The Am Law Litigation Daily named Washington, D.C. partner Theodore B. Olson as its Litigator of the Week [PDF] for convincing the U.S. Supreme Court to strike down federal limits on sports gambling. The profile was published on May 18, 2018.
The Am Law Litigation Daily named Washington, D.C. partner Theodore B. Olson as its Litigator of the Week [PDF] for convincing the U.S. Supreme Court to strike down federal limits on sports gambling. The profile was published on May 18, 2018.
Washington, D.C. partner Jason Mendro and associate Jeffrey Rosenberg are the authors of “The ‘MFW’ Framework Gains Traction Outside the Merger Context,” [PDF] published in the Delaware Business Court Insider on May 16, 2018.
Click for PDF Murphy v. National Collegiate Athletic Association, No. 16-476 New Jersey Thoroughbred Horsemen’s Association, Inc. v. National Collegiate Athletic Association, No. 16-477 Decided May 14, 2018 The Supreme Court held 7-2 that a federal law prohibiting States from authorizing sports betting violates the Tenth Amendment because it impermissibly commandeers state legislatures. Background: A federal law – the Professional and Amateur Sports Protection Act of 1992 (PASPA) – prohibits States from authorizing or licensing sports gambling. In 2014, the New Jersey legislature repealed existing prohibitions on sports gambling at casinos and racetracks. The NCAA and the four major professional sports leagues sued the State, arguing that the decision to allow sports gambling violated PASPA. Issue: Whether PASPA’s federal prohibition on state authorization of sports gambling violates the Tenth Amendment because it commandeers state legislatures. Court’s Holding: Yes. PASPA unconstitutionally commandeers state legislatures by dictating the content of state law regarding sports gambling (i.e., preventing States from legalizing sports gambling). “A more direct affront to state sovereignty is not easy to imagine.” Justice Alito, writing for the majority What It Means: In a significant victory for States’ rights, the Court’s decision makes clear that the Tenth Amendment’s anti-commandeering rule has teeth. Under that rule, Congress can neither affirmatively direct the States to enact a certain law nor prohibit them from repealing an existing law. As a result, States are now free to choose whether or not to legalize sports gambling. The Court also struck down the additional federal prohibitions on state-run lotteries, private operation of sports gambling schemes, and advertising of sports gambling. The ruling likely will lead to the legalization of sports gambling in many States. In advance of the Court’s ruling, bills authorizing sports gambling had been introduced in approximately 15 States, and they have already been enacted in Pennsylvania, Mississippi, Connecticut, and West Virginia. Gibson Dunn represented the winning party: Petitioners Philip D. Murphy, as Governor of the State of New Jersey, et. al. 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 Caitlin J. Halligan +1 212.351.3909 firstname.lastname@example.org Mark A. Perry +1 202.887.3667 email@example.com Nicole A. Saharsky +1 202.887.3669 firstname.lastname@example.org © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF This update provides an overview and summary of significant class action developments during the first quarter of 2018 (January through March), as well as a brief look ahead to some of the key class action issues anticipated later this year. Part I addresses developments at the United States Supreme Court, including the oral arguments in China Agritech, Inc. v. Resh, the decision in Jennings v. Rodriguez and its implications for Rule 23(b)(2) class actions, and three grants of certiorari in cases relating to class actions (including in two important arbitration cases, and in another that will address the use of cy pres in class action settlements). Part II covers the Ninth Circuit’s decision in In re Hyundai & Kia Fuel Economy Litigation, which may have significant consequences for plaintiffs attempting to certify nationwide class actions, as well as parties attempting to settle such actions. Part III describes several rulings addressing important issues regarding class settlements, including recent activity by the U.S. Department of Justice in scrutinizing these settlements. Part IV discusses a series of decisions from the federal courts of appeals, involving (among other things) what it takes to establish standing under Article III in data breach class actions. Part V addresses a new California Court of Appeal decision regarding the standards applicable to the use of experts at class certification. I. The U.S. Supreme Court Hears Argument on the Tolling Effect of Putative Class Actions, Issues Guidance on Rule 23(b)(2) Class Actions, and Grants Certiorari in Three Important Cases As previewed in our fourth quarter 2017 update, the U.S. Supreme Court heard oral argument on March 26, 2018, in China Agritech, Inc. v. Resh (No. 17-432). The case concerns the scope of the equitable tolling rule of American Pipe and Construction Co. v. Utah, 414 U.S. 538 (1974), which held that the filing of a class action tolls the statute of limitations for absent class members and permits them to bring subsequent individual suits after the original class action has been dismissed. China Agritech asks whether the American Pipe rule should be extended to permit absent class members to bring successive class action lawsuits—a question that has divided the courts of appeals. The oral argument did not suggest a clear answer. While some justices seemed skeptical of barring individuals who relied on their membership in a class action (as a reason not to sue within the limitations period) from then using Rule 23 in a subsequent suit, others expressed concern that applying the American Pipe rule to subsequent class actions would encourage “stacked” successive class actions that would undermine the efficiency rationales underlying the class action device. (Gibson Dunn filed an amicus brief in this case on behalf of the Chamber of Commerce of the United States, the Retail Litigation Center, Inc., and the American Tort Reform Association in support of the petitioner.) The Court also provided guidance regarding Rule 23(b)(2) classes in Jennings v. Rodriguez, 138 S. Ct. 830 (2018), a case involving the government’s detention of aliens without bond hearings. The Court instructed the Ninth Circuit to “consider whether a Rule 23(b)(2) class action continues to be the appropriate vehicle for respondents’ [due process] claims in light of” its holding in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011), that “‘Rule 23(b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class.'” Id. at 851–52 (quoting Dukes, 564 U.S. at 360). Writing for the majority, Justice Alito explained that Rule 23(b)(2) may no longer permit class treatment because some class members may not be entitled to bond hearings as a matter of constitutional due process. Id. at 852. The Court also instructed the Ninth Circuit to consider whether the “flexible” due process inquiry, which “calls for such procedural protections as the particular situation demands,” can be adjudicated in a class action. Id. (quotations omitted). Looking ahead, there are several significant class action issues on the Court’s docket. As noted in our fourth quarter 2017 update, by June 2018, the Court is expected to decide whether the National Labor Relations Act precludes enforcement of class action waivers in mandatory employment arbitration agreements, which is the question presented in a consolidated trio of cases, Epic Systems Corp. v. Lewis (No. 16-285), National Labor Relations Board v. Murphy Oil USA, Inc. (No. 16-307), and Ernst & Young LLP v. Morris (No. 16-300). In the past three months, the Court granted certiorari in three more cases that will address issues relevant to class actions. First, on February 26, 2018, the Court granted certiorari in New Prime Inc. v. Oliveira (No. 17‑340) to resolve two important issues concerning the interpretation and scope of the Federal Arbitration Act (“FAA”): (a) whether a dispute regarding the applicability of the FAA must be resolved by an arbitrator under a valid delegation clause, and (b) whether an exemption for contracts of employment for transportation workers in Section 1 of the FAA applies to independent contractors. Both questions have divided the federal courts of appeals. The case presents an opportunity for the Court to establish uniform, national rules concerning the interpretation of the FAA, including the ability of parties to incorporate enforceable arbitration provisions in agreements governing independent contractors. (Gibson Dunn represents the petitioner, New Prime Inc.) Second, on April 30, 2018, the Court granted certiorari in Lamps Plus, Inc. v. Varela (No. 17‑988), which presents the question whether the FAA forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements. Lamps Plus presents the Court with an opportunity to again wrestle with the propriety of class arbitration, an issue that the Court previously addressed in Stolt-Nielsen, S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010). Finally, on April 30, 2018, the Court granted certiorari in Frank v. Gaos (No. 17-961), which we discussed in our third quarter 2017 update and our fourth quarter 2017 update. Frank, which involved a class action settlement of claims against Google, concerns the validity of cy pres-only settlements that provide no direct compensation to class members. Frank presents an opportunity to address the “fundamental concerns” with cy pres-only settlements that Chief Justice Roberts previously identified, “including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy,” among other issues. Marek v. Lane, 134 S. Ct. 8, 9 (2013) (Roberts, C.J., respecting denial of certiorari). II. Ninth Circuit Vacates Certification of Nationwide Settlement Class This past quarter, the Ninth Circuit likely increased the scrutiny that district courts must now apply to the certification of nationwide class actions asserting state-law claims. In In re