statute’s other requirements can be performed by some companies on a just-in-time basis.
Review and bolster your cybersecurity program. While the Attorney General’s enforcement of CCPA is not expected to start until July 1, 2020, one thing is clear: as of January 1, 2020, California residents will have the right to sue for statutory damages based on a breach of certain personal information that results from a business’s lack of “reasonable security procedures and practices appropriate to the nature of the information.” The CCPA does not define what is “reasonable,” but, for example, the 2016 Attorney General’s California Data Breach Report’s number one recommendation was that the Center for Internet Security’s 20 controls constitute a “minimum level of information security that all organizations that collect or maintain personal information should meet.”[2] It is important to strategize and build a defensible cybersecurity program now, to both prevent actionable breaches, and defend any suits that could result from this private right of action.

Prioritizing compliance efforts may be critical at this point. While certain aspects of the law remain somewhat in flux, and while more specificity may be provided when the regulations are finalized, the CCPA’s core obligations are unlikely to change in any material way. Efforts spent toward these compliance measures are unlikely to be in vain, and companies subject to CCPA should consider these efforts (and others) as we begin the new year.

What to Watch Relating to CCPA in 2020

Among many issues related to CCPA, other states’ related proposals, changes to or revamping of the CCPA itself, and the overlap between CCPA and other cybersecurity-related laws will be topics to watch in 2020. Many states other than California—including Illinois, Maine, Nevada, New York, Oregon, Texas, and Washington—passed some type of enhanced data privacy law this year. All have either gone into effect or will go into effect sometime before the end of July 2020. While none are as comprehensive as CCPA (though many include a right to delete and access personal information), and while certain other states’ proposed consumer privacy laws are either still pending or have failed, we expect 2020 will bring more discussion and proposals of laws similar to CCPA.^[3]

And though the CCPA has yet to go into effect, supporters of broader privacy rights are already attempting to strengthen it. Alastair Mactaggart, the real estate magnate who submitted the ballot initiative that eventually led to the CCPA, is attempting to introduce a new ballot initiative—the California Privacy Rights and Enforcement Act of 2020 (CPREA, and also known as “CCPA 2.0”). CPREA proposes many changes to the CCPA, including adding new rights around sensitive categories of personal information (including an opt-out right from use for advertising), a California Privacy Protection Agency to implement and enforce the law administratively (in addition to leaving civil enforcement with the Attorney General), a retention disclosure requirement, disclosures relating to automated profiling, and disclosures relating to use of personal information for political purposes. Mactaggart and his nonprofit group, Californians for Consumer Privacy, will need over 600,000 signatures to qualify for the ballot in November 2020.

In addition, companies should continue to monitor changes to the existing CCPA, where relevant, including the eventually sun-setting exemptions: business-to-business and employment-related data. It is unclear at this point whether the amendments will be renewed past January 1, 2021, whether category-specific laws or amendments will be implemented, or whether the exemptions will indeed sunset. However, any changes will be significant for many of our clients.

Finally, the California Internet of Things (IoT) law, approved in September 2018 and starting enforcement on January 1, 2020, dovetails with the CCPA on the cybersecurity front, as it requires businesses selling connected devices offered for sale in California to include reasonable security features. We will see how companies address these requirements in the upcoming year, and how the Attorney General, city attorneys, county counsel, and district attorneys enforce the title’s additional security requirements.

* * *

CCPA continues to challenge businesses’ leadership and legal minds alike, with ambiguous requirements, yet-to-be-finalized regulations, and threats of new and changing legislation around the corner. Compliance efforts, however, can be tailored to fit the needs of particular businesses. We are happy to answer any questions relating to CCPA, and assist with any compliance measures as the CCPA goes into effect.

__________________

[1] The CCPA states that the Attorney General shall start enforcing either six months after issuing the final regulations, or July 1, 2020, whichever is earlier. Section 1798.185(c). Given the current status of the final regulations, we anticipate enforcement will not begin prior to July 1, 2020, and even then, enforcement with respect to certain aspects of the regulations may not begin at that time, if the regulations are released not too long prior.

[2] Those controls are available here: https://www.cisecurity.org/controls/cis-controls-list/.

[3] In addition to state laws, we may also see continuing movement based on CCPA at the federal level. As an example, two Democratic representatives (from California) have sponsored the Online Privacy Act, which would, among other things, create a Digital Privacy Agency (DPA), comparable to Data Protection Authorities established in the European Union for GDPR enforcement, and similarly allow users to access, correct, delete, and transfer their data.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Alex Southwell, Eric Vandevelde, Cassandra Gaedt-Sheckter, Tony Bedel, and Isabella Sayyah.

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, or any member of the firm’s California Consumer Privacy Act Task Force or its Privacy, Cybersecurity and Consumer Protection practice group:

California Consumer Privacy Act Task Force:
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Arjun Rangarajan – Palo Alto (+1 650-849-5398, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Deborah L. Stein (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])

Please also feel free to contact any member of the Privacy, Cybersecurity and Consumer Protection practice group:

United States
Alexander H. Southwell – Co-Chair, PCCP Practice, New York (+1 212-351-3981, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Deborah L. Stein (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])

Europe
Ahmed Baladi – Co-Chair, PCCP Practice, Paris (+33 (0)1 56 43 13 00, [email protected])
James A. Cox – London (+44 (0)20 7071 4250, [email protected])
Patrick Doris – London (+44 (0)20 7071 4276, [email protected])
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, [email protected])
Penny Madden – London (+44 (0)20 7071 4226, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Kai Gesing – Munich (+49 89 189 33-180, [email protected])
Alejandro Guerrero – Brussels (+32 2 554 7218, [email protected])
Vera Lukic – Paris (+33 (0)1 56 43 13 00, [email protected])
Sarah Wazen – London (+44 (0)20 7071 4203, [email protected])

Asia
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Jai S. Pathak – Singapore (+65 6507 3683, [email protected])

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

Dallas of counsel Ashley Rogers is the co-author of “Seventh Circuit Sets Up Potential Supreme Court Review of FTC Monetary Relief Authority,” [PDF] published in Antitrust, Vol. 34, No. 1, by the American Bar Association in Fall 2019.

On October 7, 2019, California enacted Assembly Bill 824 (AB 824)[1] in an effort to increase antitrust scrutiny of patent settlement agreements between branded and generic pharmaceutical manufacturers. The focus of the legislation is on settlements of patent infringement litigation brought under the Hatch-Waxman Act[2] that include a so-called “reverse payment,” i.e., where the generic manufacturer receives a cash payment or some other form of consideration from the branded manufacturer. AB 824 also, however, expressly covers settlements of patent litigation brought under the Biologics Price Competition and Innovation Act (BPCIA). The California legislation threatens to greatly complicate the settlement of these actions and we recommend that any branded or generic manufacturer involved in such matters carefully consider and take account of such legislation.

Increased Burdens on Defense. AB 824 seeks to make it more difficult for parties to defend patent settlements with “reverse payments” by shifting the burdens of proof. Under the U.S. Supreme Court’s opinion in FTC v. Actavis, the plaintiff bears the burden of demonstrating that the settlement contains a “large and unjustified” reverse payment and an overall “anticompetitive effect.”[3] Only upon such a showing would the burden shift to the settling parties to demonstrate the agreement’s pro-competitive merit. Under AB 824, however, once an antitrust plaintiff or enforcement body shows that the generic manufacturer agrees to limit or delay its market entry and receives “anything of value” in the patent settlement, anticompetitive effects are presumed and the burden is shifted to the settling parties to show the settlement agreement in question is procompetitive.[4] The settling parties may seek to rebut the presumption of anticompetitive effects by demonstrating that the procompetitive effects of the settlement outweigh any anticompetitive effects, or that the value received by the generic manufacturer was “fair and reasonable compensation solely for other goods and services” that the generic has agreed to provide the branded manufacturer.[5] The legislation also contains several other presumptions that are designed to make it more difficult for the settling parties to argue that their agreement was innocuous and/or had no material effect on competition.

”Anything of Value.” AB 824 defines “anything of value” broadly to include exclusive licenses and so-called “no authorized generic” provisions wherein the branded manufacturer agrees not to market or license an authorized generic during a negotiated period of time.[6] But it expressly excludes several categories of payments or agreements including licenses to market a generic version of a drug before expiration of a listed patent, acceleration clauses based on the NDA holder marketing a different dosage strength or form, waiver of damages accrued from an at-risk launch of the generic drug, and, “reasonable future litigation expenses” that have been previously documented.^[7] These exceptions could prove useful in litigation and parties negotiating such settlements will likely want to carefully consider whether their proposed settlements fit within these apparent safe harbors

Civil Penalties and Potential for Individual Liability. AB 824 purports to increase parties’ existing exposure under California antitrust and unfair competition law by providing for civil penalties of $20 million or more. Of perhaps greatest concern is that AB 824 could potentially be read to permit those civil penalties to be applied to individuals at the involved companies who “participate” or “assist” in its violation.[8]

Retroactivity. A question might be raised as to whether AB 824 could be applied to settlement agreements reached before its enactment. Statutes (especially those that include penalties), are generally presumed to be prospective only, and AB 824 has an effective date of January 1, 2020. There is therefore good reason to believe that AB 824 should not be interpreted to apply retroactively, although the statute is silent on this point.

Constitutional? The legislation’s broad sweep—and its departure from the standards set forth by the Supreme Court under federal law—raises serious questions as to whether the statute violates the U.S. Constitution. Although the legislation has provisions that purport to limit its application to agreements within California’s jurisdictional reach, in practice the standards and penalties it provides are likely to effectively regulate the content of almost any patent settlement in the U.S. between a branded and generic manufacturer given that such settlements typically apply nationally and cannot practically be limited to a particular section of the country. For this reason, the legislation appears to be vulnerable to a challenge based on the Dormant Commerce Clause of the U.S. Constitution. In a recent development, a lawsuit was filed by a consortium of generic drug manufacturers challenging AB 824 on that and a variety of other constitutional grounds.[9]

________________________

[1] To be codified at Cal. Health & Safety Code § 134000.

[2] Drug Price Competition and Patent Term Restoration Act (codified at 21 U.S.C. §§ 355 & 360cc).

[3] See FTC v. Actavis, Inc., 570 U.S. 136, 158 (2013); see also In re Cipro Cases I & II, 61 Cal. 4th 116, 348 P. 3d 845 (Cal. 2015).

[4] AB 824 § 134002(a)(1)(A) and (B).

[5] Id. at § 134002(a)(3)(A).

[6] Id.

[7] AB 824 § 134002(a)(2)(A)–(F). “Reasonable future litigation expenses” must be documented in budgets by the Abbreviated New Drug Application (ANDA) holder at least six months prior to the settlement, and cannot exceed the greater of $7,500,000 or 5% of the ANDA holder’s projected revenue for the first three years of sales of its generic, with documentation predating the settlement by at least 12 months. Id. at § 134002 (a)(2)(C)(ii)(I-II).

[8] Id. at § 134002(e)(1)(A)(i) (“Each person that violates or assists in the violation of this section shall forfeit and pay to the State of California a civil penalty sufficient to deter violations of this section . . . an amount up to three times the value received by the party that is reasonably attributable to the violation of this section, or twenty million dollars ($20,000,000), whichever is greater.”) (emphasis added).

[9] See Association for Accessible Medicines v. Becerra, No. 19-CV-2281 (E.D. Cal. Nov. 12, 2019).

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition practice group, or the following authors:

Kristen C. Limarzi – Washington, D.C. (+1 202-887-3518, [email protected])
Eric J. Stock – New York (+1 212-351-2301, [email protected])

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

Antitrust and Competition Group:

Washington, D.C.
D. Jarrett Arp (+1 202-955-8678, [email protected])
Adam Di Vincenzo (+1 202-887-3704, [email protected])
Scott D. Hammond (+1 202-887-3684, [email protected])
Kristen C. Limarzi (+1 202-887-3518, [email protected])
Joshua Lipton (+1 202-955-8226, [email protected])
Richard G. Parker (+1 202-955-8503, [email protected])
Cynthia Richman (+1 202-955-8234, [email protected])
Jeremy Robison (+1 202-955-8518, [email protected])
Chris Wilson (+1 202-955-8520, [email protected])

New York
Eric J. Stock (+1 212-351-2301, [email protected])

Los Angeles
Daniel G. Swanson (+1 213-229-7430, [email protected])
Samuel G. Liversidge (+1 213-229-7420, [email protected])
Jay P. Srinivasan (+1 213-229-7296, [email protected])
Rod J. Stone (+1 213-229-7256, [email protected])

San Francisco
Rachel S. Brass (+1 415-393-8293, [email protected])

Dallas
Veronica S. Lewis (+1 214-698-3320, [email protected])
Mike Raiff (+1 214-698-3350, [email protected])
Brian Robison (+1 214-698-3370, [email protected])
Robert C. Walters (+1 214-698-3114, [email protected])

Brussels
Peter Alexiadis (+32 2 554 7200, [email protected])
Jens-Olrik Murach (+32 2 554 7240, [email protected])
Christian Riis-Madsen (+32 2 554 72 05, [email protected])
Lena Sandberg (+32 2 554 72 60, [email protected])
David Wood (+32 2 554 7210, [email protected])

Munich
Michael Walther (+49 89 189 33 180, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])

London
Patrick Doris (+44 20 7071 4276, [email protected])
Charles Falconer (+44 20 7071 4270, [email protected])
Ali Nikpay (+44 20 7071 4273, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Deirdre Taylor (+44 20 7071 4274, [email protected])

Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
Sébastien Evrard (+852 2214 3798, [email protected])

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

Decided December 11, 2019

Peter v. NantKwest, Inc., No. 18-801

Today, the Supreme Court unanimously held that a provision in the Patent Act requiring the Patent and Trademark Office to recover all “expenses” from a patent applicant who challenges the denial of a patent application does not permit the recovery of attorney’s fees.

Background:
Section 145 of the Patent Act allows a patent applicant to challenge an adverse decision of the Patent and Trademark Office (“PTO”) in federal district court. The applicant, however, must pay the PTO “[a]ll the expenses of the proceedings” regardless whether the applicant prevails. 35 U.S.C. § 145. NantKwest sued the PTO Director under Section 145 to challenge the denial of its patent application. After the district court granted summary judgment to the PTO and the Federal Circuit affirmed, the PTO moved for reimbursement of “expenses” under Section 145. For the first time in the 170-year history of Section 145, the PTO sought reimbursement for the pro rata salaries of its in-house attorneys and a paralegal who worked on the case. The district court declined the PTO’s request, holding that the word “expenses” in Section 145 is not clear enough to rebut the “American Rule”—the background principle that each party is responsible for its own attorney’s fees. On appeal, the Federal Circuit initially concluded that the PTO was entitled to attorney’s fees, but on rehearing en banc, affirmed the district court’s decision and denied the PTO’s fee request.

Issue:
Whether the Patent Act provision requiring a patent applicant to pay “[a]ll the expenses of the proceedings” incurred by the PTO in an action under 35 U.S.C. § 145 authorizes the PTO to recover the salaries of its in-house legal personnel.

Court’s Holding:
No. The term “expenses of the proceedings” in Section 145 does not encompass the salaries of the PTO’s in-house legal personnel because that language is not a clear enough indication of congressional intent to overcome the background American Rule presumption against fee shifting.

“[T]he term ‘expenses’ alone has never been considered to authorize an award of attorney’s fees with sufficient clarity to overcome the American Rule presumption.”

Justice Sotomayor, writing for the unanimous Court

What It Means:

The Court’s ruling means that unsuccessful challengers under Section 145 of the Patent Act should not be required to pay the attorney’s fees of PTO lawyers and legal staff, thus limiting the possible costs of litigating actions under Section 145. A statutory provision providing for the recovery of “expenses” alone generally does not authorize the recovery of attorney’s fees.
The Court’s holding also likely prevents the PTO from collecting attorney’s fees from applicants challenging the denial of trademark registration under 15 U.S.C. § 1071(b)—the Lanham Act’s similarly worded analogue to Section 145.
Beyond the Lanham Act, the collateral consequences of the Court’s holding are likely to be limited. At oral argument, the PTO stated that it was aware of no other federal cost-shifting provision that uses the word “expenses” standing alone.
More broadly, the Court’s opinion reaffirms that the American Rule presumption against fee shifting applies to all statutes, even those (like Section 145) that require expenses or costs to be shifted to unsuccessful litigants.

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

Appellate and Constitutional Law Practice

Allyson N. Ho
+1 214.698.3233
[email protected]

Mark A. Perry
+1 202.887.3667
[email protected]

Related Practice: Intellectual Property

Wayne Barsky
+1 310.552.8500
[email protected]

Josh Krevitt
+1 212.351.4000
[email protected]

Mark Reiter
+1 214.698.3100
[email protected]

Howard S. Hogan
+1 202.887.3640
[email protected]

In the event of the United Kingdom leaving the European Union without an agreed deal on 31 January 2020, UK counterparties will need to make changes to their derivatives reporting arrangements in advance of that date to ensure that they comply with the UK’s European Market Infrastructure Regulation (“EMIR”) reporting requirements immediately post-Brexit. This briefing sets out what steps UK counterparties to derivatives transactions should take now in relation to their reporting arrangements to ensure a smooth transition on and after Brexit.

EMIR and much of its secondary implementation legislation takes the form of a Regulation and is therefore (before exit) directly applicable in UK law. The European Union (Withdrawal) Act 2018 provides that EU legislation that is directly applicable, such as EU EMIR, will form part of UK law on exit day and gives power to the UK government to amend the legislation so that it operates effectively post-Brexit. Consequently, post-Brexit there will be two versions of EMIR: the original EU version which will continue to apply to EU counterparties to derivatives transactions, EU central counterparties (“CCPs”) and EU trade repositories (“TRs”) (“EU EMIR”); and the UK version incorporating amendments during the onshoring process to ensure the regime continues to operate effectively post-Brexit (“UK EMIR”).

UK EMIR will operate parallel to EU EMIR. Both regimes aim to increase the resilience and stability of OTC derivative markets. UK EMIR sets out the regulatory regime relating to OTC derivatives transactions, CCPs and TRs in the UK. Like EU EMIR, UK EMIR imposes a number of requirements on derivatives market participants which include, among other things:

The obligation to centrally clear certain standardised OTC derivative contracts;
Requirements to reduce the risk arising from non-centrally cleared derivatives contracts through risk mitigation techniques; and
The obligation to report derivatives transactions to a TR.

