964 Search Results

August 15, 2019 |
2019 Mid-Year Securities Litigation Update

Click for PDF The rate of new securities class action filings appears to be stabilizing, but that does not mean 2019 has been lacking in important developments in securities law. This mid-year update highlights what you most need to know in securities litigation trends and developments for the first half of 2019: The Supreme Court decided Lorenzo, holding that, even though Lorenzo did not “make” statements at issue and is thus not subject to enforcement under subsection (b) of Rule 10b-5, the ordinary and dictionary definitions of the words in Rules 10b-5(a) and (c) are sufficiently broad to encompass his conduct, namely disseminating false or misleading information to prospective investors with the intent to defraud. Because the Supreme Court dismissed the writ of certiorari in Emulex as improvidently granted, there remains a circuit split as to whether Section 14(e) of the Exchange Act supports an implied private right of action based on negligent misrepresentations or omissions made in connection with a tender offer. We explain important developments in Delaware courts, including the Court of Chancery’s application of C & J Energy, as well as the Delaware Supreme Court’s (1) application and extension of its recent precedents in appraisal litigation to damages claims, (2) elaboration of its recent holding on MFW’s “up front” requirement, and (3) rare conclusion that a Caremark claim—“possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment”—survived a motion to dismiss. Finally, we continue to monitor significant cases interpreting and applying the Supreme Court’s decisions in Omnicare and Halliburton II. I.   Filing And Settlement Trends New federal securities class action filings in the first six months of 2019 indicate that annual filings are on track to be similar to the number of new cases filed in each of the prior two years. According to a newly released NERA Economic Consulting study (“NERA”), 218 cases were filed in the first half of this year. While there was a relative surge in new cases in the first quarter of the year, this higher level of new cases did not persist in the second quarter. Filing activity in the first half of 2019 indicates a continuation of the shift in the types of cases observed in 2018—an increase in the number of Rule 10b-5, Section 11, or Section 12 cases, and a decrease in the number of merger objection cases. If the filing composition and levels observed in the first half of 2019 are indicative of the pattern for the rest of the year, we will see a 15% increase in Rule 10b-5, Section 11, and Section 12 cases compared to the approximate 1% growth in this category of filings in 2018. On the other hand, merger objection cases filed in 2019 are on pace to be more than 16% lower than similar cases filed in the prior year. While the median settlement values for the first half of 2019 are roughly equivalent to those in 2018 (at $12.0 million, down from $12.70 million in 2018), average settlement values are down over 50% from 2018 (at $33 million, down from $71 million in 2018).  That said, this discrepancy is due predominantly to one settlement in 2018 exceeding $1 billion.  Excluding such outliers, we actually see a slight increase in average settlement values compared to the prior two years. The industry sectors most frequently sued thus far in 2019 continue to be healthcare (22% of all cases filed), tech (20%), and finance (15%). Cases filed against healthcare companies in the first half of 2019 are showing the continuation of a downward trend from a spike in 2016, while cases filed against tech and finance companies are on pace with 2018. A.   Filing Trends Figure 1 below reflects filing rates for the first half of 2019 (all charts courtesy of NERA). So far this year, 218 cases have been filed in federal court, annualizing to 436 cases, which is on pace with the number of filings in 2017 and 2018, and significantly higher than the numbers seen in years prior to 2017. Note that this figure does not include the many class suits filed in state courts or the rising number of state court derivative suits, including many such suits filed in the Delaware Court of Chancery. B.   Mix Of Cases Filed In First Half Of 2019 1.   Filings By Industry Sector As seen in Figure 2 below, the split of non-merger objection class actions filed in the first half of 2019 across industry sectors is fairly consistent with the distribution observed in 2018, with few indications of significant shifts or increases in particular sectors. As in 2018, the Health Technology and Services and the Electronic Technology and Technology Services sectors accounted for over 40% of filings. The two sectors reflecting the largest changes from 2018 thus far are Consumer Durables and Non-Durables (at 9%, up from 6% in 2018) and Consumer and Distribution Services (at 5%, down from 9% in 2018). See Figure 2, infra. 2.   Merger Cases As shown in Figure 3, 83 “merger objection” cases have been filed in federal court in the first half of 2019 —below the pace of 109 cases at this point in 2018. If the 2019 trend continues, the 166 merger objection cases projected to be filed in 2019 will be about 16% fewer than the 198 merger objection cases filed in the prior year. C.   Settlement Trends As Figure 4 shows below, during the first half of 2019, the average settlement declined to $33 million, more than 50% lower than the average in 2018 but higher than the average in 2017. This phenomenon is primarily driven by one settlement in 2018 exceeding $1 billion, heavily skewing the average for that year.  If we limit our analysis to cases with settlements under $1 billion, there is actually a slight increase in the average settlement value in 2019 compared to the prior years. Finally, as Figure 5 shows, the median settlement value for cases was $12 million, which is in line with the median in 2018 and almost double the median value in 2017. II.   What To Watch For In The Supreme Court A.   Lorenzo Affirms That Disseminators Of False Statements May Be Held Liable Under Rules 10b-5(a) And 10b-5(c) Even If Janus Shields Them From Liability Under Rule 10b-5(b) We discussed the Supreme Court’s decision to grant review of Lorenzo v. Securities and Exchange Commission, No. 17-1077, in our 2018 Mid-Year Securities Litigation Update, and our 2018 Year-End Securities Litigation Update. Readers will recall that the question presented in Lorenzo was whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be actionable as a “fraudulent scheme” under Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c), even though it would not support a claim under Rule 10b-5(b) pursuant to the Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). On March 27, 2019, the Supreme Court affirmed the D.C. Circuit in a 6–2 opinion by Justice Breyer (Justice Kavanaugh took no part in the decision because he participated in the panel decision while a judge on the court of appeals).  The Court held that the ordinary and dictionary definitions of the words in Rules 10b-5(a) and 10b-5(c) are sufficiently broad to encompass Lorenzo’s conduct, namely disseminating false or misleading information to prospective investors with the intent to defraud, even if the disseminator did not “make” the statements and is thus not subject to enforcement under subsection (b) of the Rule.  Lorenzo v. SEC, 587 U.S. ___ (2019), slip op. at 5–7. Underlying the Court’s opinion is the principle that the securities laws and regulations work together as a whole. The Court rejected Lorenzo’s argument that Rule 10b-5 should be read to mean that each provision of the Rule governs different, mutually exclusive spheres of conduct. Under Lorenzo’s reading, he could be liable for false statements only if his conduct violated provisions that specifically refer to such statements, such as Rule 10b-5(b), and could therefore not be liable under other provisions of the Rule, which do not specifically mention misstatements. The Court noted, however, that it has “long recognized considerable overlap among the subsections of the Rule” and related statutory provisions.  Id. at 7–8.  The opinion further noted that Lorenzo’s conduct “would seem a paradigmatic example of securities fraud,” making it difficult for the majority to reconcile Lorenzo’s argument with the basic purpose and congressional intent behind the securities laws.  Id. at 9. The majority also adopted the SEC’s argument that Janus concerned only Rule 10b-5(b), and thus does not operate to shield those who disseminate false or misleading information from scheme liability, even if they do not “make” the statement.  In response to Lorenzo’s contention that imposing primary liability here would weaken the distinction between primary and secondary liability, the Court drew what it characterized as a clear line:  “Those who disseminate false statements with intent to defraud may be held primarily liable under Rules 10b-5(a) and (c),” as well as Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act, “even if they are secondarily liable under Rule 10b-5(b).”  Id. at 10–11.  Finally, the Court identified a flaw in Lorenzo’s suggestion that he should only be held secondarily liable.  Under that theory, someone who disseminated false statements (even if knowingly engaged in fraud) could not be held to have aided and abetted a “maker” of a false statement if the maker did not violate Rule 10b-5(b). That is because the aiding and abetting statute requires that there be a violator to whom the secondary violator provides “substantial assistance.” Id. at 12. And if, under Lorenzo’s theory, the disseminator did not primarily violate other subsections (perhaps because the disseminator lacked the necessary intent), the fraud might go unpunished altogether.  Id. at 12–13. We noted in our 2018 Year-End Securities Litigation Update that Justice Gorsuch appeared accepting of Lorenzo’s positions during the oral argument, and he did join Justice Thomas (the author of Janus) in dissent. The dissent contended that the majority “eviscerate[d]” the distinction drawn in Janus between primary and secondary liability by holding that a person who did not “make” a fraudulent misstatement “can nevertheless be primarily liable for it.” Id. at 1 (Thomas, J., dissenting).  The dissent faulted the Court for holding, in essence, that the more general provisions of other securities laws each “completely subsumes” the provisions that specifically govern false statements, such as Rule 10b-5(b). Id. at 3.  Instead, the dissenters argued that these specific provisions must be operative in false-statement cases, and that the more general provisions should be applied only to cases that do not fall within the purview of these more specific provisions. B.   Pending Certiorari Petitions Regular readers of these updates will recall that we wrote about the Supreme Court’s pending decision in Emulex Corp. v. Varjabedian, No. 18-459, in the 2018 Year-End Securities Litigation Update. In April, the Supreme Court heard oral argument and then dismissed the writ of certiorari as improvidently granted. Emulex Corp. v. Varjabedian, 587 U.S. ___ (2019), slip op. at 1. As is common in such dismissals, the Justices offered no explanation of why they dismissed the case. Therefore, there remains a circuit split as to whether Section 14(e) of the Exchange Act supports an implied private right of action based on negligent misrepresentations or omissions made in connection with a tender offer. There is also at least one notable securities case in which a petition for certiorari is pending. Putnam Investments, LLC v. Brotherston, No. 18-926, an ERISA case, presents the question whether the plaintiff or defendant must prove that an alleged fiduciary breach related to investment option selection caused a loss to participants or the plan. The case also raises the issue of whether the First Circuit correctly held that showing that particular investment options did not perform as well as a set of index funds, selected by the plaintiffs with the benefit of hindsight, suffices as a matter of law to establish “losses to the plan.” The Supreme Court has entered an order requesting the Solicitor General file a brief expressing the views of the United States. The government has not yet filed its brief in this case. We will continue to monitor the petition and provide an update if the Supreme Court grants certiorari. III.   Delaware Developments A.   Delaware Supreme Court Affirms Deal Price Is Best Evidence Of Fair Value In Appraisal, And Of Damages In Entire Fairness Regular readers of these updates will recall that, since our 2017 Year-End Securities Litigation Update, we have been reporting on the significant shift in Delaware appraisal law resulting from the Delaware Supreme Court’s landmark decision in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017), where it directed the Court of Chancery to use market factors to determine the fair value of a company’s stock. In our 2018 Mid-Year Securities Litigation Update, we wrote about the Delaware Court of Chancery’s decision in Verition Partners Master Fund v. Aruba Networks, Inc., where the trial court interpreted Dell as endorsing a company’s unaffected market price and deal price as reliable indicators of fair value under certain circumstances. 2018 WL 2315943, at *1 (Del. Ch. May 21, 2018). In April, however, the Delaware Supreme Court reversed the trial court, clarifying that, although the “unaffected market price” of a seller’s stock “in an efficient market is an important indicator of its economic value that should be given weight” under appropriate circumstances, Dell “did not imply that the market price of a stock was necessarily the best estimate of the stock’s so-called fundamental value at any particular time.” Verition Partners Master Fund v. Aruba Networks, Inc., 210 A.3d 128, 2019 WL 1614026, at *6 (Del. Apr. 16, 2019). Eschewing remand, the Supreme Court instead ordered the trial court to enter judgment awarding deal price less synergies as the company’s “fair value.” Id. at *8–9. Then, in May, the Delaware Supreme Court extended the same market-based deference from the appraisal context to damages claims in its affirmance of In re PLX Technology Inc. Stockholders Litigation, 2018 WL 5018535 (Del. Ch. Oct. 16, 2018), aff’d, 2019 WL 2144476, at *1 (Del. May 16, 2019) (TABLE). Late last year, the Delaware Court of Chancery determined in a post-trial opinion that an activist hedge fund aided and abetted a breach of fiduciary duties by directors in connection with their sale of the target company. 2018 WL 5018535, at *1. This was a pyrrhic victory, however, as the Court of Chancery concluded that the plaintiffs failed to prove their allegation that, had the company remained a stand-alone entity, its value would have exceeded the deal price by more than 50%. Id. at *2. Instead, the Court of Chancery found that “[a] far more persuasive source of valuation evidence is the deal price that resulted from the Company’s sale process.” Id. at *54; see also id. & n.605 (citing Dell, 177 A.3d at 30). In affirming the Court of Chancery’s decision on appeal, the Delaware Supreme Court rejected the plaintiffs’ argument that “the Court of Chancery erred . . . by importing principles from . . . appraisal jurisprudence to give deference to the deal price.” In re PLX Tech. Inc. Stockholders Litig., 2019 WL 2144476, at *1 (Del. May 16, 2019) (TABLE). B.   Joint Valuation Exercise Constitutes Substantive Economic Negotiations Under Flood, Fails MFW’s “Up Front” Requirement In our 2018 Year-End Securities Litigation Update, we reported on the Delaware Supreme Court’s decision in Flood v. Synutra International, Inc., where it held that the element of Kahn v. M & F Worldwide Corp. (“MFW”), 88 A.3d 635, 644 (Del. 2014) that requires a transaction to be conditioned “ab initio” or “up front” on the approval of both a special committee and a majority of the minority stockholders, in turn “require[s] the controller to self-disable before the start of substantive economic negotiations, and to have both the controller and Special Committee bargain under the pressures exerted on both of them by these protections.” Flood v. Synutra Int’l, Inc., 195 A.3d 754, 763 (Del. 2018). In Olenik v. Lodzinski, 208 A.3d 704 (Del. 2019), the Delaware Supreme Court added color to its holding in Flood that “up front” means “before the start of substantive economic negotiations,” Flood, 195 A.3d at 763. In the decision underlying Olenik, the Court of Chancery found that, although the parties to the merger had “worked on the transaction for months” before implementing MFW’s “up front” conditions, those “preliminary discussions” were “entirely exploratory in nature” and “never rose to the level of bargaining.” Olenik, 208 A.3d at 706, 716–17. Disagreeing with and reversing the Court of Chancery, the Delaware Supreme Court held that “preliminary discussions transitioned to substantive economic negotiations when the parties engaged in a joint exercise to value” the merging entities. Id. at 717. In particular, the Delaware Supreme Court found it reasonable to infer that two presentations valuing the target “set the field of play for the economic negotiations to come by fixing the range in which offers and counteroffers might be made.” Id. Thus, the parties could not invoke MFW’s protections because they did not condition the transaction on approval of both a special committee and a majority of the minority stockholders until after these “substantive economic negotiations.” Id. C.   Under C & J Energy, Curative Shopping Process “Cannot Be Granted” To Remedy Deal Subject To Entire Fairness Recently, the Court of Chancery declined to “blue-pencil” a merger agreement resulting from a flawed process based on the Delaware Supreme Court’s decision in C & J Energy Services v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014). See FrontFour Capital Grp. LLC v. Traube, 2019 WL 1313408, at *33 (Del. Ch. Mar. 22, 2019). Recall that, in C & J Energy, the Delaware Supreme Court cautioned the Court of Chancery against depriving “adequately informed” stockholders of the “chance to vote on whether to accept the benefits and risks that come with [a flawed] transaction, or to reject the deal,” 107 A.3d at 1070, where (1) “no rival bidder has emerged to complain that it was not given a fair opportunity to bid,” id. at 1073, and (2) a preliminary injunction would “strip an innocent third party [buyer] of its contractual rights while simultaneously binding that party to consummate the transaction,” id. at 1054. In FrontFour, the plaintiff proved that the deal at issue was not entirely fair because conflicted insiders tainted the sale process; the special committee failed to inform itself adequately; standstill agreements prevented third parties from coming forward; and other deal protections prevented an effective post-signing market check, among other things. 2019 WL 1313408, at *32. Nevertheless, the Court of Chancery declined to grant “the most equitable relief” available—“a curative shopping process, devoid of [management] influence, free of any deal protections, plus full disclosures.” Id. at *33. The Court of Chancery reasoned that it had “no discretion” to do so under C & J Energy because the injunction sought would “strip an innocent third party of its contractual rights” under the merger agreement. Id. D.   