Hyundai & Kia Fuel Economy Litigation, 881 F.3d 679 (9th Cir. 2018), a divided panel vacated a nationwide class action settlement because the district court failed to properly analyze whether California law could be applied to all class members. This action arose out of alleged misstatements concerning the fuel efficiency of certain Hyundai and Kia vehicles. In re Hyundai, 881 F.3d at 694-95. The district court certified a nationwide Rule 23(b)(3) class for settlement purposes and granted preliminary approval of a proposed class settlement. Id. at 700-01. The district court ruled that it was not required to analyze whether there were significant differences between California law and the laws of the other states at issue because differences in state law could be addressed during a hearing on the fairness of the settlement. Id. at 700. The district court approved the settlement without conducting a choice-of-law analysis. See id. at 701. The Ninth Circuit vacated the class certification order. It emphasized that, under Mazza v. American Honda Motor Co., 666 F.3d 581 (9th Cir. 2012), “the district court was required to apply California’s choice of law rules to determine whether California law could apply to all plaintiffs in the nationwide class, or whether the court had to apply the law of each state, and if so, whether variations in state law defeated predominance.” In re Hyundai, 881 F.3d at 702. The Ninth Circuit agreed that district courts need not consider “litigation management issues” in deciding whether to certify a settlement class, but they were still obligated to ensure that the class “meets all of the prerequisites of Rule 23,” including its predominance requirement. Id. Punting the decision about choice-of-law issues to a “fairness hearing” was not a viable option, as a “fairness hearing under Rule 23(e) is no substitute for rigorous adherence to those provisions of the Rule designed to protect absentees[.]” Id. at 703 (alteration in original) (quoting Ortiz v. Fibreboard Corp., 527 U.S. 815, 849 (1999)). The Ninth Circuit also took steps to limit the perception that nationwide or mass advertising campaigns can produce a “common” question of whether the class relied on certain misrepresentations by the defendants. The court reasoned that even though there was some evidence of nationwide advertising, there was no evidence of uniform representations to used car purchasers, and no evidence of the sort of “massive advertising campaign” that could give rise to a presumption of reliance as to such purchasers. In re Hyundai, 881 F.3d at 704. It also rejected the argument that individualized questions regarding exposure to the advertising could simply be ignored in the settlement context. Judge Nguyen’s dissent claimed, among other things, that the majority improperly shifted the burden from the objectors to the district court or class counsel to decide whether other states’ laws apply and argued that the majority’s decision had created a circuit split and ran afoul of Erie Railroad v. Tompkins, 304 U.S. 64 (1938). The settling parties filed petitions for rehearing and rehearing en banc in March. The objectors were ordered to file their response and did so on March 28. The petitions are currently pending. III. Notable Decisions Involving Objections to Class Action Settlements There were two other notable decisions regarding class action settlements this quarter. First, the United States Department of Justice signaled a renewed interest in policing class action settlements. According to reports, the DOJ receives more than 700 notices of class action settlements each year as required by the Class Actions Fairness Act (“CAFA”), but it had only participated in two cases. Dep’t of Justice, Associate Attorney General Brand Delivers Remarks to the Washington, D.C. Lawyers Chapter of the Federalist Society (Feb. 15, 2018), https://www.justice.gov/opa/speech/associate-attorney-general-brand-delivers-remarks-washington-dc-lawyers-chapter. At a conference on February 15, however, Associate Attorney General Rachel L. Brand warned that “If a settlement isn’t fair or reasonable under CAFA, DOJ may file a statement of interest saying so. Be on the lookout in the coming days for the first example.” Id. The DOJ followed through on this promise in Cannon v. Ashburn Corp., No. 16-cv-1452, 2018 WL 1806046 (D.N.J. Apr. 17, 2018), where the district court denied a motion for final settlement approval based in part on the concerns raised by the DOJ. The DOJ had filed a “statement of interest” objecting to the class settlement of claims involving alleged false advertising in connection with the sale of wines. Id. at *12. The proposed settlement offered class members coupons worth between $0.20 to $2.25 per bottle of wine purchased, with a total settlement value estimated at $10.8 million. Id. at *3. Class counsel were to receive $1.7 million in fees. Id. In its “statement of interest,” the DOJ argued that class counsel should not receive a “windfall” of $1.7 million, given the minimal benefit to class members and the apparent lack of merit of the claims. Statement of Interest of the United States at 1, Cannon v. Ashburn Corp., No. 16‑cv‑1452 (Feb. 16, 2018), ECF No. 58. Arguing that the settlement was “a textbook coupon settlement” that would force class members to engage in future business with the defendant if they wanted to receive any benefit, the DOJ urged the court, should it grant approval, to defer payment of fees to class counsel until the total value of redeemed coupons is known. Id. at 9–11, 16. The Arizona Attorney General also weighed in on behalf of 19 states’ Attorneys General, as did ten objectors. 2018 WL 1806046, at *4. This case may be the first example of what appears to be a new trend of heightened scrutiny of class action settlements by both state and federal law enforcement officials. Second, in Low v. Trump University, LLC, 881 F.3d 1111 (9th Cir. 2018), the Ninth Circuit affirmed the district court’s order approving a class settlement between Trump University and its former students. Id. at 1113. A lone objector sought to opt out of the class after receiving a court-approved settlement notice and submitting her claim. Id. at 1115-16. The district court approved the settlement and the objector appealed. Id. at 1116. The objector argued that a single sentence in the long-form notice stating that class members would “be notified about how to obtain a share (or how to ask to be excluded from any settlement)” led her to believe that there would be a second opportunity to opt out. Id. at 1117. The Ninth Circuit found that, “reading the notice as a whole and in context,” it “promised only one opportunity to opt out,” and observed that there is “‘no authority of any kind suggesting that due process requires that members of a Rule 23(b)(3) class be given a second chance to opt out.'” Id. at 1121 (quoting Officers for Justice v. Civil Serv. Comm’n of S.F., 688 F.2d 615, 635 (9th Cir. 1982)). IV. In re Zappos.com and Other Notable Opinions from the Federal Courts of Appeals Addressing Article III Standing The issue of Article III standing in putative class actions, and in data privacy class actions in particular, continues to be a hotly litigated issue. The most significant decision this quarter came from the Ninth Circuit, which reversed the dismissal of a putative class action relating to the breach of Zappos.com’s data systems that had allegedly exposed the “names, account numbers, passwords, email addresses, billing and shipping addresses, telephone numbers, and credit and debit card information” of 24 million customers. In re Zappos.com, Inc., — F.3d —, No. 16-16860, 2018 WL 1883212, at *2 (9th Cir. Apr. 20, 2018). The district court ruled that those plaintiffs who alleged “actual fraud occurred as a direct result of the breach” had Article III standing, but that those plaintiffs who “failed to allege . . . actual identity theft or fraud” based on the breach did not. Id. at *3. The Ninth Circuit reversed, concluding that the dismissed plaintiffs had “sufficiently alleged standing based on the risk of identity theft.” Zappos, 2018 WL 1883212, at *2. The Ninth Circuit relied heavily on its previous decision in Krottner v. Starbucks Corp., 628 F.3d 1139 (9th Cir. 2010), which had addressed “the Article III standing of victims of data theft.” Zappos, 2018 WL 1883212, at *3. The court considered whether Krottner was still good law following the Supreme Court’s decision in Clapper v. Amnesty International, USA, 568 U.S. 398 (2013), but ultimately concluded that “Krottner is not clearly irreconcilable with Clapper” and thus “control[led] the results here.” Zappos, 2018 WL 1883212, at *5–*6. Applying Krottner, the Ninth Circuit reasoned that “the sensitivity of the personal information, combined with its theft,” meant that “the plaintiffs had adequately alleged an injury in fact” for standing purposes. Zappos, 2018 WL 1883212, at *6. Because the hackers had allegedly accessed full credit card numbers, the stolen information “gave hackers the means to commit fraud or identity theft,” as underscored by those “plaintiffs who alleged that the hackers had already commandeered their accounts or identities using information taken from Zappos.” Id. Finding the other elements of Article III standing satisfied, the Ninth Circuit remanded the case to the district court for further proceedings. While In re Zappos.com held that Article III was satisfied based on the facts alleged there, three other decisions issued this past quarter came to the opposite conclusion and thus affirmed the dismissal of putative class actions: In Owner-Operator Independent Drivers Association v. U.S. Department of Transportation, 879 F.3d 339 (D.C. Cir. 2018), the D.C. Circuit held that commercial truck drivers lacked Article III standing to sue the Department of Transportation for inaccuracies in its database of driver-safety information. Five commercial truck drivers sued the Department because their records contained inaccuracies, but only two of the drivers ever had the inaccurate information shared with future employers. Id. at 