From exit day onwards, UK counterparties to derivatives contracts will need to comply with UK EMIR rather than EU EMIR (assuming that the UK leaves the EU with no transitional arrangements in place), including in relation to the reporting of its derivatives transactions. The UK Financial Conduct Authority (“FCA”) released a statement to explain the changes that will be in store for TRs operating in the UK, UK counterparties and UK CCPs and what is expected with respect to compliance.[1]

The UK government has confirmed that, as far as possible, the policy approach set out in the EMIR legislation will not change after the UK has left the EU. This is unsurprising given that much of EMIR derived from commitments made at international level at the G20 in 2009.

What should UK counterparties be doing in advance of Brexit?

Undertake an audit of the UK EMIR validation rules that will apply to reports submitted on or after Brexit to UK TRs. The UK EMIR validation rules diverge from the EU EMIR validation rules and therefore it is likely that operational changes will be necessary to ensure your UK EMIR reports are compliant post-Brexit.
To the extent that a UK counterparty is currently reporting its trades to an EU TR, ensure that the necessary operational changes are made in advance of exit day to ensure that trades can be reported to a UK TR immediately post-Brexit. This may involve entering into new arrangements with a UK TR.
For UK counterparties who have engaged a third party or their counterparty to perform their reporting for them (i.e., “delegated” reporting), engage with their third party service provider or counterparty to ensure that they are making any necessary changes to ensure compliance post-Brexit.
Any UK counterparties who have accepted a delegation from clients and agreed to report on their behalf, where those clients are based in the EU, reporting will need to be provided to an EU TR post-Brexit and for UK clients, reporting will need to be made to a UK TR for those clients. Ensuring that the necessary operational changes are made will be critical for all firms providing delegated reporting services.
As all outstanding derivatives contracts entered into by a UK counterparty on or after 16 August 2012 must be held in a UK TR (whether registered or recognised) on exit day, UK counterparties should engage with their TRs to ensure all relevant trades are identified and to understand the porting process to their UK TR of choice by the date of exit.

What happens to outstanding trades post-Brexit?

All outstanding derivative trades entered into by UK counterparties on or after 16 August 2012, must be held in a UK registered, or recognised, TR by 11:00 p.m. UK time on exit day. This will require derivatives transactions of UK counterparties that remain outstanding to be ported to a UK TR in time for exit day and will require the necessary steps to ensure that new derivatives transactions will be reported to a UK TR beginning on exit day. UK counterparties would be well-advised to engage with their TRs to ensure orderly porting to their UK TR of choice by exit day and to ensure that all their relevant trades have been identified. UK counterparties should note that any updates to these trades required after Brexit will need to be made to the UK TR and not to the original EU TR.

______________________

[1] See FCA statement on the reporting of derivatives under the UK EMIR regime in a no-deal scenario, available at https://www.fca.org.uk/news/statements/fca-statement-reporting-derivatives-under-uk-emir-regime-no-deal-scenario (7 November 2019).

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 in the firm’s Financial Institutions and Derivatives practice groups, or the authors:

Michelle M. Kirschner – London (+44 20 7071 4212, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])

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

Europe:
Patrick Doris – London (+44 20 7071 4276, [email protected])
Amy Kennedy – London (+44 20 7071 4283, [email protected])
Michelle M. Kirschner – London (+44 20 7071 4212, [email protected])
Lena Sandberg – Brussels (+32 2 554 72 60, [email protected])

United States:
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])

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

Palo Alto partner H. Mark Lyon and associate Cassandra L. Gaedt-Sheckter and Los Angeles associate Frances A. Waldmann are the authors of “United States: Artificial Intelligence,” [PDF] published in the Global Data Review Insight Handbook 2020 in November 2019.

DOJ’s newly-announced Procurement Collusion Strike Force portends increased federal antitrust and False Claims Act enforcement in government procurement. Join Gibson Dunn partners as they discuss DOJ’s enforcement techniques, strategies for mitigating legal risks in the procurement process, and response plans for in-house counsel when alerted to a potential government investigation.

Topics to be covered include:

How antitrust and False Claims Act enforcement are being deployed in government procurement cases
Risk factors and red flags in competitive bids that may attract DOJ prosecutors
Best practices to minimize antitrust risks in government procurement processes

To read more about the Procurement Collusion Strike Force, visit our Client Alert regarding its announcement, “DOJ Announces a New Strike Force to Combat Antitrust Misconduct in Government Procurement.”

View Slides (PDF)

PANELISTS:

Kristen Limarzi is a partner in the Washington, D.C. office. Before joining Gibson Dunn, Ms. Limarzi was the Chief of the Appellate Section of DOJ’s Antitrust Division, and she was involved in every civil non-merger matter and all of the most complex criminal cases the Division litigated in the last decade. Her practice focuses on investigations, litigation, and counseling on antitrust merger and conduct matters, as well as appellate and civil litigation.

Scott Hammond is a partner in the Washington, D.C. office and Co-Chair of the Antitrust and Competition Practice Group. Previously, Mr. Hammond served as a DOJ prosecutor for 25 years, including 8 years as the Antitrust Division’s Deputy Assistant Attorney General for Criminal Enforcement – the highest ranking career lawyer in the Antitrust Division. He assists clients in antitrust and white-collar crime compliance, crisis management and government investigations across all industry sectors.

Jeremy Robison is a partner in the Washington, D.C. office. His practice focuses on defending companies and individuals involved in antitrust investigations by U.S. and international enforcement authorities, conducting internal investigations, and advising companies on antitrust compliance programs and policies. Mr. Robison has represented clients from a range of industries in antitrust investigations, including in the financial services, pharmaceutical, defense, healthcare, and technology sectors.

Jonathan Phillips is a partner in the Washington, D.C. office where he focuses on white collar enforcement matters and related litigation. Before joining the firm, Mr. Phillips served as a Trial Attorney in DOJ’s Civil Division, Fraud Section, where he investigated and prosecuted allegations of fraud against the United States under the False Claims Act and related statutes, including cases involving bid rigging and other allegations of fraud by government contractors.

Joseph West is a partner in the Washington, D.C. office and former Co-Chair of the firm’s Government Contracts Practice. For 40 years, Mr. West has concentrated his practice on contract counseling, compliance/enforcement, and dispute resolution. He has represented both contractors (and their subcontractors, vendors and suppliers) and government agencies, and has been involved in cases before numerous federal courts and agencies.

Lindsay Paulin is a litigation associate in the Washington, D.C. office. Her practice focuses on a wide range of government contracts issues, including internal investigations, claims preparation and litigation, bid protests, and government investigations under the False Claims Act. Ms. Paulin’s clients include contractors and their subcontractors, vendors, and suppliers across a range of industries including aerospace and defense, information technology, professional services, private equity, and insurance.

The European Union has become more active in addressing EU common foreign and security policy (“CFSP”) objectives with the help of what it calls “restrictive measures,” i.e., EU Financial and Economic sanctions. As indicated in our recent client alert, The EU Introduces a New Sanctions Framework in Response to Cyber-Attack Threats and even more recent by introducing a framework for EU Financial Sanctions against Turkey,[1] it has also specifically started to unilaterally implement sanctions addressing EU security concerns, including issues beyond traditional areas addressed by sanctions such as “traditional” sanctions imposed due to terrorism and international relations-based grounds. We have discussed this development and respective challenges in our recent publication U.S., EU, and UN Sanctions: Navigating the Divide for International Business.[2]

Furthermore, the EU Commission started to become more vocal on how it expects individuals and companies under its jurisdiction to implement those restrictive measures. A good example is the detailed guidance provided with regard to the EU Blocking Statute.

As shown below, the EU Commission has moved forward now and published the EU Guidance on Internal Compliance Programmes (“ICPs”) for dual-use trade controls.[3] In the following, we shall highlight key recommendations of the EU guidance and some additional points we consider helpful. Please note that the competent authorities of EU member states might have additional requirements and expectations.[4]

In some respects, these developments in the EU mirror recent developments in the United States. The U.S. Department of Commerce Bureau of Industry and Security (“BIS”) has previously published compliance guidance for the export of dual-use items that closely tracks the EU Commission’s guidance on ICPs.[5] The EU guidance also references similar advice on internal compliance programs published by the U.S. Department of State.[6] Most recently, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), which administers U.S. sanctions, has published guidance on sanctions compliance best practices, advising companies to implement compliance programs with similar central features. For companies with an U.S. nexus, we suggest additionally reviewing these resources, as well as our recent client alert OFAC Releases Detailed Guidance on Sanctions Compliance Best Practices.

1. EU Commission recommendations on internal compliance programs

The guidance issued by the EU Commission is intended to support companies with applying a framework to identify, manage and mitigate risks associated with dual-use trade controls and to ensure compliance with the relevant EU and national law and regulations[7].

The guidance consists of seven core elements representing what the EU Commission believes should be the “cornerstones”[8] of a company’s individual ICP.[9] While it notes that there is no one-size-fits-all approach, it also notes that “A company’s approach to compliance that includes policies and internal procedures for, at least, all the core elements could be expected to be in line with the EU ICP guidance for dual-use trade controls.”[10]

While the focus of the guidance is on managing dual-use trade[11] control impact and mitigating associated risks[12], we believe it also sheds a light on general expectations the EU Commission has with respect to internal compliance programs regarding sanctions and export controls.

1.1 Risk assessment

Prerequisite for the installation of an ICP is an assessment of the company’s business activities and their related risk of violating EU export controls, specifically the dual-use regulations. Rather than identifying every single exposure to EU regulation, this risk assessment serves as a basis to design an ICP tailor-made for the company.[13]

Furthermore, we suggest that in case the risk profile changes, such risk assessment should be rerun and—if deemed necessary—the ICP should be revised to fit the changed risk profile.

1.2 Top-level management commitment to compliance

The top-level management should continuously and distinctly express their commitment to a culture of compliance in order to lead by example. Regularly communicating corporate commitment to compliance to all employees and defining expectations, both orally and in writing, is considered vital in order to encourage such a culture of compliance.[14]

We further suggest such making sure this commitment—including the way it was expressed—is well-documented.

Furthermore, any expressed commitment to compliance should be reviewed by counsel to ensure the statement itself does not cause regulatory concerns in light of applicable anti-boycott law. For example, a statement made by a German resident noting, “Our company fully complies with all U.S. sanctions,” is itself a breach of applicable law in Germany, specifically section 7 of the German Trade Ordinance.

1.3 Organization structure, responsibilities and resources

According to the EU guidelines, companies should create an internal organizational chart in order to define responsibilities and assign functions to various employees. It is also suggested that companies designate at least one person in control of the overall compliance commitment (in some EU Member States this person must be part of the top-level management)and at least one employee in charge of the dual-use trade control function.[15] The personnel overseeing compliance with dual-use regulations needs to be authorized to stop transactions and has to be guarded from potential conflicts of interest.

Additionally, companies are advised to give these personnel access to relevant legislation, especially the latest lists of controlled goods and embargoed or sanctioned destinations and entities, and to gather all relevant compliance-related documents (policies and procedures) and assemble them in a “compliance manual.”

1.4 Training and awareness raising

Companies should also require periodic training (in the form of external seminars or in-house training events, etc.) to keep the control staff up-to-date with the dual-use regulations and the company’s ICP.[16] Training sessions may also include lessons learned from performance reviews. Moreover, as potential compliance issues are a concern at all relevant levels of a company, measures to raise awareness for such issues should be taken accordingly.

1.5 Transaction screening process and procedures

Establishing standardized transaction processes and procedures can help ensure compliance with relevant export law. This is best achieved by collecting and analysing all relevant information concerning item classification, transaction risk assessment, license determination and post-licensing controls.[17]

Even if all necessary information is readily available, it remains challenging to verify a certain item classification from a legal perspective as the performance characteristics of an item need to be checked against the EU and national dual-use control lists. This classification regularly demands cooperation between different departments of a company, such as a cooperation between the competent technical department and the legal team.[18]

Companies may also directly contact the competent authority and ask for assistance with the classification after providing a detailed technical description of the respective item. At the competent authorities, such mix of personnel is mirrored, e.g. the competent German authority, the Federal Office for Economic Affairs and Export Control (BAFA), employs both (legally trained) engineers / technicians and lawyers.

1.6 Transaction risk assessment

Companies also need to ascertain whether their counterparties (intermediaries, purchasers, consignees or end users) are subject to any embargoes or sanctions. The guidance of the EU Commission proposes acquiring end-use statements from customers, checking the reliability of end users with the national competent authority and to giving attention to diversion risk indicators. If information learned or acquired from the competent authority gives cause for concern, procedures must be in place to avert any export without the authority’s explicit permit.[19]

1.7 Licensing

The company should ensure that it has all relevant contact details of the competent control authority. Moreover, the exporter should be aware that exports via cloud services or personal baggage and other activities such as providing technical assistance and brokering are subject to dual-use control measures.[20]

1.8 Post-licensing controls

A final check should be conducted to make sure that all steps ensuring compliance were duly taken and that licenses have not been invalidated since their issuance due to changes of the details of the exporter, the intermediaries or the end users.[21] A procedure to stop or suspend the export—if necessary—should be implemented. Note that companies are still obligated to independently investigate the lawfulness of the transaction.[22]

1.9 Performance review, audits, reporting and corrective actions

According to the guidelines, it is essential to implement procedures that regularly analyse, test, evaluate, and revise the company’s ICP (e.g., in the form of targeted and documented audits).[23] Furthermore, specific reporting procedures should be in place in order to enable the company to take the required action when a case of noncompliance is suspected or has occurred. Employees must also feel secure to express concerns about noncompliance or the operational reliability of the ICP. Any suspected noncompliance should be documented. After taking effective corrective actions, the relevant personnel should be informed of those measures.

1.10 Record-keeping and documentation

The company should establish policies for legal document storage, record management and traceability of trade control-related activities.[24] This may be legally required in some cases, but it also generally renders the search for legal documents more effective. The relevant EU and national legal provisions for record-keeping (period of safekeeping, scope of documents, etc.) should be reviewed before establishing such a filing system. Additionally, it is suggested that the company keep track of past contacts with responsible authorities.

1.11 Physical and information security

Due to the generally high sensitivity of dual-use items, companies are requested to introduce procedures to prevent the unapproved access to and removal of controlled items. With regard to physical items, the establishment of restricted access areas, personnel access or exit controls or physically safeguarding the respective item should be considered. To assure the security of physically intangible technology, the guideline recommends, among other steps, that the company install antivirus programs, file encryption and firewalls[25].

2. Outlook

Taking into account both the new EU guidance and the Framework for OFAC Compliance Commitments,[26] there is a clear trend visible from authorities to voice and detail their expectations on how companies should address sanctions and export control compliance. In turn, it can be expected that noncompliance with such expectations will increasingly be under enhanced regulatory scrutiny.

___________________

[1] See: Press release of the Council of the EU: Turkey’s illegal drilling activities in the Eastern Mediterranean: Council adopts framework for sanctions, available online at: [2] A. Smith, S. Connor and R. Roeder, U.S., EU, and UN Sanctions: Navigating the Divide for International Business, Bloomberg, 2019, ISBN 978-1-68267-281-5. The first chapter can be found online at: https://www.gibsondunn.com/wp-content/uploads/2019/11/Smith-Connor-Roeder-US-EU-and-UN-Sanctions-Navigating-the-Divide-for-International-Businesses-Bloomberg-Law-2019.pdf.

[3] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 3/18.

[4] E.g. for Germany, please see: Internal Compliance Programmes – ICP – Company-internal export control systems, available online at: www.bafa.de › Downloads › afk_merkblatt_icp_en.

[5] https://www.bis.doc.gov/index.php/documents/pdfs/1641-ecp/file.

[6] https://icp.acis.state.gov/.

[7] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 1/18.

[8] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 3/18.

[9] Please note that the EU ICP guidance makes reference to the 2011 Wassenaar Arrangement Best Practice Guidelines on Internal Compliance Programmes for Dual-Use Goods and Technologies (available online at https://www.wassenaar.org/app/uploads/2015/06/2-Internal-Compliance-Programmes.pdf); the “Best Practice Guide for Industry” from the Nuclear Suppliers Group (NSG), click here; the ICP elements in the Commission Recommendation 2011/24/EU; the results from the fourth Wiesbaden Conference (2015) on “Private Sector Engagement in Strategic Trade Controls: Recommendations for Effective Approaches on United Nations Security Council Resolution 1540 (2004) Implementation”; and the 2017 United States Export Control and Related Border Security Program ICP Guide website (available online at http://icpguidelines.com/).

[10] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 3/18.

[11] Council Regulation (EC) 428/2009, regularly referred to as the EU Dual-Use Regulation, has set up an EU regime for the control of export, transit and brokering of dual-use items in order to contribute to international peace and security by precluding the proliferation of nuclear, chemical, or biological weapons and their means of delivery. To adapt to the rapidly changing technological, economic and political circumstances, the EU Commission presented a proposal in September 2016 to update and expand the existing rules that was supported by the European Parliament in its first report on the matter. On June 5, 2019, the Council issued its own parameters for negotiations with the European Parliament seeking a more limited recast of the dual-use regulation. Thereby the discussion mainly focuses on the classification of cyber surveillance technologies as dual-use goods and the possibility of a resulting discrimination of EU companies. Considering the ongoing discussions, we do not expect the implementation to take place in the coming weeks. The progress of the respective discussion can be viewed at : http://www.europarl.europa.eu/legislative-train/theme-europe-as-a-stronger-global-actor/file-review-of-dual-use-export-controls.

[12] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 3/18.

[13] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 4/18.

[14] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – pages 5/18 and 6/18.

[15] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 6/18.

[16] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 7/18.

[17] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 7/18.

[18] For best practices from a company perspective please see: Müller, Alexandra / Groba, Alexander in AW-Prax 2019 – page 300.

[19] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 9/18.

[20] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 10/18.

[21] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 10/18.

[22] Müller, Alexandra / Groba, Alexander in AW-Prax 2019 – page 303.

[23] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 10/18.

[24] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 11/18.

[25] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019H1318&from=EN – page 12/18.

[26] https://www.treasury.gov/resource-center/sanctions/Documents/framework_ofac_cc.pdf.