Delaware Supreme Court Holds Caremark Claim Adequately Pleaded As we reported in our 2017 Year-End Securities Litigation Update, a Caremark claim generally seeks to hold directors personally accountable for damages to a company arising from their failure to properly monitor or oversee the company’s major business activities and compliance programs. On June 19, 2019, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of a derivative suit against key executives and the board of directors of Blue Bell USA, carrying implications for both determinations of director independence and fiduciary duties under Caremark. See Marchand v. Barnhill, 2019 WL 2509617 (Del. June 19, 2019). In its demand futility analysis, the Court held that a combination of a “longstanding business affiliation” and “deep . . . personal ties” cast reasonable doubt on a director’s ability to act impartially. Id. at *2. Notably, the reversal turned on the length and depth of one director’s relationship with the CEO of Blue Bell and his family. Although being “social acquaintances who occasionally have dinner or go to common events” does not per se preclude one’s independence, the current CEO’s father and predecessor had hired, mentored, and quickly promoted the director in question to senior management. Id. at *11. The director maintained a close relationship with the CEO’s family that spanned more than three decades and the family even spearheaded a campaign to name a college building after the director. Id. at *10. This combination of facts persuaded the Court that this director was not independent for demand futility purposes. Id. at *10–11. The Court also held that a board’s failure to implement oversight systems related to a “compliance issue intrinsically critical to the business operation” gives rise to a duty of loyalty claim under Caremark. Id. at *13. The Court concluded that because food safety compliance was critical to the operation of a “single-product food company,” id at *4, neither the Company’s nominal compliance with some applicable regulations, nor management’s discussion of general compliance matters with the board were sufficient to satisfy the board’s oversight responsibilities, id. at *13–14. IV.   Loss Causation Developments The first half of 2019 saw several notable developments regarding loss causation, including continued developments relating to Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), discussed below in Section VI. Separately, on June 24, 2019, the Supreme Court rejected a petition for a writ of certiorari filed in First Solar, Inc. v. Mineworkers’ Pension Scheme, which we discussed in the 2018 Mid-Year Securities Litigation Update. First Solar involved a perceived ambiguity in prior precedent regarding the correct test for loss causation under the Securities Exchange Act of 1934 (the “Exchange Act”). Readers will recall that the Ninth Circuit held in First Solar that loss causation can be established even when the corrective disclosure did not reveal the alleged fraud on which the securities fraud claim is based. Mineworkers’ Pension Scheme v. First Solar, Inc., 881 F.3d 750, 754 (9th Cir. 2018), cert. denied, No. 18-164, 2019 WL 2570667 (U.S. June 24, 2019). First Solar filed its petition for writ of certiorari in August 2018, arguing that loss causation can be proven only if the market learns of, and reacts to, the underlying fraud. In May 2019, the Solicitor General filed an amicus brief recommending that certiorari be denied, arguing that the Ninth Circuit correctly rejected a “revelation-of-the-fraud” requirement for loss causation, pursuant to which a stock-price drop comes immediately after the revelation of a defendant’s fraud. Following the Ninth Circuit’s decision in First Solar, some courts have found that a plaintiff adequately pleaded loss causation for the purposes of stating a claim under the Exchange Act when the revelation that caused the decline in a company’s stock price could be tracked back to the facts allegedly concealed, thus establishing proximate cause at the pleadings phase. See, e.g., In re Silver Wheaton Corp. Sec. Litig., 2019 WL 1512269, at *14 (C.D. Cal. Mar. 25, 2019) (denying motion to dismiss); Maverick Fund, L.D.C. v. First Solar, Inc., 2018 WL 6181241, at *8–10 (D. Ariz. Nov. 27, 2018) (denying motion to dismiss and finding that plaintiffs had adequately pleaded facts that, if proven, would establish that disclosures related to misstatements were “casually related” to fraudulent scheme). We will continue to monitor these and other developments regarding loss causation. V.   Falsity Of Opinions – Omnicare Update In the first half of 2019, courts continued to define the boundaries of Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), the case in which the Supreme Court addressed the scope of liability for false opinion statements under Section 11 of the Securities Act. In Omnicare, the Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Id. at 1327. Under that standard, opinion statements give rise to liability under only three circumstances: (1) when the speaker does not “actually hold[] the stated belief;” (2) when the statement contains false “embedded statements of fact;” and (3) when the omitted facts “conflict with what a reasonable investor would take from the statement itself.” Id. at 1326–27, 1329. Consistent with past years, Omnicare remains a high bar to pleading the falsity of opinion statements. See, e.g, Plaisance v. Schiller, 2019 WL 1205628, at *11 (S.D. Tex. Mar. 14, 2019) (dismissing complaint that was “[m]issing . . . allegations of fact capable of proving that [the company] did not subjectively believe its audit opinions when they were issued”); Teamsters Local 210 Affiliated Pension Tr. Fund v. Neustar, Inc., 2019 WL 693276, at *5 (E.D. Va. Feb. 19, 2019) (finding that plaintiffs did not “allege facts that create a strong inference that at the time they [made the alleged misstatement], the Defendants could not have reasonably held the opinion” proffered). For example, in Neustar, plaintiffs alleged that defendants’ opinion that a certain transition “would occur by September 30, 2018” was false or misleading. 2019 WL 693276, at *5. Even though defendants were in possession of a “Transition Report, which warned that the transition might not occur” by that date, the court found that “[t]hese statements were far from definitive pronouncements that the transition date would occur later than September 2018.” Id. In addition, courts have continued to flesh out the contours of when a plaintiff has alleged that a company is in possession of sufficient information cutting against its statements to render it liable for an omission. In In re Ocular Therapeutix, Inc. Securities Litigation, the court found that a CEO’s statement that the company “think[s]” it had remedied deficiencies leading to the FDA’s denial of its New Drug Application was inactionable, even where the FDA later rejected the resubmitted application. 2019 WL 1950399, at *8 (D. Mass. Apr. 30, 2019). Not only did the CEO’s language “signal[] to investors that his statement was an opinion and not a guarantee,” but he also cautioned that it was up to the FDA to determine whether or not those deficiencies were corrected. Id. In Securities & Exchange Commission v. Rio Tinto plc, the SEC alleged that Rio Tinto violated securities laws by overstating the valuation of its newly acquired coal business when there had been certain adverse developments concerning the ability to transport coal and the quality of coal in the ground. 2019 WL 1244933, at *9 (S.D.N.Y. Mar. 18, 2019). The court dismissed the claim based on early valuation statements because those statements were opinions that “‘fairly align[ed] with’” information known at the time: namely, the main transportation option had not been entirely rejected, and the SEC did not “allege that Rio Tinto had come to fully appreciate the difficulties” concerning other transportation options and coal reserves by the time of those statements. Id. The SEC has moved to amend its complaint. Gibson Dunn represents Rio Tinto in this and other litigation. This year, courts also weighed in on the question of whether Omnicare applies to claims other than those brought under Section 11. Specifically, a Northern District of California court found that “[t]he Ninth Circuit has only extended Omnicare to Section 10(b) and Rule 10b-5 claims, not to Section 14 claims,” and therefore “decline[d] to extend Omnicare past the Ninth Circuit’s guidance.” Golub v. Gigamon Inc., 372 F. Supp. 3d 1033, 1049 (N.D. Cal. 2019) (citing City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 616 (9th Cir. 2017)). Gibson Dunn represents several defendants in that matter. In contrast, the Fourth Circuit applied Omnicare to dismiss a Section 14 claim without any discussion about Omnicare’s limitations, determining that a forward-looking statement was still actionable as an omission. Paradise Wire & Cable Defined Benefit Pension Plan v. Weil, 918 F.3d 312, 322–23 (4th Cir. 2019). Rather, the court emphasized the importance of context when evaluating opinion statements, noting that “words matter” and, as in Paradise Wire, can “render the claim for relief implausible.” Id. at 323. “When the words of a proxy statement, like the ones in this case, . . . contain tailored and specific warnings about the very omissions that are the subject of the allegations, those words render the claim for relief implausible.” Id. Additionally, a District of Delaware court recently declined to apply Omnicare to Section 10(b) claims: “Because the Third Circuit has twice declined to decide that Omnicare applies to Exchange Act claims, the Court is reluctant to decide that issue of first impression in connection with a motion to dismiss.” Lord Abbett Affiliated Fund, Inc. v. Navient Corp., 363 F. Supp. 3d 476, 496 (D. Del. 2019) (citing Jaroslawicz v. M & T Bank Corp., 912 F.3d 96 (3d Cir. 2018); In re Amarin Corp. PLC Sec. Litig., 689 F. App’x 124, 132 n.12 (3d Cir. 2017)). The Southern District of New York also considered whether Omnicare required broad disclosure of attorney-client privileged communications that might bear on whether omitted information rendered an opinion misleading. Pearlstein v. BlackBerry Ltd., 2019 WL 1259382, at *16 (S.D.N.Y. Mar. 19, 2019). In Pearlstein, plaintiffs argued that under Omnicare, a company’s “decision to include a legal opinion in [a] press release waived all attorney-client communications” related to the issuance of that release. Id. at *15. The court noted that Omnicare did not mandate a wholesale waiver, but “[a]t best . . . suggest[ed] that communications specific to a particular subject allegedly omitted or misrepresented within a securities filing may be subject to disclosure and, if the communications happen to be privileged, those communications may be subject to a finding of waiver.” Id. at *16. Accordingly, the company could not insulate itself with the privilege—documents containing relevant factual information were discoverable. However, privilege was not waived over the “side issue” of the company’s legal exposure, including as to documents on the strength and likelihood of any legal claims and “communications conducted solely for purposes of document preservation in connection with anticipated legal claims.” Id. VI.   Courts Continue To Define “Price Impact” Analysis At The Class Certification Stage We are continuing to monitor significant decisions interpreting Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (“Halliburton II”), but the one federal circuit court of appeal decision issued in the first half of 2019 did little to resolve outstanding questions regarding what it will mean for securities litigants. Recall that in Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption, permitting plaintiffs to maintain the common proof of reliance that is required for class certification in a Rule 10b-5 case, but also permitting defendants to rebut the presumption at the class certification stage with evidence that the alleged misrepresentation did not impact the issuer’s stock price. There are three key questions we have been following in the wake of Halliburton II. First, how should courts reconcile the Supreme Court’s explicit ruling in Halliburton II that direct and indirect evidence of price impact must be considered at the class certification stage, Halliburton II, 573 U.S. at 283, with the Supreme Court’s previous decisions holding that plaintiffs need not prove loss causation or materiality until the merits stage? See Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 815 (2011); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013). Second, what standard of proof must defendants meet to rebut the presumption with evidence of no price impact? Third, what evidence is required to successfully rebut the presumption? As noted in our 2018 Year-End Securities Litigation Update, the Second Circuit addressed the first two questions in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (“Barclays”) and Arkansas Teachers Retirement System v. Goldman Sachs Group, Inc., 879 F.3d 474 (2d Cir. 2018) (“Goldman Sachs”). Those decisions remain the most substantive interpretations of Halliburton II. Barclays addressed the standard of proof necessary to rebut the presumption of reliance and held that after a plaintiff establishes the presumption of reliance applies, the defendant bears the burden of persuasion to rebut the presumption by a preponderance of the evidence. This puts the Second Circuit at odds with the Eighth Circuit, which cited Rule 301 of the Federal Rules of Evidence when reversing a trial court’s certification order on price impact grounds, see IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782 (8th Cir. 2016), because Rule 301 assigns only the burden of production—i.e., producing some evidence—to the party seeking to rebut a presumption, but “does not shift the burden of persuasion, which remains on the party who had it originally.” Fed. R. Evid. 301. Nonetheless, that inconsistency was not enough to persuade the Supreme Court to review the Second Circuit’s decision.  Barclays PLC v. Waggoner, 138 S. Ct. 1702 (Mem.) (2018) (denying writ of certiorari). In Goldman Sachs, the Second Circuit vacated the trial court’s ruling certifying a class and remanded the action, directing that price impact evidence must be analyzed prior to certification, even if price impact “touches” on the issue of materiality.  Goldman Sachs, 879 F.3d at 486. On remand, the district court again certified the class. In re Goldman Sachs Grp. Sec. Litig., 2018 WL 3854757, at *1–2 (S.D.N.Y. Aug. 14, 2018). Plaintiffs argued on remand that because the company’s stock price declined following the announcement of three regulatory actions related to the company’s conflicts of interest, previous misstatements about its conflicts had inflated the company’s stock price.  See id. at *2. Defendants’ experts testified that correction of the alleged misstatements could not have caused the stock price drops, both because thirty-six similar announcements had not impacted the company’s stock price and because alternative news (i.e., news of regulatory investigations), in fact, caused the price drop. Id. at *3. The court found the plaintiffs’ expert’s “link between the news of [the company]’s conflicts and the subsequent stock price declines . . . sufficient,” and defendants’ expert testimony insufficient to “sever” that link. Id. at *4–6. In January, however, the Second Circuit agreed to review Goldman Sachs for a second time.  See Order, Ark. Teachers Ret. Sys. v. Goldman Sachs, Case No. 18-3667 (2d Cir. Jan. 31, 2019) (“Goldman Sachs II”). In Goldman Sachs II, the Second Circuit is poised to address what evidence is sufficient to rebut the presumption and how the analysis is affected by plaintiffs’ assertion that the alleged misstatements’ price impact is evidenced not by a price increase when the alleged misstatement is made, but by a price drop when the alleged misstatements are corrected, known as “price maintenance theory.” Defendants-appellants challenged the district court’s finding in two primary ways. First, they argued that the district court impermissibly extended price maintenance theory. See Brief for Defendants-Appellants, Goldman Sachs II, at 28–52 (2d Cir. Feb. 15, 2019). They reasoned that a price maintenance theory is unsupportable where the alleged corrective disclosures revealed no concrete financial or operational information that had been hidden from the market for the purpose of maintaining the stock price, see id. at 28–40, and where the challenged statements are too general to have induced reliance (and thus impacted the stock’s price), see id. at 40–50. Second, defendants-appellants argued that the district court misapplied the preponderance of the evidence standard by considering plaintiffs-appellees’ allegations as evidence and misconstruing defendants-appellants’ evidence of no price impact. See id. at 53–67. Plaintiffs-appellees responded that defendants-appellants’ price-maintenance arguments are not supported by law and that such arguments regarding the general nature of the statements are, in essence, a materiality challenge in disguise and thus not appropriate at the class certification stage. Brief for Plaintiffs-Appellees, Goldman Sachs II, at 20–30 (2d Cir. Feb. Apr. 19, 2019). Plaintiffs-appellees further argued that the district court did not abuse its discretion in weighing the evidence. Id. at 36–61. Defendants-appellants submitted their reply brief in May, Reply Brief for Defendants-Appellants, Goldman Sachs II (2d Cir. May 3, 2019), and the Second Circuit heard the case in June. Seven amicus briefs were filed in this case, including by the United States Chamber of Commerce and a number of securities law experts supporting defendants-appellants, and by the National Conference on Public Employee Retirement Systems supporting plaintiffs-appellees. Our 2018 Year-End Securities Litigation Update also noted that the Third Circuit was poised to address price impact analysis in Li v. Aeterna Zentaris, Inc. in the coming months. Briefing there invited the Third Circuit to clarify the type of evidence defendants must present, including the burden of proof they must meet, to rebut the presumption of reliance at the class certification stage and whether statistical evidence regarding price impact must meet a 95% confidence threshold. The district court had rejected defendants’ argument that plaintiff’s event study rebutted the presumption, and criticized defendants for not offering their own event study. See Li v. Aeterna Zentaris, Inc., 324 F.R.D. 331, 345 (D.N.J. 2018). With limited analysis, the Third Circuit affirmed, finding that the district court did not abuse its discretion in its consideration of conflicting expert testimony. Vizirgianakis v. Aeterna Zentaris, Inc., 2019 WL 2305491, at *2–3 (3d Cir. May 30, 2019). We will continue to monitor developments in Goldman Sachs II and other cases. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Jefferson Bell, Monica Loseman, Brian Lutz, Mark Perry, Shireen Barday, Lissa Percopo, Lindsey Young, Mark Mixon, Emily Riff, Jason Hilborn, Andrew Bernstein, Alisha Siqueira, Kaylie Springer, and Collin James Vierra. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation practice group steering committee: Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Robert F. Serio – Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young – Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) Jefferson Bell – New York (+1 212-351-2395, jbell@gibsondunn.com) Jennifer L. Conn – New York (+1 212-351-4086, jconn@gibsondunn.com) Thad A. Davis – San Francisco (+1 415-393-8251, tadavis@gibsondunn.com) Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark A. Kirsch – New York (+1 212-351-2662, mkirsch@gibsondunn.com) Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Monica K. Loseman – Denver (+1 303-298-5784, mloseman@gibsondunn.com) Jason J. Mendro – Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Alex Mircheff – Los Angeles (+1 213-229-7307, amircheff@gibsondunn.com) Robert C. Walters – Dallas (+1 214-698-3114, rwalters@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 15, 2019 |
Gibson Dunn Lawyers Recognized in the Best Lawyers in America® 2020