340. On these facts, the court determined that “the mere existence of inaccurate database information is not sufficient to confer Article III standing” because there was no concrete or de facto harm. Id. at 345. Nevertheless, the court found the actual dissemination of inaccurate information was sufficient to confer standing for the two truck drivers whose information had in fact been shared. Id. In Bassett v. ABM Parking Services, Inc., 883 F.3d 776 (9th Cir. 2018), the Ninth Circuit agreed with the Second and Seventh Circuits that alleging “a statutory violation,” without more, was “too speculative” a “theory of exposure to identity theft” to confer Article III standing on a plaintiff to litigate claims under the Fair and Accurate Credit Transactions Act and the Fair Credit Reporting Act. Id. at 777, 783; see also Crupar–Weinmann v. Paris Baguette Am., Inc., 861 F.3d 76 (2d Cir. 2017); Meyers v. Nicolet Rest. of De Pere, LLC, 843 F.3d 724 (7th Cir. 2016). The court determined that this bare procedural violation failed to establish a concrete harm and that plaintiff’s “theory of ‘exposure’ to identity theft”—premised on the printing of a few digits of his credit card on a parking receipt—”[was] . . . ‘too speculative for Article III purposes.'” Bassett, 883 F.3d at 783 (quoting Missouri ex rel. Koster v. Harris, 847 F.3d 646, 654 (9th Cir. 2017)). In Hagy v. Demers & Adams, 882 F.3d 616 (6th Cir. 2018), the Sixth Circuit ruled that alleging a violation of the Fair Debt Collection Practices Act (“FDCPA”) is not enough to confer Article III standing. The defendant’s attorney sent plaintiffs a debt-collection letter stating there would be no more “attempt[s] to collect any deficiency balance.” Id. at 619. This letter failed to disclose that it was a “communication . . . from a debt collector” in violation of the FDCPA. Id. (quoting 15 U.S.C. § 1692e(11)). The court determined that “[f]ar from causing . . . any injury, tangible or intangible, the . . . letter gave [plaintiffs] peace of mind.” Id. at 621. It accordingly declined to elevate a “bare violation” of the statute to an injury sufficient for Article III standing, as “there must be some limits on Congress’s power to create injuries in fact suitable for judicial resolution.” Id. at 622-23. V. California Court of Appeal Adopts Majority Position of Federal Courts of Appeals in Holding that the State’s Daubert Equivalent Applies at Class Certification In an important new decision, Apple Inc. v. Superior Court of San Diego County, 19 Cal. App. 5th 1101 (2018), the Court of Appeal held that Sargon Enterprises, Inc. v. University of Southern California, 55 Cal. 4th 747 (2012), which adopts a standard comparable to that by which federal courts evaluate the admissibility of expert testimony under Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993), “applies to expert opinion evidence submitted in connection with a motion for class certification.” Apple, 19 Cal. App. 5th at 1106. The ruling aligns California law with the majority of federal courts of appeals. A proposed class of consumers sought certification of their putative class claims that a purportedly defective power button on older iPhone models decreased the phones’ value. The plaintiffs relied on expert declarations to support their certification motion, and the trial court held that it did not need to apply the Sargon standard until evidentiary hearings later in the proceedings. The Court of Appeal reversed, reasoning that certifying the class based on inadmissible evidence “would merely lead to its exclusion at trial, imperiling continued certification of the class and wasting the time and resources of the parties and the court.” Apple, 19 Cal. App. 5th at 1117. The court was careful to clarify, however, that the scope of Sargon‘s applicability at class certification was “limited . . . compared with the inquiry at trial” because the court “need not rule on the admissibility of certain expert opinion evidence” that is “irrelevant or unnecessary for [the class certification] decision.” Id. at 1120. The ruling rested in part on the recognition that “[a]lthough some federal courts appear to have a largely semantic disagreement over whether to apply a ‘full’ or ‘focused’ Daubert analysis, the substantive result appears the same,” and these decisions show that applying the standard is both feasible and desirable. Apple, 19 Cal. App. 5th at 1119-20. Four circuits endorse a “full” Daubert analysis at class certification, see In re Blood Reagents Antitrust Litig., 783 F.3d 183 (3d Cir. 2015); In re Carpenter Co., No. 14-0302, 2014 WL 12809636 (6th Cir. Sept. 29, 2014); Sher v. Raytheon Co., 419 F. App’x 887 (11th Cir. 2011); American Honda Motor Co. v. Allen, 600 F.3d 813 (7th Cir. 2010), while the Eighth Circuit, and more recently, the Ninth Circuit, have adopted a more “focused” approach, see In re Zurn Pex Plumbing Prod. Liab. Litig., 644 F.3d 604 (8th Cir. 2011); Sali v. Corona Regional Medical Ctr., No. 15-56460 (9th Cir. May 3, 2018). Although the Supreme Court has suggested that Daubert should apply to expert evidence at class certification, it has yet to squarely resolve the issue. See Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 354 (2011) (“The District Court concluded that Daubert did not apply to expert testimony at the certification stage of class-action proceedings. . . . We doubt that is so. . . .”) (internal citation omitted). Apple v. Superior Court joins a growing body of case law recognizing that the “corrosive effects of improper expert opinion testimony may be felt with substantial force at class certification,” so courts must scrutinize such testimony at that stage. 19 Cal. App. 5th at 1119. The following Gibson Dunn lawyers prepared this client update: Christopher Chorba, Theane Evangelis, Kahn Scolnick, Bradley J. Hamburger, Lauren M. Blas, Gregory Bok, Jessica Culpepper, Wesley Sze, and Josh Burk. Gibson Dunn 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 Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers: Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (+1 213-229-7000, email@example.com) Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, firstname.lastname@example.org) Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7726, email@example.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, firstname.lastname@example.org) Bradley J. Hamburger – Los Angeles (+1 213-229-7658, email@example.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF On April 30, 2018, a federal judge in the Eastern District of Pennsylvania preliminarily enjoined enforcement of a Philadelphia Ordinance prohibiting employers from asking applicants about their wage history. Although over a dozen states and localities have recently enacted similar wage-history laws, this is the first court decision to rule on whether such laws violate employers’ First Amendment rights. Aimed at reducing the wage gap between men and women, the Ordinance imposes two prohibitions on Philadelphia employers: It prohibits employers from inquiring about an applicant’s wage history and from relying on wage history to make a salary determination unless that history was knowingly and willingly disclosed by the applicant. In a 59-page opinion, the District Court concluded that the plaintiff—the Chamber of Commerce for Greater Philadelphia, represented by Gibson Dunn—was entitled to a preliminary injunction prohibiting enforcement of the Ordinance’s inquiry provision. The Court determined that the Chamber was likely to prevail on the merits of its First Amendment challenge for two reasons. First, the Court held that wage-history inquiries do not concern unlawful activity under the first prong of the Central Hudson test for restrictions of commercial speech. “[W]hile using wage history to formulate salaries is made illegal” by the Ordinance, the Court reasoned, “other uses of wage history are not illegal.” The Court concluded that the City’s contrary position “would stand Central Hudson on its head.” Second, the District Court held that the City had failed to show that the Ordinance “directly advances” a substantial government interest, as required under the third Central Hudson prong. Although the City had asserted a substantial interest in reducing discriminatory wage disparities, the Court ruled that the City’s evidence was “riddled with conclusory statements, amounting to ‘various tidbits’ and ‘educated guesses.'” “[M]ore is needed,” the Court emphasized. Without substantial evidence “that inquiry into salary history results in lower salaries for women and minorities,” it is “impossible to know whether the Inquiry Provision will directly advance the [City’s] substantial interests.” The District Court also concluded that the other requirements for a preliminary injunction had been met. The Court explained that the Chamber had demonstrated irreparable harm by “alleg[ing] a real and actual deprivation of its and its members’ First Amendment rights through declarations,” and that “the City cannot claim a legitimate interest in enforcing an unconstitutional law.” The District Court did uphold the Ordinance’s provision prohibiting employers from relying on an applicant’s salary history in making a salary determination unless that history is knowingly and willingly disclosed. The Court reasoned that reliance on wage history is not speech for First Amendment purposes. Nonetheless, the Court’s decision preliminarily enjoining the Ordinance’s inquiry provision will enable employers to use wage-history information to ascertain prevailing market wages and to identify potentially unaffordable applicants at the outset of the hiring process. The decision may also prompt employers to mount a First Amendment challenge to similar wage-history laws in other jurisdictions.  Chamber of Commerce for Greater Phila. v. City of Philadelphia, No. 17-1548, slip op. at 54 (E.D. Pa. Apr. 30, 2018).  Phila. Code §§ 9-1131(2)(a)(i)–(ii).  Chamber of Commerce for Greater Phila., No. 17-1548, slip op. at 12 (discussing Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of N.Y., 447 U.S. 557, 566 (1980)).  