The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Patrick Doris, Michael Walther, R.L. Pratt and Richard Roeder.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, [email protected])
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, [email protected])
Jose W. Fernandez – New York (+1 212-351-2376, [email protected])
Marcellus A. McRae – Los Angeles (+1 213-229-7675, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Ben K. Belair – Washington, D.C. (+1 202-887-3743, [email protected])
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, [email protected])
Laura R. Cole – Washington, D.C. (+1 202-887-3787, [email protected])
R.L. Pratt – Washington, D.C. (+1 202-887-3785, [email protected])
Samantha Sewall – Washington, D.C. (+1 202-887-3509, [email protected])
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, [email protected])
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, [email protected])

Europe:
Peter Alexiadis – Brussels (+32 2 554 72 00, [email protected])
Nicolas Autet – Paris (+33 1 56 43 13 00, [email protected])
Attila Borsos – Brussels (+32 2 554 72 10, [email protected])
Patrick Doris – London (+44 (0)207 071 4276, [email protected])
Sacha Harber-Kelly – London (+44 20 7071 4205, [email protected])
Penny Madden – London (+44 (0)20 7071 4226, [email protected])
Steve Melrose – London (+44 (0)20 7071 4219, [email protected])
Benno Schwarz – Munich (+49 89 189 33 110, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Richard W. Roeder – Munich (+49 89 189 33-160, [email protected])

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

Spearheaded by Daniel M. Kolkey, a former Associate Justice on the California Court of Appeal, Third Appellate District, and former Counsel to the Governor of California, Gibson Dunn’s California Appellate Practice Group has prepared the attached California Supreme Court Round-Up, which previews upcoming cases and summarizes select opinions issued by the Court. This edition includes opinions handed down from January through November 2019, organized by subject. Each entry contains a description of the case, as well as a substantive analysis of the Court’s decision. The Round-Up provides a resource for busy practitioners seeking an in-depth, timely, and objective report on the California Supreme Court’s actions.

To view the Round-Up, click here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court, or in state or federal appellate courts in California. Please feel free to contact the following lawyers in California, or any member of the Appellate and Constitutional Law Practice Group.

Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, [email protected])
Daniel M. Kolkey – San Francisco (+1 415-393-8420, [email protected])
Julian W. Poon – Los Angeles (+1 213-229-7758, [email protected])
Theane Evangelis – Los Angeles (+1 213-229-7726, [email protected])
Michael Holecek – Los Angeles (+1 213-229-7018, [email protected])
Jennafer M. Tryck – Orange County (+1 949-451-4089, [email protected])

On November 21, 2019, amid mounting tensions between China and Hong Kong, the U.S. Congress passed the Hong Kong Human Rights and Democracy Act of 2019 (the “Bill”)[1] and sent it to the President for his signature. The Bill, which aims to protect civil rights in Hong Kong and to deter human rights violations in the territory (including by punishing those who commit them), was passed by supermajorities in both houses of Congress—the House of Representatives approved the Bill by a 417-1 margin, while the Bill received unanimous support in the Senate.[2] As of this writing, the President has not signed the legislation. On November 22, 2019, President Trump suggested that he might veto the Bill in order to prioritize a trade deal with China, despite the fact that the President’s ability to exercise such authority will be limited because the Bill passed both houses of Congress with rare veto-proof majorities. Although the U.S. Congress has the power to create the law, the U.S. President has sole enforcement authority, and President Trump may still be able to express his displeasure with the Bill by narrowly interpreting the law’s provisions. We would expect that the President could announce his desire to narrowly interpret the law in a signing statement made simultaneous with his signing of the Bill.

The Bill has received widespread support from the Hong Kong protestors, whose activities over the past several months have often included calls on Washington to show its support for their movement. On the other hand, the Bill has been met with strong opposition in Hong Kong and China due to concerns that the legislation could disrupt economic stability in Hong Kong, as well as worsen the existing trade relationship between Hong Kong and the United States.[3] In Hong Kong, Chief Executive Carrie Lam has said that foreign interference in Hong Kong’s internal affairs is “totally unacceptable” and that any sanctions imposed by Washington would only serve to complicate matters further.[4] Beijing has also characterized the Bill as an interference in China’s domestic affairs and has threatened to take “strong countermeasures” against the United States if the Bill is implemented.[5]

Overview of the Hong Kong Human Rights and Democracy Act 2019

If enacted, the Bill would amend the United States-Hong Kong Policy Act of 1992 (the “1992 HK Act”), the primary legislation that governs the United States’ relationship with Hong Kong. The 1992 HK Act statute allows Hong Kong to be treated separately from mainland China on various economic matters such as trade. An earlier version of the Bill had been introduced in 2014 in response to the “Umbrella Revolution” that took place in Hong Kong that year;[6] and an updated version was again introduced in 2017. However, the Bill only gained legislative traction this year as violence in Hong Kong escalated. The protests, which have spanned more than 22 weeks, originally began in June. They were spurred by a now-withdrawn bill that would have allowed extraditions from Hong Kong to mainland China, among other jurisdictions, a move that many Hong Kongers viewed as an attempt to circumvent the “one country, two systems” rule and erode human rights in the territory.[7] The protests have since grown into a bigger movement, including broader demands for democracy, such as universal suffrage and the ability for Hong Kongers to elect its own leaders, as set out under the Basic Law of the Hong Kong Special Administrative Region (the “Basic Law”).[8] Other demands that the protestors have made also include calls to establish an independent commission of inquiry to look into alleged police brutality against protestors.

The Bill, if signed into law, will increase the United States’ scrutiny over the situation in Hong Kong. According to the Bill, the objective of the legislation is to “reaffirm the principles and objectives set forth in the [1992 HK Act]”.[9] The Bill also calls for Hong Kong to remain “sufficiently autonomous from the People’s Republic of China to ‘justify treatment under a particular law of the United States, or any provision thereof, different from that accorded to the People’s Republic of China.’”[10] Similar to the 1992 HK Act, the Bill requires an annual assessment of Hong Kong’s autonomy to determine whether it should continue to be treated differently from mainland China. Additionally, the Bill introduces the potential imposition of U.S. sanctions in response to human rights violations in Hong Kong.

The following is a summary of the key provisions of the Bill:

Annual Certification of Hong Kong

Under the provisions of the Bill, on an annual basis the U.S. Secretary of State will be required to report to the Congress the U.S. Government’s view as to whether Hong Kong retains sufficient autonomy to merit its continued enjoyment of economic treatment by the United States distinct from (and in almost all cases more favorable than) the treatment provided to the mainland.[11] Furthermore, the report must include “an assessment of the degree of any erosions to Hong Kong’s autonomy” that have an impact on a number of matters such as commercial agreements, sanctions enforcement, export controls, and any other agreements and forms of exchange involving dual-use, critical, or other sensitive technologies as a result of any action taken by the Chinese government that is inconsistent with its commitments under the Basic Law or the Sino-British Joint Declaration of 1984.[12] Importantly, under the Bill a positive assessment that allows the continued differentiated treatment between Hong Kong and mainland China does not require that Beijing allow for further democratization in Hong Kong.

Annual Report on Violations of U.S. Export Control Laws and UN Sanctions in Hong Kong

The Bill also requires the U.S. Secretaries of the Treasury and State to submit a separate joint report to Congress that includes:

an assessment of the nature and extent of violations of U.S. export control and sanctions laws occurring in Hong Kong;
an identification of items reexported from Hong Kong in violation of U.S. export control and sanctions laws, including the countries and persons to which the items were reexported to, and how such items were used;
an assessment of whether sensitive dual-use items subject to U.S. export control laws are being transhipped through Hong Kong and used to develop mass surveillance programs in China;
an assessment of whether China has been using Hong Kong’s status as a separate customs territory to import goods into China from Hong Kong in contravention of U.S. export control laws through certain schemes or programs that may exploit Hong Kong as a conduit for controlled sensitive technology;
an assessment of whether Hong Kong has adequately enforced sanctions imposed by the United Nations (“UN”);
a description of the types of goods and services transhipped or reexported through Hong Kong in violation of UN sanctions to North Korea, Iran, or other high risk jurisdictions or entities; and
an assessment of whether any shortcomings in Hong Kong’s enforcement of sanctions and export controls necessitates the assignment of additional personnel to the U.S. Consulate of Hong Kong.[13]

Promulgation of U.S. Sanctions in Response to Human Rights Violations in Hong Kong

The Bill empowers the President to impose sanctions on individuals deemed responsible for “the extrajudicial rendition, arbitrary detention, or torture of any person in Hong Kong” or “other gross violations of internationally recognized human rights in Hong Kong.”[14] The potential sanctions that could be imposed are varied, and could include asset blocking which would effectively blacklist any identified party from participating in transactions with U.S. persons. This would be akin to adding such a party to the U.S. Specially Designated Persons and Blocked Persons List (the “SDN List”), freezing any property owned by such a party in the United States, and prohibiting any transactions involving such a party that has a U.S. nexus.[15] This would also greatly limit the designated party’s ability to engage in U.S. Dollar trade (which almost always requires clearing through a bank under U.S. jurisdiction).

Other types of sanctions that could be imposed include the revocation or denial of U.S. visas currently issued or to be issued to identified individuals.[16]

On the other hand, the Bill provides that visa applications from Hong Kong applicants will not be denied on the basis of “politically motivated arrest, detention, or other adverse government action.”[17]

Implications of the Hong Kong Human Rights and Democracy Act 2019

Potential Impact on Hong Kong Companies

Under the 1992 HK Act, Hong Kong’s distinct trading status from China has meant that it enjoys protection from punitive tariffs that the United States has imposed on China, including the tariffs that are currently in force as a result of continuing U.S.-China trade disagreements. If the Bill becomes law and Hong Kong’s protected status is eroded or removed, the impact could be significant for both Hong Kong and U.S. companies. As discussed, the Bill requires the U.S. Secretary of State to assess and certify on an annual basis, whether Hong Kong should continue to enjoy its special trade benefits vis-à-vis the United States. An adverse assessment could potentially threaten this status. Hong Kong is currently the United States’ 21st largest trading partner, with goods and services trade with Hong Kong amounting to nearly $70 billion in 2018.[18] Any limitations on trade imposed on Hong Kong could also threaten its reputation as a global financial hub – which has relied, at least in part, on its preferential trading relationship with counterparties including the United States. More than 1,300 U.S. firms currently operate in Hong Kong, and nearly every major U.S. financial firm maintains a presence in the territory, with billions of dollars of assets under management.[19] Hong Kong also risks losing ready access to U.S. technologies that are more tightly controlled when exported to China as the Bill could result in the United States imposing the same export controls on Hong Kong as it places on China.

Potential Impact on U.S. Companies

The impact of the Bill on the United States could be broader than trade-related losses with respect to Hong Kong. The Bill could stall trade talks between the United States and China and derail plans between the two nations to complete a “phase one” trade deal that had been announced earlier in November.[20] Even more significantly, the Bill may invite China to impose its long-threatened countersanctions against U.S. companies. Following its recent favourable World Trade Organization decision against the United States, China may find justification to impose $3.6 billion in tariffs against the United States.[21] The Bill could spur China to place additional sanctions on key U.S. imports such as aircraft, services, and wider manufacturing. Earlier in June 2019, aerospace manufacturer Boeing was reportedly in talks with Chinese air carriers for a potential $30 billion deal for the sale of wide-body aircraft, which would be one of the largest orders ever placed.[22] The deal has been threatened by the ongoing trade war, and may be subject to further delay or even cancellation if the Bill becomes law and dealings with U.S. firms become more sensitive for major Chinese entities.[23]

Perhaps most aggressively, China could go as far as to proscribe some U.S. companies from doing business in China – effectively placing U.S. firms on a Chinese blacklist. Beijing has threatened such a response in the past but has yet to fully enact such a consequence. China announced the beginnings of such a list earlier in 2019 in response to the U.S. restrictions placed on Huawei Technologies Co.[24] At that time, China announced plans to establish an “unreliable entity” list that targets foreign companies or persons who China deems as severely damaging the legitimate interests of Chinese companies by, amongst others, blocking or cutting off supply chains for “non-commercial reasons.”[25]

_________________________

[1] Summary of 116thCongress (2019-2020) (Nov. 21, 2019), https://www.congress.gov/bill/116th-congress/senate-bill/1838/summary/55

[2] See Jacob Pramuk, Congress passes Hong Kong rights bill as Trump tries to strike China trade deal, CNBC (Nov. 20, 2019), https://www.cnbc.com/2019/11/20/house-passes-hong-kong-rights-bill-amid-trump-china-trade-talks.html

[3] See Tobias Hoonhout, China Calls Senate’s Passing of Hong Kong Human Rights and Democracy Act ‘Very Disappointing’, National Review (Nov. 20, 2019), https://www.nationalreview.com/news/china-calls-senates-passing-of-hong-kong-human-rights-and-democracy-act-very-disappointing/

[4] See Iain Marlow and Daniel Flatley, What the U.S. Congress Is and Isn’t Doing About Hong Kong, Washington Post (Nov. 18, 2019), https://www.washingtonpost.com/business/what-the-us-congress-is-and-isnt-doing-about-hong-kong/2019/11/18/d51ab226-0a19-11ea-8054-289aef6e38a3_story.html

[5] See China warns U.S. of “strong countermeasures” to looming legislation on Hong Kong, CBS News (Nov. 21, 2019), https://www.cbsnews.com/news/china-hong-kong-human-rights-and-democracy-act-2019-strong-countermeasures-beijing-today-2019-11-21/

[6] Hong Kong Human Rights and Democracy Act, S. 2922

[7] See Senate Passes Bill Supporting Human Rights in Hong Kong as Protests Show No Sign of Abating, Associated Press (Nov. 20, 2019), https://time.com/5733673/senate-human-rights-democracy-act-hong-kong/

[8] See Hong Kong’s Protests Explained, Amnesty International (undated), https://www.amnesty.org/en/latest/news/2019/09/hong-kong-protests-explained/

[9] Section 3 of the Hong Kong Human Rights and Democracy Act of 2019, S. 1838

[10] Id.

[11] Id at Section 4

[12] Id.

[13] Id at Section 5.

[14] Id at Section 7.

[15] Id.

[16] Id.

[17] Id at Section 4.

[18] Office of the United States Trade Representative Hong Kong Report.

[19] United States Department of State 2019 Hong Kong Policy Act Report.

[20] See US and China ‘getting close’ to trade deal, White House economic advisor Kudlow says, CNBC (Nov. 15, 2019), https://www.cnbc.com/2019/11/15/us-china-getting-close-to-trade-deal-white-house-advisor-kudlow.html

[21] See Robert Delaney, China wins WTO case to sanction US$3.6 billion in US products following anti-dumping dispute, South China Morning Post (Nov. 2, 2019), https://www.scmp.com/news/china/article/3036010/china-wins-wto-case-sanction-us36-billion-us-trade

[22] See Boeing and Chinese airlines in talks for US$30 billion mega-deal that trade war could derail, South China Morning Post (Jun. 6, 2019), https://www.scmp.com/news/china/article/3013289/boeing-and-chinese-airlines-talks-us30-billion-mega-deal-trade-war-could

[23] See Explainer: U.S.-China trade war – the levers they can pull, Reuters (Jun. 6, 2019), https://www.reuters.com/article/us-usa-trade-china-levers-explainer/explainer-u-s-china-trade-war-the-levers-they-can-pull-idUSKCN1T62KY

[24] Gibson Dunn Client Alert (May 20, 2019), Citing a National Emergency, the Trump Administration Moves to Secure U.S. Information and Communications Technology and Service Infrastructure, https://www.gibsondunn.com/?search=news&article-type=publications&s=huawei&year=&practice%5B%5D=1680

[25] See What We Know About China’s ‘Unreliable Entities’ Blacklist, Bloomberg News (Jun. 4, 2019), https://www.bloomberg.com/news/articles/2019-06-04/understanding-china-s-unreliable-entities-blacklist-quicktake

The following Gibson Dunn lawyers assisted in preparing this client update: Adam Smith, Grace Chow, Stephanie Connor, Chris Timura, Judith Alison Lee, David Lee, Brian Schwarzwalder, Scott Jalowayski, Kelly Austin, John Fadely, Fang Xue, Paul Boltz, and Yi Zhang.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, [email protected])
Adam M. Smith – Washington, D.C. (+1 202-887-3547, [email protected])
David C. Lee – Orange County, CA (+1 949-451-3842, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, [email protected])

Asia:
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Paul Boltz – Hong Kong (+852 2214 3723, [email protected])
Grace Chow – Singapore (+65 6507 3632, [email protected])
John Fadely – Hong Kong (+852 2214 3810, [email protected])
Scott Jalowayski – Hong Kong (+852 2214 3727, [email protected])
Brian Schwarzwalder – Hong Kong (+852 2214 3712, [email protected])
Fang Xue – Beijing (+86 10 6502 8687, [email protected])
Yi Zhang – Hong Kong (+852 2214 3988, [email protected])

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

Washington, D.C. partner Joshua Lipshutz was one of three lawyers recognized as Law360’s 2019 Cybersecurity MVPs [PDF]. The series profiles attorneys who “have distinguished themselves from their peers by securing hard-earned successes in high-stakes litigation, complex global matters and record-breaking deals.” His profile was published on November 25, 2019.

Last week, the New York State Department of Financial Services (“DFS”) proposed a new regulation allowing regulated entities to share “confidential supervisory information” with their legal counsel and independent auditors without first obtaining approval from DFS.[1] Announced by superintendent Linda Lacewell, DFS stated that the new regulation will make it easier for banks to share confidential information with attorneys[2] and other advisors by seeking to “streamline” the disclosure process.[3] The regulation will be subject to a 60-day comment period following publication in the state register on November 27, 2019.[4]

DFS’s Current Outlier Approach

As New York’s chief financial regulator,[5] DFS has broad “supervisory” authority[6] to examine and investigate banks, trust companies, investment companies, and other banking organizations in order to “protect the public interest.”[7] In exercising that authority, DFS has long mandated that reports, memoranda, or correspondence relating to such investigations and examinations, including materials from banks or regulatory agencies, be deemed “confidential” and not be subject to subpoena or disclosed to the public without DFS approval.[8] This confidentiality requirement, which is more than a century old,[9] applies even after an entity has received a disclosure request pursuant to New York’s Freedom of Information Law.[10]

DFS and its predecessors have long maintained that such a rule is intended to “encourage frank and open communications” between regulated entities and DFS.[11] And that is because the restriction can, in some cases, facilitate “effective” and “comprehensive” examinations by DFS[12] and allow the agency to make “frank and forceful criticism” without fear of disclosure.[13] Indeed, other important bank regulators have imposed similar restrictions on disclosure of confidential supervisory information, including the Consumer Financial Protection Bureau (“CFPB”),[14] the Office of the Comptroller of the Currency (“OCC”),[15] the Board of Governors of the Federal Reserve System (“FRB”),[16] and the Federal Deposit Insurance Corporation (“FDIC”).[17]

Nevertheless, the sheer breadth of DFS’s prohibition and the agency’s aggressive approach in interpreting its own mandate have led some to criticize DFS’s rule as out of step with more sensible restrictions imposed by other regulators.[18] For example, DFS has often asserted restrictions to prevent regulated companies from sharing information with other regulators. It has also taken the position that its prohibition applies even when a regulated entity seeks to provide confidential supervisory information to important professional advisors such as legal counsel—an interpretation that raises constitutional concerns[19] in light of its obvious impact on the attorney-client relationship and which, in any event, may lack statutory support[20] given the New York Legislature’s prohibition on disclosure of such information to the “public.”[21]

As a result of DFS’s aggressive approach, legal counsel with financial clients are often forced to take the cumbersome, time-consuming step of obtaining DFS approval before considering such confidential supervisory information and can be impaired from providing timely and thorough advice with respect to compliance with the state’s banking statutes.