The Best Lawyers in America® 2020 has recognized 158 Gibson Dunn attorneys in 54 practice areas. Additionally, 48 lawyers were recognized in Best Lawyers International in Belgium, Brazil, France, Germany, Singapore, United Arab Emirates and United Kingdom.

August 13, 2019 |
Getting the Deal Through: Appeals 2019

Washington, D.C. partner Mark Perry and Los Angeles partner Perlette Jura are the contributing editors of “Appeals 2019,” a publication examining Appellate law and procedure between jurisdictions around the globe, published by Getting the Deal Through in June 2019.  Perry and Jura are the authors of the “Global Overview” and the “United States” chapters of the book, and London partners Patrick Doris and Doug Watson and associate Daniel Barnett are the authors of the “United Kingdom” chapter.

July 29, 2019 |
Delaware Supreme Court Revisits Oversight Liability

Click for PDF In a recent decision applying the famous Caremark doctrine, the Delaware Supreme Court confirmed several important legal principles that we expect will play a central role in the future of derivative litigation and that serve as important reminders for boards of directors in performing their oversight responsibilities.  In particular, the Delaware Supreme Court held that a claim for breach of the duty of loyalty is stated where the allegations plead that “a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation.”[1] Although the case addressed extreme facts that will have no application to most mature corporations, the plaintiffs’ bar can be expected to attempt to weaponize the decision.  With all the benefits that hindsight provides, derivative plaintiffs will more frequently contend that a board lacked procedures to monitor “central compliance risks” that were “essential and mission critical.”[2]  The Supreme Court’s decision reinforces that directors need to implement controls that enable them to monitor the most serious sources of risk, and may even caution in favor of a special discussion each year around critical risks. The Decision Marchand involved problems at Blue Bell Creameries USA, Inc., “a monoline company that makes a single product—ice cream.”[3] After several years of food-safety issues known by management, the company suffered a listeria outbreak. This outbreak led to a product recall, a complete operational shutdown, the layoff of one-third of employees, and three deaths.[4] The operational shutdown, in turn, caused the company to accept a dilutive investment to meet its liquidity needs.[5] After obtaining books and records, a stockholder sued derivatively alleging breach of fiduciary duties under Caremark.[6] That theory requires sufficiently pleading that “the directors utterly failed to implement any reporting or information system or controls” or “having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of the risks or problems requiring their attention.”[7] The plaintiff, though, chose not to make a demand on the board before suing on behalf of the company, so he was subject to the burden of pleading that making a demand would have been futile. In an effort to do so, he tried to allege that a majority of the board was not independent because it could not act impartially in considering a demand and that the directors also faced liability under Caremark. The Delaware Court of Chancery rejected both arguments, holding that the plaintiff came up one director short on his independence theory and that the plaintiff failed to plead liability under Caremark.[8] The Delaware Supreme Court reversed both holdings.[9] On independence, Chief Justice Strine continued his instruction from Delaware County Employees Retirement Fund v. Sanchez, 124 A.3d 1017 (Del. 2015) and Sandys v. Pincus, 152 A.3d 124 (Del. 2016) that Delaware law “cannot ignore the social nature of humans or that they are motivated by things other than money, such as love, friendship, and collegiality.”[10] “[D]eep and long-standing friendships are meaningful to human beings,” the Chief Justice reasoned, and “any realistic consideration of the question of independence must give weight to these important relationships and their natural effect on the ability of parties to act impartially towards each other.”[11] The director at issue, although recently retired from his role as CFO at the company, owed his “successful career” of 28 years at the company to the family of the CEO whom the director would be asked to sue.[12] And that family “spearheaded” an effort to donate to a local college that resulted in the college naming a new facility after the director.[13] These facts “support[ed] a pleading-stage inference” that the director could not act independently.[14] This was so despite the director’s previously voting against the CEO on whether to split the company’s CEO and Chairman position. Although the Court of Chancery reasoned that this militated against holding that the director was not independent, the Delaware Supreme Court held it was irrelevant to the demand futility analysis.[15] Voting to sue someone, the Supreme Court explained, is “materially different” than voting on corporate-governance issues.[16] The Supreme Court thus held that the number of directors incapable of acting impartially was sufficient to excuse demand. On Caremark liability, the Court focused on the first prong of the Caremark test: whether the board had made any effort to implement a reporting system. It explained that a director “must make a good faith effort” to oversee the company’s operations. “Fail[ing] to make that effort constitutes a breach of the duty of loyalty”[17] and can expose a director to liability. To meet this standard, the board must “try”[18] “to put in place a reasonable system of monitoring and reporting about the corporation’s central compliance risks.”[19] For Blue Bell, food safety was “essential and mission critical”[20] and “the obviously most central consumer safety and legal compliance issue facing the company.”[21] Despite its importance, the complaint contained sufficient facts to infer that no system of board-level compliance monitoring and reporting over food safety existed at the company. For example: “no board committee that addressed food safety existed”; “no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed”; “no schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed”; “during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board”; “the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture”; and “the board meetings [we]re devoid of any suggestion that there was any regular discussion of food safety issues.”[22] These shortcomings convinced the Delaware Supreme Court that the plaintiff had pleaded sufficient allegations that Blue Bell’s “board ha[d] undertaken no efforts to make sure it [wa]s informed of a compliance issue intrinsically critical to the company’s business operation.” Id. at 33. So the Court could infer that the board “ha[d] not made the good faith effort that Caremark requires.”[23] That management “regularly reported” to the board on “operational issues” was insufficient to demonstrate that the board had made a good faith effort to put in place a reasonable system of monitoring and reporting about Blue Bell’s central compliance risks.[24] So, too, was “the fact that Blue Bell nominally complied with FDA regulations.”[25] Neither of these facts showed that “the board implemented a system to monitor food safety at the board level.”[26] In light of these facts, the Supreme Court held that the plaintiff met his “onerous pleading burden” and was entitled to discovery to prove out his Caremark claim.[27] Key Takeaways Independence: Close Personal Ties Increase Litigation Risk Directors should be aware that the greater the level of close personal or business relationships amongst themselves, management, and even each other’s families, the greater risk they face of being held incapable of exercising their business judgment in a demand futility analysis, even in circumstances where they have plainly demonstrated independent or dissenting judgment on corporate-governance matters. Caremark Increased Litigation Risk over Compliance Efforts Derivative Litigation. Although Caremark claims will remain “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,”[28] we expect an increase in attempted derivative litigation over a purported lack of board-level monitoring systems for specific risks as plaintiffs try to shoehorn as many standard business and non-business risks as possible into Marchand’s “essential and mission critical” risk category. Whereas to date many Caremark claims have focused on the second prong of the standard—alleging that a board consciously failed to monitor or oversee the operation of its reporting system or controls and by ignoring red flags disabled themselves from being informed of risks or problems requiring their attention—Marchand likely will focus plaintiffs on the first prong: whether in particular areas a board failed to implement any reporting or information system or controls. The plaintiffs’ bar is bound to focus on the full array of corporate risks, including many that are not correctly characterized as “central compliance risks” for most companies. These areas could range from risks disclosed in the company’s SEC filings to cultural issues, like harassment or bullying, and more broader environmental, social, and governance (“ESG”) issues. Books and Records Litigation. Similarly, we expect a rise in Section 220 books and records demands seeking to investigate a board’s specific oversight of central compliance risks. Assessing Central Compliance Risks Marchand does not change the core principle that a company’s board of directors is responsible for seeing that the company has systems in place to provide the board with information that is sufficient to allow directors to perform their oversight responsibilities. This includes information about major risks facing the company. The Delaware Supreme Court emphasized in Marchand that these systems can be “context- and industry-specific approaches tailored to . . . companies’ business and resources.”[29] Accordingly, boards have wide latitude in designing systems that work for them. In light of this, boards should be comfortable that they understand the “central compliance risks” facing their companies. They should satisfy themselves that they are receiving, on an appropriate schedule, reports from management and elsewhere on these central risks and what management is doing to manage those risks. In recent years, many boards have devoted significant time to thinking about how best to allocate responsibility for risk oversight at the board level. Boards should be comfortable that there is adequate coverage, among the full board and its committees, of the major compliance and other risks facing the corporation, and that the full board is receiving appropriate reports from responsible committees, as well as from management. They also should periodically evaluate the most effective methods for monitoring “essential and mission critical” risk to their companies, even where these risks do not relate directly to operational issues, and whether the current committee structure, charters, and meeting schedules are appropriate. These efforts, reports, and discussions should be documented. Boards should establish systems so that management provides them with an adequate picture of compliance risks. In Marchand, although management received many reports about food-safety issues, “this information never made its way to the board.”[30] Boards should remain mindful of the second prong in Caremark by overseeing the company’s response when they are informed of risks or problems requiring their attention. When reporting systems or other developments demonstrate that risks are becoming manifest, directors should assess whether a need exists to implement a heightened system of monitoring, such as setting additional meetings and requiring additional reports from management about the steps the company is taking to address the risk. Boards should hesitate to leave the response entirely to management. Documenting the Board’s Work Minutes of board meetings, and board materials, should not just reflect the “good news.” Instead, they should demonstrate that the board received appropriate information about issues and challenges facing the company, and that the board spent time discussing those issues and challenges. The goal should be to create a balanced record demonstrating diligent oversight by the board, while recognizing that those minutes could be produced in litigation. ________________________    [1]   Marchand v. Barnhill, No. 533, 2018, slip op. at 33 (Del. June 18, 2019).    [2]   Id. at 36.    [3]   Id. at 5.    [4]   Id. at 1.    [5]   Id.    [6]   Id. at 19.    [7]   Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).    [8]   Marchand, No. 533, 2018, slip op. at 20-23.    [9]   Id. at 3. [10]   Id. at 25. [11]   Id. at 28. [12]   Id. at 26. [13]   Id. [14]   Id. at 29. [15]   Id. at 27. [16]   Id. [17]   Id. at 37. [18]   Id. at 30. [19]   Id. at 36 (emphasis added). [20]   Id. [21]   Id. at 37. [22]   Id. at 32-33. [23]   Id. [24]   Id. at 35-36. [25]   Id. at 34. [26]   Id. [27]   Id. at 37. [28]   Stone v. Ritter, 911 A.2d 362, 372 (Del. 2006). [29]   Marchand, No. 533, 2018, slip op. at 30. [30]   Id. at 12. 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, any member of the firm’s Securities Litigation or Securities Regulation and Corporate Governance practice groups, or the authors in Washington, D.C.: Securities Litigation Group: Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Jason J. Mendro (+1 202-887-3726, jmendro@gibsondunn.com) Jason H. Hilborn (+1 202-955-8276, jhilborn@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising (+1 202-955-8287, eising@gibsondunn.com) Ronald O. Mueller (+1 202-955-8671, rmueller@gibsondunn.com) Gillian McPhee (+1 202-955-8201, gmcphee@gibsondunn.com) Please also feel free to contact any of the following leaders of the Securities Litigation group: Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Robert F. Serio – Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young – Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 26, 2019 |
New UK Prime Minister – what has happened?

Click for PDF Boris Johnson has won the Conservative leadership race and is the new Prime Minister of the UK. Having been supported by a majority of Conservative MPs, this week the former mayor of London won a 66% share (92,153 votes) in the ballot of Conservative party members. Although there is some criticism of the fact that the new Prime Minister has been elected by such a narrow constituency, it is the case that most political parties in the UK now select their leaders by way of a members ballot. As things stand, the UK is due to leave the European Union (EU) at 23:00 GMT on 31 October 2019. Boris Johnson’s new Cabinet, and the 17 related departures, has set a new tone of determination to leave the EU by that date with or without a deal – “no ifs or buts”. Although only 12 of the 31 members of the new Cabinet originally voted to leave the EU, these “Brexiteer” MPs now dominate the senior Cabinet positions. The newly elected President of the European Commission, Ursula von der Leyen, has however indicated she is willing to support another extension to Brexit talks. In Parliament the Conservatives govern in alliance with the Northern Irish DUP and can only stay in power with the support of the House of Commons. Following defections earlier in the year and the recent suspension of a Conservative MP facing criminal charges, the Government now has an overall working majority of only two MPs (and if, as expected, the Conservatives lose a by-election on 1 August, the Government’s working majority will fall to one). A number of the members of Prime Minister May’s Government who resigned before Boris Johnson took office have made it clear that they will do everything they can to prevent the UK leaving without a deal including voting against the Government. There is therefore a heightened prospect of a general election. This theory is supported by the appointment as Special Adviser to the Prime Minister of political strategist Dominic Cummings who was the chief architect of the campaign to leave the EU in 2016. There has been some debate about whether the new Prime Minister would prorogue Parliament (effectively suspending it) to prevent it stopping a no deal Brexit. That would undoubtedly trigger a constitutional crisis but, despite the rhetoric, it feels like an unlikely outcome. Indeed Parliament recently passed a vote to block that happening. It is difficult to tell where the mood of the House of Commons is today compared to earlier in the year when Prime Minister May’s deal was voted down three times. Since then both the Conservative and Labour parties suffered significant losses in the EU election in May. The new Brexit Party which campaigned to leave made significant gains, as did the Liberal Democrats who have a clear policy to remain in the EU. The opinion polls suggest that, if an election was called today, no party would gain overall control of the House of Commons. It is just possible, however, that some MPs on both sides of the House who previously voted against the May deal would now support something similar, particularly to avoid a no-deal exit from the EU. It may be the case that Boris Johnson, who led the campaign to leave the EU, is the last chance those supporting Brexit have to get Brexit through Parliament. If he fails then either a second referendum or a general election will probably follow. It is not clear what the result of a second referendum would be but it is likely that Labour, the Liberal Democrats and the SNP would all campaign to remain. The EU has consistently said that it will not reopen Prime Minister May’s Withdrawal Agreement although the non-binding political declaration is open to negotiation. The so-called “Irish backstop” remains the most contentious issue. The backstop is intended to guarantee no hard border between Ireland and Northern Ireland but Boris Johnson is concerned it could “trap” the UK in a customs union with the EU. Boris Johnson claims that technology and “trusted trader schemes” means that checks can be made without the need for a hard border. Others, including the EU, remain to be convinced. Parliament has now gone into recess until 3 September 2019 and then, mid-September, there will be another Parliamentary break for the two week party conference season. The Conservative Party Conference on 29 September – a month before the UK’s scheduled exit from the EU – will be a key political moment for the new Prime Minister to report back to the party supporters who elected him. Finally, it is not clear what “no deal” really means. Even if the UK leaves without adopting the current Withdrawal Agreement, it is likely that a series of “mini deals” would be put in place to cover security, air traffic control, etc. A new trading agreement would then still need to be negotiated to establish the ongoing EU-UK relationship. And the issue of the Northern Irish border will still need to be resolved. This client alert was prepared by Charlie Geffen, Ali Nikpay and Anne MacPherson in London. We have a working group in London (led by Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  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 Sandy Bhogal – Tax SBhogal@gibsondunn.com Tel: 020 7071 4266 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 © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 26, 2019 |
Greta Williams Named Among 2019 D.C. Rising Stars

The National Law Journal named Washington, D.C. partner Greta Williams among its 2019 D.C. Rising Stars, featuring 40 attorneys who have “excelled on some of the biggest stages.” The list was published on July 24, 2019. Greta Williams represents clients in a wide range of employment matters, including those involving non-competition agreements and trade secrets, executive employment disputes, wage-hour and discrimination laws, and whistleblower protection laws. She has also handled numerous employment-related investigations, including investigations involving sexual harassment allegations and the possible misappropriation of trade secrets.

July 25, 2019 |
Navigating Cross-Border Investigations Involving Switzerland

Washington D.C. partner F. Joseph Warin and associate attorneys Jason Smith and Susanna Schuemann are the authors of “Navigating Cross-Border Investigations Involving Switzerland” [PDF] published by the Global Investigations Review on July 12, 2019.

June 24, 2019 |
Webcast: Impacts of the Tax Cuts and Jobs Act on Electric Utilities

This webcast brings together a diverse panel of professionals in electric utility tax issues to discuss the impact of the 2017 Federal Tax Cuts and Jobs Act (“TCJA”) on electric utilities, with a particular focus on the impacts on utility accounting and Federal Energy Regulatory Commission (“FERC”) ratemaking. Although the industry awaits a final FERC rulemaking addressing these issues, the impacts of the TCJA are already being felt, with some utilities already adjusting rates, recording regulatory liabilities for excess accumulated deferred income taxes (“ADITs”), and taking other ratemaking actions. And once the rulemaking issues, utilities will want to be ready to move quickly to implement any mandates as stakeholders will be anxious to capture the benefits of the TCJA for themselves. The panelists for the webcast have extensive experience on these issues and represent a cross-section of professionals in this area—an electric utility attorney, an electric utility tax manager, and a “Big Four” accountant—each of whom will discuss their own experiences with these issues. Anyone involved in utility tax accounting or ratemaking will want to attend to hear their insights into these evolving issues. View Slides (PDF) PANELISTS: David Davoren is the Corporate Tax Manager for Emera Maine, an electric utility company operating in eastern and northern Maine. At Emera Maine, Mr. Davoren is responsible for, among other things, the determination and financial disclosure of corporate income tax expense (federal and state) used in audited financials and regulatory reporting. Mr. Davoren has also assisted in developing filings with the Federal Energy Regulatory Commission related to the Tax Cuts and Jobs Act of 2017 and its effects on ADITs. Prior to joining Emera Maine in 2012, Mr. Davoren previously worked as a Corporate Tax Consultant for the Corporate Tax Group, a regional tax consulting firm specializing in corporate tax clients. Mr. Davoren is a Certified Public Accountant in the state of Maine and holds a Bachelor’s of Science in Business Administration from Boston College.elect Jeffrey M. Jakubiak is a partner in Gibson Dunn’s New York and Washington, D.C. offices and a member of the firm’s Energy, Regulation and Litigation Practice Group who counsels clients regarding matters at the Federal Energy Regulatory Commission. Holding a bachelor’s degree in quantitative economics, Mr. Jakubiak’s practice focuses on matters at the crossroads of law and economics, particularly those involving electric company ratemaking, mergers, and power sales, as well as the workings of energy markets. Mr. Jakubiak also has developed proprietary quantitative analytical tools that he uses to advise clients on electric asset transactions, market-based rate authorizations, and litigation risk. Kimberly Johnston is a National Tax Partner in Ernst & Young’s Power & Utilities tax practice serving clients, industry groups, and regional teams throughout the United States, Canada, and Mexico to deliver sustainable value for tax operations, regulatory proceedings, and investment growth plans. Ms. Johnston has 25 years of energy sector experience in corporate tax, including experience leading tax efficient M&A strategies, legislative advocacy efforts, regulatory proceedings, audit settlement negotiations, tax operational effectiveness, and merger integration and divesture plans. Her areas of focus include serving investor-owned utilities, independent power producers and midstream energy companies on regulatory strategy, rate case proceedings, tax planning strategies, due diligence on investment growth opportunities, and tax operations. Prior to rejoining Ernst & Young, Ms. Johnston served as the Vice President of Tax for CenterPoint Energy and Tax Director of Spectra Energy. Moderator: Jennifer C. Mansh is a senior associate in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Energy, Regulation and Litigation Practice Group. Ms. Mansh advises clients on a wide range of energy litigation, regulatory, and transactional matters before the Federal Energy Regulatory Commission, the Commodity Futures Trading Commission, the Department of Energy, and state public utility commissions. Ms. Mansh has represented a wide variety of electric utilities, merchant transmission companies, power marketers, and natural gas and oil pipeline companies in rate, licensing, and enforcement proceedings before FERC, CFTC, and state public utility Commissions. In addition to her litigation experience, Ms. Mansh assists clients on a variety of transactional matters and compliance issues. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit. © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 25, 2019 |
New York State Enacts Sweeping Emissions Reduction Law