Id. at 14.  Id. at 15.  Cent. Hudson, 447 U.S. at 566.  Chamber of Commerce for Greater Phila., No. 17-1548, slip op. at 30.  Id.  Id. at 30, 33–34.  Id. at 46.  See Phila. Code § 9-1131(2)(a)(ii).  Chamber of Commerce for Greater Phila., No. 17-1548, slip op. at 40. 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 the authors: Miguel A. Estrada – Washington, D.C. (+1 202-955-8500, firstname.lastname@example.org) Amir C. Tayrani – Washington, D.C. (+1 202-887-3692, email@example.com) Kellam M. Conover – Washington, D.C. (+1 202-887-3755, firstname.lastname@example.org) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF SAS Institute, Inc. v. Iancu, No. 16-969 Decided April 24, 2018 Today, the Supreme Court held 5-4 that if the Patent Trial and Appeal Board (PTAB) exercises its discretion to institute inter partes review, it must issue an opinion on all challenged claims. Background: Inter partes review is an administrative process in which the PTAB revisits the patentability of claims in existing patents. The PTAB may institute that review if the petitioner shows a “reasonable likelihood” of success on at least one claim. 35 U.S.C. § 314(a). If the PTAB institutes inter partes review, it “shall issue” a written decision as to the patentability of “any patent claim challenged by the petitioner.” 35 U.S.C. § 318(a). In this case, SAS Institute petitioned the PTAB for inter partes review of a certain patent. The PTAB reviewed only some of the claims, as U.S. Patent and Trademark Office (PTO) regulations permit. SAS Institute argues that the PTAB was required to issue a final decision on all of the claims. Issue: Whether the PTAB must issue a final written decision as to every claim challenged by the petitioner when it institutes an inter partes review. Court’s Holding: Yes, if the PTAB institutes inter partes review, it must rule on all challenged claims. “Even under Chevron, we owe an agency’s interpretation of the law no deference unless, after ‘employing traditional tools of statutory construction,’ we find ourselves unable to discern Congress’s. meaning.” Justice Gorsuch, writing for the majority What It Means: The Court determined that the statute’s plain text does not permit the PTAB to decide which claims to review when it grants inter partes review. Instead, if the PTAB decides that the petitioner is reasonably likely to succeed on at least one claim, the statute requires the PTAB to review all of the claims in the petition. The Court rejected SAS Institute’s invitation to overrule Chevron U.S.A. Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984), under which courts defer to reasonable agency interpretations of an ambiguous statute. Here, the Court held that the PTO is not entitled to deference because the statute is not ambiguous. The majority left open the possibility that the PTAB could deny a petition while noting that one or more claims merit reexamination and permitting the petitioners to file a new petition limited to those claims. The America Invents Act’s estoppel provisions prevent a petitioner from arguing that a claim is invalid, in a district court or before the International Trade Commission, on any ground raised or that reasonably could have been raised on inter partes review if the PTAB issues a final written decision on the claim. As a result of today’s decision, if the PTAB institutes review, every claim raised must be addressed—and so likely will trigger the estoppel provisions. The Supreme Court’s ruling may lead the PTAB to grant fewer petitions—meaning more patent litigation in the district courts. 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 Caitlin J. Halligan +1 212.351.3909 email@example.com Mark A. Perry +1 202.887.3667 firstname.lastname@example.org Nicole A. Saharsky +1 202.887.3669 email@example.com Related Practice: Intellectual Property Wayne Barsky +1 310.552.8500 firstname.lastname@example.org Josh Krevitt +1 212.351.4000 email@example.com Mark Reiter +1 214.698.3100 firstname.lastname@example.org © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, No. 16-712 Decided April 24, 2018 The Supreme Court held 7-2 that the U.S. Patent and Trademark Office’s inter partes review process does not violate the Constitution. Background: In 2011, Congress passed the America Invents Act, which created a new adversarial process within the U.S. Patent and Trademark Office (PTO), known as inter partes review. This process allows anyone to challenge the validity of an existing patent on the grounds that the patent was anticipated by is or obvious in light of the prior art. Under that process, the Patent Trial and Appeal Board (PTAB) – rather than a federal court – decides whether to cancel or confirm a challenged patent, subject to deferential review by the Federal Circuit. Issue: Whether inter partes review violates Article III’s grant of judicial power to the federal courts and the Seventh Amendment’s right to a jury trial. Court’s Holding: No, patents are public rights, and not purely private rights, so Congress may allow non-Article III tribunals (like the PTAB) to adjudicate those rights. “[T]he decision to grant a patent is a matter involving public rights—specifically, the grant of a public franchise. Inter partes review is simply a reconsideration of that grant, and Congress has permissibly reserved the PTO’s authority to conduct that reconsideration.” Justice Thomas, writing for the majority Gibson Dunn filed an amicus brief defending inter partes review for Dell, Facebook, Hewlett Packard, Twitter and others. What It Means: The Court held that patents are public rights that may be granted, abridged, or withdrawn without adjudication by an Article III court or factfinding by a jury. The Court explained that a patent owner’s property rights in an issued patent are subject to PTO’s authority to reexamine or cancel the patent. Although inter partes review resembles adversarial litigation, it determines a party’s patent right against the government – not liability between private parties. The Court rejected the argument that, historically, the validity of a patent could only be challenged in court. Instead, drawing on the argument that Gibson Dunn made in its amicus brief, the Court concluded that inter partes review is consistent with historical practice under the English patent system. The Court emphasized that its holding is narrow and that it did not decide whether infringement actions or other patent matters could be heard outside of an Article III court or whether the retroactive application of inter partes review is constitutional. 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 Caitlin J. Halligan +1 212.351.3909 email@example.com Mark A. Perry +1 202.887.3667 firstname.lastname@example.org Nicole A. Saharsky +1 202.887.3669 email@example.com Related Practice: Intellectual Property Wayne Barsky +1 310.552.8500 firstname.lastname@example.org Josh Krevitt +1 212.351.4000 email@example.com Mark Reiter +1 214.698.3100 firstname.lastname@example.org © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF Jesner v. Arab Bank, PLC, No. 16-499 Decided April 24, 2018 Today, the Supreme Court held 5-4 that a foreign corporation may not be sued under the Alien Tort Statute. Background: The Alien Tort Statute of 1789 (ATS) provides that foreign nationals may sue in federal court “for a tort only, committed in violation of the law of nations or a treaty of the United States.” 28 U.S.C. § 1350. In recent years, plaintiffs increasingly have relied on the ATS to sue multinational corporations and banks in federal courts for alleged terrorist activities and human rights violations abroad. In this case, the plaintiffs sued Arab Bank, PLC—a Jordanian financial institution with a branch in New York—alleging that the bank helped finance terrorist attacks in the Middle East. Issue: Whether foreign corporations can be sued in federal court in the United States under the ATS. Court’s Holding: No. Neither the language of the ATS nor the Court’s precedents interpreting it supports extending the statute to reach suits against foreign corporations. The political branches, rather than the courts, are responsible for weighing foreign-policy concerns and deciding whether foreign corporations should face liability for acts like those at issue in this case. The Judiciary is “not well suited to make the required policy judgments that are implicated by corporate liability in cases like this one.” “[A]bsent further action from Congress it would be inappropriate for courts to extend ATS liability to foreign corporations.” Justice Kennedy, writing for the majority What It Means: Although the decision does not resolve whether plaintiffs may sue U.S. corporations under the ATS, it does stop the recent trend of plaintiffs using the ATS to sue foreign corporations and foreign financial institutions in the United States. Jesner joins a line of recent precedents refusing to create new private rights of action and reiterating that the decision to attach liability to certain conduct is best left to Congress. By clearly prohibiting ATS liability against foreign corporations, the decision may strengthen the arguments of U.S. corporations seeking to dismiss an ATS suit when the underlying claim is based on the conduct of a foreign affiliate. The decision may place greater pressure on Congress to legislate in this area. 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 Caitlin J. Halligan +1 212.351.3909 email@example.com Mark A. Perry +1 202.887.3667 firstname.lastname@example.org Nicole A. Saharsky +1 202.887.3669 email@example.com Related Practice: Transnational Litigation William E. Thomson +1 213.229.7891 firstname.lastname@example.org Andrea E. Neuman +1 212.351.3883 email@example.com Perlette Michèle Jura +1 213.229.7121 firstname.lastname@example.org © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
New York partner James Hallowell and New York associate Lee Crain are the authors of “Does a Nonresident Del. Officer’s Service to a Corporation Allow Courts to Compel Testimony?” [PDF] published by Delaware Business Court Insider on April 18, 2018.