The Proposed Regulation

The new regulation would provide a “limited exception” to DFS’s restrictions as they relate to regulated entities and professional advisors.[22] In particular, regulated entities would now be able to share confidential supervisory information with legal counsel and auditors without first obtaining DFS’s approval, provided that they enter into a written agreement stating, among other things, that the information will be used solely to provide “legal representation or auditing services”; that the information will be disclosed solely to employees, directors, or officers on a “need to know” basis; that the counsel or auditors will notify DFS of demands or requests for such information; and that the advisors will assert legal privileges or protections as requested by DFS and on the agency’s behalf.[23] In addition, the regulated entities must keep a record of all disclosed confidential supervisory information[24] and a copy of each required written agreement.[25]

The new regulation would place DFS closer in line with other regulators of financial institutions, which also permit disclosure to legal counsel and other professionals.[26] The CFPB, FDIC, OCC, and FRB all currently allow certain service providers to access confidential supervisory information without seeking additional approval from the regulator.[27]

“With this action, DFS is delivering on a promise I made to ensure the Department engages in an open dialogue with the financial services industry,” said Superintendent Lacewell,[28] who was confirmed as Superintendent this year.[29] “This is one of the many steps DFS is taking to ensure an efficient regulatory structure to assist the industry.”[30]

Conclusion

The new DFS administration is likely to be applauded for this proposed regulation, which reflects a meaningful attempt to “modernize and transform” DFS’s practices[31] and to adhere to its statutory mandate to “foster the growth of the financial industry in New York and spur state economic growth through judicious regulation.”[32] Moving forward, financial institutions should view this new measure as a favorable development, and sophisticated legal counsel are likely to find it easier to provide prompt legal advice to their clients.

___________________________

[1] Click here.

[2] https://www.law.com/newyorklawjournal/2019/11/14/dfs-proposes-new-regulation-streamlining-info-sharing-between-banks-and-their-lawyers/.

[3] Click here.

[4] https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1911141.

[5] See, e.g., N.Y. Financial Services Law §§ 101-a, 102; see also, e.g., Dep’t of Fin. Servs., 2018 Annual Rep. at 1, https://www.dfs.ny.gov/system/files/documents/2019/07/dfs_annualrpt_2018.pdf.

[6] See, e.g., N.Y. Financial Services Law §§ 201(a), 202, 301-302.

[7] See, e.g., N.Y. Banking Law §§ 10, 36(1); see id. §§ 2(11), 11, 14(1), 38-39; see also, e.g., N.Y. Financial Services Law §§ 102(j), 104(a)(4).

[8] N.Y. Banking Law § 36(10); 3 N.Y.C.R.R. Sup. Proc. G 106.8; see ch. 146, 1961 N.Y. Laws, 779, 680; see also here.

[9] See, e.g., ch. 41, 1914 N.Y. Laws 1264, 1264.

[10] See 3 N.Y.C.R.R. Sup. Proc. G 106.8.

[11] See, e.g., Banking Dep’t Mem. of Bill Before the Gov. for Exec. Action (June 29, 1999), reprinted in Bill Jacket for ch. 206 (1999) (“Bill Jacket”), at 11.

[12] Ltr. from Sen. Hugh T. Farley to Hon. James M. McGuire (June 28, 1999), reprinted in Bill Jacket at 4.

[13] See, e.g., Stratford Factors v. New York State Banking Dep’t, 10 A.D.2d 66, 70-71 (1st Dep’t 1960) (citation and internal quotation marks omitted).

[14] See 12 C.F.R. § 1070.42.

[15] See id. § 4.37.

[16] See id. § 261.20.

[17] See id. § 309.6.

[18] See, e.g., https://www.law360.com/articles/980300/ny-regulator-s-untenable-authority-over-confidential-info.

[19] N.Y. Const. art. Art. 1, § 6.

[20] See, e.g., https://www.law360.com/articles/980300/ny-regulator-s-untenable-authority-over-confidential-info.

[21] See Banking Law § 36(10) (“All reports of examinations and investigations, correspondence and memoranda concerning or arising out of such examination and investigations . . . shall not be made public unless, in the judgment of the superintendent, the ends of justice and the public advantage will be subserved by the publication thereof.” (emphasis added)).

[22] See 3 N.Y.C.R.R. § 7.2(b) (proposed 2019); see also here.

[23] See 3 N.Y.C.R.R. § 7.2(c) (proposed 2019); see also here.

[24] See 3 N.Y.C.R.R. § 7.2(c) (proposed 2019); see also here.

[25] See 3 N.Y.C.R.R. § 7.2(c) (proposed 2019); see also https://www.law.com/newyorklawjournal/2019/11/14/dfs-proposes-new-regulation-streamlining-info-sharing-between-banks-and-their-lawyers/.

[26] See 12 C.F.R. §§ 4.37(b)(2), 261.20(b), 309.6(a), 1070.42(b)(2).

[27] Id.

[28] https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1911141.

[29] https://money.usnews.com/investing/news/articles/2019-06-21/ny-state-senate-confirms-linda-lacewell-as-new-chief-of-financial-regulator.

[30] https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1911141.

[31] N.Y. Financial Services Law § 101-a.

[32] N.Y. Financial Services Law § 201; see 3 N.Y.C.R.R. § 7.2(c) (proposed 2019) (citing § 201).

Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Public Policy or Financial Institutions practice groups, or the authors:

Mylan L. Denerstein – Co-Chair, Public Policy Practice, New York (+1 212-351-3850, [email protected])
Matthew L. Biben – Co-Chair, Financial Institutions Practice, New York (+1 212-351-6300, [email protected])
Seth M. Rokosky – New York (+1 212-351-6389, [email protected])
Randi Kira Brown* – New York (+1 212-351-6205, [email protected])

Please also feel free to contact the following practice group leaders:

Financial Institutions Group:
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])

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

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

On November 19, 2019, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation (Agencies) finalized their regulation (Final Rule) on High Volatility Commercial Real Estate (HVCRE) that had been proposed in September 2018.

The Final Rule made few changes from the 2018 proposal. Although the text of the rule and its preamble do not answer all HVCRE questions, there is now a much more reasonable framework for borrowers than under the original Basel III capital rule and the Agencies’ interpretations of it.

The Original Basel III Capital Rule and the Agencies’ Interpretations

HVCRE treatment is a purely American phenomenon; it was not included in the international Basel III framework. A form of capital “gold plating,” it imposes a 50% heightened capital treatment on certain real estate loans that are characterized as HVCRE exposures. The original Basel III capital rule defined an HVCRE exposure as follows:

A credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property, unless the facility finances:

One- to four-family residential properties;
Certain community development properties
The purchase or development of agricultural land, provided that the valuation of the agricultural land is based on its value for agricultural purposes; or
Commercial real estate projects in which:
- The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio under Agency standards – e.g., 80% for a commercial construction loan;
- The borrower has contributed capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development expenses out-of-pocket) of at least 15% of the real estate’s appraised “as completed” value; and
- The borrower contributed the amount of capital required before the bank advances funds under the credit facility, and the capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project.[1]

The original Basel III capital rule raised many interpretative questions; the few to which the Agencies responded were answered in a non-intuitive, unduly conservative manner.[2] In particular, the Agencies interpreted the requirement relating to “internally generated capital” as forbidding distributions of earned income even if the amount of capital in the project would exceed the 15% of “as completed” value post-distribution.[3] In addition, the Agencies did not permit appreciated land value to be taken into account for purposes of the borrower’s capital contribution – even though it would count if the land were sold and the cash contributed instead.

In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 became law, and certain of its provisions overrode the original Basel III capital rule. The Final Rule implements the 2018 statute.

Final Rule – Definition of HVCRE

The Final Rule follows the statute in narrowing the definition of an HVCRE exposure requiring 50% additional capital to be held. Such an exposure is:

A credit facility secured by land or improved real property that—
- (A) primarily finances or refinances the acquisition, development, or construction of real property;
- (B) has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and
- (C) is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility.

The Final Rule states that a “credit facility secured by land or improved real property” is a credit facility where “the estimated value of the real estate collateral at origination (after deducting all senior liens held by others) is greater than 50 percent of the principal amount of the loan at origination.” In addition, the preamble states that “other land loans” – i.e., loans secured by vacant land other than land known to be used for agricultural purposes – are not automatically included as an HVCRE exposure, but must be analyzed under the three-prong test.

HVCRE Exclusion for Certain Commercial Real Estate Projects

With respect to commercial real estate projects, under the Final Rule, as in the original regulation, the loan-to-value (LTV) ratio for the loan must be less than or equal to the applicable regulatory maximum LTV for the type of property at issue.

Unlike the original regulation, the Final Rule permits internally generated income to be distributed out of the project as long as the 15% originally contributed stays in. With respect to the 15% test itself, the preamble indicates that funds borrowed (such as from a corporate parent) can count as equity if they are not “derived from [or] related to,” or do not “encumber” the project that the credit facility is financing or “encumber any collateral that has been contributed to the project.”

The Final Rule also permits real property and improvements “directly related to” the project to count as part or all of the required 15% capital (reduced by the amount of any liens), along with cash, unencumbered readily marketable assets, and development expenses paid out-of-pocket.[4]It states that “readily marketable assets” are insured deposits, other financial instruments, and bullion, in each case that can be sold reasonably promptly for fair value. With respect to the value of contributed real property, the Final Rule states that it is “the appraised value” under a qualifying appraisal, reduced by the aggregate amount of any other liens on such property.

The Final Rule includes a clarification regarding projects with separate phases, stating that each project phase being financed by a credit facility should have a proper appraisal or evaluation with an associated “as completed” value. Where appropriate and in accordance with the banking organization’s applicable underwriting standards, however, a banking organization may look at a multiphase project as a complete project rather than as individual phases.[5]

The Final Rule also provides, without interpretive gloss, that HVCRE status may end prior to the replacement of an ADC loan with permanent financing, upon:

the “substantial completion” of the development or construction of the real property being financed by the credit facility; and
cash flow being generated by the real property being sufficient to support the debt service and expenses of the real property, in accordance with the bank’s applicable loan underwriting criteria for permanent financings.

HVCRE Exclusion for One- to Four-Family Residential Properties

With respect to the exclusion for one- to four-family residential properties, the Final Rule is more generous to borrowers than the proposal. Construction loans secured by single-family dwelling units, duplex units, and townhouses will qualify for the one- to four-family residential property exclusion, as will condominium and cooperative construction loans, even if the loan is financing the construction of a building with five or more dwelling units as long as the repayment of the loan comes from the sale of individual condominium dwelling units or individual cooperative housing units. Loans secured by vacant lots in established multifamily residential sections, however, will not qualify for the exclusion, nor will credit facilities that solely finance land development activities, such as the laying of sewers, water pipes, and similar improvements to land, without any construction of one- to four-family residential structures.

The Agencies also clarified that when both a land acquisition and development loan and a loan to construct one- to four-family dwellings are originated simultaneously, the individual exposures must be evaluated separately to determine whether each loan on its own qualifies for an HVCRE exclusion.

HVCRE Exclusion for Community Development Properties

With respect to this exclusion, the Final Rule refers to Agencies’ Community Reinvestment Act (CRA) regulations and their definition of community development investment to determine which properties qualify. These regulations are quite detailed, and therefore a case-by-case analysis of particular properties will be required when this exclusion is considered.

HVCRE Exclusion for Agricultural Land

Relying on bank Call Report Instructions, the Final Rule uses a broad definition for this exclusion – “all land known to be used or usable for agricultural purposes,” but excluding loans for farm property construction and land development purposes.

HVCRE Exclusion for Income-Producing Properties Qualifying as Permanent Financings

Finally, the statute added a new exclusion, for credit facilities for:

the acquisition or refinance of existing income-producing real property secured by a mortgage on such property; and
improvements to existing income-producing improved real property secured by a mortgage on such property,

in each case, “if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the institution’s applicable loan underwriting criteria for permanent financings.”

With respect to this exclusion, the Agencies stated that they expect banking institutions to have and rely on “prudent, clear and measurable” underwriting standards, which the Agencies may review as part of the regular supervisory process.

Effective Date; Treatment of Loans Made Prior to Effective Date; Agency FAQs

The Final Rule is effective on April 1, 2020. Under the 2018 statute, loans made prior to January 1, 2015 may not be classified as HVCRE loans. With respect to loans made between January 1, 2015 and March 31, 2020, banking institutions will have the option to apply the original Basel III capital rule or the Final Rule. Non-HVCRE determinations made in this period are generally not required to be re-evaluated, but if loans made after January 1, 2015 and prior to the effective date are amended in a manner that materially changes the underwriting (increases to the loan amount, changes to the size and scope of the project, or removal of all or part of the 15 percent minimum capital contribution in a project), then banking institutions should re-analyze the loan for HVCRE. As of the effective date, the Agency FAQs under the original Basel III capital rule are deemed superseded.

Conclusion

HVCRE has taken a long and somewhat winding road since 2013. With the Final Rule, a more reasonable approach to the heightened capital treatment for HVCRE loans is now in place, and one that fulfills the intent of Congress in the 2018 legislation.

_________________

[1] See, e.g., 12 C.F.R. § 3.2 (2013).

[2] The Banking Agencies published certain responses to HVCRE Frequently Asked Questions (Interagency FAQs) in April 2015.

[3] See Interagency FAQ Response 15.

[4] The 15 percent equity must be contributed before loan is made, except for nominal sums meant to secure the banking organization’s lien on the real property.

[5] The Agencies do not provide any further gloss on this statement.

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 in the firm’s Financial Institutions or Real Estate practice groups, or the following:

Financial Institutions Group:
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Stephanie Brooker (+1 202-887-3502, [email protected])
M. Kendall Day (+1 202-955-8220, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
James O. Springer – New York (+1 202-887-3516, [email protected])

Real Estate Group:
Jesse Sharf – Los Angeles (+1 310-552-8512, [email protected])
Erin Rothfuss – San Francisco (+1 415-393-8218, [email protected])
Aaron Beim – New York (+1 212-351-2451, [email protected])
Drew C. Flowers – Los Angeles (+1 213-229-7885, [email protected])
Noam I. Haberman – New York (+1 212-351-2318, [email protected])
Andrew A. Lance – New York (+1 212-351-3871, [email protected])
Kahlil T. Yearwood – San Francisco (+1 415-393-8216, [email protected])

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

On November 18, 2019, the U.S. Office of the Comptroller of the Currency (OCC) issued a proposed regulation (OCC Proposal) that would codify, for national banks and federal thrifts, the common law “valid when made” doctrine of usury law. Yesterday, the Federal Deposit Insurance Corporation (FDIC) issued a similar proposal (FDIC Proposal) for FDIC-insured state banks and thrifts. In so doing, the agencies entered a lively debate that has gone on since the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, with significant ramifications for banks, thrifts, and nonbank lending companies. This Client Alert discusses the OCC and FDIC Proposals. The OCC and FDIC will receive comments on their proposals for 60 days from their publication in the Federal Register.

I. The “Valid When Made” and “Most Favored Lender” Doctrines

The “valid when made” doctrine is a common law doctrine that states that a loan that is not usurious at inception cannot subsequently become usurious by reason of its sale. It has been traced back to Supreme Court cases in the first half of the 19^th century,[1] and has been cited by federal courts frequently since then.[2] With respect to loans made by a national bank or federal thrift, this doctrine has operated in tandem with the “most favored lender” doctrine, which also dates to the 19th century. Under the latter doctrine, which derives from court interpretations of 12 U.S.C. § 85, a national bank or federal thrift that has operations in more than one state may choose the law of its home state to govern interest rates on all its loans – including home states that have no usury limitations in their statutes.[3]

II. Madden v. Midland Funding

Taken together, the “valid when made” and “most favored lender” doctrines provide significant benefits to national banks and federal thrifts – such institutions that operate in a state without usury limitations not only have made loans nationwide with higher interest rates than permitted in some states, but those rates have also applied when the loans were assigned to third parties for value.

These benefits, however, were opened to challenge when the United States Court of Appeals for the Second Circuit handed down its decision in Madden v. Midland Funding, LLC in 2015.[4] In Madden, the plaintiff lived in New York, a state that has usury limits, but had a credit card with a national bank located in Delaware, which places no limitations on the amount of interest that can be charged. The national bank sold the plaintiff’s credit card debt to Midland Funding, which sought to collect it at an interest rate of 27%, a rate higher than permitted in New York.

Although the Second Circuit recognized the “most favored lender” doctrine in Madden, it did not apply the “valid when made” doctrine. Rather, it analyzed the case as a question of federal preemption of state usury limits under the National Bank Act. It held that although courts had extended National Bank Act preemption to benefit subsidiaries and affiliates of national banks, it would not be appropriate to permit Midland Funding, a non-affiliate, to benefit from such preemption.[5] Refusing to give Midland Funding the benefit of preemption, in the Second Circuit’s view, would not – under the relevant preemption test – “significantly interfere” with a national bank’s ability to exercise its powers under the National Bank Act.[6]

Although the Second Circuit’s Madden holding was extremely controversial and arguably in conflict with decisions in other circuits, the United States Supreme Court denied Midland Funding’s petition for certiorari. Congress has taken no action to amend the National Bank Act since Madden was decided.