Click for PDF Last week, the New York State Legislature passed the Climate Leadership and Community Protection Act, Senate Bill S6599 (“CLCPA”).[1]  It is considered to impose “the most aggressive legal mandate in the country” for emissions reduction.[2]  New York State Governor Andrew Cuomo called the bill “the most aggressive climate change program in the United States of America, period.”[3]  Governor Cuomo is expected to sign it into law. The timing of the CLCPA is notable given that the federal Environmental Protection Agency has just promulgated a rule requiring rather scant emissions reductions.[4]  Indeed, one supporter of the CLCPA remarked that “[a]s the White House continues to put fossil fuels first, this legislation is a model for other states to follow.”[5] New Law Will Apply to Anything Regulators Deem a “Greenhouse Gas” Notably, the CLCPA does not only target carbon emissions.  Instead, it requires emissions reductions of anything regulators deem to be a “greenhouse gas.”  In addition to usual suspects like carbon dioxide and methane, the CLCPA defines the term “greenhouse gas” to include “any other substance emitted into the air that may be reasonably anticipated to cause or contribute to anthropogenic climate change.”[6]  The law thus potentially allows New York to regulate any business that emits substances into the air. Required Aggressive Emissions Reductions The CLCPA requires New York’s Department of Environmental Conservation (“Department”) to promulgate regulations to aggressively and rapidly curtail the emission of anything deemed a greenhouse gas.  By 2030, greenhouse gas emitters must reduce emissions to “60% of 1990 emissions” levels, and by 2050 they must achieve “15% of 1990 emissions” levels.[7]  The regulations requiring these reductions must be promulgated within a year of the CLCPA’s becoming effective.[8]  Already, some have questioned whether businesses in New York, including those in energy and real estate, can meet the goals set forth in the bill.[9] The law also seeks “reduction of emissions beyond eighty-five percent,” and “net zero emissions in all sectors of the economy.”[10]  The details of how these aggressive goals will be met is left to a “state climate action council” (“Council”), which will prepare a “scoping plan” and report within two years of the CCLPA’s becoming effective.[11]  The Council will consist of twenty-two members, including the heads of twelve state agencies “or their designees;” “two non-agency expert members appointed by the governor;” “three members to be appointed by the temporary president of the senate;” “three members to be appointed by the speaker of the assembly;” “one member to be appointed by the minority leader of the senate;” and “one member to be appointed by the minority leader of the assembly.[12]  The Council must “provide meaningful opportunities for public comment” before issuing its recommendations.[13]  Once completed, the Council’s report “shall [be] incorporate[d]” into the “state energy planning board’s” “state energy plan,” which will establish the State’s “clean energy goals” and how to meet them.[14]  The Council is broadly empowered to consider all manner of methods for achieving emissions reductions, including “displacing fossil-fuel fired electricity with renewable electricity,” “land-use and transportation planning,” “establishing appliance efficiency standards, strengthening building energy codes,” and “limit[ing] the use of chemicals” that may “contribute to global climate change.”[15] Alternative Compliance Through Net Zero Emissions Reduction While the CLCPA generally mandates gross emissions reductions, entities may be able to meet their reductions requirements through “an alternative compliance mechanism” under which they would need to achieve “net zero emissions.”[16]  But use of this alternative mechanism will be significantly limited.  First, the Department is left to decide whether to create this alternative compliance structure at all.[17]  Second, to utilize the alternative compliance mechanism, entities must go through “an application process” in which they must demonstrate that “compliance with” the normal emissions limits is not feasible and that they “ha[ve] reduced emission to the maximum extent practicable.”[18] Renewable Energy Requirements for Power Companies Serving End-Users The CLCPA requires New York’s Public Service Commission (“Commission”) to impose new regulations on companies that “secure[] energy to serve the electrical energy requirements of end-use customers in New York.”[19]  These companies will be required to meet demand with renewable energy.  Specifically, such companies regulated by the Commission will have to meet their customers’ needs with at least 70% renewable energy by 2030, and they will need to meet all demand with zero emissions by 2040.[20]  These targets may be suspended or modified if the Commission finds that they will adversely impair safety, existing agreements, or if they cause “arrears or service disconnection.”[21] Conclusion The CLCPA will impose hefty requirements on all industries that contribute to greenhouse gas emissions, including energy, transportation, real estate, and any others that New York’s regulators may identify in deciding which emissions contribute to climate change.  And because of the size of New York’s economy, businesses that operate within New York to any extent will likely need to adjust their operations and compliance structures to meet the CLCPA’s requirements.  Additionally, businesses and other stakeholders may wish to provide comment on how the CLCPA is to be implemented, whether before the Department, the Commission, or the newly-created Council. They may also wish to apply for the alternative net zero emissions compliance channel, or provide comment on what should or should not be considered a greenhouse gas.  Thus, in addition to expending considerable resources to adapt to the new law’s requirements, many businesses may also decide it is necessary to spend resources to engage in the new regulatory processes established by the CLCPA. _______________________    [1]   https://www.nysenate.gov/legislation/bills/2019/s6599    [2]   https://www.politico.com/states/new-york/albany/story/2019/06/19/senate-passes-ambitious-renewable-energy-measure-1067167    [3]   http://nymag.com/intelligencer/2019/06/new-york-state-to-approve-impressive-ambitious-climate-bill.html    [4]   https://www.washingtonpost.com/climate-environment/trump-epa-finalizes-rollback-of-key-obama-climate-rule-that-targeted-coal-plants/2019/06/19/b8ff1702-8eeb-11e9-8f69-a2795fca3343_story.html    [5]   https://www.nysenate.gov/newsroom/press-releases/velmanette-montgomery/senate-democratic-majority-passes-historic-climate    [6]   Senate Bill S6599 § 2.    [7]   Id.    [8]   Id.    [9]   https://www.nytimes.com/2019/06/18/nyregion/greenhouse-gases-ny.html [10]   Id. [11]   Senate Bill S6599 § 2. [12]   Id. [13]   Id. [14]   Id. [15]   Id. [16]   Id. [17]   Id. [18]   Id. [19]   Id. § 4. [20]   Id. [21]   Id. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Public Policy or Environmental Litigation and Mass Tort practice groups, or the authors: Mylan L. Denerstein – Co-Chair, Public Policy Practice, New York (+1 212-351-3850, mdenerstein@gibsondunn.com) Abbey Hudson – Los Angeles (+1 213-229-7954, ahudson@gibsondunn.com) Michael Klurfeld – New York (+1 212-351-6370, mklurfeld@gibsondunn.com) Please also feel free to contact the following practice group leaders: Environmental Litigation and Mass Tort Group: Daniel W. Nelson – Washington, D.C. (+1 202-887-3687, dnelson@gibsondunn.com) Peter E. Seley – Washington, D.C. (+1 202-887-3689, pseley@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 31, 2019 |
Gibson Dunn Named Winner in Two Categories for D.C. Litigation Department of the Year

In its 2019 D.C. Litigation Department of the Year contest, the National Law Journal named Gibson Dunn as one of three winners in the General Litigation [PDF] category and as the winner in the Labor & Employment [PDF] category. The publication noted the firm’s “knack for taking on fights that will shape the law.” This is the firm’s second consecutive win for the general litigation category and third consecutive win in Labor & Employment. The winners were announced on May 31, 2019. Acclaimed as a litigation powerhouse, Gibson, Dunn & Crutcher and the members of the Litigation Practice Group have a long record of outstanding successes. The members of our litigation practice group are not just litigators, they are first-rate trial lawyers.  Each year, we try numerous cases to verdicts before juries, judges and arbitrators.  Our clients have trusted us to try their most significant disputes to verdict, and we believe our trial win-loss record is unsurpassed.  

April 25, 2019 |
Gibson Dunn Earns 79 Top-Tier Rankings in Chambers USA 2019

In its 2019 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 79 first-tier rankings, of which 27 were firm practice group rankings and 52 were individual lawyer rankings. Overall, the firm earned 276 rankings – 80 firm practice group rankings and 196 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Real Estate National – Retail National – Securities: Regulation CA – Antitrust CA – Environment CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Media & Entertainment: Litigation NY – Technology & Outsourcing TX – Antitrust This year, 155 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings:  D. Jarrett Arp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael Darden, William Dawson, Patrick Dennis, Mark Director, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Daniel Kolkey, Brian Lane, Jonathan Layne, Karen Manos, Randy Mastro, Cromwell Montgomery, Daniel Mummery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Sean Royall, Eugene Scalia, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin and Debra Wong Yang.

April 11, 2019 |
President Trump Issues Two Executive Orders on Energy Infrastructure

Click for PDF On April 10, 2019, President Trump issued two long awaited executive orders (“EOs”) intended to promote the development of energy infrastructure through several regulatory reforms.  In many respects, the EOs are driven by concerns that some states are thwarting the development of much needed energy infrastructure.  Indeed, a central feature of the first EO addresses reforms seeking to expedite and remove barriers to domestic energy projects.  The second EO reforms the process for permitting international cross-border projects, including oil pipelines. EO ON DOMESTIC INFRASTRUCTURE ISSUES President Trump’s first EO takes aim at a range of regulatory issues hindering the development of energy infrastructure projects domestically, including the Clean Water Act Section 401 water quality certifications and outdated safety regulations for LNG facilities.  The EO also requires reports on a number of energy issues, including, among others, constraints for entering the energy markets of New England and economic growth in the Appalachian region. Clean Water Act Section 401 Review There has been a great deal of concern that some states are impermissibly using  delegated federal authority under Section 401 of the Clean Water Act to impede construction of natural gas pipelines.  As a result, President Trump declared that outdated federal guidance and regulations on Water Quality Certifications are causing confusion and uncertainty and hindering the development of energy infrastructure.  EO I at Sec. 3.  Accordingly, President Trump ordered the Administrator of the EPA to consult with states, tribes and the relevant executive departments and agencies to review these materials to determine whether any provisions should be clarified to reduce confusion and regulatory uncertainty.  Id. at Sec. 3(a).  This review will include existing guidance issued under President Obama, which, among other things declares that the one-year time limit for states to act on a Section 401 certification begins when the certifying agency deems an application complete—contrary to recent case law.  See, e.g., N.Y. State Dep’t of Envtl. Conserv. v. FERC, 884 F.3d 450 (2d Cir. 2018) (finding that the one-year time limit begins when the applicant submits the application). The review that EPA must conduct appears aimed at addressing recent efforts in some states to exploit the Section 401 process to hinder energy projects by focusing on the following: The need to promote timely Federal-State cooperation and collaboration, EO I at Sec. 3(a)(i); The appropriate scope of water quality reviews, id. at Sec. 3(a)(ii); Types of conditions that may be appropriate to include in a certification, id. at Sec. 3(a)(iii); Expectations for reasonable review times for various types of certification requests, id. at Sec. 3(a)(iv); and The nature and scope of information States and authorized tribes may need in order to substantively act on a certification request within a prescribed period of time, id. at Sec. 3(a)(v). New EPA Section 401 Guidance:  President Trump ordered that upon completion of the review of existing guidance and regulations, but no later than 60 days from the date of the order (June 9, 2019), the Administrator of the EPA shall issue new guidance to States and authorized tribes to supersede the Section 401 interim guidance.  Id. at Sec. 3(b). The new guidance will, at minimum, clarify the issues listed above.  Id. Revised EPA Section 401 Regulations:  President Trump ordered that upon completion of the review, but no later than 120 days from the date of this order (August 8, 2019), the Administrator of the EPA shall review the Section 401 implementing regulations for consistency with the policies set forth above and publish revised rules for notice and comment.  Id. at Sec. 3(c).  Such revised rules shall be finalized no later than 13 months after the date of the order (May 10, 2020).  Id. Updated Guidance for 401 Implementing Agencies:  Following the issuance of the new Section 401 guidance, the Administrator of the EPA will lead an interagency review, in coordination with the head of each agency, such as the Federal Energy Regulatory Commission and the Army Corps of Engineers, that issues permits or licenses subject to Section 401 certification requirements, of existing regulations and guidance for consistency with the EPA guidance and rulemaking.  Id. at Sec. 3(d).  The heads of these agencies will then update their respective agency’s guidance within 90 days (i.e., no later than September 7, 2019).  Id.  Within 90 days of the EPA finalizing revised rules regarding Section 401, the heads of these agencies shall initiate a rulemaking to ensure their respective regulations are consistent with the EPA’s revised rules (i.e., no later than August 8, 2020).  Id. LNG Safety Regulations Currently, the Department of Transportation’s safety regulations for LNG facilities in 40 C.F.R. Part 193 apply uniformly to all LNG facilities regardless of size (e.g., small-scale peak shaving and large-scale import and export terminals).  Id. at Sec. 4(a).  Because the current rules were developed to regulate small facilities and new LNG export terminals are in various stages of development, President Trump ordered the Secretary of Transportation to initiate a rulemaking to update Part 193 using risk-based standards (i.e., those that impose regulatory requirements commensurate with the associated risk) to the maximum extent practicable.  Id.  The EO requires the Secretary to finalize that rulemaking no later than 13 months after the date of the order.  Id. In addition, President Trump directed that the Secretary of Transportation propose for notice and comment rulemaking, no later than 100 days from the date of the order, a rule that would allow LNG to be transported via rail in approved tank cars.  Id. at Sec. 4(b). The rule shall be finalized no later than 13 months from the date of the order. Capital Markets Because a majority of project financing is done through the United States capital markets, President Trump directed the Secretary of Labor to complete a review of the data filed with the Department of Labor by retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) to identify whether there are discernable trends with respect to such plans’ investments in the energy sector.  President Trump directed that within 180 days of the issuance of the order the Secretary of Labor shall complete the review and provide an update to the Assistant to the President for Economic Policy on any discernable trends in energy investments of such plans.  Id. at Sec. 5. The President also directed that the Secretary of Labor complete a review of existing Department of Labor guidance on the fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets.  Id. Rights-of-Way Renewals and Reauthorizations To address the issue of automatic sunset provisions in rights-of-way granted for energy infrastructure projects, President Trump directed the Secretaries of Commerce, Agriculture, and Interior to develop a master agreement for energy infrastructure rights-of-way renewals or reauthorizations, and within a year of the date of the order, initiate renewal or reauthorization for all expired energy rights-of-way.  Id. at Sec. 6. Reports on Barriers to National Energy Market Report on New England Constraints:  President Trump directed the Secretary of Transportation, in consultation with the Secretary of Energy, to submit a report regarding the economic and other effects caused by the inability to transport sufficient quantities of natural gas and other domestic energy resources into the States in New England and, as appropriate, other regions of the United States.  The report must be submitted within 180 of the order and assess to what extent state, local, tribal, and territorial actions have contributed to these issues.  Id. at Sec. 7(a). Report on West Coast Export Constraints:  President Trump also directed the Secretary of Energy, in consultation with the Secretary of Transportation, to submit a report regarding the economic and other effects cause by limitation on the export of coal, oil, natural gas, and other domestic energy resources through the west coast of the United States.  This report shall also be submitted within 180 days of the order and assess to what extent state, local, tribal, and territorial actions have contributed to such effects.  Id. at Sec. 7(b). Report on Intergovernmental Assistance Due to the vital role state and local governments play in supporting energy infrastructure projects, President Trump directed the heads of agencies to review existing authorities related to the transportation and development of domestically produced energy resources and report within 30 days on how those authorities can be most efficiently and effectively used to promote energy infrastructure development.  Id. at Sec. 8. Report on Economic Growth in Appalachian Region President Trump directed the Secretary of Energy to submit a report describing opportunities, through the federal government or otherwise, to promote economic growth of the Appalachian region, including growth of petrochemical and other industries.  The report shall also assess diversifying the Appalachian economy and promoting workforce development.  The report is due within 180 days of the order.  Id. at Sec. 9. EO ON INTERNATIONAL CROSS-BORDER PERMITTING Citing concerns that the policies of certain executive agencies have hindered the permitting process and relations with neighboring countries, President Trump’s second EO transfers authority from the Secretary of State to the President to issue, deny or amend Presidential permits for certain international border crossing facilities, including oil pipelines.  EO II at Sec. 1.  Under the EO, such decisions shall now reside solely with the President.  Id. at Sec. 2(i).  The EO requires the State Department to complete its review of any application and to provide any opinion supporting the issuance of a permit to the President within 60 days of receipt of the application.  Id. at Sec. 2.  The EO will effectively eliminate what has, at times, been a lengthy State Department review process.  These reforms would allow the President to permit a project like the Keystone XL, which was famously denied after the type of State Department review that is being eliminated here. Subject to a few significant exceptions, the EO applies to all Presidential permits for “pipelines . . . and similar facilities for exportation or importation of all products,” “facilities for the transportation of persons or things,” “bridges,” and “motor and rail vehicle” border crossings.  EO II at Sec. 2(b).  The EO specifically excepts, however, natural gas import and export facilities, electric transmission lines, and licenses to land or operate submarine cables.  Id.; see also Executive Order 10486 at Sec. 1(1)-(2); Executive Order 10530 at Sec. 5(a). The EO requires the Secretary of State to “adopt procedures to ensure” that if taken, certain actions are “completed within 60 days of the receipt of an application for a Presidential permit.”  EO II at Sec. 2.  While not required, during that 60-period the Secretary “may” “[R]equest additional information from the applicant,” or “refer the application and pertinent information” to other agency heads, id. at Sec. 2(c)(i)-(ii); “[A]dvise the President” on whether to “request the opinion, in writing, of any heads of agencies concerning the application,” id. at Sec. 2(d).  Should the President request such opinions, the agency heads are to provide them in writing “30 days from the date of the request, unless the President otherwise specifies,” id.; and “[S]olicit such advice from State, tribal, and local government officials, and foreign governments, as the President may deem necessary,” but must “seek responses no more than 30 days from the date of a request,” id. at Sec. 2(e). If after reviewing the additional information received from the applicant, the “opinions” of other agency heads, or “advice from State, tribal, and local government officials, and foreign governments,” the Secretary considers other information necessary for the President’s evaluation, the Secretary “shall advise the President accordingly.”  Id. at Sec. 2(f).  If directed by the President, the Secretary shall request such additional information.  Id. Within 60 days of receipt of the application, and after receiving or requesting the information discussed above, if the Secretary “is of the opinion” that issuance or amendment of a permit “would” or “would not serve the foreign policy interests of the United States, the Secretary” shall provide the reasons supporting that opinion to the President in writing.  Id. at Sec. 2(g)-(h). The EO also revokes Executive Orders 13337 and 11423, which had previously granted the Secretary of State authority to grant, deny or amend Presidential permits for the covered international border-crossing facilities.  Id. at Sec. 2(k). Notably, the EO makes no provision for the Secretary of State to make public notice of or seek public comment on a proposed permit.  Nor does it make allowance for any review that may be required under the National Environmental Policy Act (“NEPA”) or any other statute.  The current State Department’s NEPA regulations provide that an environmental assessment is normally required for “actions for which the Department has lead-agency responsibility and which may significantly affect the human environment of the United States,” including the “[i]ssuance of permits for construction of international bridges and pipeline[.]”  22 C.F.R. § 161.7(c). Gibson Dunn’s Energy, Regulation and Litigation lawyers are available to assist in addressing any questions you may have regarding the developments discussed above.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or the authors: William S. Scherman – Washington, D.C. (+1 202-887-3510, wscherman@gibsondunn.com) Ruth M. Porter – Washington, D.C. (+1 202-887-3666, rporter@gibsondunn.com) Jason J. Fleischer – Washington, D.C. (+1 202-887-3737, jfleischer@gibsondunn.com) Amy E. Mersol-Barg – Washington, D.C. (+1 202-955-8529, amersolbarg@gibsondunn.com)