Click for PDF United States v. Microsoft Corp., No. 17-2 Decided April 17, 2018 Today, the Supreme Court held that Microsoft’s dispute with the federal government over the government’s attempts to access email stored oversees is moot. Background: The Stored Communications Act, 18 U.S.C. § 2701 et seq., authorizes the government to require an email provider to disclose the contents of emails (and certain other electronic data) within its control if the government obtains a warrant based on probable cause. In this case, the federal government obtained a warrant to obtain emails from an email account used in drug trafficking. The drug trafficking allegedly occurred in the United States, but the emails were stored on a data server in Ireland. Microsoft refused to provide the emails on the ground that the Stored Communications Act does not apply to emails stored overseas. Issue: Whether the Stored Communications Act requires an email provider to disclose to the government emails stored abroad. Court’s Holding: The case is moot. On March 23, 2018, the President signed the Clarifying Lawful Overseas Use of Data Act (CLOUD Act), which amended the Stored Communications Act so that it now applies to emails stored abroad. The parties’ dispute under the old version of the law therefore was moot. “No live dispute remains between the parties over the issue with respect to which certiorari was granted.” Per Curiam What It Means: Given passage of the CLOUD Act, there was no longer any need for the Supreme Court to interpret the prior version of the Stored Communications Act. The CLOUD Act requires an email provider to disclose emails, so long as the statute’s procedures have been followed, regardless of whether those emails are “located within or outside of the United States.” CLOUD Act § 103(a)(1) (to be codified at 18 U.S.C. § 2713). But the CLOUD Act permits courts to exempt providers from disclosing emails of customers who are not U.S. Citizens or residents, if disclosure would risk violating the laws of certain foreign governments. CLOUD Act § 103(b) (to be codified at 18 U.S.C. § 2703(h)). 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 Caitlin J. Halligan +1 212.351.3909 email@example.com Mark A. Perry +1 202.887.3667 firstname.lastname@example.org Nicole A. Saharsky +1 202.887.3669 email@example.com Related Practice: White Collar Defense and Investigations Joel M. Cohen +1 212.351.2664 firstname.lastname@example.org Charles J. Stevens +1 415.393.8391 email@example.com F. Joseph Warin +1 202.887.3609 firstname.lastname@example.org Related Practice: Privacy, Cybersecurity and Consumer Protection Alexander H. Southwell +1 212.351.3981 email@example.com © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF Two recent decisions confirm that, in the wake of the Delaware Supreme Court’s landmark decisions in Dell and DFC, Delaware courts are taking an increasingly skeptical view of claims in appraisal actions that the “fair value” of a company’s shares exceeds the deal price. However, as demonstrated by each of these recent Delaware Court of Chancery decisions—In re Appraisal of AOL Inc. and Verition Partners Master Fund Limited v. Aruba Networks, Inc.—several key issues are continuing to evolve in the Delaware courts. In particular, Delaware courts are refining the criteria in appraisal actions for determining whether a transaction was “Dell-compliant.” If so, then the court will likely look to market-based indicators of fair value, though which such indicator (unaffected share price or deal price) is the best evidence of fair value remains unresolved. If not, the court will likely conduct a valuation based on discounted cash flow (DCF) analysis or an alternative method to determine fair value. The development of these issues will help determine whether M&A appraisal litigation will continue to decline in frequency and will be critical for deal practitioners. DFC and “Dell-Compliant” Transactions In DFC, the Delaware Supreme Court endorsed deal price as the “best evidence of fair value” in an arm’s-length merger resulting from a robust sale process. The Court held that, in determining fair value in such transactions, the lower court must “explain” any departure from deal price based on “economic facts,” and must justify its selection of alternative valuation methodologies and its weighting of those methodologies, setting forth whether such methodologies are grounded in market-based indicators (such as unaffected share price or deal price) or in other forms of analysis (such as DCF, comparable companies analysis or comparable transactions analysis). In Dell, the Court again focused on the factual contexts in which market-based indicators of fair value should be accorded greater weight. In particular, the Court found that if the target has certain attributes—for example, “many stockholders; no controlling stockholder; highly active trading; and if information is widely available and easily disseminated to the market”—and if the target was sold in an arm’s-length transaction, then the “deal price has heavy, if not overriding, probative value.” Aruba Networks and AOL: Marking the Boundaries for “Dell-Compliant” Transactions In Aruba Networks, the Delaware Court of Chancery concluded that an efficient market existed for the target’s stock, in light of the presence of a large number of stockholders, the absence of a controlling stockholder, the deep trading volume for the target’s stock and the broad dissemination of information about the target to the market. In addition, the court found that the target’s sale process had been robust, noting that the transaction was an arm’s-length merger that did not involve a controller squeeze-out or management buyout, the target’s board was disinterested and independent, and the deal protection provisions in the merger agreement were not impermissibly restrictive. On this basis, the Court determined that the transaction was “Dell-compliant” and, as a result, market-based indicators would provide the best evidence of fair value. The Court found that both the deal price and the unaffected stock price provided probative evidence of fair value, but in light of the significant quantum of synergies that the parties expected the transaction to generate, the Court elected to rely upon the unaffected stock price, which reflected “the collective judgment of the many based on all the publicly available information . . . and the value of its shares.” The Court observed that using the deal price and subtracting synergies, which may not be counted towards fair value under the appraisal statute, would necessarily involve judgment and introduce a likelihood of error in the Court’s computation. By contrast, AOL involved facts much closer to falling under the rubric of a “Dell-compliant” transaction, but the Court nonetheless determined that the transaction was not “Dell-compliant.” At the time of the transaction, the target was well-known to be “likely in play” and had communicated with many potential bidders, no major conflicts of interest were present and the merger agreement did not include a prohibitively large breakup fee. Nonetheless, the Court focused on several facts that pointed to structural defects in the sale process, including that the merger agreement contained a no-shop period with unlimited three-day matching rights for the buyer and that the target failed to conduct a robust auction once the winning bidder emerged. In addition, and importantly, the Court took issue with certain public comments of the target’s chief executive officer indicating a high degree of commitment to the deal after it had been announced, which the Court took to signal “to potential market participants that the deal was done, and that they need not bother making an offer.” On this basis, the Court declined to ascribe any weight to the deal price and instead conducted a DCF analysis, from which it arrived at a fair value below the deal price. It attributed this gap to the inclusion of synergies in the deal price that are properly excluded from fair value. Parenthetically, the Court did take note of the fact that its computation of fair value was close to the deal price, which offered a “check on fair value analysis,” even if it did not factor into the Court’s computation. Key Takeaways Aruba Networks and AOL provide useful guidelines to M&A practitioners seeking to manage appraisal risk, while also leaving several open questions with which the Delaware courts will continue to grapple: Whether market-based indicators of fair value will receive deference from the Delaware courts (and, correspondingly, diminish the incentives for would-be appraisal arbitrageurs) depends upon whether the sale process could be considered “Dell-compliant.” This includes an assessment of both the robustness of the sale process, on which M&A practitioners seeking to manage appraisal risk would be well-advised to focus early, and the efficiency of the trading market for the target’s stock, to which litigators in appraisal actions should pay close attention. For those transactions found to be “Dell-compliant,” the best evidence of fair value will be a market-based indicator of the target’s stock. Whether such evidence will be the deal price, the unaffected stock price or a different measure remains an open question dependent upon the facts of the particular case. However, for those transactions in which synergies are anticipated by the parties to be a material driver of value, Aruba Networks suggests that the unaffected share price may be viewed as a measure of fair value that is less susceptible to errors or biases in judgment. For those transactions found not to be “Dell-compliant,” DCF analyses or other similar calculated valuation methodologies are more likely to be employed by courts to determine fair value. As AOL and other recent opinions indicate, however, there is no guarantee for stockholders that the result will yield a fair value in excess of the deal price—particularly given the statutory mandate to exclude expected synergies from the computation.  Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017); DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017). See our earlier discussion of Dell and DFC here.  In re Appraisal of AOL Inc., C.A. No. 11204-VCG, 2018 WL 1037450 (Del. Ch. Feb. 23, 2018); Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL, 2018 WL 922139 (Del. Ch. Feb. 15, 2018).  It is worth noting that, after DFC and Dell, the Delaware Supreme Court summarily affirmed the decision of the Court of Chancery in Merlin Partners, LP v. SWS Grp., Inc., No. 295, 2017, 2018 WL 1037477 (Table) (Del. Feb. 23, 2018), aff’g, In re Appraisal of SWS Grp., Inc., C.A. No. 10554-VCG, 2017 WL 2334852 (Del. Ch. May 30, 2017). The Court of Chancery decided SWS Group prior to the Delaware Supreme Court’s decisions in DFC and Dell. Nonetheless, it is clear that the court would have found the transaction at issue in SWS Group not to be “Dell-compliant,” as the transaction involved the sale of the target to a buyer that was also a lender to the target and so could exercise veto rights over any transaction. Indeed, no party to the SWS Group litigation argued that the deal price provided probative evidence of fair value. See our earlier discussion of the SWS Group decision by the Delaware Court of Chancery here.  See 8 Del. C. § 262(h) (“[T]he Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation . . . .”); see also Global GT LP v. Golden Telecom, Inc., 993 A.2d 497, 507 (Del. Ch.) (“The entity must be valued as a going concern based on its business plan at the time of the merger, and any synergies or other value expected from the merger giving rise to the appraisal proceeding itself must be disregarded.” (internal citations omitted)), aff’d, 11 A.3d 214 (Del. 2010). The following Gibson Dunn lawyers assisted in preparing this client update: Barbara Becker, Jeffrey Chapman, Stephen Glover, Eduardo Gallardo, Jonathan Layne, Joshua Lipshutz, Brian Lutz, Adam Offenhartz, Aric Wu, Meryl Young, Daniel Alterbaum, Colin Davis, and Mark Mixon. Gibson Dunn’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, the authors, or any of the following leaders and members of the firm’s Mergers and Acquisitions practice group: Mergers and Acquisitions Group / Corporate Transactions: Barbara L. Becker – Co-Chair, New York (+1 212-351-4062, firstname.lastname@example.org) Jeffrey A. Chapman – Co-Chair, Dallas (+1 214-698-3120, email@example.com) Stephen I. Glover – Co-Chair, Washington, D.C. (+1 202-955-8593, firstname.lastname@example.org) Dennis J. Friedman – New York (+1 212-351-3900, email@example.com) Jonathan K. Layne – Los Angeles (+1 310-552-8641, firstname.lastname@example.org) Eduardo Gallardo – New York (+1 212-351-3847, email@example.com) Jonathan Corsico – Washington, D.C. (+1 202-887-3652), firstname.lastname@example.org Mergers and Acquisitions Group / Litigation: Meryl L. Young – Orange County (+1 949-451-4229, email@example.com) Brian M. Lutz – San Francisco (+1 415-393-8379, firstname.lastname@example.org) Aric H. Wu – New York (+1 212-351-3820, email@example.com) Paul J. Collins – Palo Alto (+1 650-849-5309, firstname.lastname@example.org) Michael M. Farhang – Los Angeles (+1 213-229-7005, email@example.com) Joshua S. Lipshutz – Washington, D.C. (+1 202-955-8217, firstname.lastname@example.org) Adam H. Offenhartz – New York (+1 212-351-3808, email@example.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
As the Supreme Court continues its 2017 Term, Gibson Dunn’s Supreme Court Round-Up is summarizing the issues presented in the cases on the Court’s docket and the opinions in the cases the Court has already decided. The Court has accepted 64 cases for argument this Term, and has heard arguments in 51 cases. Gibson Dunn has presented one oral argument this Term and has two arguments this month, in addition to being involved in ten cases as counsel for amici curiae. In addition, the Court has granted certiorari in eight cases for the 2018 Term, and Gibson Dunn is counsel for the petitioner in one of those cases. Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions. To view the Round-Up, click here. Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 19 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the class action, intellectual property, separation of powers, and First Amendment fields. Moreover, while the grant rate for certiorari petitions is below 1%, Gibson Dunn’s certiorari petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 23 certiorari petitions since 2006. * * * * 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 attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group. Theodore B. Olson (+1 202.955.8500, firstname.lastname@example.org) Amir C. Tayrani (+1 202.887.3692, email@example.com) Brandon L. Boxler (+1 202.955.8575, firstname.lastname@example.org) Rajiv Mohan (+1 202.955.8507, email@example.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
New York partner Avi Weitzman is the author of “Percoco Highlights Pre-Verdict Remedies For False Testimony,” published by Law360 on March 28, 2018.