III. The Proposed Rules

The OCC styled its proposal as a clarification of doctrine under the National Bank Act; the text of the OCC Rule states that “[i]nterest on a loan that is permissible under 12 U.S.C. 85 [and 1463(g) (the Most Favored Lender doctrine)] shall not be affected by the sale, assignment, or other transfer of the loan.”[7]

The OCC set forth the following arguments in support of the Proposed Rule. First is the “valid when made” doctrine itself: “this longstanding rule relating to usury certainly applies here; a loan by a bank that complies with section 85 or 1463(g) is by definition not usurious when it is originated, and a subsequent assignment of the loan does not render the loan usurious.”[8] Second, the interpretation flows from the valid bank power to assign loan contracts to third parties: “[b]ecause the assignee steps into the bank’s shoes upon assignment, the third party receives the benefit of and may enforce the permissible interest term.”[9] The OCC stated further that the Supreme Court recognized this principle as prudent risk management in the mid-19th century: “[banks] must be able to assign or sell [their] notes when necessary and proper, as, for instance, to procure more specie in an emergency . . . .”[10] Finally, in what is the preamble’s strongest point, the OCC stated that Congress had extended the “most favored lender” doctrine – with the implicit “valid when made” gloss – to federal thrifts, state-chartered insured depository institutions, and insured credit unions in 1980.[11] Then, in 2010, while revisiting federal preemption generally in the Dodd-Frank Act, Congress expressly preserved national banks’ authority under 12 U.S.C. § 85 and thereby reaffirmed the importance of that provision in the banking system.[12]

The FDIC Rule is similar to the OCC Rule, but reflects the different statutory scheme applicable to FDIC-insured state banks and savings associations. That scheme dates from 1980, when Congress amended the Federal Deposit Insurance Act (FDIA) to add Section 27, which provides that:

In order to prevent discrimination against State-chartered insured depository institutions, . . . if the applicable rate prescribed in this subsection exceeds the rate such State bank . . . would be permitted to charge in the absence of this subsection, such State bank . . . may, notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section, take, receive, reserve, and charge on any loan or discount made . . . interest at a rate of not more than 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal Reserve bank in the Federal Reserve district where such State bank . . . is located or at the rate allowed by the laws of the State, territory, or district where the bank is located, whichever may be greater.[13]

The FDIC has interpreted Section 27 to provide parity with national banks, and therefore insured state banks can export the interest rates permitted by their home states even if they have a branch in a different state in which the borrower resides.

In the preamble to its proposal, the FDIC stated that it was filling a statutory gap – Section 27 does not “state at what point in time the permissibility of interest should be determined” for purposes of judging compliance with Section 27.[14] The FDIC stated that its proposal would fill that gap by providing that this time is when the loan is first made, not when interest is taken or received.[15] The FDIC therefore, unlike the OCC, did not rely on the “valid when made” doctrine, but it stated that its interpretation was consistent with it. Like the OCC, the FDIC also relied on the inherent power of banks to assign their loans, and noted that the Madden decision made the power of a state bank to make a loan at Section 27’s rate “illusory.”[16]

IV. Conclusion

The Proposed Rules are likely to generate substantial comment, from both the banking industry and consumer advocates. The proposals are highly likely to be controversial with certain members of the latter constituency. Tellingly, and in likely reaction to recent skepticism over bank regulatory “guidance,” the OCC and FDIC issued their interpretations in the traditional form of a rule proposal subject to notice and comment. If the rules are adopted as proposed, it would not be surprising if they are challenged as an impermissible construction of the National Bank Act and FDIA, thus raising again the issue of how much deference to accord bank regulators in interpreting federal banking law. Whether the proposals will restore uniformity to the secondary market for loans – an area where there is undoubtedly a federal interest, and where Madden was an unfortunate departure – therefore remains to be seen.

_________________

[1] See Nichols v. Fearson, 32 U.S. (7 Pet.) 103, 109 (1833).

[2] See, e.g., FDIC v. Lattimore Land Corp., 656 F.2d 139, 148-49 (5th Cir. 1981).

[3] In 1980, Congress granted this benefit to federal thrifts. See 12 U.S.C. § 1463(g).

[4] Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (2016).

[5] See id.

[6] See id.

[7] Office of the Comptroller of the Currency, Notice of Proposed Rulemaking: Permissible interest on loans that are sold, assigned, or otherwise transferred (November 18, 2019).

[8] Id. at 9.

[9] Id. at 10.

[10] Id. (quoting Planters’ Bank of Miss. v. Sharp, 47 U.S. 301, 323 (1848)).

[11] See 12 U.S.C. §§ 1463(g), 1785, and 1831d.

[12] See Office of the Comptroller of the Currency, Notice of Proposed Rulemaking: Permissible interest on loans that are sold, assigned, or otherwise transferred (November 18, 2019), at 11-12.

[13] 12 U.S.C. § 1831d (emphasis added).

[14] See Federal Deposit Insurance Corporation, Notice of Proposed Rulemaking: Federal Interest Rate Authority (November 19, 2019), at 14.

[15] See id.

[16] See id. at 12.

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 in the firm’s Financial Institutions practice group, or the following:

Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
James O. Springer – New York (+1 202-887-3516, [email protected])

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

Munich partner Mark Zimmer is the co-author of “Betriebsrat ohne Zeugnisverweigerungsrecht” [PDF] published in the issue 47/2019 of the German publication Betriebs-Berater, together with Camilla Bertheau. The article stresses the often neglected fact that German works council members cannot refuse testimony in judicial proceedings regarding any facts employees have entrusted to them.

New York partner Arthur Long is the author of “Revised Section 13(3) of the Federal Reserve Act,” [PDF] published in Business Law Today on March 22, 2019.

Washington, D.C. partner Adam Smith and of counsel Stephanie Connor and Munich associate Richard Roeder are the authors of U.S., EU, and UN Sanctions: Navigating the Divide for International Business, published by Bloomberg Law in 2019. The first chapter “Introduction – The Golden Age of Sanctions” can be viewed here.

San Francisco partner Brian Lutz and Washington, D.C. associate Jason Hilborn are the authors of “If It Looks Like a Duck: Chancery Court Knows a Demand When It Sees One,” [PDF] published in the Delaware Business Court Insider on November 13, 2019.

Last week, New York Governor Andrew Cuomo signed a new measure lengthening the statute of limitations period for public water suppliers to sue for water contamination.[1] Supporters have characterized this as a “significant blow” to companies alleged to be polluters[2] because it could aid in suing to recover hundreds of millions of dollars for alleged contamination cleanup costs.[3] The new law will take effect immediately.[4]

The Old Limitations Period

Before last week, New York law set forth a three-year limitations period for claims to recover damages from latent effects of substance exposure, running from “the date of discovery of the injury by the plaintiff or from the date when through the exercise of reasonable diligence such injury should have been discovered by the plaintiff, whichever is earlier.”[5] New York law also provided an independent one-year period (subject to conditions) if the plaintiff did not know the cause of its injuries during the initial three-year period.[6]

Officials and environmental advocates criticized this standard as discouraging lawsuits by public water suppliers, in part because of a lag between contamination and discovery[7] and perceived ambiguity over when contamination allegedly occurred.[8] Moreover, prior court rulings applied the general rule that began the statute of limitations period when a “reasonably prudent water provider should have or could have brought the suit.”[9] In the context of public water suppliers alleging contamination, however, the general counsel for the Suffolk County Water Authority explained that such a rule makes it difficult “to know when they should commence the action.” For example, New York courts had held that discovery occurred when, “based upon an objective level of awareness of the dangers and consequences of the particular substance, ‘the injured party discovers the primary condition on which the claim is based.’”[10] “Thus, knowledge of both the ‘dangers and consequences’ posed by contamination and harmful impact” were required.[11] In light of such obstacles, lawmakers complained that it was difficult for public water suppliers to overcome statute of limitations defenses raised by polluters in many cases.”[12]

The hurdles presented by the prior limitations period were evident in a recent Second Circuit decision affirming dismissal of claims brought by the Bethpage Water District.[13] The parties took divergent views on the application of New York law, with a company arguing that a “cause of action accrues when the water provider learns that the contamination threatens water quality to such an extent that remedial action must be promptly taken, even if the contamination has not yet reached the water source,” and the District arguing that the limitations period “does not accrue until contamination is actually detected in the water source itself.”[14] Rejecting the District’s argument, the Court dismissed the District’s claims because it had been “aware that the threat of contamination was sufficiently significant to warrant ‘immediate or specific remediation efforts.’”[15]

The New Limitations Period

The new measure amends the Civil Practice Law and Rules to create a new statute of limitations for actions brought by public water suppliers to recover damages from water contamination.[16] The period begins to run once contamination has been detected in a public water supply, rather than when the contamination occurred.[17] It also clarifies that the statute of limitations period runs from the latest of (1) when a test has detected contamination in the raw water of a well or plant intake sample point in excess of state or federal drinking water limits, or (2) the last action taken by a company contributing to the contamination.[18]

“Polluters need to be held responsible for their actions and with this measure we are closing an unacceptable loophole that let them skate for far too long,” Governor Cuomo said in a statement.[19] “This law will equip public water authorities with a desperately needed tool to hold corporate polluters accountable for contaminating our drinking water and ensure these deep-pocketed polluters, not ratepayers, pay the costs of removing contaminants like 1,4-dioxane from our drinking water,” a legislation sponsor said.[20]

Conclusion

The new measure increases potential challenges for companies alleged to be contributors to contamination. By setting the limitations period to run from the date of the impact on the water supply, this measure lengthens the period in which public water suppliers may sue, and it clarifies certain instances in which discovery will trigger that period to run. Moreover, while the old limitations period will still apply for private plaintiffs,[21] this new measure will nevertheless increase the potential liability of companies faced with allegations that they have contributed to ground water contamination. Moving forward, companies and stakeholders may wish to account for the greater resulting uncertainty about their potential liability risk due to this statute.

_____________________________

[1] https://www.nystateofpolitics.com/2019/11/173011/.

[2] https://www.newsday.com/long-island/environment/water-treatment-pollutants-1-4-dioxane-1.31984977.

[3] https://www.newsday.com/news/region-state/1-4-dioxane-cuomo-gaughran-1.38223403.

[4] Click here.

[5] See N.Y. C.P.L.R. 214-c.

[6] Vincent C. Alexander, Practice Commentaries to C.P.L.R. 214-c (Westlaw 2019).

[7] https://www.newsday.com/news/region-state/1-4-dioxane-cuomo-gaughran-1.38223403.

[8] https://www.nystateofpolitics.com/2019/11/173011/; also click here.

[9] https://www.newsday.com/long-island/environment/water-treatment-pollutants-1-4-dioxane-1.31984977.

[10] Bethpage Water Dist. v. Northrop Grumman Corp., 884 F.3d 118, 125 (2018) (quoting MRI Broadway Rental, Inc. v. U.S. Min. Prods., 92 N.Y.2d 421, 429 (1998)).

[11] Id.

[12] N.Y. State Assembly Mem. In Supp. of Legis., click here.

[13] See Bethpage Water Dist., 884 F.3d at 119.

[14] Id. (emphasis added).

[15] Id. at 128.

[16] See N.Y. C.P.L.R. 214-h.

[17] https://www.newsday.com/news/region-state/1-4-dioxane-cuomo-gaughran-1.38223403; https://www.governor.ny.gov/news/governor-cuomo-signs-legislation-giving-public-water-suppliers-three-year-statute-limitations.

[18] https://www.governor.ny.gov/news/governor-cuomo-signs-legislation-giving-public-water-suppliers-three-year-statute-limitations; see https://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A05477&term=2019&Summary=Y&Text=Y.

[19] https://www.governor.ny.gov/news/governor-cuomo-signs-legislation-giving-public-water-suppliers-three-year-statute-limitations.

[20] Id.

[21] See, e.g., Panzo v. Keyspan Corp., 2019 N.Y. Slip Op. 07407 (2d Dep’t Oct. 16, 2019).

Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Public Policy or Environmental Litigation and Mass Tort practice groups, or the authors:

Mylan L. Denerstein – Co-Chair, Public Policy Practice, New York (+1 212-351-3850, [email protected])
Abbey Hudson – Los Angeles (+1 213-229-7954, [email protected])
Seth Rokosky- New York (+1 212-351-6389, [email protected])

Please also feel free to contact the following practice group leaders:

Environmental Litigation and Mass Tort Group:
Daniel W. Nelson – Washington, D.C. (+1 202-887-3687, [email protected])
Peter E. Seley – Washington, D.C. (+1 202-887-3689, [email protected])

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

Gibson Dunn’s Congressional Investigations team has been following the impeachment inquiry in the U.S. House of Representatives and has developed a set of questions and answers designed to help sort out the many competing claims being made on both sides of the aisle, by media, and by various commentators. We hope that you find this document helpful and invite you to let us know of other questions you have.

Since Speaker Nancy Pelosi’s September 24, 2019 announcement of a formal impeachment inquiry,[1] a myriad of uncertainties have emerged and continue to unspool as witnesses parade through the House Permanent Select Committee on Intelligence. We hear daily summaries of testimony and competing takes on its significance, but it’s not easy to discern how all of the developing information fits within the impeachment process.

Perhaps the most important question is the macro one. As the Trump Administration and House leadership spar over whether proper procedures are being followed and whether the Administration should cooperate with the inquiry, it is difficult to determine, “who is right?”

The Trump Administration has vowed to fight all Congressional subpoenas and refused to cooperate with the inquiry. On October 8, White House Counsel, Pat A. Cipollone, sent a letter to Speaker Pelosi and several committee chairs, arguing that the inquiry is “constitutionally invalid and a violation of due process.”[2] Cipollone pointed to the secretive nature of the proceedings and argued that the inquiry was fueled by a partisan desire to “undo the democratic results of the last election” and “influence the next election.”[3] In addition, he emphasized that a mere “announcement” was insufficient to authorize an official inquiry because the full House of Representatives failed to take a vote.[4]

Meanwhile, a legal action involving the authority of the House to access grand jury material in the Mueller Report teed up a key issue in the impeachment debate. On October 25, the District Court for the District of Columbia found that a House resolution was not necessary to initiate an impeachment inquiry.[5] In support of this conclusion, Chief Judge Beryl A. Howell cited multiple impeachment proceedings (and impeachments) of federal judges without a vote, as well as the absence of a vote for four months into President Clinton’s impeachment inquiry.[6] The court also noted that it ultimately “lacks authority to require the House to pass a resolution tasking a committee with conducting an impeachment inquiry.”[7] Shortly thereafter, on October 29, the Court of Appeals for the District of Columbia Circuit placed a stay on the decision.[8]

Two days later, following a month of closed-door discussions, the House passed a resolution to initiate the public phase of the impeachment inquiry.[9] The resolution authorizes the House Intelligence Committee to conduct open hearings and grants the ranking Republican member on the committee the ability (with the concurrence of the chair) to issue subpoenas as well.[10] In announcing the initial draft of the resolution, Speaker Pelosi underscored that an affirmative vote on the resolution diminishes the ability for the Trump Administration to ignore subpoenas, withhold documents, and prevent witness testimony. Yet, while the resolution establishes a procedural outline for committee hearings, much ambiguity remains. The resolution directs committees “to continue their ongoing investigations as part of the existing House of Representatives inquiry.”[11] There is no explicit grant of due process rights,[12] thereby leaving the Judiciary Committee to develop procedures “not inconsistent” with existing committee or House rules.

As discussed herein, impeachment proceedings are both complicated and rare, so there are seldom definitive answers to questions. In the sections that follow, we provide a series of questions and answers regarding impeachment such as: What does the U.S. Constitution require? What were the procedures used in past impeachments? Is there a difference between the impeachment and oversight powers of the House? Is impeachment a criminal proceeding? What is the role and effect of executive privilege in impeachment?

I. FAQs

A. What Is Impeachment?

Impeachment is a formal charge of misconduct made against the holder of a public office. Impeachment is the first step in a two-step process for the House and Senate to remove federal officials. The members of the House investigate allegations of misconduct. A majority is required to charge the official by authorizing articles of impeachment. When a president is impeached, the Chief Justice presides over the trial in the Senate. A two-thirds majority vote of the Senate is required to remove an official.[13]

B. Is Impeachment A Novel Idea?

In short, no. Impeachment, as an American procedure, was borrowed from Great Britain, as Alexander Hamilton noted in 1788.[14] Great Britain’s use of impeachment as a process to remove government officials dates as far back as the late fourteenth century.[15] The first American impeachment was that of William Blount in 1797 for conspiring to assist Britain in capturing Spanish territory.[16] There have been nineteen individuals impeached by a vote of the House of Representatives since the country’s founding.[17] Of those nineteen, eight have been convicted by a trial in the Senate.[18] The most recent impeachment by the House occurred in March of 2010 with the impeachment of Judge G. Thomas Porteous, Jr. of the Eastern District of Louisiana.[19] He was subsequently convicted by the Senate and removed from his position.[20]

C. What Does The Constitution Say About The Impeachment Process?

The Constitution allocates the impeachment power to the legislative branch, broadly states the types of offenses that warrant removing a president from office, and makes clear that a president can face a criminal trial after the Senate convicts him.

The Constitution gives only a skeletal framework for impeachment proceedings. Many of the missing details may be surprising. For example, the Constitution is silent about:

How the House of Representatives presents its case to the Senate;
Whether all Senators must be present to hear all of the evidence against the president;
Whether the president must be present for the proceeding;[21]
Whether the proceeding must be open to the public;
What rules of evidence apply to the proceeding;
Whether the president has a constitutional right to counsel;
What standard of proof the House should use to charge and what standard the Senate should use to convict.