April 3, 2019 |
U.S. EPA Finalizes New Owner Clean Air Act Audit Program Tailored for the Oil and Natural Gas Sector

Click for PDF On March 29, 2019, the U.S. Environmental Protection Agency finalized the New Owner Clean Air Act Audit Program (the “Program”) for the oil and natural gas sector. Under the Program, new owners of upstream exploration and production sites can seek complete civil penalty mitigation in exchange for auditing their sites for Clean Air Act violations, disclosing any violations, and correcting those violations on an agreed timeline.[1] Opting into the Program. New owners of upstream sites seeking to participate in the program must notify EPA within nine months after acquiring new facilities. Buyers then must consult with the EPA to determine the scope of the audit, including the number of facilities covered. Although EPA strongly encourages new owners to conduct a comprehensive Clean Air Act audit of all applicable statutory and regulatory requirements, the agency has expressed a willingness to entertain proposals for more targeted Clean Air Act compliance audits.[2] Terms of the Program. In announcing the program, EPA provided a template audit agreement outlining the audit process. The template agreement requires, for example, participating new owners to follow an EPA-designed systematic process for estimating vapor control system pressures and vapor flow rates to control devices, and to correct any violations discovered during this process within 180 days of each respective violation’s discovery.[3] Violations discovered outside of the scope of the predesigned process for vapor control systems must be corrected within 60 days of their discovery. Benefits of the Program. Taken as a whole, the requirements of the template audit process may, unlike previous audit policies, require participating new owners to go beyond the requirements of applicable regulations in order to mitigate emissions from storage tanks.[4] Significantly, however, new owners that enter into, and fulfill, all obligations under the template agreement are provided with complete relief from civil penalties. In taking this approach, EPA acknowledged that it was providing for penalty mitigation over and beyond the approach used in preexisting audit guidance (which only allows for mitigation of the “gravity” component of a civil penalty, not the entire civil penalty). Risk Mitigation. EPA’s new audit program provides the upstream oil and gas sector with an option to mitigate enforcement risk by proactively addressing vapor control design issues targeted by a recent EPA enforcement initiative. EPA’s FY19 enforcement goals include an initiative specifically aimed at reducing emissions from storage vessels at upstream sites allegedly resulting from insufficient vapor controls. Under this initiative, EPA already has settled enforcement cases at facilities in Colorado, Oklahoma, Ohio, West Virginia, and Pennsylvania. In one case, the estimated cost of upgrades to vapor control systems and storage vessels resulting from EPA’s efforts was $60 million. Given the potential for substantial civil penalties, the Program may still be an attractive option for new owners seeking to avoid civil penalties or enforcement in spite of the Program’s emissions mitigation requirements.    [1]   The Program is distinct from, and does not alter, preexisting EPA policies incentivizing industry actors to self-audit their potential pollution (e.g., EPA’s Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations, 65 Fed. Reg. 19,618 (Apr. 11, 2000)). Industry members that prefer the incentive schemes of prior audit policies may still avail themselves of such policies.    [2]   EPA, Oil and Gas New Owner Program Questions and Answers (Mar. 29, 2019), available at https://www.epa.gov/compliance/oil-and-gas-new-owner-program-questions-and-answers.    [3]   Id.    [4]   Dawn Reeves, Lacking Fixes, Oil & Gas Sector Unlikely to Use EPA Penalty Relief Policy, Inside EPA (April 2, 2019), available at https://insideepa.com/daily-news/lacking-fixes-oil-gas-sector-unlikely-use-epa-penalty-relief-policy. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Environmental Litigation and Mass Tort or Oil and Gas practice groups, or the authors: Peter S. Modlin – San Francisco (+1 415-393-8392, pmodlin@gibsondunn.com) Michael K. Murphy – Washington, D.C. (+1 202-955-8238, mmurphy@gibsondunn.com) Stacie B. Fletcher – Washington, D.C. (+1 202-887-3627, sfletcher@gibsondunn.com) Kyle Neema Guest – Washington, D.C. (+1 202-887-3673, kguest@gibsondunn.com) Environmental and Mass Tort Group: Washington, D.C. Stacie B. Fletcher (+1 202-887-3627, sfletcher@gibsondunn.com) Raymond B. Ludwiszewski (+1 202-955-8665, rludwiszewski@gibsondunn.com) Michael K. Murphy (+1 202-955-8238, mmurphy@gibsondunn.com) Daniel W. Nelson – (+1 202-887-3687, dnelson@gibsondunn.com) Peter E. Seley – (+1 202-887-3689, pseley@gibsondunn.com) Los Angeles Patrick W. Dennis (+1 213-229-7568, pdennis@gibsondunn.com) Matthew Hoffman (+1 213-229-7584, mhoffman@gibsondunn.com) Thomas Manakides (+1 949-451-4060, tmanakides@gibsondunn.com) New York Andrea E. Neuman (+1 212-351-3883, aneuman@gibsondunn.com) Anne M. Champion (+1 212-351-5361, achampion@gibsondunn.com) San Francisco Peter S. Modlin (+1 415-393-8392, pmodlin@gibsondunn.com) Oil and Gas Group: Michael P. Darden – Houston (+1 346-718-6789, mpdarden@gibsondunn.com) Tull Florey – Houston (+1 346-718-6767, tflorey@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Shalla Prichard – Houston (+1 346-718-6644, sprichard@gibsondunn.com) Doug Rayburn – Dallas (+1 214-698-3442, drayburn@gibsondunn.com) Gerry Spedale – Houston (+1 346-718-6888, gspedale@gibsondunn.com) Justin T. Stolte -Houston (+1 346-718-6800, jstolte@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 27, 2019 |
Supreme Court Holds That Securities Fraud Liability Extends Beyond “Maker” Of False Statements

Click for PDF Decided March 27, 2019 Lorenzo v. SEC, No. 17-1077 Today, the Supreme Court held 6-2 that an individual who knowingly disseminates false statements, even if the individual did not “make” the statements under SEC Rule 10b-5(b), can be held liable under other subdivisions of Rule 10b-5 and related securities laws. Background: Francis Lorenzo sent emails to prospective investors containing false statements about the sale of securities.  He sent the emails at the direction of his boss, who wrote their content.  Under Janus Capital v. First Derivative Traders, 564 U.S. 135 (2011), Lorenzo could not be held liable for making false statements under Rule 10b-5(b) because he was not the “maker” of the statements—his boss retained “ultimate authority” over their content.  Id. at 142.  The SEC nonetheless charged Lorenzo with violating other parts of Rule 10b-5 and related statutes.  For example, the SEC alleged that Lorenzo had “employ[ed] any device, scheme, or artifice to defraud” under Rule 10b-5(a), and also had “engage[d] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” under Rule 10b-5(c).  The D.C. Circuit rejected Lorenzo’s contention that, because he was not the “maker” of the misstatements, he could not be held liable under Rule 10b-5(a) and (c) and related statutes. Issue:  Whether someone who is not a “maker” of a misstatement under Rule 10b-5(b) can nevertheless be held liable for dissemination of misstatements under other subsections of Rule 10b-5 and related securities laws. Court’s Holding:  Yes.  The prohibitions of fraudulent schemes and fraudulent practices in Rule 10b-5(a) and (c), as well as related prohibitions in securities laws, are broad enough to encompass the knowing dissemination of false or misleading statements directly to investors with the intent to defraud, even if the person who disseminates them did not “make” them under Rule 10b-5(b). “[W]e conclude that . . . dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5 . . . even if the disseminator did not ‘make’ the statements and consequently falls outside subsection (b) of the Rule.” Justice Breyer, writing for the majority What It Means: The Court read the language of Rule 10b-5 broadly, relying on dictionary definitions to hold that an individual need not “make” false statements in order to be liable for “employ[ing]” a scheme to defraud under Rule 10b-5(a) or for “engag[ing]” in an act that operates as a fraud under Rule 10b-5(c) based on the individual’s knowing dissemination of false statements with intent to deceive. The Court declined to read the subdivisions of Rule 10b-5 as mutually exclusive, reasoning that their prohibitions involve “considerable overlap” to ensure coverage for multiple forms of fraud. The Court suggested some limits to its broad reading of Rule 10b-5, observing that “liability would typically be inappropriate” for individuals “tangentially involved” in disseminating false statements, such as “a mailroom clerk.” The Court reaffirmed its precedent holding that private suits are not permitted against secondary violators of Section 10(b), 15 U.S.C. § 78j(b).  For example, private plaintiffs cannot sue defendants for undisclosed actions that investors could not have relied upon.  Therefore, the Court’s ruling should be limited to claims involving the dissemination of false information directly to investors. The Court did not address what intent (scienter) is required to establish violations of Rule 10b-5 and related securities laws, as Lorenzo did not challenge the D.C. Circuit’s holding that he had the requisite scienter.  The Court also reaffirmed that the SEC, “unlike private parties, need not show reliance in its enforcement actions.” The decision may result in the SEC and private plaintiffs increasingly relying on provisions other than Rule 10b-5(b) when alleging violations of the securities laws. 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 Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Related Practice: Securities Litigation Brian M. Lutz +1 415.393.8379 blutz@gibsondunn.com Robert F. Serio +1 212.351.3917 rserio@gibsondunn.com Meryl L. Young +1 949.451.4229 myoung@gibsondunn.com

March 11, 2019 |
Webcast: Shareholder Litigation Developments and Trends (2019)

Shareholder lawsuits are not only complicated to litigate, but due to the high financial stakes, these actions can be among the most threatening to a company and its directors and officers. It has been over twenty years since Congress enacted the Private Securities Litigation Reform Act of 1995, and since that time, private actions under the federal securities laws have continued to be filed at a steady pace. Over the last decade, the U.S. Supreme Court and the state supreme courts have issued multiple decisions impacting the way shareholder actions are litigated and decided. This One-Hour Briefing highlights recent developments and trends in this constantly evolving and complex area of the law. Faculty discuss: Shareholder actions filing and settlement trends Shareholder actions arising out of the #MeToo movement and claims of sexual harassment by senior executives Potential implications of future Supreme Court decisions in securities cases View Slides (PDF) PANELISTS: Jennifer L. Conn is a partner in the New York office of Gibson, Dunn & Crutcher.  Ms. Conn is co-editor of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition. She has extensive experience in a wide range of complex commercial litigation matters, including those involving securities, accounting malpractice, antitrust, contracts, insurance and information technology. Ms. Conn is also a member of Gibson Dunn’s General Commercial Litigation, Securities Litigation, Appellate, and Privacy, Cybersecurity and Consumer Protection Practice Groups. Marshall R. King is a partner in the New York office of Gibson, Dunn & Crutcher. Mr. King is co-author of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition.  He has extensive experience in commercial and business litigation matters, with particular focus on securities litigation and disputes arising out of acquisitions. Mr. King is also a member of Gibson Dunn’s Securities Litigation, Class Actions, International Arbitration, Litigation, Media, Entertainment and Technology and Transnational Litigation Practice Groups. Gabrielle Levin is a partner in the New York office of Gibson, Dunn & Crutcher.  Ms. Levin is co-author of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition.  Her practice focuses on representing corporate clients in securities, employment, and general litigation matters. She has extensive experience in securities class actions, shareholder derivative litigation, SOX and Dodd-Frank whistleblower litigation, and employment litigation. Ms. Levin is a member of Gibson Dunn’s Securities Litigation Practice, Labor and Employment Practice, and Media, Entertainment and Technology Practice Groups, as well as the Firm’s Diversity Committee. MCLE INFORMATION:  This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