Click for PDF On March 22, 2018, in a 4-1 opinion, the Delaware Supreme Court held that where defendants have demonstrated that litigating in Delaware would result in an overwhelming hardship to defendants, Delaware courts may dismiss suits under the doctrine of forum non conveniens even if no alternative forum is available. Given the significant number of multinational corporations subject to suit in Delaware, and the challenges those defendants face presenting a meaningful defense where the key documents, witnesses and evidence reside overseas, this ruling will go a significant way toward enabling defendants to better protect their rights to a full and fair trial. The underlying litigation was filed in Delaware state court by Argentine citizens alleging exposure to pesticides used on Argentine tobacco farms and seeking compensatory and punitive damages against several defendants, including Monsanto Company, Philip Morris Global Brands, Inc., and Philip Morris USA Inc. (“Philip Morris USA”). Rejecting the rules governing forum non conveniens in federal court, and adopting reasoning consistent with the forum non conveniens approach in New York’s courts, the Delaware Supreme Court held that the existence of an alternative forum is not a pre-requisite to dismissal, but rather only one of many factors to be considered in making the determination whether “‘litigating in Delaware would result in an overwhelming hardship to [the defendant].’” The Delaware Supreme Court explained that the doctrine of forum non conveniens has changed dramatically since it was first recognized by the U.S. Supreme Court in 1947. Citing one study showing that federal courts granted “roughly half of motions to dismiss for forum non conveniens,” the Court wrote that “state courts now shoulder more of the transnational litigation.” But these “cases are complex and strain judicial resources,” as demonstrated by the present litigation, in which all conduct occurred in Argentina, all documents and witnesses would be located in Argentina, and the Delaware courts would need to apply Argentine law to a dispute that “has no real connection [to Delaware].” International comity also informed the Court’s decision not to require an alternative forum prior to dismissal. The Court recognized that “some countries have erected barriers preventing plaintiffs from pursuing litigation in their home country once a case has been filed in the United States” and that “plaintiffs can take steps to render the foreign jurisdiction unavailable.” The Court reasoned that rejecting the available-forum requirement “might encourage foreign jurisdictions to rethink laws and rules shifting to the U.S. courts disputes that are more closely connected to their own countries and citizens.” In announcing the rule, the Delaware Supreme Court did not totally foreclose foreign plaintiffs from bringing suit against Delaware companies in Delaware courts because “[t]he degree of the Delaware corporate defendant’s connection to the alleged wrong will still be considered” in the forum non conveniens analysis. But the Court emphasized that “trial court[s] will … have the discretion to dismiss a transnational dispute when the defendant has demonstrated overwhelming hardship if the case is litigated in the Delaware courts, even if an alternative forum is not available.” The Delaware Supreme Court’s decision is a significant development in transnational case law. Given the sheer number of businesses incorporated in Delaware, Delaware state court is an obvious target for foreign plaintiffs seeking to avail themselves of American courts, which are widely viewed as plaintiff-friendly. But this decision gives U.S. businesses sued in connection with foreign conduct another arrow in their quivers as they defend against costly transnational litigation. Gibson Dunn represented Philip Morris USA in the Delaware litigation. Patrick Dennis, Miguel Estrada, Perlette Jura, and Amir Tayrani led the Gibson Dunn team.  Aranda v. Philip Morris USA, Inc., No. 525, 2016 (Del. Mar. 22, 2018).  Id. at 13-14 (quoting Mar–Land Indus. Contractors, Inc. v. Caribbean Petroleum Refining, L.P., 777 A.2d 774, 779 (Del. 2001)).  Id. at 14-15 (citing Maggie Gardner, Retiring Forum Non Conveniens, 92 N.Y.U. L. Rev. 390, 396 (2017)).  Id. at 15-16.  Id. at 16.  Id. at 17-18.  Id. at 18.  Id. The following Gibson Dunn lawyers assisted in the preparation of this client update: Patrick Dennis, Perlette Jura, Amir Tayrani, Chris Leach, and Miguel Loza 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 of the following members of the firm’s Transnational Litigation Group: Randy M. Mastro – New York (+1 212-351-3825, firstname.lastname@example.org) Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, email@example.com) Scott A. Edelman – Los Angeles (+1 310-557-8061, firstname.lastname@example.org) Andrea E. Neuman – New York (+1 212-351-3883, email@example.com) William E. Thomson – Los Angeles (+1 213-229-7891, firstname.lastname@example.org) Perlette Michèle Jura – Los Angeles (+1 213-229-7121, email@example.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, firstname.lastname@example.org) Anne M. Champion – New York (+1 212-351-5361, email@example.com) Please also feel free to contact the following members of the Environmental Litigation and Mass Tort practice group: Washington, D.C. Stacie B. Fletcher (+1 202-887-3627, firstname.lastname@example.org) Avi S. Garbow – Co-Chair (+1 202-955-8558, email@example.com) Raymond B. Ludwiszewski (+1 202-955-8665, firstname.lastname@example.org) Michael K. Murphy (+1 202-955-8238, email@example.com) Daniel W. Nelson – Co-Chair (+1 202-887-3687, firstname.lastname@example.org) Peter E. Seley – Co-Chair (+1 202-887-3689, email@example.com) Los Angeles Patrick W. Dennis (+1 213-229-7568, firstname.lastname@example.org) Matthew Hoffman (+1 213-229-7584, email@example.com) Thomas Manakides (+1 949-451-4060, firstname.lastname@example.org) New York Anne M. Champion (+1 212-351-5361, email@example.com) Andrea E. Neuman (+1 212-351-3883, firstname.lastname@example.org) San Francisco Peter S. Modlin (+1 415-393-8392, email@example.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439 Decided March 20, 2018 Today, the Supreme Court held 9-0 that class actions alleging only federal claims under the Securities Act of 1933 may be heard in state court and, if brought in state court, cannot be removed to federal court. Background: Federal and state courts have traditionally shared jurisdiction over claims under the Securities Act of 1933. After the Private Securities Litigation Reform Act of 1995 (PSLRA) tightened standards for pleading and proving federal securities fraud class actions, plaintiffs began filing those claims in state court. In response, Congress enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which requires certain “covered class actions” alleging state law securities claims to be heard and dismissed in federal court. 15 U.S.C. § 77p(c). But courts were split over whether covered class actions filed in state court that allege only claims under the 1933 Act also must be heard in federal court. In this case, investors in Cyan, Inc. filed a class action in California state court alleging only claims under the 1933 Act. The California courts refused to dismiss the case for lack of subject-matter jurisdiction. Issues: (1) Whether state courts lack subject-matter jurisdiction over class actions that allege only Securities Act of 1933 claims, and (2) Whether defendants in class actions filed in state court that allege only 1933 Act claims may remove the cases to federal court. “[W]e will not revise [Congress’s] legislative choice, by reading a conforming amendment and a definition in a most improbable way, in an effort to make the world of securities litigation more consistent or pure.” Justice Kagan,writing for the Court Court’s Holding: SLUSA does not deprive state courts of subject-matter jurisdiction over class actions raising only claims under the 1933 Act and does not authorize defendants to remove such actions to federal court. What It Means: SLUSA has often been the subject of statutory-interpretation disputes. But here, the unanimous Court held that SLUSA’s “clear statutory language” does not preclude state courts from adjudicating class actions involving 1933 Act claims. SLUSA’s class-action bar and federal-court-channeling provision apply only to state law claims. Under SLUSA, covered securities class actions based on the 1934 Act must proceed in federal court. 15 U.S.C. § 78aa. But as a result of the Court’s decision today, covered class actions based only on the 1933 Act may proceed in state court. Either way, the Court emphasized, the substantive protections of the PSLRA (such as the safe harbor for forward-looking statements) apply to all claims under both the 1933 and 1934 Acts. The United States argued that SLUSA permits defendants in class actions filed in state court that raise 1933 Act claims to remove those actions to federal court. The Court disagreed. In the wake of this ruling, businesses should expect to see more securities class actions alleging violations of the 1933 Act in state court, because plaintiffs will seek to take advantage of state courts that are perceived to be friendlier to their interests. This significant loophole may prompt Congress to enact new legislation, similar to SLUSA, to ensure that plaintiffs are required to bring securities class actions in federal court. 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 Caitlin J. Halligan +1 212.351.3909 firstname.lastname@example.org Mark A. Perry +1 202.887.3667 email@example.com Nicole A. Saharsky +1 202.887.3669 firstname.lastname@example.org Related Practice: Securities Litigation Brian M. Lutz +1 415.393.8379 email@example.com Robert F. Serio +1 212.351.3917 firstname.lastname@example.org Meryl L. Young +1 949.451.4229 email@example.com Related Practice: Class Actions Theodore J. Boutrous, Jr. +1 213.229.7804 firstname.lastname@example.org Christopher Chorba +1 213.229.7396 email@example.com Theane Evangelis +1 213.229.7726 firstname.lastname@example.org © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF Last week, on March 15, 2018, the Federal Energy Regulatory Commission (FERC) issued a number of orders aimed at addressing potential over-recovery of income tax in pipelines’ regulated rates. First, in the wake of a loss in the D.C. Circuit, FERC reversed course on its long-standing policy of allowing master limited partnerships (MLPs) to include an income-tax allowance in their cost-of-service rates. Second, FERC announced various initiatives to address potential over-recovery of taxes through cost-of-service rates that may result from the reduction in the corporate tax rate from 35% to 21%. Although the markets initially reacted quite negatively, the actual impact will not be immediate and will vary considerably from company to company. Indeed, many companies have already announced that the FERC orders will not have a material impact on their revenue. Reversal of Income Tax Policy for MLPs In the wake of the unfavorable United Airlines v. FERC decision, the FERC reversed its long-standing policy of allowing MLPs to include an income-tax allowance in their cost-of-service rates. FERC issued a policy statement that found such an allowance results in an impermissible double-recovery of costs in combination with the discounted cash flow (DCF) methodology for calculating return on equity. FERC concluded that because the DCF methodology used to calculate the return necessary to attract capital is done on a pre-tax basis, investors’ tax liability is already reflected in calculated return on equity. Thus, FERC concluded that any allowance for income tax with respect to an MLP would result in double-recovery of those costs. A few important points to keep in mind regarding the impact of this policy change: This