The answers to these questions are left to Congress.[22] Below is a list of constitutional requirements and the relevant constitutional provisions.

i. Constitutional Requirements

The impeachment process is split between the two chambers of Congress. The House of Representatives impeaches the president, meaning the House investigates. The House then authorizes the articles of impeachment, which are the charges against the president.[23] The Senate tries the case, meaning it decides whether to acquit or convict the president.[24]
The House of Representatives and the Senate each create their own rules for the investigation and trial.[25] This means that the Constitution does not require an impeachment proceeding to be exactly the same as a criminal trial. There is also very limited judicial review of impeachment proceeding procedures; federal courts may decline to resolve questions about impeachment proceedings.[26]
The Chief Justice shall preside over the Senate trial of a president.[27]
Two-thirds of the Senate must vote to convict the president.[28] If convicted, the president is removed from office.[29] The Senate can also disqualify a president from holding “any Office of honor, Trust, or Profit under the United States.”[30]
A president may be impeached for “Treason, Bribery, or other high Crimes and Misdemeanors.”[31] Treason is the only crime defined in the Constitution: “Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court.”[32]
An impeachment proceeding does not require a jury trial.[33]
If a president or other official is removed from office by the Senate, he can then be subject to criminal proceedings: “the Party convicted shall nevertheless be liable and subject to Indictment, Trial, Judgment and Punishment, according to Law.”[34]
The Twenty-Fifth Amendment gives an alternative mechanism to remove the president from office. It requires two-thirds of both houses of Congress to vote to remove him.[35]

D. What Did The Framers Say About The Grounds For Impeachment?

As noted above, the Constitution specifically states that “Treason, Bribery, or other high Crimes and Misdemeanors” are grounds for impeachment. Looking to the debates during the ratification of the Constitution provides a little context as to what that phrase actually means. Impeachment first appeared to make its way into the Constitutional text via language proposed by the Virginia Plan, written by James Madison and argued for by George Mason.[36] The Virginia Plan stated that impeachment would be for “Malpractice and Neglect of Duty.”[37] This language was revised and replaced with “Treason and Bribery.” Fearing that treason and bribery would “not reach the many great and dangerous offences,” Mason advocated for impeachment to cover “Treason, Bribery, or Maladministration.”[38] However, Madison argued that the additional term was so vague that it would be “equivalent to a tenure during displeasure of the Senate.”[39] Thus, the Convention delegates ultimately compromised and revised the phrase to “Treason, Bribery, or Other High Crimes and Misdemeanors” though they did not further clarify it. According to the ratification debates, the most vocal delegates with respect to this power thought maladministration was too low of a bar and treason and bribery alone to be an incomplete list. Renowned English legal commentator William Blackstone, with whom the framers were very familiar, defined “high misdemeanors,” and the “first and principal” among such high misdemeanors was “the mal-administration of such high officers, as are in public trust and employment.”[40] Thus, one can intuit that the Framers did intend to include maladministration of office as at least part of the definition of “high Crimes and Misdemeanors.”

E. Is A House Resolution Needed To Start An Impeachment Inquiry?

The impeachment process in the House of Representatives is “usually initiated…when a Member submits a resolution through the hopper (in the same way that all House resolutions are submitted).”[41] However, not every impeachment process has begun with a floor vote on whether to open an impeachment inquiry. In fact, three relatively recent judicial impeachments—that of Harry E. Claiborne, Alcee Hastings, and Walter E. Nixon—were not initiated by a House resolution explicitly authorizing an impeachment inquiry.[42] Additionally, nowhere in the Constitutional provisions on impeachment does it mention a requirement that a resolution first be passed to authorize an official impeachment inquiry. A recent Congressional Research Service report notes that “ [i]n the past, House committees, under their general investigatory authority, have sometimes sought information and researched charges against officers prior to the adoption of a resolution to authorize an impeachment investigation.”[43] While precedent exists for an impeachment inquiry to begin with a House vote, there is no Constitutional provision requiring one, nor has the House, even recently, fully abided by this practice in all circumstances.

Perhaps an argument can be made that judicial impeachments, such as those mentioned above, function differently from presidential impeachments—and that the latter requires a resolution to officially open an inquiry, or at least to authorize a committee to commence an impeachment (as opposed to a legislative) investigation. After all, the Judiciary Committee that has led investigations into impeachable judges has explicit authority over the judiciary that is not analogous to any committee’s jurisdiction over the president. Moreover, Congress has arguably established a separate process for initiation of judicial impeachment proceedings by authorizing the Judicial Conference to conduct investigations of misconduct by federal judges and, when the Conference determines “that consideration of impeachment may be warranted,” to refer such matters to the House for further proceedings. 28 U.S.C. § 355(b). By contrast, the two other presidential impeachment proceedings of the modern era—those of Presidents Clinton and Nixon—have had an official resolution voted on by the full House. And now the current proceedings have included such a vote, too.

The Constitution does distinguish presidential impeachment proceedings from all others in that “[w]hen the President of the United States is tried, the Chief Justice shall preside.”[44] However, there is no indication that any other procedural distinctions were intended. Further, although the House impeachment proceeding against President Nixon ultimately included a House resolution, the Judiciary Committee “began an examination of the charges against the President under its general investigatory authority.”[45] The resolution that passed, which was reported by the House Rules Committee, provided for additional investigation authority.[46] Additionally, the past two presidential impeachment inquiries were the result of special prosecutor investigations—Archibald Cox in the case of Nixon and Ken Starr in the case of Clinton. In the current proceeding, the impeachment investigation was brought on by a whistleblower complaint and not the result of the report of a special prosecutor.

In short, every past impeachment case appears to be unique in both scope and procedure; however, it does not seem that a House Resolution authorizing an impeachment investigation or inquiry is required. Impeachment proceedings are ill-defined in the Constitution and vary based on the circumstances surrounding it. This current one is no different.

F. When Does Congress Have The Power To Issue Subpoenas Pursuant To An Impeachment Inquiry?

Congress has been engaging in investigations and issuing subpoenas since the beginning of the Republic.[47] Its power to do so was first confirmed by the Supreme Court in the 1927 case McGrain v. Daugherty. For the most part, the Constitution does not directly speak to the procedures or limits of Congressional authority in this space; instead, House and Senate rules primarily govern. Courts have limited their own oversight of Congress by holding that they do not have authority to impose particular structures or procedures on Congress when Congress is within the bounds of its Constitutional duties and delegations.[48]

i. What Subpoenas Can Congress Constitutionally Issue?

Congress can issue subpoenas to assist with its constitutionally delegated powers: legislation and impeachment.[49] Legislative subpoenas are by far the most common. Congress’s legislative power (and thus its legislative power of investigation) is broad.[50]

In McGrain, Congress subpoenaed bank records related to the then-Attorney General and his Department of Justice. The Supreme Court concluded that the subpoena was valid because Congress’s “power of inquiry . . . is an essential and appropriate auxiliary to the legislative function.”[51] The Court went on to explain that Congress could investigate and issue subpoenas on any subject for which “legislation could be had,” as long as the information requested would materially aid the legislation.[52] This is the limitation placed on investigations (and thus subpoenas) that are conducted pursuant to Congress’s legislative power.

Occasionally, in cases such as Mazars, courts are faced with subpoenas that may serve mixed purposes. There, the House Committee on Oversight and Reform issued a subpoena to an accounting firm for records related to President Trump. President Trump, challenging the subpoena, argued that it was not properly “legislative” because the Committee’s real purpose was to inquire about potentially impeachable offenses.

The Mazars majority found that the subpoena was issued pursuant to the Committee’s authority to “legislate and conduct oversight regarding compliance with ethics laws and regulations,”[53] notwithstanding the potential implications of the subpoena for a potential impeachment. After finding a valid legislative purpose, the majority ended their inquiry.[54]

Judge Rao dissented vehemently from the majority’s approach in Mazars on the basis that the Oversight Committee’s true (or additional) aims were impeachment, not legislation. Judge Rao argued that investigations targeting questions of impeachment cannot permissibly be authorized by Congress’s power to issue legislative subpoenas.[55] Here, she argued, any potential “legislative purpose” that might underlie the subpoena is dwarfed by the Committee’s purpose to investigate the president for impeachable offenses.[56]

In a case such as Mazars, or even more so in a case where the president himself is subpoenaed, Rao highlights the importance of considering separation of powers principles when ruling on the legitimacy of such a subpoena. To allow Congress to use its legislative power to issue a subpoena to the Executive Branch while seeking the subpoena to assist its impeachment inquiry could risk trampling on the constitutional distinction between those two separate grants of authority. Judge Rao’s dissent is novel, as the Mazars majority points out, but time will show which perspective will ultimately prevail.

ii. When Do Congressional Committees Have Subpoena Power?

An additional limitation on all subpoenas issued by Congress comes from the House and Senate Rules. When courts have evaluated the legitimacy of Congressional subpoenas, they have often looked to the rules and resolutions that authorized the investigation. This inquiry is particularly relevant when a Congressional committee, as opposed to the entire House or Senate, is the body issuing subpoenas.

In United States v. Rumely, for example, a House committee subpoenaed the names of people who had purchased certain types of books under resolution that authorized an investigation of “lobbying activities.”[57] The Court ultimately held that the “sale of books” was not included in the authorization to investigate “lobbying activities.”[58]

The court in Mazars recently took that same approach. After finding that the subpoena had a proper legislative purpose, the Mazars majority asked whether the committee was authorized to issue the subpoena at all. To analyze the Committee’s power, the D.C. Circuit looked to House Rules to determine “whether the committee [was] authorized” by the full House “to exact the information” it sought.[59] The court noted that the House rules broadly authorize the Oversight Committee to conduct investigations to “review and study on a continuing basis the operation of Government activities at all levels, including the Executive Office of the President.”[60] This includes the power to issue subpoenas to “carry[] out any of [its] functions and duties.”[61] When such authority is built into a committee’s creation, the committee does not need additional authorization from the full House to carry out its mandate.

While most committees have some legislative authority (and therefore the ability to issue legislative subpoenas), recent events have raised a somewhat novel question: when and how are Congressional committees authorized to issue impeachment-related subpoenas?

Some have opined that the entire House must vote to specifically provide a committee with impeachment-related investigative powers. By contrast, the U.S. District Court for the District of Columbia recently ruled that all “investigating committees” of the House have inherent authority by their very creation to conduct investigations, even where the committee develops and reports facts that may set an impeachment into motion.[62]

Now that the full House has voted to authorize the impeachment-related investigations of several committees, it is clear that those committees can properly issue subpoenas under their legislative or impeachment authority moving forward. But what about the subpoenas issued prior to the recent House vote? The recent D.C. district court ruling, for one, did not provide guidance on the legitimacy of subpoenas issued by “investigative committees” prior to impeachment inquiry authorization, nor did it pass on the authority of non-investigative committees to issue impeachment-related subpoenas. We are left asking: do the previously issued subpoenas need to have a “valid legislative purpose” to make them constitutionally permissible?

These are novel questions. The Supreme Court has yet to rule on these issues, making them ripe for continued debate and litigation.

G. Can Congress Subpoena A Sitting President? And, If So, Must The President Comply?

Congress has investigated sitting presidents on several occasions, both for actions taken before the president in question had taken office and for actions taken by the president in his official role.

In 1832, the House vested a select committee with subpoena power to investigate whether the President had knowledge of a contract that the Secretary of War had allegedly awarded fraudulently.[63] In 1946, the Senate investigated whether the President had “provoked” Japan into attacking the United States.[64] And, finally, the well-known Watergate Investigation centered on President Nixon.[65]

Some presidents, such as President Reagan when he was investigated for his role in the Iran-Contra Affair, have complied willingly with Congress’s subpoenas.[66] Others, such as President Nixon, have asserted executive privilege over the requested documents.[67]

When President Nixon fought the Congressional subpoenas directed at him, he did not contest that the issuing committee had the authority to so subpoena a sitting president. Neither did the D.C. Circuit, finding instead that executive privilege shielded the tapes. The court in Mazars interprets the Nixon decision as “impl[ying] that Presidents enjoy no blanket immunity from congressional subpoenas.” If such immunity existed, says the Mazars court, the Nixon court would have had no reason to “explore the subpoena’s particulars” and conduct the balancing test necessary in evaluating a claim of executive privilege.[68]

H. Is Impeachment A Criminal Proceeding?

Asking and answering this question is crucial for two related reasons. First, a criminal proceeding follows specific procedures leading up to and during a trial. These procedural rules govern the actions of the prosecutor, grand jury, judge, petit jury (i.e., the jury at trial), and, of course, the defendant and his lawyer. Second, a criminal defendant has specific constitutional rights, such as a right to a public trial, due process, and the right against self-incrimination.

There is no authoritative or definitive answer to whether an impeachment proceeding is a criminal proceeding. The text of the Constitution, the Framers’ comments, court cases, and authoritative comments all indicate that impeachment proceedings are informed by, but are ultimately different from, criminal proceedings.

i. What Is A Criminal Proceeding?

A federal criminal case is brought on behalf of the United States to address a general grievance. If convicted, a criminal defendant can be fined (i.e., loss of property), imprisoned (i.e., loss of liberty), or put to death (i.e., loss of life). Consequently, criminal defendants are afforded additional constitutional protections. It is worth noting that non-criminal proceedings can have serious consequences but participants are not given the same panoply of rights afforded to criminal defendants. For example, a family evicted from their home is deprived of something valuable; yet, there is no constitutional guarantee of a lawyer in housing court. The due process clause ensures minimum procedural protections in civil proceedings, but does not impose the wide array of additional procedural protections applicable in the criminal context.

In a federal criminal proceeding, a prosecutor represents the United States. In conjunction with law enforcement, such as the FBI, she builds her case. Before she can file charges, she must present her evidence to a grand jury unless the defendant waives that right. The grand jury comprises members of the public and meets in secret. If the grand jury finds there is probable cause, they issue a true bill.

After receiving a true bill, the prosecutor may proceed to trial. Before trial, a petit jury is seated in order to decide questions of fact (e.g., Did the event happen? Did the defendant have the requisite mental state?). At trial, a judge presides over the trial and rules on questions of law, such as the admissibility of evidence.

After hearing the evidence from the prosecutor and any evidence from the defense, the petit jury deliberates in secret. They are not allowed to consider external evidence, such as news reports. To convict the defendant, the jury must unanimously find him guilty beyond a reasonable doubt.

ii. What Does The Constitution Say?

The Constitution uses the language of criminal law in discussing impeachment but also indicates that impeachment proceedings are procedurally different from a criminal proceeding. On the one hand, the Constitution uses the language of criminal law when talking about impeachment. For example, Article II states an official may be removed from office for “Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors.” Similarly, “[t]he Senate shall have the sole Power to try all Impeachments . . . And no Person shall be convicted without the Concurrence of two thirds of the Members present.”[69]

On the other hand, the Constitution is clear that impeachment is procedurally different from a criminal proceeding. Under the Constitution, a president is expressly made subject to impeachment proceedings during office; he can also be subject to criminal proceedings after he leaves office. Art. I, § 3 cl. 7 states that “the Party convicted shall nevertheless be liable and subject to Indictment, Trial, Judgment, and Punishment, according to Law.” This structure indicates that impeachment and criminal proceedings are different.

Additionally, the Constitution states, “[t]he trial of all crimes, except in cases of impeachment, shall be by jury.”[70] Similarly, “the President … shall have the Power to grant Reprieves and Pardons for Offenses against the United States, except in Cases of Impeachment.”[71] The use of “except” implies that an impeachment proceeding is a type of criminal proceeding, while at the same time clarifying that an impeachment proceeding is different from a criminal trial.

Moreover, the trial in the Senate is different from a trial before a petit jury. First, the Senate is not a jury of the president’s peers; the Senate is an elected body. Second, a president may be convicted by a two-thirds vote of the Senate, whereas a petit jury must unanimously convict a criminal defendant in a federal trial. Moreover, there is no double jeopardy violation if the Senate convicts a president and he is later tried in a criminal proceeding.

Finally, the consequence of impeachment indicates that an impeachment proceeding is different from a criminal proceeding. One hallmark of a criminal proceeding is the sentencing exposure: impeachment is not a criminal proceeding because the official is not exposed to a loss of liberty (i.e., imprisonment) or life. If convicted in the Senate, the official is removed from office. The Senate may also vote to bar the official from holding future offices.

iii. What Did the Framers Say?

The Framers discussed whether impeachment is a criminal proceeding. There were a variety of opinions and it is difficult to draw a definitive conclusion given the disagreements among them.

The first impeachment proceeding in Congress raised this very question of whether impeachment is a criminal proceeding. The question was whether an impeached official, in this case Senator Blount, had to be tried with a jury in the Senate. Thomas Jefferson wrote to Senator Tazewell on the question of “whether an impeachment for a misdemeanor be a criminal prosecution?”[72] In consulting Blackstone and Wooddeson, two leading legal treatises, Jefferson concluded, “in Law language the term crime is in common use applied to misdemeanors, and that impeachments, even when for misdemeanors only are criminal prosecutions.”[73] He took the position that the Senate must use a jury to try an impeached official. The Senate and other Framers disagreed. Ultimately, the Senate voted 26-3 against using juries in impeachment proceedings.[74]

During the proceeding against Sen. Blount, Rep. Dana took the position that “the process in cases of impeachment in this country is distinct from either civil or criminal––it is a political process, having in view the preservation of the Government of the Union.”[75]

Madison indicated that he did not agree with Jefferson that impeachment is a criminal proceeding. In a letter to Thomas Jefferson, James Madison wrote, “[m]y impression has always been that impeachments are somewhat sui generis, and excluded the use of juries.”[76] Merriam Webster defines sui generis as “constituting a class alone: unique, peculiar.”

iv. What Have Courts Said?

Courts have said very little, probably because impeachment proceedings are rare and because the Supreme Court has held that impeachment proceedings fall under the political doctrine exception to judicial review.[77]

In the case of Judge Walter Nixon, the Supreme Court hinted that impeachment proceedings are different from criminal proceedings. Chief Justice Rehnquist wrote, “the Framers recognized that most likely there would be two sets of proceedings for individuals who commit impeachable offenses—the impeachment trial and a separate criminal trial. In fact, the Constitution provides for two separate proceedings. See Art. I, Sec. 3, cl. 7.”[78]

In the same case, a circuit court judge wrote: “The inference that the framers intended impeachment trials to be roughly akin to criminal trials is reinforced by seemingly unrefuted statements made by Alexander Hamilton during the ratification debates.”[79]

v. What Have Other Sources Said?

Other authorities such as Senators, the Department of Justice, and the transcripts of past proceedings all indicate that impeachment proceedings are informed by, but ultimately different from, criminal proceedings.

Senators have indicated they believe an impeachment proceeding is something different from a criminal trial. As Senator Crapo (R-ID) said about the Clinton trial: “As each Senator took the oath to provide impartial justice, . . . [n]o longer was the Senate a legislative body, it was a court of impeachment. A unique court, to be sure, not identical to traditional civil and criminal courts, but a court nonetheless.” He also stated, “Although the ‘beyond a reasonable doubt’ standard of traditional criminal trials is not applicable in impeachment proceedings, I am convinced the evidence presented in this case [against President Clinton] meet[s] even this high standard.”