March 5, 2019 |
2018 Year-End Securities Litigation Update

Click for PDF 2018 witnessed even more securities litigation filings than 2017, in which we saw a dramatic uptick in securities litigation as compared to previous years.  This year-end update highlights what you most need to know in securities litigation developments and trends for the latter half of 2018, including: The Supreme Court heard oral argument in Lorenzo v. Securities and Exchange Commission, and is set to answer the question of whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be pursued as a “fraudulent scheme” claim even though it would not be actionable as a Rule 10b-5(b) claim under Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). The Supreme Court granted the petition for writ of certiorari in Emulex Corp. v. Varjabedian to consider whether Section 14(e) of the Exchange Act supports an inferred private right of action based on negligent (as opposed to knowing or reckless) misstatements or omissions made in connection with a tender offer. We discuss recent developments in Delaware law, including case law exploring, among other things, (1) appraisal rights, (2) the standard of review in controller transactions, (3) application of the Corwin doctrine, and (4) when a “Material Adverse Effect” permits termination of a merger agreement. We review case law implementing the Supreme Court’s decisions in Omnicare and Halliburton II. We review a decision from the Third Circuit regarding the obligation to disclose risk factors, and a decision from the Ninth Circuit regarding the utilization of judicial notice and the incorporation by reference doctrine at the motion to dismiss stage. 1. Filing and Settlement Trends Figure 1 below reflects filing rates for 2018 (all charts courtesy of NERA). Four hundred and forty-one cases were filed this past year. This figure does not include the many class suits filed in state courts or the increasing number of state court derivative suits, including many such suits filed in the Delaware Court of Chancery. Those state court cases represent a “force multiplier” of sorts in the dynamics of securities litigation today. Figure 1: As shown in Figure 2 below, over 200 “merger objection” cases were filed in federal courts in 2018. Building off a trend from 2017, this is nearly triple the number of such cases filed in 2016, and more than quadruple the number filed in 2014 and 2015. Note that this statistic only tracks cases filed in federal courts. Historically, most M&A litigation had occurred in state court, particularly the Delaware Court of Chancery. But as we have discussed in prior updates, the Delaware Court of Chancery announced in early 2016 in In re Trulia Inc. Stockholder Litigation, 29 A.3d 884 (Del. Ch. 2016) that the much-abused practice of filing an M&A case followed shortly by an agreement on “disclosure only” settlement is effectively at an end. This is likely driving an increasing number of cases to federal court. Figure 2: 2018 saw the continuation of a decline in the percentage of cases filed against healthcare companies, following the peak of such cases in 2016. The percentage of new cases involving electronics and technology companies, meanwhile, saw a significant bump, comprising 21% of all fillings in 2018. The proportion of cases in the finance sector remained roughly consistent as compared to 2017. Figure 3: As Figure 4 shows, the average settlement value was $69 million in 2018, returning to a number comparable to the average in 2016 ($77 million) after a sharp decline to $25 million in 2017. Figure 5 reflects that the median settlement value also rose from $6 million in 2017 to $13 million in 2018. In any given year, of course, median settlement statistics also can be influenced by the timing of large settlements, any one of which can skew the numbers.  The statistics are not highly predictive of the settlement value of any individual case, which is driven by a number of important factors, such as (i) the amount of D&O insurance; (ii) the presence of parallel proceedings, including government investigations and enforcement actions; (iii) the nature of the events that triggered the suit, such as the announcement of a major restatement; (iv) the range of provable damages in the case; and (v) whether the suit is brought under Section 10(b) of the Exchange Act or Section 11 of the Securities Act. Figure 4: Figure 5: Following a decline in 2017, 2018 witnessed the return of Median NERA-Defined Investor Losses and Median Ratio of Settlement to Investor Losses by Settlement Year to $479 million, a level similar to that seen in 2015 and 2016. Figure 6: 2018 also saw a greater number of settlement sizes in the $10 to $50 million range, with settlements in the $20 to $49.9 million range reaching an unprecedented 24% of all settlements. Figure 7: 2. What to Watch for in the Supreme Court A. Lorenzo Will Test the Reach of Janus on Who May Be Held Liable for False Statements In our 2018 Mid-Year Securities Litigation Update, we discussed the Supreme Court’s grant of certiorari in Lorenzo v. Securities and Exchange Commission, No. 17-1077. As readers will recall, Lorenzo involves the question of whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be pursued as a “fraudulent scheme” claim under Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c) even though it would not be actionable under Rule 10b-5(b) pursuant to the Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). In the decision below, the D.C. Circuit held that Lorenzo’s distribution of an email that included false statements drafted by his supervisor could not form the basis for 10b-5(b) liability under Janus, but could form the basis for “scheme” liability under 10b-5(a) and (c). Lorenzo v. Sec. & Exch. Comm’n, 872 F.3d 578, 580, 592 (D.C. Cir. 2017). Then-Judge Kavanaugh dissented from the panel opinion. In the merits brief, Petitioner (a securities broker) argued that allowing scheme liability would permit an end-run around the Court’s decision in Janus, which held that only the “maker” of a statement can face primary liability for securities fraud. Brief for Petitioner at 24. Petitioner specifically contended that the D.C. Circuit’s ruling would effectively nullify Janus, and would allow the SEC to impose liability for conduct under 10b-5(a) and (c) that is not actionable under 10b-5(b). Id. at 27-28. Petitioner also argued that the scheme liability theory adopted by the D.C. Circuit is functionally no different than aiding-and-abetting liability—a theory of liability under Section 10(b) of the Exchange Act that the Supreme Court rejected in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 177 (1994). Id. at 36. In its responsive brief on the merits, Respondent (the SEC) argued that neither Janus nor Central Bank purport to extend their holdings to claims made pursuant to Rules 10b-5(a) and (c). Brief for Respondent at 23-26, 31-33. On behalf of the SEC, the U.S. Solicitor General also argued that because the messages that contained the false statements were sent by Lorenzo, and because the transmission of the messages was necessary to the scheme, Lorenzo’s actions fall squarely within the provisions imposing scheme liability. Id. at 15-18. At oral argument on December 3, 2018, several Justices seemed troubled by Lorenzo’s argument because Janus relied on statutory text that prohibited the “making” of a false statement, but the statutory provisions under which the SEC charged Lorenzo do not include any references to the “making” of statements. Justice Alito repeatedly pressed Lorenzo’s counsel to explain why the alleged conduct did not “fall squarely within the language” of the statute. Tr. at 11. Justice Kagan expressed skepticism of Lorenzo’s theory that the various provisions of the anti-fraud statutes are “mutually exclusive,” such that misstatements can be sanctioned only under the provisions directed specifically at misstatements. Tr. at 25. Justice Gorsuch, however, appeared more accepting of Petitioner’s arguments, and pressed the government’s lawyer on how scheme liability could apply when the only fraud is the making of a false statement (a fraud claim barred by Janus on these facts). Tr. at 32-36. Justice Kavanaugh was recused because he participated in the decision below. We expect a decision in Lorenzo by the end of the 2018 Supreme Court Term in June 2019. We will continue to monitor developments in this area and report on any updates in our 2019 Mid-Year Securities Litigation Update. B. In Emulex, the Court Will Address whether Liability May Be Imposed under Section 14(e) for Negligent Conduct On January 4, 2019, the Supreme Court granted certiorari in Emulex Corp. v. Varjabedian, No. 18-459, to consider whether Section 14(e) of the Exchange Act supports an inferred private right of action based on negligent misstatements or omissions made in connection with a tender offer. The case arises out of the Ninth Circuit, which split with five of its sister circuits in holding that plaintiffs seeking to recover under Section 14(e) of the Exchange Act need only plead and prove negligence, not scienter. 888 F.3d 399, 405 (9th Cir. 2018). This case involves a joint press release announcing a merger between Avago Technologies Wireless Manufacturing, Inc. and Emulex Corp. The press release announced that Avago would pay a premium for Emulex stock. Documents filed with the SEC in support of the offer omitted a one-page “Premium Analysis” showing that while the premium fell within the normal range of merger premiums in comparable transactions, it was below average. A class of former Emulex shareholders filed a putative class action and alleged defendants had violated Section 14(e) by failing to summarize the Premium Analysis and to disclose that the premium was below the average for premiums in similar mergers. The district court dismissed the Section 14(e) claim for failure to plead that the misstatement or omission was made intentionally or with deliberate recklessness. The Ninth Circuit reversed the district court, noting that Section 14(e) contains two separate clauses, which each proscribe different conduct: (1) making or omitting an untrue statement of material fact and (2) engaging in fraudulent, deceptive or manipulative acts or practices. The Ninth Circuit reasoned that the first clause, on its face, does not include a scienter requirement. Although the Ninth Circuit acknowledged that five other circuits (the Second, Third, Fifth, Sixth, and Eleventh) have held that Section 14(e) requires that plaintiffs plead scienter, the Ninth Circuit believes those circuits ignored or misread Supreme Court precedent to import Rule 10b-5’s scienter requirement to Section 14(e) claims. Id. at 405. According to the Ninth Circuit, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976), found that Rule 10b-5 requires a showing of scienter because it was promulgated by the SEC, which only has the authority to regulate manipulative or deceptive devices that necessarily entail scienter. Varjabedian, 888 F. Supp. at 406. The Ninth Circuit also reasoned that the text of Section 14(e) is similar to that of Section 17(a)(2) of the Securities Act, which the Supreme Court held in Aaron v. SEC, 446 U.S. 680, 696-97 (1980), does not require a showing of scienter. Varjabedian, 888 F. Supp. at 406. The Ninth Circuit distinguished the contrary rulings in the other circuits by noting that they were either decided before Ernst & Ernst and Aaron or that they failed to follow the reasoning of those decisions and acknowledge the distinction between Rule 10b-5 and Section 14(e). Id. at 405. Emulex filed a petition for a writ of certiorari on October 11, 2018. Emulex argued that the Ninth Circuit’s decision “upset[] the statutory scheme enacted by Congress.” Petition for Writ of Certiorari at 15. Emulex further contended that the Supreme Court has not previously recognized a private right of action under Section 14(e) and declined to do so in Piper v. Chris-Craft Industries Inc., 430 U.S. 1, 24 (1977). While lower courts have inferred a private right of action, they have declined to create private rights of action for negligent conduct. Petition for Writ of Certiorari at 18-19. Emulex also argued that the circuit split “blew up” the consensus among circuit courts which had held that Section 14(e) does not support a private right of action or remedy based on mere negligence. Id. at 14. The Ninth Circuit’s decision, according to Petitioner, “creat[es] an expansive new regime at odds with the uniform view in the rest of the country.” Id. at 15. As noted, the Supreme Court granted certiorari in January 2019. We expect that the parties will submit their briefing to the Supreme Court in the spring of 2018, with oral argument to follow in the coming months. We will continue to monitor this appeal and provide an update in our 2019 Mid-Year Securities Litigation Update. C. Pending Certiorari Petitions There are two notable securities cases in which petitions for certiorari are pending. The first is Toshiba Corp. v. Automotive Industries Pension Trust Fund, No. 18-486, which also involves a circuit split created by the Ninth Circuit. The Ninth Circuit split from the Second Circuit in holding that the Supreme Court’s landmark decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), which held that U.S. securities laws do not apply extraterritorially, does not bar suits arising out of domestic transactions in the securities of a foreign issuer even when the foreign issuer has no role in facilitating the transaction. Also pending is First Solar Inc. v. Mineworkers’ Pension Scheme, No. 18-164, which we discussed in the 2018 Mid-Year Securities Litigation Update. Readers will recall that, in that case, the Ninth Circuit issued a per curiam opinion holding that loss causation can be established even when the corrective disclosure did not reveal the fraud on which the securities fraud claim is based. In both Toshiba and First Solar, the Supreme Court has entered orders requesting the Solicitor General to file briefs expressing the views of the United States. The government has not yet filed its brief in either case. We will continue to monitor these petitions and provide an update in our 2019 Mid-Year Securities Litigation Update if the Supreme Court grants certiorari. 3. Delaware Law Developments A. Contractual Waiver of Appraisal Rights Enforceable under Delaware Law In our 2018 Mid-Year Securities Litigation Update, we reported on two Court of Chancery decisions interpreting and applying new Delaware appraisal law set forth in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017). In the second half of 2018, the Court of Chancery continued implementing the Delaware Supreme Court’s directive by looking first—and primarily—to market factors to determine the fair value of a company’s stock when supported by appropriate facts. See Blueblade Capital Opportunities LLC v. Norcraft Cos., 2018 WL 3602940 (Del. Ch. July 27, 2018) (giving deal price no weight where stock thinly traded and sales process significantly flawed); In re Appraisal of Solera Holdings, Inc., 2018 WL 3625644 (Del. Ch. July 30, 2018) (giving deal price “dispositive” weight where sales process was “characterized by many objective indicia of reliability” and company’s actively traded stock had “a deep base of public stockholders”). Delaware courts also looked at appraisal mechanics in other contexts. In Manti Holdings, LLC v. Authentix Acquisition Co., the Court of Chancery enforced a provision in a stockholder agreement waiving stockholders’ right to pursue statutory appraisal for certain transactions. 2018 WL 4698255 (Del. Ch. Oct. 1, 2018). Stockholder-petitioners who had entered into the stockholder agreement lost their shares via merger. Id. at *1. Under the stockholder agreement, they had agreed “to refrain from the exercise of appraisal rights” if “a Company Sale [was] approved by the Board.” Id. at *2. That a “Company Sale” occurred was not disputed. In reaching its conclusion that the waiver was enforceable, the Court rejected as nonsensical the Petitioners’ argument that the waiver terminated upon consummation of the deal. Id. at *3. Importantly, the Court rejected the Petitioners’ argument that enforcing the Agreement “would impermissibly . . . impose a limitation on classes of stock by contract” in violation of DGCL Section 151(a), which, according to the Petitioners, requires such limits to derive from the corporate charter. Id. at *4. Reasoning that the Company entered into the agreement to “entice investment” and that the stockholders simply “took on contractual responsibilities in exchange for consideration,” the Court held that enforcing the stockholder agreement was “not the equivalent of imposing limitations on a class of stock under Section 151(a).” Id. B. Courts Clarify MFW’s “Ab Initio” Requirement In the second half of 2018, both the Delaware Supreme Court and the Court of Chancery clarified when the “ab initio” requirement is satisfied under Kahn v. M & F Worldwide Corp. (“MFW”), 88 A.3d 635, 644 (Del. 2014). Under MFW, a conflicted-controller transaction earns business judgment review when six elements are satisfied: (i) the procession of the transaction is conditioned ab initio on the approval of both a special committee and a majority of the minority stockholders (the “dual protections”); (ii) the special committee is independent; (iii) the special committee is empowered to freely select its own advisors and to say no definitively; (iv) the special committee meets its duty of care in negotiating a fair price; (v) the vote of the minority stockholders is informed; and (vi) there is no coercion of the minority stockholders. Id. at 645. In Olenik v. Lodzinski, the Court of Chancery held that the ab initio requirement was satisfied because the controller’s first offer, although extended after nine months of discussions, announced MFW’s dual protections “‘before any negotiations took place.’” 2018 WL 3493092, at *15 (Del. Ch. July 20, 2018) (quoting Swomley v. Schlecht, 2014 WL 4470947, at *21 (Del. Ch. 2014), aff’d, 128 A.3d 992 (Del. 2015) (TABLE)). The Court relied on settled Delaware law distinguishing between “discussions,” which were extensive in Olenik, and “negotiations,” which began only with the controller’s first offer. Id. at *16; see also Colonial Sch. Bd. v. Colonial Affiliate, NCCEA/DSEA/NEA, 449 A.2d 243, 247 (Del. 1982) (distinguishing between “negotiate,” which “means to bargain toward a desired contractual end,” and “discuss,” which “means merely to exchange thoughts and points of views on matters of mutual interest”). The Delaware Supreme Court weighed in three months later, holding in Flood v. Synutra International, Inc. that the ab initio element “require[s] the controller to self-disable before the start of substantive economic negotiations, and to have both the controller and Special Committee bargain under the pressures exerted on both of them by these protections.” 195 A.3d 754, 763 (Del. 2018). In particular, the Supreme Court affirmed the trial court’s conclusion that the controller satisfied the ab initio element by conditioning the transaction on MFW’s dual protections in “the Follow-up Letter [sent] just over two weeks after [it] first proposed the Merger, before the Special Committee ever convened and before any negotiations ever took place.” Id. at 764. Although these decisions are based on notably different facts—for example, nine months elapsed between the initial communication and the first offer in Olenik, and only two weeks passed between the initial communication and “the Follow-up Letter” in Synutra—they appear to create one rule: MFW’s “ab initio” requirement will be satisfied as long as the controller commits to MFW’s dual protections before substantive economic negotiations occur. Olenik is on appeal to the Delaware Supreme Court, which may further clarify matters. C. Inadequate Disclosures Preclude Cleansing under Corwin In two recent cases, the Court of Chancery concluded the Corwin doctrine did not apply. In re Xura, Inc. S’holder Litig., 2018 WL 6498677 (Del. Ch. Dec. 10, 2018) (denying Corwin motion based on seven alleged material omissions); In re Tangoe, Inc. S’holder Litig., 2018 WL 6074435 (Del. Ch. Nov. 20, 2018) (holding stockholders were not adequately informed for Corwin purposes where audited financials and the facts underlying a restatement were not disclosed). Under Corwin, the business judgment rule applies to judicial review of transactions that are not otherwise subject to the entire fairness standard so long as the transaction was “approved by a fully informed, uncoerced vote of the disinterested stockholders.” See id. at *9 (quoting Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 309 (Del. 2015)). Initially an appraisal proceeding, Xura morphed into a plenary action after appraisal discovery revealed questionable conduct primarily by a seller’s CEO. Xura, 2018 WL 6498677, at *1. The CEO, it was alleged, steered his company into a transaction with an interest that differed from other stockholders: self-preservation. Id. at *11. He stood to lose his job and a $25 million payout if the company was not sold. Id. at *13. The proxy statement for the deal failed to disclose the CEO’s actions relating to the sales process, leaving stockholders “entirely ignorant” of his influence over the transaction and “his possible self-interested motivation for pushing an allegedly undervalued [t]ransaction on the [c]ompany and its stockholders.” Id. Vice Chancellor Slights held that Corwin-cleansing was unavailable because the “stockholders could not have cleansed conduct about which they did not know.” Id. at *12. The stockholders in Tangoe similarly were found to be uninformed. Thirteen months before the transaction at issue, the SEC notified Tangoe that it would need to restate almost three years of its financials. Tangoe, 2018 WL 6074435, at *1. Tangoe took so long to do so that NASDAQ delisted its stock and the SEC threatened to deregister it. Id. at *2. After an activist stockholder increased its stake in the company and signaled to the board that “a proxy contest was coming,” the board began shifting its focus from restating the financials to selling the company. Id. at *1, 4-6. While it did so, it also altered its own compensation so that its members collectively would receive nearly $5 million in the event of a change of control. Id. at *5, 12-13. Throughout the sales process, the board failed to provide stockholders with audited financial statements. Although the Court pointed out that audited financial statements are not per se material, when combined with the misstatements in the company’s financial statements, among other things, the stockholders were left in an “information vacuum.” Id. at *10. The Court also found it significant that the board failed to disclose information related to the process of restating the company’s financials. Id. at *11. Accordingly, the Court held that Corwin-cleansing was unavailable because a reasonable inference could be drawn that the stockholders were not fully informed when they approved the transactions. Id. at *10-12. D. Delaware Supreme Court Affirms MAE Ruling On December 7, 2018, the Delaware Supreme Court affirmed the Court of Chancery’s recent post-trial ruling that a “Material Adverse Effect” (or “MAE”) permitted a buyer to terminate a merger agreement. Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff’d, — A.3d —-, 2018 WL 6427137 (Del. Dec. 7, 2018). Several factors contributed to the Court of Chancery’s finding that Akorn suffered an MAE. First, after Fresenius agreed to acquire Akorn, Akorn’s business “fell off a cliff”: in three consecutive quarters, it announced year-over-year declines in quarterly revenues of 29%, 29%, and 34%; in operating income of 84%, 89%, and 292%; and in earnings per share of 96%, 105%, and 300%. Id. at *21, 24, 35. Second, whistleblower letters prompted an investigation into Akorn’s product development and quality control process. Id. at *26. This investigation revealed many flaws, including falsification of laboratory data submitted to the FDA. Id. at *30-31. Third, Akorn failed to operate its business in the ordinary course post-signing, fundamentally changing its quality control and information technology functions without Fresenius’s consent. Id. at *88. On appeal, the Delaware Supreme Court held that the record “adequately support[ed]” the Court of Chancery’s determination. Akorn, Inc., — A.3d —-, 2018 WL 6427137 (Del. Dec. 7, 2018). E. N.Y. First Department Reverses Xerox, Dissolves Injunction As we reported in our 2018 Mid-Year Securities Litigation Update, in April 2018, the New York Supreme Court enjoined a multi-billion dollar merger of Xerox Corp. and Fujifilm Holdings Corp. (“Fujifilm”) because Xerox’s CEO, who negotiated the deal, and a majority of Xerox’s board were conflicted or lacked independence because they expected to continue serving the combined entity. In re Xerox Corp. Consolidated Shareholder Litigation, 2018 WL 2054280, at *7 (N.Y. Sup. Apr. 27, 2018). Xerox and Fujifilm appealed. In October 2018, the First Department reversed the decision unanimously “on the law and the facts,” holding that the business judgment rule applied and that the plaintiffs had failed to show a likelihood of success on their breach of fiduciary duty and fraud claims. Deason v. Fujifilm Holdings Corp., 165 A.D.3d 501 (1st Dep’t 2018). In particular, the plaintiffs “failed to show bad faith or a disabling interest on the part of the majority of the directors of Xerox” because “the possibility that any one of the directors would be named to [the combined] board alone was not a material benefit such that it was a disabling interest;” any potential conflict created by Xerox’s CEO continuing as the future CEO of the new company was acknowledged by the board; and the board “engaged outside advisers,” “discussed the proposed transaction on numerous occasions,” and the deal was not “unreasonable on its face.” Id. at 501-02. As a result, the First Department dismissed the complaints against Fujifilm and dissolved the injunctions enjoining the deal. Id. On February 21, 2019, the First Department denied the class plaintiffs’ motion for reargument or, in the alternative, leave to appeal to the Court of Appeals. 