only impacts FERC cost-of-service rates: Oil Pipelines: For oil pipelines, market-based rates and settlement rates will be unaffected. With respect to indexed rates, there is no automatic immediate impact. FERC will, however, address this issue in the next reassessment of the index in 2020. Gas Pipelines: For interstate gas pipelines negotiated rates, market-based rates, and settlement rates are not affected. Discount rates could be impacted, but only to the extent recourse rates are reduced below the discount-rate level as a result of the implementation of this policy. The policy statement does not actually change any pipeline’s rates. Oil Pipelines: For oil pipelines, it announces a new policy that the pipelines may no longer include an income tax allowance in their cost of service on the annual Form 6 reporting. Once this cost-of-service data is made publically available, it certainly could lead to FERC or shippers filing a complaint pursuant to Section 13(1) of the Interstate Commerce Act to reduce rates. In addition, FERC intends to address the impact of the tax reduction in the five year review of the oil pipeline index in 2020. Thus, in theory, FERC could require a reduction in rates for any pipelines whose rates are set at the ceiling by setting a negative index at that time. Gas Pipelines: For gas pipelines, FERC is proposing a one-time reporting requirement to obtain data about the impact of this policy and the reduction in the corporate tax rate on each pipeline’s cost of service as discussed in more detail below. Again, once this cost-of-service data is made public, FERC or shippers could initiate a proceeding to reduce rates pursuant to Section 5 of the Natural Gas Act. This result is not automatic, however. The policy statement did not decide whether other non-pass through entities (e.g., limited partnerships, LLCs, etc.) would also no longer be permitted to recover a tax allowance in their rates. Instead, FERC deferred those issues to consideration in future rate proceedings, but made clear that the issue of double-recovery would need to be addressed in those instances. FERC’s Order on Remand in the United Airlines case seems to leave little room for FERC to reach a contrary finding or other pass-through entities, as FERC reasoned that “MLPs and similar pass-through entities do not incur income tax at the entity level” and therefore the ROE offered under the DCF methodology must be sufficient to cover the investor’s tax liability. Notice of Proposed Rulemaking on Federal Income Tax Rate Reductions for Gas Pipelines FERC issued a notice of proposed rulemaking that seeks require natural gas pipelines to do a one-time informational filing of an “abbreviated cost and revenue study” to provide information to allow FERC to determine whether gas pipelines are over-recovering for taxes in light of the reduction in the corporate tax rate. FERC proposed to use the same form that FERC has attached to its orders initiating Section 5 rate investigations in recent years for this informational filing. FERC then proposes several options to address over-recoveries, including some intended to encourage pipelines to voluntarily reduce rates: Limited Section 4 Filings: Although FERC typically does not allow pipelines to file a limited rate case to adjust individual components of rates, FERC proposed to allow pipelines to file a limited Section 4 rate case to reduce their rates by the percentage reduction in the cost of service from the decrease in the federal corporate income tax rate and the elimination of the income tax allowance for MLPs. File a Statement Explaining Why an Adjustment is Not Necessary: If a pipeline’s reduction in cost of service from the tax cuts and elimination of income tax allowance are offset by increases in costs elsewhere or if the pipeline is overall not recovering its cost of service despite the tax decease, a pipeline can file a statement explaining why no decrease in rates is appropriate despite the income tax reduction. Commit to File a General Section 4 Rate Case (or an Uncontested Settlement): In lieu of a limited Section 4 rate case, pipelines can commit to file a general Section 4 rate case and indicate an approximate time-frame for making such a filing. FERC proposes that if a pipeline commits to make such a filing by December 31, 2018, FERC will not initiate a Section 5 investigation of the pipeline’s rates prior to that time. File the Information Required and Do Nothing Else: FERC, in a somewhat disingenuous acknowledgement that it cannot legally force pipelines to file a Section 4 rate case, notes that a pipeline may simply file the required information with FERC, take no further action, and wait to see if FERC initiates a Section 5 investigation. FERC proposes, however, to open a rate proceeding docket for each filing and issue a public notice inviting interventions and protests on the filing. FERC will then decide whether to initiate a Section 5 proceeding based on the public comments and protests. In sum, these procedures are strikingly similar to requiring a Section 4 rate filing. With respect to intrastate Hinshaw and Section 311 pipelines, FERC found that its existing policies are generally sufficient to address potential over-recovery resulting from the Tax Cuts and Jobs Act. However, FERC does propose to require that if a pipeline adjusts its state-jurisdictional rates as a result of the Act, then the pipeline must file a new rate election within 30 days after the reduced intrastate rate becomes effective. Notice of Inquiry Regarding the Effect of Tax Cuts and Jobs Act Finally, FERC opened an inquiry to solicit comments on the impacts of other aspects of tax reform on jurisdictional rates, such as the treatment of accumulated deferred income taxes and the new 100% bonus depreciation regime which applies to oil pipelines. In this regard, FERC is particularly interested how to treat accumulated deferred income tax going forward in light of the reduction in future tax liability. FERC is soliciting comments on various topics related to ADIT, including: How to ensure rate base continues to be treated in a manner similar to that prior to the Tax Cuts and Jobs Act until excess and deficient ADIT is fully settled. Whether and how adjustments should be made so that rate base may be appropriately adjusted by excess and deficient ADIT. How tax allowance or expense in cost of service will be implemented to reflect the amortization of excess and deficient plant-based ADIT. FERC is also soliciting comments on the effect of the bonus depreciation change under the Tax Cuts and Jobs Act, which increases the bonus depreciation allowance from 50% to 100% for qualified property placed into service after September 1, 2017 and before January 1, 2023. Comments are due 60 days after publication of the notice in Federal Register.  Revised Policy Statement on Treatment of Income Taxes, 162 FERC ¶ 61,227 (2018).  827 F.3d 122 (D.C. Cir. 2016).  SFPP, L.P., 162 FERC ¶ 61,228 at P 22 (2018).  Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating to Federal Income Tax Rate, 162 FERC ¶ 61,226 (2018).  Inquiry Regarding the Effect of the Tax Cuts and Jobs Act on Commission Jurisdictional Rates, 162 FERC ¶ 61,223 (2018). Gibson Dunn’s Energy, Regulation and Litigation lawyers are available to assist in addressing any questions you may have regarding the developments discussed above. Please contact the Gibson Dunn lawyer with whom you usually work, or the following: William S. Scherman – Washington, D.C. (+1 202-887-3510, email@example.com) Ruth M. Porter – Washington, D.C. (+1 202-887-3666, firstname.lastname@example.org) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF In our client alert of 8 December 2017 we summarised the political deal relating to the terms of withdrawal of the UK from the EU with a two year transition. It is important to remember that this “Phase 1” deal only relates to the separation terms and not to the future relationship between the UK and the EU post Brexit. In her Mansion House speech on 2 March 2018 UK Prime Minister Theresa May set out Britain’s vision for a future relationship. The full text of her speech can be found here. It continues to make it clear that the UK will remain outside the Single Market and Customs Union. On the critical issue of the Irish border, the UK Government’s position remains that a technological solution is available to ensure that there is neither a hard border within Ireland nor a border in the Irish Sea which would divide the UK. Neither the EU nor Ireland itself accept that a technological solution is workable, and there remain doubts whether such a solution is possible if the UK is outside the EU Customs Union (or something equivalent to a customs union). The terms of the political deal in December make it clear that, in the absence of an agreed solution on this issue, the UK will maintain full alignment with the rules of the Single Market and Customs Union. The UK’s main opposition party, The Labour Party, has now shifted its position to support the UK remaining in a customs union. The Government is proposing a “customs partnership” which would mirror the EU’s requirements for imports and rules of origin. Theresa May has acknowledged both that access to the markets of the UK and EU will be less than it is today and that the decisions of the CJEU will continue to affect the UK after Brexit. On a future trade agreement, the UK’s position is that it will not accept the rights of Canada and the obligations of Norway and that a “bespoke model” is not the only solution. There is, however, an acknowledgement that, if the UK wants access to the EU’s market, it will need to commit to some areas of regulation such as state aid and anti-trust. Prime Minister May has confirmed that the UK will not engage in a “race to the bottom” in its standards in areas such as worker’s rights and environmental protections, and that there should be a comprehensive system of mutual recognition of regulatory standards. She has also said that there will need to be an independent arbitration mechanism to deal with any disagreements in relation to any future trade agreement. Theresa May has also said that financial services should be part of a deep and comprehensive partnership. The UK will also pay to remain in the European Medicines Agency, the European Chemicals Agency and the European Aviation Safety Agency but will not remain part of the EU’s Digital Single Market. Donald Tusk, the European Council President, has rejected much of the substance of the UK’s position, stating that the only possible arrangement is a free trade agreement excluding the mutual recognition model at the heart of the UK’s proposals. Crucially, however, he has said that there would be more room for negotiation should the UK’s red lines on the Customs Union and Single Market “evolve”. It is clear that this is an opening position for the two sides in the negotiations and that there is a long history of EU negotiations being settled at the very last minute. The current timetable envisages clarity on the final terms of the transition and the “end state” by the European Council meeting on 18/19 October 2018. This client alert was prepared by London partners Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) that has been considering these issues for many months. Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel: 020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel: 020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel: 020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel: 020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel: 020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel: 020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Houston partners Gerry Spedale and Hillary Holmes are the authors of “Joint Venture Traps to Avoid,” [PDF] published in Midstream Business in March 2018.