The Department of Justice recently took the position that “[t]he Constitution carefully separates congressional impeachment proceedings from criminal judicial proceedings.” (Chief Judge Howell rejected the Department of Justice’s position in her recent decision.)

I. What Does It Mean That The House Of Representatives Is Like A Grand Jury?

In an impeachment proceeding, the House acts like a prosecutor and grand jury because it investigates and decides whether to bring charges.

In a criminal proceeding, a grand jury’s investigation is kept secret. The defendant has very few rights during a grand jury investigation and proceeding; most of the rights we associate with criminal law attach only after an indictment is returned or charges are filed. In United States v. Williams, 504 U.S. 36, 49 (1992) the Supreme Court said, “certain constitutional protections afforded defendants in criminal proceedings have no application before that body [i.e. the grand jury].” For example, the target of the investigation does not have a right to present his case to the grand jury; that right attaches at trial. Similarly, he also does not have a right to cross-examine the witnesses in a grand jury proceeding; that right also attaches at trial.

i. Overview Of A Grand Jury

In a criminal proceeding, a grand jury must find there is probable cause before a person can be indicted.[80] The grand jury meets in secret.[81] The Supreme Court has explained why grand jury proceedings are secret:

(1) to prevent the escape of those whose indictment may be contemplated; (2) to insure the upmost freedom to the grand jury in its deliberations, and to prevent persons subject to indictment or their friends from importuning the grand jurors; (3) to prevent subornation of perjury or tampering with the witness who many testify before the grand jury and later appear at the trial of those indicted by it; (4) to encourage free and untrammeled disclosures of persons who have information with respect to the commission of crimes; (5) to protect the innocent accused who is exonerated from disclosure of the fact that he has been under investigation, and from the expense of standing trial where there was probability of guilt.[82]

A grand jury has the power to subpoena witnesses and physical evidence, including documents. A witness “cannot refuse to answer questions simply because the answer is embarrassing, may cause the witness to lose his job, or might implicate some other person in a crime.”[83] However, a grand jury witness does enjoy the right against self-incrimination. This means a witness cannot be compelled to answer questions that would implicate himself in a crime.[84] The law is relatively complicated when it comes to producing documents.[85]

ii. The House Of Representatives As A Grand Jury

The House of Representatives is like a prosecutor and grand jury because it considers the evidence against the president before deciding whether to authorize articles of impeachment. To the extent the House acts as a grand jury, it is not required to conduct its investigation in public.

Moreover, assuming the House investigation models a grand jury investigation, a president has very few rights. For example, a defendant in a grand jury proceeding does not have the right to present his own evidence. Neither he nor his attorneys have the right to be present during the questioning of witnesses or to question those witnesses. He does not have the right to receive exculpatory material during a grand jury proceeding. There is not a due process right per se because the grand jury is not depriving the defendant of life, liberty, or property; the grand jury is determining whether there is probable cause to move forward with such proceedings.

There are some notable differences between the House of Representatives and a grand jury. First, a grand jury consists of members of the public whereas the House is made up of elected officials. Second, a grand jury must meet in secret. The House of Representatives may choose to hold secret hearings or public hearings. Third, the grand jury has a clear standard of proof; they can return a true bill only if they find probable cause that the defendant committed the crime. The House of Representatives is free to select their own standard of proof. The Constitution does not specify what standard of proof the House of Representatives may or must use, instead simply vesting the “sole Power of Impeachment” in the House. U.S. Const. art. I, § 2, cl. 5.

J. What Does It Mean That The Senate Is Like A Petit Jury?

A petit jury is the jury on a criminal trial that decides questions of fact (e.g., was the light red?). Many commentators have described the Senate as a jury because the Senate decides whether to acquit or convict the president. However, there are several ways the Senate is different from a petit jury.

First, a criminal trial requires a unanimous jury. The Senate can remove the president from office with two-thirds of the Senators present.

Second, the Senate can decide questions of law and fact. Traditionally, a jury is a trier of fact (i.e., did this event happen, did the defendant have the intent?). The judge determines questions of law (i.e., what does this statute mean, is this evidence admissible?). During President Clinton’s impeachment trial, Chief Justice Rehnquist ruled that, “[t]he Senate is not simply a jury, it is a court in this case. Therefore counsel should refrain from referring to senators as jurors.”[86]

Third, jurors on a petit jury are instructed to decide the case based on the evidence presented in court. A judge instructs the jurors not to “consult dictionaries or reference materials, search the internet, websites, blogs” and jurors may not discuss the case with each other before deliberations. Since the Senate is not sequestered, senators do not have to abide by such restrictions. While a Senator may decide not to discuss the case with the press, she will likely continue to read news stories and discuss the case with her colleagues.

Fourth, senators can be called as witnesses under existing rules for impeachment trials.[87] In a criminal trial, a witness cannot serve as a juror.

K. Does The President Have A Constitutional Right To Due Process?

It is not self-evident that a president has a constitutional right to due process in an impeachment proceeding.

The due process clause states no person shall be “deprived of life, liberty or property without due process of law.” U.S. Const., Amend. V. The plain text does not seem to encompass impeachment proceedings and past impeachments do not seem to have relied on the due process clause. Of course, a commitment to fairness and a legitimate process demand that an elected official must have some protections in an adversarial proceeding against him.

There are several reasons the Fifth Amendment due process clause does not seem to apply to an impeachment proceeding.

First, according to the plain text of the due process clause of the Constitution, a person is guaranteed due process only in cases where life, liberty, or property is at stake. If a president is convicted, he is removed from office. Removal from elected office is not a deprivation of life or liberty. While there is case law on whether government employment constitutes a property interest, it may be a stretch to apply those cases to the Office of the President.

Second, the House and Senate have historically relied on their power to make the rules of proceedings, not the due process clause, to grant the president procedural protections. When the House impeached President Clinton, it adopted rules to “provide the President with certain procedural rights[,]” “similar to those adopted by the Committee in 1974.” Specifically:

The President and his counsel shall be invited to attend all executive session and open committee hearings. The President’s counsel may cross examine witnesses. The President’s counsel may make objections regarding the pertinency of evidence. The President’s counsel shall be invited to suggest that the Committee receive additional evidence. Lastly, the President or the President’s counsel shall be invited to respond to the evidence adduced by the Committee at an appropriate time.[88]

Pursuant to H. Res. 660, the House Judiciary Committee has given the President some procedural protections once the House Permanent Select Committee on Intelligence Committee completes its investigation and issues its report setting forth its findings and recommendations.[89] The President and his counsel are to be given copies of reports and they are invited to attend the Judiciary Committee proceedings. The rules authorize his counsel to question witnesses subject to “instructions from the chair or presiding member.” The chair, in consultation with the ranking member, may invite the President’s counsel to respond to evidence presented. The counsel may also submit requests for additional witnesses.

Third, one of the only court decisions to address the question of due process during impeachment proceedings determined that due process applied in only a general sense. (It is important to note that this court case is not precedential. The decision is from a district court and the decision was vacated by the D.C. Court of Appeals.) The district court judge wrote, “[t]here is no reason to believe that the full panoply of due process protections that apply to a trial by an Article III court necessarily apply to every proceeding. Impeachment trials are unique, and are entitled to be carried out using procedures that befit their special nature. However, they must be conducted in keeping with the basic principles of due process that have been enunciated by the courts and, ironically, by the Congress itself.”[90]

L. Does The President Have A Constitutional Right To Exculpatory Material?

A president probably does not have a constitutional right to exculpatory material, known as Brady evidence, during the House impeachment proceeding. Brady material is specific to criminal trials and impeachment is probably not a criminal trial. Moreover, even a criminal defendant does not have a right to Brady material during the investigation phase. That right attaches after charges are filed. House Resolution 660 does not include a provision to turn over exculpatory material.

In a criminal case, due process requires that the prosecution turn over favorable or exculpatory evidence to the defendant. This is known as “Brady evidence.”[91] A criminal defendant does not have a right to Brady material during the investigation phase. The right to favorable evidence applies only after charges are filed. In other words, the target, i.e., the defendant, of the investigation does not have a right to exculpatory material during a grand jury proceeding. (The grand jury only determines whether there is probable cause to bring a charge, not whether there is proof beyond a reasonable doubt.) Moreover, the prosecutor is not obligated to present exculpatory material evidence to the grand jury.[92] Therefore, a president probably does not have a right to favorable or exculpatory evidence during the investigation portion of impeachment proceedings.

It is a closer question whether a president has a right to exculpatory evidence during a trial in the Senate. On the one hand, Brady material relies on the due process clause and it is not obvious that the due process clause applies. (See section K). On the other hand, Brady material is relevant “to guilt or to punishment.”[93] Because an impeachment trial does raise questions about guilt, the president could claim he does or should have a have a right to the material. That said, the more public and transparent the process, the less likely an explicit Brady right would be needed.

M. How Do Impeachment And Executive Privilege Interact?

The question of whether a president can invoke executive privilege during impeachment proceedings is largely unsettled by the courts, but will likely prove a battleground between the House and the administration in the weeks and months to come. The Supreme Court has never ruled directly on the issue, but has given some indication about the contours of executive privilege in other circumstances.

i. Overview Of Executive Privilege

Executive privilege (also known as presidential communications privilege) is a qualified right of the president, based in the constitutional separation of powers, to preserve the confidentiality of communications, information, and documents related to presidential decision-making. As the D.C. Circuit has explained: “The President can invoke the privilege when asked to produce documents or other materials that reflect presidential decisionmaking and deliberations and that the President believes should remain confidential. If the President does so, the documents become presumptively privileged. However, the privilege is qualified, not absolute, and can be overcome by an adequate showing of need.”[94]

The privilege also extends to close aides of the president, in order to “provide sufficient elbow room for advisers to obtain information from all knowledgeable sources” and not otherwise chill robust policy discussion within the Executive branch.[95]

ii. Other Forms Of Privilege

Executive privilege is a broad, umbrella term that is often used loosely for other legal concepts depending on the context. In general, it serves to protect confidential presidential communications. There are also two related forms of privilege that are sometimes viewed as components of executive privilege: diplomatic privilege and deliberative process privilege.

Military, Diplomatic, and National Security Secrets: The Supreme Court has long recognized that the president has a common-law based right to withhold documents related to military, diplomatic and state secrets and communications and documents related to the same.[96]
Deliberative Process Privilege: Lower courts have held that the deliberative process extends beyond the confines of the White House, and presidential communications themselves, to other departments within the Executive branch, allowing such agencies “to withhold documents and other materials that would reveal advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated.”[97] Its scope and applicability remain uncertain.

A third concept is executive immunity, but this too can have conflicting meanings. On one hand, it is a separate doctrine that provides an absolute protection for the president regarding civil liability for official acts in office.[98] On the other, it represents a concept advocated for by the current and prior administrations that Executive branch officials are immune from compelled testimony before Congress.[99]

iii. George Washington’s View Of Executive Privilege And Impeachment

In 1796, President George Washington asserted executive privilege against a House demand for diplomatic communications surrounding the Jay Treaty by arguing that the House only had the power to compel such documents during an impeachment proceeding. In doing so, he noted “[i]t does not occur that the inspection of the papers asked for can be relative to any purpose under the cognizance of the House of Representatives, except that of an impeachment, which the resolution [demanding the papers] has not expressed.”[100]

That episode produced additional guidance from Washington’s advisers, similarly recognizing the unique powers of an impeachment proceeding. Attorney General Charles Lee indicated “there may be occasions when the books and original papers should be produced: for instance to sustain an impeachment commenced.”[101] Secretary of War James McHenry similarly queried, “But as the House of Representatives are vested with the sole power of impeachment, has it not a right as an incident to that power to call for papers respecting a treaty when the object is impeachment?”[102] While the House never received the documents, Washington did share them with the Senate when it considered the treaty for approval.[103]

iv. Claiming Privilege Against Congressional Subpoenas

The President has directed several current and former administration employees to refuse both to comply with Congressional subpoenas or to appear before hearings on Capitol Hill. These refusals have not always been accompanied by a formal invocation of executive privilege. At the same time, the administration has wielded broad claims of the Executive branch’s rights and immunities under the separation of powers and the requirements of maintaining confidentiality.

In one example, the White House Counsel’s office sought to restrict the testimony before Congress of former senior National Security Council staffer Fiona Hill. In doing so, it cited the classified nature of the information, along with the deliberative process privilege and executive privilege, as well as the then-absence of an official vote on impeachment. The White House’s letter noted that “even if it were the case that executive privilege operates differently in connection with an impeachment inquiry, there is no ground for Dr. Hill to believe that she may disclose privileged information on that basis to the House Committee.”[104] Hill eventually testified.

Other recent administrations have also claimed executive privilege. President Obama invoked it once, during the Congress’s investigation of Operation Fast and Furious; President Bush asserted it six times, in matters ranging from EPA air quality standards to the revelation of Valerie Plame’s identity as a CIA agent.[105] President Clinton invoked executive privilege in relation to multiple grand jury proceedings, both inside and outside the context of his impeachment over the Lewinsky affair.[106]

v. The Supreme Court And Nixon

The Supreme Court did consider President Nixon’s invocation of executive privilege during his impeachment, but that case, United States v. Nixon, addressed a grand jury subpoena in the separate and distinct setting of a criminal prosecution.[107] Nevertheless, the Supreme Court narrowed the scope of the privilege in several meaningful and relevant ways, rejecting the president’s claim of an absolute executive privilege and providing a balancing test between the confidentiality of presidential communications and the rule of law.[108] This remains the fundamental judicial framework for evaluating executive privilege today.

[N]either the doctrine of separation of powers nor the need for confidentiality of high-level communications, without more, can sustain an absolute, unqualified Presidential privilege of immunity from judicial process under all circumstances. The President’s need for complete candor and objectivity from advisers calls for great deference from the courts. However, when the privilege depends solely on the broad, undifferentiated claim of public interest in the confidentiality of such conversations, a confrontation with other values arises. Absent a claim of need to protect military, diplomatic, or national security secrets, we find it difficult to accept the argument that even the very important interest in confidentiality of Presidential communications is significantly diminished by production of such material for in camera inspection with all the protection that a district court will be obliged to provide.[109]

vi. Other Notable Court Cases

The Supreme Court has never ruled directly on executive privilege in the context of a dispute with Congress. However, several other cases in the lower courts have added texture and nuance to the concept.

In 1997, the D.C. Circuit added significant jurisprudence to the scope of executive privilege in In re Sealed Case. Among other things, the case established a distinction between the presidential communications privilege and the deliberative process privilege, emphasizing that the former relates to “direct decisionmaking by the President,” including his close advisers.[110] It also reinforced that the privilege may only be overcome by a substantial showing that the “subpoenaed materials likely contain[] important evidence” that is not available with due diligence elsewhere.[111]
In 2008, the D.C. District Court in Committee on the Judiciary v. Miers, determined that while an administration official could invoke executive privilege as to specific questions, she could not assert the privilege in a blanket manner to altogether prevent compelled testimony before Congress.[112] Miers was stayed pending appeal, and eventually settled, leaving its impact somewhat ambiguous.
In 2016, the D.C. District Court again took up the scope of the privilege, this time regarding a Congressional subpoena requesting documents related to the Fast and Furious investigation. While it held that the deliberative process privilege provided a qualified basis for resisting Congressional subpoenas, it nonetheless found that “under the specific and unique circumstances of this case … the qualified privilege invoked to shield material that the Department has already disclosed has been outweighed by a legitimate [Congressional investigative] need that the Department does not dispute, and therefore, the records must be produced.”[113]

N. Can Congress Enforce A Subpoena Against Administration Officials Unwilling To Testify?

Also undefined is the balance between Congress’s subpoena power and administration officials’ invocation of privilege or immunity. Preliminary—but likely not definitive—answers to this question, however, may come soon, as at least two current and former White House officials have sought a resolution of where they stand from the courts.

i. Options To Enforce A Subpoena

Congress has two paths to enforce a subpoena: criminal contempt and civil action. In both cases, enforcing compliance with the subpoena presents unique challenges. Congress can hold an individual who willfully refuses to comply with a committee subpoena in contempt of Congress.[114] But a contempt of Congress citation is referred back to the Executive branch for prosecution, which in the case of contempt by Executive officials would essentially require the administration to prosecute itself. Congress can also bring a civil action to enforce compliance with its subpoena, but this routes the issue through the courts and could require potentially protracted litigation.[115] In the time between 2008 and the current administration, Congress has held an Executive branch official in criminal contempt four times, and in each case the administration declined to bring the issue before a grand jury.[116]

The main constraint on bringing a civil enforcement action to challenge an assertion of executive privilege is time—it may well take months or years for the courts, which are already hesitant to address such thorny political topics, to resolve a dispute between the branches of government. Moreover, House Democrats have made clear that they may find strategic value in not pursuing litigation regarding their subpoena power. In a letter issuing a subpoena to President Trump’s personal attorney Rudy Giuliani, House Democrats noted “[y]our failure or refusal to comply with the subpoena, including at the direction or behest of the president or the White House, shall constitute evidence of obstruction of the House’s impeachment inquiry and may be used as an adverse inference against you and the president.”[117] An adverse inference would presumably be used as a stand-in for incriminating evidence in follow-on litigation or impeachment proceedings.

ii. Punting to the Courts

The difficulties with subpoena enforcement are center stage in ongoing litigation involving two former White House advisers—Charles Kupperman, a former Deputy National Security Adviser; and Donald McGahn, former White House Counsel. Faced with a Congressional subpoena in one hand, and a letter from the White House Counsel in the other telling them to not to testify, Kupperman and McGahn decided to punt these unsettled legal questions to the courts.