4. Falsity of Opinions – Omnicare Update As discussed in our prior securities litigation updates, courts continue to define the boundaries of Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015). The Supreme Court’s Omnicare decision addressed the scope of liability for false opinion statements under Section 11 of the Securities Act. The Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Id. at 1327. An opinion statement can give rise to liability only when the speaker does not “actually hold[] the stated belief,” or when the opinion statement contains “embedded statements of fact” that are untrue. Id. at 1326–27. But in the heavily debated “omission” part of the opinion, the Court held that a factual omission from a statement of opinion gives rise to liability when the omitted facts “conflict with what a reasonable investor would take from the statement itself.” Id. at 1329. The plaintiffs’ bar predicted that this omission theory of falsity would give rise to a wave of securities litigation complaints poised to survive the pleadings phase. While the theory has indeed become commonplace in complaints, it has fared little to no better in the last half of 2018 against the exacting pleading standards generally applicable to all theories of liability under the securities laws. See, e.g., Hering v. Rite Aid Corp., 331 F. Supp. 3d 412, 427 (M.D. Pa. 2018) (finding that “Plaintiff has failed to meet the exacting pleading standard of the PSLRA” where reasonable investors would understand the statements to be estimates). One district court recently emphasized that “a general allegation that ‘Defendants had knowledge of, or recklessly disregarded, omitted facts’” is insufficient. In re Under Armour Sec. Litig., 342 F. Supp. 3d 658, 676 (D. Md. 2018) (citation omitted). Another court rejected plaintiff’s claim that defendants should have conducted an inquiry into the facts underlying their opinion, finding that “[a] blanket conclusory assertion that no investigation occurred, without more, is insufficient.” Pension Tr. v. J. Jill, Inc., 2018 WL 6704751, at *8 (D. Mass. Dec. 20, 2018). Courts have specifically grappled with whether plaintiffs met the pleading standard in cases involving a company’s general opinions on its financial condition. In Frankfurt-Tr. Inv. Luxemburg AG v. United Technologies Corp., the Southern District of New York held that “omitting even significant, directly contradictory information from opinion statements is not misleading, ‘especially’ when there are countervailing disclosures.” 336 F. Supp. 3d 196, 230–31 (S.D.N.Y. 2018). Relying on Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016) and Martin v. Quartermain, 732 F. App’x 37 (2d Cir. 2018), the court found that statements about the company’s business and projected earnings per share were not misleading even where they failed to disclose specifics regarding a “slowdown of commercial aftermarket sales” and other potentially negative factors. Id. at 230. Plaintiff’s allegations—unlike the highly detailed allegations about test data in Sanofi and Martin—were “too scant in detail and scope” and “at a high level,” meaning that they failed to show that the alleged omissions would have a meaningful impact on a reasonable investor’s understanding of the company. Id. On the other hand, the District of Delaware found that plaintiffs met their pleading burden where they alleged that particular information omitted from a proxy statement, which recommended that shareholders vote in favor of a merger, made other specific statements about the fairness of the merger misleading. Laborers’ Local #231 Pension Fund v. Cowan, 2018 WL 3243975, at *10–12 (D. Del. July 2, 2018), reargument denied, 2018 WL 3468216 (D. Del. July 18, 2018). Because the board cited a fairness opinion in its decision to approve the merger, the court held that a reasonable investor may have thought that the company “placed confidence” in the fairness opinion and believed that it “accurately analyzed [the company’s] potential financial growth,” which “conflict[ed] with undisclosed facts or knowledge held by the board,” namely that the fairness opinion “did not incorporate acquisition based growth into its projections.” Id. at *10–11. Several courts also provided guidance for companies making opinion statements about legal and compliance risks, again highlighting the importance of context. For example, the Northern District of Illinois concluded that statements about legal compliance that were accompanied by disclosures concerning an ongoing IRS investigation would not be misleading to reasonable investors “unless they ignore[d] those disclosures.” Societe Generale Sec. Servs., GbmH v. Caterpillar, Inc., 2018 WL 4616356, at *4–5 (N.D. Ill. Sept. 26, 2018). Likewise, in Jaroslawicz v. M&T Bank Corp., the Third Circuit found that a company’s statements about its due diligence, which allegedly omitted deficiencies in its anti-money laundering compliance program, were not misleading. 912 F.3d 96, 113–14 (3d Cir. 2018). Paying close attention to the context, the court held that the statements were accompanied by sufficient facts that the company conducted a shorter period of diligence than investors may have otherwise expected. See id. at 114. In addition, the plaintiffs alleged both general negligence—insufficient to plead a violation under Omnicare—as well as that “a reasonable investor would have expected the banks to conduct a sampling of customer accounts” as part of their due diligence process. Id. The court found that a single allegation that the bank could have conducted a sampling was too weak to defeat the motion to dismiss. See id. In contrast, a Southern District of New York court found that a company’s statements regarding careful management and compliance with laws regarding its credit portfolio could be misleading because plaintiffs alleged that company was aware of particular facts suggesting the falsity of those statements. See In re Signet Jewelers Ltd. Sec. Litig., 2018 WL 6167889, at *12–13 (S.D.N.Y. Nov. 26, 2018). Noting that the pleading burden is “no small task,” the court held that plaintiffs nevertheless met their burden because they alleged “particularized and material[] facts” based on the testimony of former employees who provided information to the plaintiffs. Id. at *13. In particular, specific allegations that the company was “aware that a substantial and growing portion of its credit portfolio contained subprime loans and chose to disregard internal warnings about that fact” rendered the complaint sufficient to survive a motion to dismiss. Id. In the latter half of the year, courts also dealt with the circumstances in which a pharmaceutical company’s opinions on the safety of a drug undergoing clinical trials may give rise to liability under Omnicare. In Hirtenstein v. Cempra, Inc., the court held that the company’s statements that it believed a drug was safe was an inactionable opinion. 2018 WL 5312783, at *17–18 (M.D.N.C. Oct. 26, 2018). Plaintiffs claimed that because the company’s chief executive officer “elected to speak about [the drug’s] purportedly ‘compelling’ clinical data . . . [she] had a duty to disclose that . . . safety data showed a significant and genuine signal for liver toxicity and liver injury.” Id. at *17. The court held that the company did not have a “duty to disclose adverse events, particularly where the statements [were] couched as opinion and [did] not constitute affirmative statements that there are no safety concerns associated with the drug.” Id. at *18. These types of opinions could not be actionable, where they were “little more than vague optimistic statements regarding the safety profile of the drug.” Id. at *19. On the other hand, in SEB Inv. Mgmt. AB v. Endo International, PLC, the court found that plaintiff stated a Section 11 claim where it alleged that the company had specific knowledge of “an increasing number of serious adverse events linked to injection” of the drug at issue. 2018 WL 6444237, at *21–22 (E.D. Pa. Dec. 10, 2018). Despite the fact that the company allegedly knew about the “increased rate in injection use, [it] failed to disclose to investors that it faced a serious risk of regulatory action, including removal of the drug from the market,” forming the basis for an actionable Section 11 claim. Id. 5. Courts Continue to Shape “Price Impact” Analysis at the Class Certification Stage Courts across the country continue to grapple with implementing the Supreme Court’s landmark ruling in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), although the second half of 2018 did not bring any new decisions from the federal circuit courts of appeal. In Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption—a presumption enabling plaintiffs to maintain the common proof of reliance that is essential to class certification in a Rule 10b-5 case—but made room for defendants to rebut that presumption at the class certification stage with evidence that the alleged misrepresentation had no impact on the price of the issuer’s stock. Two key questions continue to recur. First, how should courts reconcile the Supreme Court’s explicit ruling in Halliburton II that direct and indirect evidence of price impact must be considered at the class certification stage, Halliburton II, 123 S. Ct. at 2417, with its previous decisions holding that plaintiffs need not prove loss causation or materiality until the merits stage? See Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (“Halliburton I”); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013). Second, what standard of proof must defendants meet to rebut the presumption with evidence of no price impact? As we have previously reported, the Second Circuit has addressed both of these key questions in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (“Barclays”) and Arkansas Teachers Retirement System v. Goldman Sachs, 879 F.3d 474 (2d Cir. 2018) (“Goldman Sachs”). Those decisions remain the most substantive interpretations of Halliburton II. Barclays addressed the standard of proof necessary to rebut the presumption of reliance and held that after a plaintiff establishes the presumption of reliance applies, defendant bears the burden of persuasion to rebut the presumption by a preponderance of the evidence. As we have previously noted, this puts the Second Circuit at odds with the Eighth Circuit, which cited Rule 301 of the Federal Rules of Evidence when reversing a trial court’s certification order on price impact grounds, see IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782 (8th Cir. 2016), because Rule 301 assigns only the burden of production—i.e., producing some evidence—to the party seeking to rebut a presumption, but “does not shift the burden of persuasion, which remains on the party who had it originally.” Fed. R. Evid. 301. That inconsistency, however, was not enough to persuade the Supreme Court to review the Second Circuit’s decision. Barclays PLC v. Waggoner, 138 S.Ct. 1702 (Mem) (2018) (denying writ of certiorari). In Goldman Sachs, the Second Circuit vacated the trial court’s ruling certifying a class and remanded the action, directing that price impact evidence must be analyzed prior to certification, even if price impact “touches” on the issue of materiality. Goldman Sachs, 879 F.3d at 486. Following the Second Circuit’s decision, the district court held an evidentiary hearing and heard oral argument. In re Goldman Sachs Grp. Sec. Litig., 2018 WL 3854757, at *1-2 (Aug. 14, 2018). The court, again, certified the class. Id. On remand, plaintiffs argued that because the company’s stock price declined following the announcement of three regulatory actions related to the company’s conflicts of interest, previous misstatements about its conflicts had inflated the company’s stock price. See id. at * 2. Defendants argued the alleged misstatements could not have caused the stock price drops for two reasons, and offered expert testimony to support each. Id. at *3. First, they argued that the company’s stock price had not reacted to thirty-six prior reports commenting on company conflicts, and, therefore, the identified stock price drops could not be linked to the alleged misstatements. Id. at *3. Second, they argued that news of enforcement activities (and not a correction of earlier statements regarding conflicts and business practices) caused the identified stock price drops. Id. The court found plaintiff’s expert’s “link between the news of Goldman’s conflicts and the subsequent stock price declines . . . sufficient.” Id. at *4. The court was persuaded that the first allegedly corrective disclosure revealed new information about the conflicts, see id., and held that defendants’ expert testimony regarding alternative explanations for the stock price decline (i.e., the nature of the enforcement actions rather than the subject matter) was not sufficient to “sever” that link. Id. at *5-6. The Second Circuit has agreed to review Goldman Sachs for a second time and has ordered an expedited briefing schedule. See Order, Ark. Teachers Ret. System v. Goldman Sachs, Case No. 18-3667 (2d Cir. Jan. 31, 2019). The Third Circuit is also poised to substantively address price impact analysis at the class certification stage in the coming months in its review of Li v. Aeterna Zentaris, Inc., 324 F.R.D. 331 (D.N.J. 2018) (“Aeterna”). See Order, Vizirgianakis v. Aeterna Zentaris, Inc., No. 18-8021 (3d Cir. Mar. 30, 2018). Substantive briefing is completed in Aeterna, which invites the Third Circuit to clarify the type of evidence defendants must present, including the burden of proof they must meet to rebut the presumption of reliance and whether statistical evidence rebutting the presumption must meet a 95% confidence threshold. In certifying the class, the district court described defendants’ burden as “producing [enough] evidence . . . ‘to withstand a motion for summary judgment or judgment as a matter of law,’” Aeterna, 324 F.R.D. at 344 (quoting Lupyan v. Corinthian Colleges, Inc., 761 F.3d 314, 320 (3d Cir. 2014) and citing Best Buy, 818 F.3d at 782 and Fed. R. Evid. 301), but then observed defendants failed to prove lack of price impact with “‘scientific certainty,’” see id. at 345 (quoting Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 310 F.R.D. 69, 95 (S.D.N.Y. 2015)). The district court rejected defendants’ argument that plaintiff’s event study, which did not attribute a statistically significant price movement to the alleged misstatement, rebutted the presumption and criticized defendants for not offering their own event study. See id. at 345. We will continue to monitor developments in these and other cases. 6. The Third Circuit Explores the Requirement to Disclose Risk Factors In late December 2018, the Third Circuit issued a decision in the latest case to address the scope of disclosure requirements for proxy solicitations under Section 14(a) of the Securities Exchange Act of 1934. In Jaroslawicz v. M&T Bank Corp., 912 F.3d 96 (3d Cir. 2018), former shareholders of Hudson City Bancorp filed suit against Hudson and M&T Bank, alleging the joint proxy soliciting votes for the merger between the two entities was materially misleading because (1) it failed to disclose certain practices that did not comply with relevant regulatory requirements, which posed significant risk factors facing the merger, as required under Item 503(c) of Regulation S-K (the “Regulatory Risk Disclosures”); and (2) these omissions rendered opinion statements regarding M&T Bank’s compliance with laws materially false and misleading (the “Legal Compliance Disclosures”). Specifically, as to the Regulatory Risk Disclosures, the proxy statement was alleged to be misleading because it did not discuss M&T Bank’s past consumer violations involving switching no-fee checking accounts to fee-based accounts. As to Legal Compliance Disclosures, the proxy statement was alleged to be misleading because M&T Bank had failed to discuss deficiencies in its Bank Secrecy Act/anti-money laundering (“BSA/AML”) compliance program until it filed a supplemental disclosure six days before the shareholder vote, when it disclosed for the first time that it was the subject of a Federal Reserve Board investigation on these programs. In interpreting the scope of disclosure under Item 503(c), which requires proxy issuers to discuss “the most significant factors that make the offering speculative or risky,” the Court explained that risk disclosures, such as the Regulatory Risk Disclosures at issue, must be “company-specific” in order to insulate an issuer from liability. Jaroslawicz, 912 F.3d at 106–08. Thus, “generic disclosures which could apply across an industry are insufficient” to protect a company in the event that a risk falling under a “boilerplate” disclosure later transpires. Id. at 108, 111. For this reason, the Court concluded that M&T Bank’s generic references to being subject to regulatory oversight were not “company-specific” risk factors that would “communicate anything meaningful” to stockholders. Id. at 111. Thus, even though the bank had ceased its alleged consumer violations, the Court found it plausible that the undisclosed “high volume of past violations made the upcoming merger vulnerable to regulatory delay.” Id. at 107. With respect to the plaintiffs’ allegations regarding BSA/AML deficiencies, the Court held that the supplemental proxy statement’s disclosure that the bank was the subject of an investigation regarding these practices, which “would likely result in delay of regulatory approval,” was “likely adequate” under Section 14(a). However, because the supplemental disclosures were issued a mere six days before the stockholder vote on the transaction, the Court concluded that the plaintiffs had adequately alleged that a reasonable investor did not have enough time to digest this relevant information. Id. at 112. Further, although the Court declined to expressly decide whether a heightened standard for pleading falsity applied to the Legal Compliance Disclosures and other claims brought under Section 14(a) of the Exchange Act, it found that the stockholders failed to allege a claim under their “misleading opinion” theory. Id. at 113. In dismissing plaintiffs’ Omnicare claims alleging that the Legal Compliance Disclosures were actionably misleading, the Court reiterated the longstanding principle that an opinion statement is not rendered misleading simply because it later “proved to be false.” Id. Crucially, the Court explained that the Legal Compliance Disclosures in the proxy statement were not plausibly alleged to be misleading because the bank adequately divulged the basis for its opinion. In particular, the proxy statement made clear that the bank had concluded it was in compliance with applicable laws based on a brief period of due diligence conducted in connection with the transaction. Id. at 114. 7. The Ninth Circuit Clarifies when Courts May Consider Documents Outside of the Pleadings on Motions to Dismiss Securities Claims On August 13, 2018, the Ninth Circuit revisited the extent to which a court can properly consider materials outside of the four corners of the complaint in ruling on a motion to dismiss a securities claim. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 994 (9th Cir. 2018). It is well settled that courts must not only accept all factual allegations in a complaint as true for purposes of deciding a motion to dismiss, but also consider “other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, [1] documents incorporated into the complaint by reference, and [2] matters of which a court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). In the Ninth Circuit, a defendant can seek to treat a document as incorporated into the complaint “if the plaintiff refers extensively to the document or the document forms the basis of the plaintiff’s claim.” United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003). The incorporation by reference doctrine allows courts to treat documents as if they are part of the complaint in their entirety, which “prevents plaintiffs from selecting only portions of documents that support their claims, while omitting portions of those very documents that weaken—or doom—their claims.” Khoja, 899 F.3d at 1002. Judicial notice, on the other hand, is explicitly permitted by Federal Rule of Evidence 201, and allows a court to take notice of an adjudicative fact if it is “not subject to reasonable dispute.” Fed. R. Evid. 201(b). In Khoja, the Ninth Circuit noted the “concerning pattern” of courts improperly using these procedures in securities cases “to defeat what would otherwise constitute adequately stated claims at the pleading stage,” and “aim[ed] to clarify when it is proper to take judicial notice of facts in documents, or to incorporate by reference documents into a complaint.” 899 F.3d at 998, 999. The district court in Khoja considered twenty-one documents quoted or referenced by the complaint, and granted the defendant’s motion to dismiss the claims plaintiff filed under Sections 10 and 20 of the Exchange Act. Id. at 997. On appeal, the Ninth Circuit reversed in part, holding that the district court had abused its discretion in taking judicial notice of at least one document and in treating at least seven documents as incorporated by reference. Id. at 1018. Regarding judicial notice under FRE 201, the Court explained that just because a document is subject to judicial notice “does not mean that every assertion of fact within that document is judicially noticeable for its truth.” Id. “‘[A] court may take judicial notice of matters of public record without converting a motion to dismiss into a motion for summary judgment,’” but “‘cannot take judicial notice of disputed facts contained in such public records.’” Id. (quoting Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001)). For example, in Khoja, the district court had judicially noticed a September 11, 2014 investors’ conference call transcript that was submitted with the defendant’s SEC filings. Khoja, 899 F.3d at 999. The Ninth Circuit explained that the district court could take judicial notice of the existence of the call, but could not take judicial notice of the statements in the transcript, as “the substance of the transcript ‘is subject to varying interpretations, and there is a reasonable dispute as to what the [transcript] establishes.’” Id. at 999-1000 (quoting Reina-Rodriguez v. United States, 655 F.3d 1182, 1193 (9th Cir. 2011)). Regarding incorporation by reference, the Ninth Circuit explained that a document that “merely creates a defense to the well-pled allegations in the complaint” should not automatically be incorporated by reference. Khoja, 899 F.3d at 1002. A contrary result would enable defendants to “insert their own version of events into the complaint to defeat otherwise cognizable claims.” Id. Applying these principles, the Ninth Circuit held that the district court abused its discretion by incorporating a Wall Street Journal blog post, as the complaint had quoted the post only once in a two-sentence footnote, and the quote conveyed only basic historical facts. Id. at 1003-04. The Khoja court explained that, under its prior precedent in Ritchie, a reference is not “extensive” enough to warrant incorporation by reference when the document is only referenced once, unless that “single reference is relatively lengthy.” Id. The Ninth Circuit held that the mere mention of the Wall Street Journal blog post was insufficient, especially as the document did not form the basis of any claim in the complaint. Id. at 1003. Ultimately, the Ninth Circuit held that the district court abused its discretion by incorporating by reference at least seven documents. Id. at 1018. It remains to be seen what impact Khoja will have in the Ninth Circuit, as Khoja did not eliminate a defendant’s ability to rely on documents outside the complaint at the motion to dismiss stage. 899 F.3d at 1018 (affirming district court with respect to half of the documents challenged on appeal). Nonetheless, the case may prompt other federal courts to revisit their practices of incorporation by reference and judicial notice, particularly in securities cases where such practices are common. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Jefferson Bell, Monica Loseman, Brian Lutz, Mark Perry, Shireen Barday, Lissa Percopo, Michael Kahn, Emily Riff, Mark Mixon, Jason Hilborn, Alisha Siqueira, Andrew Bernstein, and Kaylie Springer. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation Practice Group Steering Committee: Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Robert F. Serio – Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young – Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) Jefferson Bell – New York (+1 212-351-2395, jbell@gibsondunn.com) Jennifer L. Conn – New York (+1 212-351-4086, jconn@gibsondunn.com) Thad A. Davis – San Francisco (+1 415-393-8251, tadavis@gibsondunn.com) Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark A. Kirsch – New York (+1 212-351-2662, mkirsch@gibsondunn.com) Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Monica K. Loseman – Denver (+1 303-298-5784, mloseman@gibsondunn.com) Jason J. Mendro – Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Alex Mircheff – Los Angeles (+1 213-229-7307, amircheff@gibsondunn.com) Robert C. Walters – Dallas (+1 214-698-3114, rwalters@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 20, 2019 |
Several Gibson Dunn Cases Named Top Verdicts of the Year