Click for PDF Yesterday, the Court of Justice of the European Union (CJEU) issued its much awaited ruling on the compatibility of intra-EU bilateral investment treaties (BITs) with EU law, in Achmea B.V. (formerly known as Eureko B.V.) v. Slovakia. The CJEU determined that arbitration provisions found in BITs concluded between EU Member States are incompatible with EU law. Adopting the policy views expressed by the European Commission in recent years, the CJEU’s decision goes against the Advisory Opinion of the Attorney General Wathelet issued in September 2017, who had advised that there is no incompatibility with EU law. The decision also goes against a long line of decisions from international arbitration tribunals rejecting the suggestion that EU law precludes the jurisdiction of such arbitral tribunals. The decision itself is surprisingly light in terms of its reasoning and leaves many questions unanswered. For example, it is not clear how the CJEU ruling will impact pending disputes against EU Member States under intra-EU BITs. It also appears to suggest that arbitration under the Energy Charter Treaty may be unaffected. However, the ruling no doubt will have consequences for the protection of foreign investments within the EU going forward. Investors will not be able to commence arbitration proceedings under BITs between EU Member States. Thus, in order to maximize protection from potential adverse government actions, investors from EU Member States with investments in other EU Member States should seriously consider restructuring their investments in order to ensure that they can take advantage of investment treaty protections. Background to the Dispute The question of compatibility of intra-EU BITs with EU law was brought before the CJEU following a request for preliminary ruling by the German Federal Court of Justice (Bundesgerichtshof) (BGH) in 2016. The BGH referred the issue to the CJEU in the context of a challenge to an arbitral award rendered under the Netherlands and Slovakia BIT of 1991 in Achmea B.V. (formerly known as Eureko B.V.) v. Slovakia in December 2012. The Slovak Republic was seeking to set aside the UNCITRAL award before the Frankfurt courts (Frankfurt was the seat of arbitration). The arbitral tribunal had awarded the claimant, Achmea, EUR 22.1 million plus interest and costs. The Slovakia argued inter alia that the BIT was incompatible with EU law based on certain provisions of the Treaty of the Functioning of the European Union (TFEU) and that the EU courts had exclusive jurisdiction over Achmea’s claims. The first instance court in Frankfurt initially dismissed Slovakia’s application to have the award set aside. Slovakia subsequently appealed to the BGH, following which BGH referred the questions on incompatibility to the CJEU, while enunciating its view that the BIT was in fact compatible with EU law. Although not binding on the CJEU, the EU Advocate General (AG) also weighed in the discussion with an Advisory Opinion in September 2017 in which he opined that intra-EU BITs are indeed compatible with EU law. The AG expressly disagreed with the European Commission’s position (which had intervened and filed written submissions in a number of intra-EU BIT arbitrations) that intra-EU BITs are incompatible with EU law. CJEU’s Decision The BGH’s opinion and the AG’s Advisory Opinion, however, did not sway the CJEU. In fact, the CJEU ruled that the arbitration clause featured in the Netherlands and Slovakia BIT of 1991 has an adverse effect on the autonomy of EU law and was therefore incompatible. The Court opined that the BIT established a mechanism for settling disputes between an investor and a Member State by an arbitral tribunal which falls outside the judicial system of the EU and thus did not ensure the full effectiveness of EU law should the dispute in question require the interpretation or application of EU law. Implications of the CJEU Decision Currently, there are more than 190 BITs between EU Member States still in force and the CJEU’s ruling today will therefore have ramifications for the future of investment protection within the EU. Although it remains to be seen how future investment treaty tribunals will interpret the CJEU’s ruling, they may consider that they lack jurisdiction when asked to hear disputes brought by European investors against EU Member States under intra-EU BITs in light of this ruling. At the very least, any EU national court that is asked to assist in arbitration proceedings seated in EU Member States or hear recognition/enforcement applications for investment treaty awards under intra-EU BITs would need to consider the CJEU’s ruling. What this decision means for arbitrations taking place outside the EU or under the self-contained regime of the ICSID Convention rules, however, is unclear. From the face of the decision, it appears that the CJEU left open the question as to whether its findings would apply to the provisions of multilateral treaties, such as the Energy Charter Treaty (ECT), to which the EU itself is a Party. In particular, the CJEU appeared to distinguish between agreements only signed between two EU Member States and those signed by the EU itself (such as the ECT). To date, all ECT tribunals that have considered jurisdictional objections based on EU law have rejected such arguments. What Should Investors Consider Doing in Light of the Decision? In light of today’s ruling, it would be wise for EU based investors with investments in other EU Member States to consider restructuring their investments to ensure that their corporate structure includes at least one entity outside the EU in a country that has a BIT with the relevant EU Member State. As has been consistently confirmed by investment treaty tribunals, re-structuring of investments before a dispute arises with a view to maximizing investment treaty protections is a legitimate business goal. By undertaking such a restructuring, investors will ensure that they have additional remedies should they face adverse government actions against their investments.  The ruling can be accessed at curia.europa.eu.  Opinion of Advocate General Wathelet, Case C-284/16, Slowakische Republik v Achmea BV, 19 September 2017, available at: <http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62016CC0284&from=EN>.  See the press release No. 81/2016 dated 10 May 2016, in which the BGH announced that it requested a preliminary ruling from the CJEU, available at <http://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=pm&Datum=2016&Sort=3&nr=74606&pos=2&anz=83>.  For example, in Eastern Sugar v. Czech Republic, SCC Case No. 088/2004; AES v. Hungary, ICSID Case No. ARB/07/22; Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19; Charanne v. Spain, SCC Case No. V062/2012; Isolux v. Spain, SCC Case V2013/153; Blusun v. Italy, ICSID Case No. ARB/14/3; Novenergia v Spain, SCC Case No. 2015/063; in enforcement proceedings in Micula v Romania No. 15-3109-cv (2d Cir.).  In the recent years, the Commission has been increasing pressure on arbitral tribunals hearing disputes under intra-EU BITs to decline jurisdiction and also on EU Member States. In 2015, for example, it initiated infringement proceedings against five EU Member States (Austria, the Netherlands, Romania, Slovakia and Sweden) and requested them to terminate their intra-EU BITs, see press release dated 18 June 2015 available at: <http://europa.eu/rapid/press-release_IP-15-5198_en.htm>. In late November 2017, the European Commission’s Competition Office has indicated that any compensation to be paid by EU Member States to foreign investors following successful investment treaty claims would constitute state aid requiring approval from the Commission: see report dated 10 November 2017 available at: <http://ec.europa.eu/competition/state_aid/cases/258770/258770_1945237_333_2.pdf>.  See for example Charanne B.V. and Construction Investments S.A.R.L. v. Spain, SCC No. 062/2012; RREEF v. Spain, ICSID Case No. ARB/13/30; Eiser Infrastructure v. Spain, ICSID Case No. ARB/13/36; Blusun v. Italy, ICSID Case No. ARB/14/3; Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration practice group, or the following: Cyrus Benson – London (+44 (0) 20 7071 4239, email@example.com) Penny Madden – London (+44 (0) 20 7071 4226, firstname.lastname@example.org) Jeffrey Sullivan – London (+44 (0) 20 7071 4231, email@example.com) Rahim Moloo – New York (+1 212-351-2413, firstname.lastname@example.org) Ceyda Knoebel – London (+44 (0)20 7071 4243, email@example.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
San Francisco partner Marc Fagel is the author of “ALJs Check Their Own Work, With Unsurprising Results,” [PDF] published by Law360 on March 2, 2018.