Kupperman, under subpoena to testify from the House but ordered by the White House to refuse to appear on the basis of testimonial immunity, sought a declaratory judgment from the D.C. District Court to resolve what he called “irreconcilable commands by the Legislative and Executive Branches of the Government.”[118] Kupperman’s complaint notes that “he is aware of no controlling judicial authority definitively establishing which Branch’s command should prevail,” but that his personal stakes are high—on the one hand, defying a Congressional subpoena could result in criminal contempt, on the other, an erroneous decision to appear could “unlawfully impair the President in the exercise of his core national security responsibilities.”[119] U.S. District Judge Richard J. Leon has fast-tracked this case and set oral argument for December 10.[120] A similar dispute is unfolding in court regarding former White House Counsel Don McGahn, who also claimed testimonial immunity. Press reports indicate that, in a recent hearing on the case, U.S. District Judge Ketanji Brown Jackson was skeptical of the administration’s claim of blanket immunity and questioned how such a broad privilege could be squared with fundamental separation of powers concepts.[121]

For either case, however, a determinative outcome is unlikely. Even if one of the district court judges rules in favor of the House or the administration on the balance between a subpoena and concepts of executive privilege and immunity, that decision will undoubtedly be appealed to the D.C. Circuit. So too would any appellate decision be appealed, with the potential for a subsequent argument en banc or a petition to the Supreme Court following that. The effect of this may be to frustrate the efforts of the House—as long as litigation remains pending, the legal ramifications of not complying with Congressional subpoenas will remain undetermined. In light of this, the administration will likely continue to command its current and former officials not to testify.

II. Conclusion

We will continue to keep you informed on these and other related issues as they develop.

APPENDIX

Constitutional Provisions About Impeachment

Art. I, § 2, cl. 5: The House of Representatives shall choose their Speaker and other Officers; and shall have the sole Power of Impeachment.

Art. I, § 3, cl. 6: The Senate shall have the sole Power to try all Impeachments. When sitting for that Purpose, they shall be on Oath or Affirmation. When the President of the United States is tried, the Chief Justice shall preside: And no Person shall be convicted without the Concurrence of two thirds of the Members present.

Art. I, § 3, cl. 7: Judgment in Cases of impeachment shall not extend further than to removal from Office, and disqualification to hold and enjoy any Office of honor, Trust or Profit under the United States: but the Party convicted shall nevertheless be liable and subject to Indictment, Trial, Judgment and Punishment, according to Law.

Art. I, § 5, cl. 2: Each House may determine the Rules of its Proceedings, punish its Members for disorderly Behaviour, and, with the Concurrence of two thirds, expel a Member.

Art. II, § 2, cl. 1: [The President] shall have Power to grant Reprieves and Pardons for Offences against the United States, except in Cases of Impeachment.

Art. II, § 4: The President, Vice President and all civil Officers of the United States, shall be removed from Office on Impeachment for, and Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors.

Art. III, § 2, cl. 3: The Trial of all Crimes, except in Cases of Impeachment, shall be by Jury.

Art. III, § 3, cl. 1: Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court.

Amend. XXV, § 4: Whenever the Vice President and a majority of either the principal officers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office, the Vice President shall immediately assume the powers and duties of the office as Acting President.

Thereafter, when the President transmits to the President pro tempore of the Senate and the Speaker of the House of Representatives his written declaration that no inability exists, he shall resume the powers and duties of his office unless the Vice President and a majority of either the principal officers of the executive department or of such other body as Congress may by law provide, transmit within four days to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office. Thereupon Congress shall decide the issue, assembling within forty-eight hours for that purpose if not in session. If the Congress, within twenty-one days after receipt of the latter written declaration, or, if Congress is not in session, within twenty-one days after Congress is required to assemble, determines by two-thirds vote of both Houses that the President is unable to discharge the powers and duties of his office, the Vice President shall continue to discharge the same as Acting President; otherwise, the President shall resume the powers and duties of his office.

___________________________

[1] Nicholas Fandos, Nancy Pelosi Announces Formal Impeachment Inquiry of Trump, N.Y. Times (Sept. 24, 2019), https://www.nytimes.com/2019/09/24/us/politics/democrats-impeachment-trump.html?module=inline.

[2] Letter from Pat A. Cipollone, White House Counsel, to Nancy Pelosi, Speaker, House of Representatives, 2 (Oct. 8, 2019), https://www.whitehouse.gov/wp-content/uploads/2019/10/PAC-Letter-10.08.2019.pdf.

[3] Id. at 1.

[4] Id. at 2–3.

[5] In re Application of the Committee on the Judiciary, U.S. House of Representatives, for an Order Authorizing the Release of Certain Grand Jury Materials, 1:19-gj-00048-BAH (Oct. 25, 2019 D.D.C.) (the finding that a House resolution was unnecessary to authorize an impeachment inquiry was part of the central issue of the case, which was centered upon whether the House is authorized to access grand jury material).

[6] Id. at *50–52.

[7] Id. at *53.

[8] Order No. 19-5288, In re Application of the Committee on the Judiciary, U.S. House of Representatives, for an Order Authorizing the Release of Certain Grand Jury Materials, 1:19-gj-00048-BAH (Oct. 29, 2019 D.C. Cir.).

[9] H. Res. 660 (Oct. 31, 2019); Elise Viebeck, Karoun Demirjian, Rachael Bade and Mike DeBonis, A divided House backs impeachment probe of Trump, Wash. Post (Oct. 31, 2019), https://www.washingtonpost.com/national-security/house-to-vote-on-rules-governing-next-phase-of-trump-impeachment-inquiry/2019/10/31/bc2f5e7a-fbcc-11e9-ac8c-8eced29ca6ef_story.html.

[10] H. Res. 660, § 2; Deirdre Walsh, House Democrats Release Draft Resolution on Impeachment Inquiry, NPR (Oct. 29, 2019), https://www.npr.org/2019/10/29/774380175/read-house-democrats-release-draft-resolution-on-impeachment-inquiry (providing the text of the initial draft resolution).

[11] H. Res. 660, § 1.

[12] The resolution did, however, provide rights to the ranking minority member of the Permanent Select Committee (the “minority”). First, as determined by the chair, the chair and the ranking minority member (or a designated staff member) will be permitted to question witnesses for equal specified periods of longer than five minutes. Second, the ranking member may submit to the chair any requests for witness testimony relevant to the investigation. Third, the ranking member (with the concurrence of the chair) may issue subpoenas for the attendance and testimony of any person or the production of documents and interrogatories for the furnishing of information.

[13] See Congressional Research Service, The Impeachment Process in the House of Representatives 1 (Oct. 10, 2019).

[14] Alexander Hamilton, The Federalist No. 65 (Mar. 7, 1788).

[15] Jason J. Vicente, Impeachment: A Constitutional Primer, 3 Tex. Rev. L. & Pol. 117, 126 (1998).

[16] Id. at 134.

[17] List of Individuals Impeached by the House of Representatives, History, Art & Archives, United States House of Representatives, https://history.house.gov/Institution/Impeachment/Impeachment-List/.

[18] Impeachment, United States Senate, https://www.senate.gov/artandhistory/history/common/briefing/Senate_Impeachment_Role.htm. An argument can be made that nine individuals have been removed by the Senate in connection with an impeachment proceeding as they expelled William Blount by other means before trial after the first ever successful impeachment vote in the House of Representatives.

[19] See, supra, n.17.

[20] See, supra, n.18.

[21] During the first impeachment trial, the defendant was not present. See Blount Expulsion, United States Senate, https://www.senate.gov/artandhistory/history/common/expulsion_cases/Blount_expulsion.htm (last accessed Nov. 1, 2019) (“Despite Blount’s absence, his impeachment trial began in the Senate on December 17, 1798.”).

[22] U.S. Const. art. I, § 5, cl. 2. (“Each House may determine the Rules of its Proceedings.”).

[23] U.S. Const. art. I, § 2, cl. 5.

[24] U.S. Const. art. I, § 3, cl. 6.

[25] U.S. Const. art. I, § 5, cl. 2.

[26] See Nixon v. United States, 506 U.S. 224 (1993) (note: the Nixon in this case was former Judge Walter Nixon, not former President Richard Nixon).

[27] U.S. Const. art. I, § 3, cl. 6 (emphasis added).

[28] U.S. Const. art. I, § 3, cl. 6.

[29] U.S. Const. art. I § 3, cl. 7.

[30] U.S. Const. art. I, § 3, cl. 7.

[31] U.S. Const. art. II § 4.

[32] U.S. Const. art. III § 3, cl. 2.

[33] U.S. Const. art. III, § 2, cl. 3. See also Buckner F. Melton Jr., Federal Impeachment and Criminal Procedure: the Framers’ Intent, 52 Md. L. R. 437 (1993) (The Senate rejecting a resolution to use a jury in the first impeachment proceeding).

[34] U.S. Const. art. I, § 3, cl. 7.

[35] U.S. Const. Amend. XXV, § 4.

[36] Erick Trickery, Inside the Founding Fathers’ Debate Over What Constituted an Impeachable Offense, Smithsonian Magazine (October 2, 2017); see also Ronald D. Rotunda, An Essay on the Constitutional Parameters of Federal Impeachment, 76 Ky. L.J. 707, 723 n.4 (1988).

[37] Id.

[38] Id.

[39] Id.

[40] United States House of Representatives Committee on the Judiciary, Report By the Staff of the Impeachment Inquiry, Feb. 1974. James Madison later described Blackstone’s Commentaries on the Laws of England as “a book which is in every man’s hand.” Id.

[41] Congressional Research Service, The Impeachment Process in the House of Representatives 1 (Oct. 10, 2019).

[42] Id. at 4.

[43] Id. at 1.

[44] U.S. Const. art II § 4.

[45] Congressional Research Service, The Impeachment Process in the House of Representatives 5 (Oct. 10, 2019).

[46] Id.

[47] See Trump v. Mazars USA, LLP, No. 19-5142, 2019 WL 5089748 (D.C. Cir. Oct. 11, 2019) for a history of congressional investigations prior to 1927.

[48] In re Application of the Committee on the Judiciary, Grand Jury Action No. 19-48 (BAH) (D.D.C. Oct. 25, 2019) at 52 (citing Mazars, 2019 WL 5089748 at *24); see also Barker v. Conroy, 921 F.3d 1118, 1130 (D.C. Cir. 2019).

[49] U.S. Const. art I, § 2, cl. 5

[50] Watkins v. U.S., 354 U.S. 178, 187 (1957).

[51] McGrain v. Daugherty, 273 U.S. 134, 174–75 (1927).

[52] Id. at 175–76.

[53] Mazars, 2019 WL 5089748, at *6 (citing Letter from Elijah E. Cummings, Chairman, House Committee on Oversight and Reform, to Pat Cipollone, Counsel to the President, The White House 1 (Feb. 15, 2019) at 7–8).

[54] Mazars, 2019 WL 5089748, at *46

[55] Mazars, 2019 WL 5089748, Rao, J., dissent at *2.

[56] Mazars, 2019 WL 5089748, Rao, J., dissent at *6.

[57] 345 U.S. 41, 42 (1953).

[58] Id. at 45, 48.

[59] Mazars, 2019 WL 5089748, at *54 (citing Rumely, 345 U.S. at 42–43).

[60] House Rule X, cl. 3(i).

[61] House Rule XI, cl. 2(m)(1); see also Rules of the House Committee on Oversight and Reform, 116th Cong., Rule 12(g) (2019) (authorizing the Oversight Committee Chair to issue subpoenas as provided in Rule XI to conduct an investigation within the Committee’s jurisdiction).

[62] In re Application of the Committee on the Judiciary, Grand Jury Action No. 19-48 (BAH) (D.D.C. Oct. 25, 2019) at 54, citing Jefferson’s Manual, which governs the House in all applicable situations as per House Rule XXI.

[63] See H.R. Rep. No. 22-502, at 1 (1832).

[64] S. Doc. No. 79-244, at xiii, 251 (1946) (exonerating the president of this charge).

[65] S. Res. 60, 119 Cong. Rec. 3255, 93rd Cong. §1(a) 1973).

[66] See Morton Rosenberg, Congressional Research Service, RL 30319, Presidential Claims of Executive Privilege: History, Law, Practice and Recent Developments 14 (Aug. 21, 2008).

[67] See Senate Select Committee on Presidential Campaign Activities v. Nixon, 498 F.2d 725, 726–27 (D.C. Cir. 1974).

[68] Mazars, 2019 WL 5089748, at 18.

[69] U.S. Const. art. I, § 3, cl. 6 (emphasis added).

[70] U.S. Const. art. III, § 2 (emphasis added).

[71] U.S. Const. art. II, § 2, cl. 1.

[72] Letter from Thomas Jefferson to Henry Tazewell (Jan. 27, 1798), available in Wilbur S. Howell, Jefferson’s Parliamentary Writings 11 (2016).

[73] Id.

[74] Buckner F. Melton, Federal Impeachment and Criminal Procedure: The Framers’ Intent, 52 Md L. R. 427, 439, 454 (1993).

[75] Hinds’ Precedents, Volume 3. Available at https://www.govinfo.gov/content/pkg/GPO-HPREC-HINDS-V3/html/GPO-HPREC-HINDS-V3-19.htm.

[76] Letter from James Madison to Thomas Jefferson (Mar. 4, 1798), available at https://founders.archives.gov/documents/Madison/01-17-02-0062, last accessed Oct. 24, 2019.

[77] See Nixon v. U.S., 506 U.S. 224 (1993).

[78] Id. at 234.

[79] Nixon v. United States, 938 F.2d 239, 260 (D.C. Cir. 1991) (Randolph, J., concurring) aff’d, 506 U.S. 224 (1993) (emphasis added).

[80] U.S. Const. Amend. V.

[81] See Fed. R. Crim. P. 6(d) (“The following persons may be present while the grand jury is in session: attorneys for the government, the witness being questioned, interpreters when needed, and a court reporter or an operator of a recording device.”)

[82] Douglas Oil Co. v. Petrol Oil Stops Northwest, 441 U.S. 211, 219 n.10 (1979).

[83] Ronald J. Allen, Et Al., Criminal Procedure: Adjudication And Right To Counsel 1097 (2nd ed. 2016).

[84] Id.

[85] Id. at 1085.

[86] Joan Biskupic, Chief Justice Assumes a Speaking Part, Wash. Post, Jan. 23, 1999, at A13.

[87] See Senate Rule for Impeachment XVIII (“If a Senator is called as a witness, he shall be sworn, and give his testimony standing in his place.”).

[88] H.R. Rep. No. 105-795, at 25 (1998).

[89] H. Res. 660, §§ 2(6) & 4; Impeachment Inquiry Procedures in the Committee on the Judiciary Pursuant to H. Res. 660, https://rules.house.gov/sites/democrats.rules.house.gov/files/ImpeachmentInquiryProceduresJudiciary.pdf (last accessed Nov. 6, 2019).

[90] Hastings v. United States, 802 F. Supp. 490, 504 (D.D.C. 1992), vacated by Hastings v. United States, 988 F.2d 1280 (D.C. Cir. 1993).

[91] See Brady v. Maryland, 373 U.S. 83, 87 (1963) (“suppression by the prosecution of evidence favorable to an accused upon request violates due process where the evidence is material either to guilt or to punishment, irrespective of the good faith or bad faith of the prosecution.”).

[92] See United States v. Williams, 504 U.S. 36 (1992).

[93] Brady, 373 U.S. at 87.

[94] In re Sealed Case, 121 F.3d 729, 745–46 (D.C. Cir. 1997).

[95] Id. at 745.

[96] See United States v. Reynolds, 345 U.S. 1, 6–8 (1953); Chicago & Southern Air Lines, Inc. v. Waterman Steamship Corp., 333 U.S. 103, 111 (1948); Totten v. United States, 92 U.S. 105, 106–07 (1875).

[97] In re Sealed Case, 121 F.3d at 737.

[98] See Nixon v. Fitzgerald, 457 U.S. 731, 749 (1982).

[99] Testimonial Immunity Before Congress of Former counsel to the President, 43 Op. O.L.C., slip op. (May 20, 2019), https://www.justice.gov/olc/opinion/testimonial-immunity-congress-former-counsel-president (“The immunity of the President’s immediate advisers from compelled congressional testimony on matters related to their official responsibilities has long been recognized and arises from the fundamental workings of the separation of powers.”).

[100] 5 Annals of Cong. 760–62 (1796) (emphasis added).

[101] Letter from Attorney General Charles Lee to President George Washington (Mar. 26, 1796), https://founders.archives.gov/documents/Washington/05-19-02-0491.

[102] Letter from Secretary of War James McHenry to President George Washington (Mar. 26, 1796), https://founders.archives.gov/documents/Washington/05-19-02-0492.

[103] 4 Annals of Cong. at 761.

[104] Letter from Michael Purpura, Deputy Counsel to the President, to Lee S. Wolosky, Esq. (Oct. 14, 2019).

[105] Congressional Research Service, Presidential Claims of Executive Privilege: History, Law, Practice, and Recent Developments (Dec. 15, 2014), 26–28.

[106] Id. at 25.

[107] United States v. Nixon, 418 U.S. 683, 710 (1974).

[108] Id. at 703–710.

[109] Id. at 706.

[110] In re Sealed Case, 121 F.3d at 745, 754.

[111] Id. at 757.

[112] 558 F. Supp. 2d 53, 99 (D.D.C. 2008).

[113] Committee on Oversight and Government Reform v. Lynch, 156 F. Supp. 3d 101, 115 (D.D.C. 2016).

[114] See 2 U.S.C. 192.

[115] See 2 U.S.C. 288b.

[116] Congressional Research Service, Congressional Subpoenas: Enforcing Executive Branch Compliance (Mar. 27, 2019).

[117] The Hill, Giuliani Subpoenaed as Trump Rages Against Schiff, Whistleblower (Oct. 1, 2019), https://thehill.com/homenews/morning-report/463762-the-hills-morning-report.

[118] Compl. of Charles Kupperman at 2, United States House of Representatives v. Donald Trump, No. 193224 (D.D.C. 2019).

[119] Id. at 2–3.

[120] See Washington Post, U.S. Judge Fast-Tracks Hearing Over House Impeachment Subpoena to Former National Security Aide Charles Kupperman (Nov. 4, 2019), https://www.washingtonpost.com/local/public-safety/us-judge-fast-tracks-hearing-over-house-impeachment-subpoena-to-ex-trump-deputy-national-security-adviser-charles-kupperman/2019/11/04/5606e5bc-ff3e-11e9-8bab-0fc209e065a8_story.html.

[121] See Washington Post, John Bolton’s Former Deputy Asks Judge to Resolve Conflicting Demands for House Impeachment Testimony (Oct. 31, 2019), https://www.washingtonpost.com/local/legal-issues/john-boltons-former-deputy-asks-judge-to-resolve-conflicting-demands-for-house-impeachment-testimony/2019/10/31/6119ae8c-f9b0-11e9-8190-6be4deb56e01_story.html.

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