The Daily Journal recognized six Gibson Dunn wins in its annual feature on the top verdicts in California for 2018.  The publication named In re: Korean Ramen Antitrust Litigation, Bahamas Surgery Center v. Kimberly-Clark, Lawson v. GrubHub among its top 20 Defense Results and O’Connor v. Uber and Sabadia et al. v. Holland & Knight LLP among its Top 5 Appellate Reversals. The feature was published in the February 20, 2019 issue.

February 1, 2019 |
California Supreme Court Winter 2019 Round-Up

Click for PDF Spearheaded by Daniel M. Kolkey, a former Associate Justice on the California Court of Appeal, Third Appellate District, and former Counsel to the Governor of California, Gibson Dunn’s California Appellate Practice Group has prepared the attached California Supreme Court Winter 2019 Round-Up, which previews upcoming cases and summarizes select opinions issued by the Court.  This edition includes opinions handed down from May through December 2018, organized by subject.  Each entry contains a description of the case, as well as a substantive analysis of the Court’s decision.  The Round-Up provides a resource for busy practitioners seeking an in-depth, timely, and objective report on the California Supreme Court’s actions. To view the Round-Up, click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court, or in state or federal appellate courts in California.  Please feel free to contact the following lawyers in California, or any member of the Appellate and Constitutional Law Practice Group. Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Daniel M. Kolkey – San Francisco (+1 415-393-8420, dkolkey@gibsondunn.com) Julian W. Poon – Los Angeles (+1 213-229-7758, jpoon@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kirsten Galler – Los Angeles (+1 213-229-7681, kgaller@gibsondunn.com) Michael Holecek – Los Angeles (+1 213-229-7018, mholecek@gibsondunn.com) Jennafer M. Tryck – Orange County (+1 949-451-4089, jtryck@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 31, 2019 |
Federal Circuit Update (January 2019)

Click for PDF This edition of Gibson Dunn’s Federal Circuit Update summarizes the Supreme Court’s on-sale bar decision as well as key filings for certiorari or en banc review.  The Update lists the Federal Circuit’s new guidelines to address scheduling conflicts.  We also summarize recent Federal Circuit decisions confirming the scope of required IPR review, deciding the impact of term changes on obvious-type double patenting, and reflecting differences in how infringement letters can give rise to personal jurisdiction for declaratory judgment claims. Federal Circuit News Supreme Court: Helsinn Healthcare S.A. v. Teva Pharm. USA, Inc. (No. 17-1229):  On January 22, 2019, the Supreme Court unanimously affirmed the Federal Circuit’s decision that a commercial sale to a third party may trigger the “on-sale bar” under 35 U.S.C. § 102(a), even if that third party is required to keep the sale confidential.  The Supreme Court explained that its pre-AIA precedent did not require a sale to be public for purposes of the bar.  Writing for the Court, Justice Thomas explained: “we presume that when Congress reenacted the same language in the AIA, it adopted the earlier judicial construction of that phrase.”  The AIA’s addition of the phrase “or otherwise available to the public” was insufficient to support a different conclusion. Helsinn stands to particularly impact companies where inventors need to raise capital before an invention, although sufficiently complete for a patent application, is ready to be commercialized.  Biotechnology and life sciences firms, for example, may need to consider earlier filings at the research and development stage or strategically review how capital acquisition is structured.  A summary of the decision from our Appellate and Constitutional Law Practice can be found here. There is one additional patent case from the Federal Circuit scheduled to be heard in 2019, and one trademark case for which certiorari was granted. Case Status Issue Amicus Briefs Filed Return Mail Inc. v. United States Postal Service, No. 17-1594 Argument scheduled February 19, 2019. Whether the government is a “person” who may petition to institute review proceedings under the Leahy-Smith America Invents Act 9 Iancu v. Brunetti, No. 18-302 Certiorari granted January 4, 2019. Whether Section 2(a) of the Lanham Act’s prohibition on registration of “immoral” or “scandalous” marks is facially invalid under the free speech clause of the First Amendment – Noteworthy Petitions for a Writ of Certiorari: HP Inc. v. Berkheimer (No. 18-415):  On September 28, 2018, HP filed for certiorari, presenting the question of “whether patent eligibility is a question of law for the court based on the scope of the claims or a question of fact for the jury based on the state of the art at the time of the patent.”  HP argued that, based on Supreme Court precedent, including Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014), patent eligibility is a question of law for the court. As we earlier reported, the Federal Circuit (Moore, Taranto, Stoll, JJ.) held that step two of the Alice patent-eligibility analysis—whether claims involve well-known, routine, or conventional activities—presents a question of fact.  Accordingly, the panel vacated in part and remanded a grant of summary judgment under Section 101, holding that a genuine issue of material fact existed.  HP petitioned for rehearing en banc, which the Federal Circuit denied.  Judge Reyna dissented from that denial, arguing that the decision is a “change in” the Federal Circuit’s law and “counter to guidance from the Supreme Court” in Alice.  As a practical matter, the decision limits accused infringers ability to obtain a dismissal on subject matter grounds before trial. Several amici have filed to support HP’s petition, including the Electronic Frontier Foundation, T-Mobile USA, Inc. and Sprint Spectrum L.P.  On January 7, 2019, the Supreme Court invited the Solicitor General to file a brief expressing the views of the United States on this issue. Mark Perry of Gibson Dunn serves as co-counsel for HP in this matter.  Mark, as well as Gibson Dunn attorneys Helgi Walker, Brian Buroker, and Alex Harris, also successfully represented CLS Bank in the Supreme Court Alice case. Hikma Pharmaceuticals USA Inc. v. Vanda Pharmaceuticals Inc. (No. 18-817):  On December 27, 2018, Hikma filed for certiorari, seeking review of “whether patents that claim a method of medically treating a patient automatically satisfy Section 101 … even if they apply a natural law using only routine and conventional steps.”  Hikma argues that the Federal Circuit’s decision “sharply breaks” from and “effectively overrules” Supreme Court precedent in Alice and Mayo. The Federal Circuit panel majority (Lourie, Hughes, JJ.) held that a method of treating schizophrenia with iloperidone, with dosage based on a patient’s genotype, is patent-eligible.  According to the ruling, the method “makes iloperidone safer” and requires a doctor to administer the drug in set amounts based on testing.  The claims are thus “directed to a specific method . . . using a specific compound at specific doses to achieve a specific outcome.” Chief Judge Prost dissented, arguing the claims were no more than an “optimization” of an existing treatment and that the specific dosage required added “nothing inventive . . . beyond [a] natural law.”  Adding to Judge Prost’s criticism, Hikma argues that, so long as claims are now drafted as methods of treatment, the Federal Circuit’s ruling no longer requires claims directed to natural laws to contain other inventive elements as Mayo dictates, with the PTO now using the challenged ruling to instruct examiners that “it is not necessary for ‘method of treatment’ claims that practically apply natural relationships to include nonroutine or unconventional steps.” Noteworthy Petitions for En Banc Review: Eli Lilly has petitioned for en banc review from the decision in Erfindergemeinschaft UroPep Gb v. Eli Lilly and Co. (No. 17-2603).  The petition asks as one of its two questions: Does a single-step therapeutic method claim violate the “written description” and “enablement” requirements of 35 U.S.C. § 112 under longstanding precedent of this Court and the Supreme Court where: a)      the sole limitation in the claim’s single step that potentially imparts patentability to the claim merely recites a function to be performed, b)      the claim preempts all future ways that might be discovered to perform the function recited in the claim, and c)      the specification fails to identify which, if any, of the embodiments disclosed in the specification actually perform the function to which the claim is directed. This petition could allow the Federal Circuit to clarify written description and enablement requirements for methods of medical treatment, particularly in light of decisions such as Mayo and Alice.  Coupled with the certiorari petition from Hikma, it also reflects further challenge to the Federal Circuit’s upholding method of treatment claims, albeit in the context of Section 112.  The Washington Legal Foundation and Eisai Co. have filed amicus briefs in support of Eli Lilly. Federal Circuit Practice Update Revision to Process for Advising of Scheduling Conflicts: On December 10, 2018, the Federal Circuit revised its process for advising it of scheduling conflicts: The court will only consider scheduling conflicts by arguing counsel; non-arguing counsel and client conflicts will no longer be considered when scheduling argument. Arguing counsel must provide an explanation, including a showing of good cause, for any submitted scheduling conflict. Arguing counsel will be limited to submitting only ten total days of unavailability during the six consecutive court weeks identified in the Notice to Advise of Scheduling Conflicts. The Federal Circuit also stated that “[c]onflicts submitted without a sufficient showing of good cause will not be considered by the court when scheduling argument.”  The Federal Circuit’s notice can be found here. Key Case Summaries (December 2018 – January 2019) AC Technologies S.A. v. Amazon.com Inc., No. 18-1433 (Fed. Cir. Jan. 9, 2019):  If the Board institutes an IPR, it must address all grounds of unpatentability raised by the petitioner. Amazon petitioned for review of one of AC’s patents relating to a data management system.  Although Amazon only identified one piece of prior art, it asserted three grounds depending on how a key term was construed.  The Board instituted the IPR on the basis of one construction.  Later, the Board construed the claim differently, finding that Amazon had failed to show invalidity on two of its three grounds.  Amazon moved for reconsideration, noting that the Board did not address its third ground.  The patentee argued that the third ground had never been instituted, but the Board evaluated it and invalidated the challenged claims on that basis. The Federal Circuit (Stoll, J.) affirmed, rejecting the patentee’s argument that the Board erred by addressing a ground of invalidity that was not expressly part of its institution decision.  The panel explained that the Board either institutes review, or does not, and it must render a final decision addressing all challenged claims.  Likewise, “if the Board institutes an IPR, it must similarly address all grounds of unpatentability raised by the petitioner” (emphasis added). Novartis AG v. Ezra Ventures LLC, No. 2017-2284 (Fed. Cir. Dec. 7, 2018) and Novartis Pharms. Corp. v. Breckenridge Pharm. Inc., Nos. 2017-2173, -2175, -2176, -2178, -2179, -2180, -2182, -2183, -2184 (Fed. Cir. Dec. 7, 2018): Term extensions do not give rise to obviousness-type double patenting (Novartis represented successfully by Gibson Dunn in Ezra). Obviousness-type double patenting (ODP) is a judicial doctrine that prevents patentees from obtaining sequential patents on the same invention, or obvious variants, that extend exclusivity beyond the original patent term.  In the two Novartis cases, the Federal Circuit addressed how to apply ODP if an earlier-filed patent obtains a later expiration than a later-filed patent due to a term extension or due to the term change in the 1995 Uruguay Round Agreements Act (URAA). In Ezra, the Federal Circuit considered ODP in the context of Section 156, which can extend term up to five years when an invention could not be commercialized without approval from a regulatory agency, such as the FDA.  Novartis’s first patent was to expire in 2014, and a second, related patent to expire in 2017.  But, based on an extension, the first patent’s term was extended to 2019—after expiration of the second, later-filed patent.  Ezra argued that the first patent was invalid or should be at least terminally disclaimed to the expiration of the later-filed patent. The Federal Circuit (Chen, J.) rejected Ezra’s positions.  According to the panel, Section 156 allows a patentee to choose one patent to extend, and “[a]s long as the requirements for a patent term extension recited in § 156(a) are met, the Director of the Patent and Trademark Office ‘shall’ grant a [patent term extension] on the patent of the patentee’s choice.”  ODP does not invalidate a patent with a validly-obtained patent term extension because holding otherwise “would mean a judge-made doctrine would cut off a statutorily-authorized time extension.” Breckenridge considered ODP in light of the 1995 change in patent term from 17 years after issuance to 20 years from the earliest effective filing date.  Novartis had two patents that both claimed the same priority date.  Because of the URAA’s change in term, the first, earlier-filed patent, a pre-URAA patent, was to expire later than the second post-URAA patent. The Federal Circuit (Chen, J.) held that the URAA change did not give rise to ODP.  Novartis had not tried to extend its patent term.  Rather, the difference was created by the URAA—indeed, it “truncated” the term of Novartis’s second-filed patent.  The panel held that a change in law “should not truncate the term statutorily assigned” to the first patent, and that holding otherwise “would abrogate Novartis’s right to enjoy one full patent term on its invention.” Jack Henry & Assoc., Inc. v. Plano Encryption Techs. LLC, No. 16-2700 (Fed. Cir. Dec. 7, 2018): Infringement letters can establish personal jurisdiction and venue in a declaratory action. Jack Henry brought a declaratory action against Plano in the Northern District of Texas.  Plano had sent enforcement letters to Jack Henry (which did business in the district) identifying Plano’s patents, stating its belief that infringement was occurring, and offering a license.  Thus, minimum contacts were met—the issue was whether exercising jurisdiction would be reasonable and fair.  The district court held that Plano’s contacts should not subject it to jurisdiction. The Federal Circuit (Newman, J., joined by Wallach and Stoll, JJ.) reversed, rejecting the view that infringement letters alone cannot provide a basis for personal jurisdiction in a declaratory action.  The panel noted that Plano did not contend that jurisdiction in the district would be inconvenient.  Plano was also subject to general jurisdiction in Texas and was registered to do business throughout the state.  Under these facts, personal jurisdiction and venue were satisfied. Maxchief Investments v. Wok & Pan, Indus., No. 18-1121 (Fed. Cir. Nov. 29, 2018): Infringement letters do not establish jurisdiction just because they are directed to the forum. Maxchief brought a declaratory judgment action against Wok & Pan in the Eastern District of Tennessee.  Wok & Pan had sent infringement notices to Maxchief’s attorney in the district, although Maxchief itself was a Kansas company that did not operate in Tennessee.  Maxchief also argued that a separate suit by Wok in California, which sought a broad injunction impacting Maxchief’s products, would have “effects” in Tennessee as one of its distributors operated there.  But the district court dismissed the suit, holding Maxchief failed to allege the minimum contacts. The Federal Circuit (Dyk, J., joined by Reyna, J., and Hughes, J.) affirmed, holding that personal jurisdiction based on enforcement activity requires intentional conduct “directed at the forum.”  “[I]t is not enough that Wok’s lawsuit might have ‘effects’ in Tennessee.”  As to infringement letters, the panel deemed the contact to be with Maxfield in Kansas, notwithstanding that the letter was sent to a lawyer in Tennessee.  Taken with Jack Henry above, this illustrates the fact-dependent nature of the personal jurisdiction inquiry for declaratory judgment actions. Upcoming Oral Argument Calendar For a list of upcoming arguments at the Federal Circuit, please click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com) Raymond A. LaMagna – Los Angeles (+1 213-229-7101, rlamagna@gibsondunn.com) Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups: Appellate and Constitutional Law Group: Caitlin J. Halligan – New York (+1 212-351-4000, challigan@gibsondunn.com) Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) Intellectual Property Group: Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com) Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Mark Reiter – Dallas (+1 214-698-3100, >mreiter@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 28, 2019 |
Law360 Names Gibson Dunn Among Its Environmental 2018 Practice Groups of the Year

Law360 named Gibson Dunn one of its five Environmental Groups Of The Year [PDF] for 2018. The firm was recognized for “[scoring] several high-profile victories in environmental litigation in 2018.” The firm’s Environmental practice was profiled on January 28, 2019. For more than 30 years Gibson Dunn has provided counsel on the complete range of legal issues and challenges that arise in environmental and mass tort areas.  Our group’s members represent clients in civil and criminal litigation before U.S. federal and state courts as well as administrative agencies.  The lawyers on our team have been involved in a number of high-profile, precedent-setting matters leading to published decisions that affect or control the interpretation of applicable laws. The group’s lawyers also provide counsel in connection with transactional concerns such as ongoing regulatory compliance, legislative activities and environmental due diligence.