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September 13, 2019 |
Stacie Fletcher and Katherine Smith Named Among Americas Rising Stars

Euromoney Legal Media Group named two partners to its 2019 Americas Rising Stars list. Washington D.C. partner Stacie Fletcher was named “Best in Environment,” and Los Angeles partner Katherine Smith was awarded “Best in Labor & Employment.” The awards were announced on September 12, 2019. Stacie Fletcher represents clients in a wide variety of federal and state litigation, including agency enforcement actions, cost recovery cases, and mass tort actions. Katherine Smith has extensive experience representing employers in individual, representative and class action litigation at both the trial court and appellate level. Her practice focuses on high stakes litigation matters such as wage and hour class actions, whistleblower retaliation cases, and executive disputes.

September 9, 2019 |
Law360 Names Seven Gibson Dunn Lawyers as 2019 Rising Stars

Seven Gibson Dunn lawyers were named among Law360’s Rising Stars for 2019 [PDF], featuring “attorneys under 40 whose legal accomplishments transcend their age.”  The following lawyers were recognized: Washington D.C. partner Chantal Fiebig in Transportation, San Francisco partner Allison Kidd in Real Estate, Washington D.C. associate Andrew Kilberg in Telecommunications, New York associate Sean McFarlane in Sports, New York partner Laura O’Boyle in Securities, Los Angeles partner Katherine Smith in Employment and Century City partner Daniela Stolman in Private Equity. Gibson Dunn was one of three firms with the second most Rising Stars. The list of Rising Stars was published on September 8, 2019.

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 14, 2019 |
UK Employment Update – Summer 2019

Click for PDF In this, our 2019 mid-year alert, we look back at the key developments in UK employment law over the past six months and look forward to anticipated developments in the six months to come. A brief overview of developments and key cases which we believe will be of interest to our clients is provided below, with more detailed information on each topic available by clicking on the links. 1.   Political Developments in the UK (click on link) We consider the impact of the plans of the recently appointed Prime Minister, Boris Johnson, and his Conservative government for employment laws in the UK including in relation to the UK’s departure from the European Union which will take place on 31 October 2019 absent any further extension. 2.   Changes in Corporate Governance (click on link) We consider those UK corporate governance measures which have come into effect in 2019, increasing large companies’ reporting requirements. In particular, we consider the requirement to publish the ratio between CEO and workforce median pay and the impact of the introduction of the 2018 UK Corporate Governance Code, which places greater emphasis on employee engagement for listed companies. 3.   SMCR (click on link) We highlight those provisions of the Senior Managers and Certification Regime (the “SMCR”) which will be considerably expanded to apply to all UK financial services firms regulated only by the UK’s Financial Conduct Authority (“FCA”) with effect from 9 December 2019. 4.   #MeToo and Use of NDAs (click on link) We summarise recent developments in this area of law and consider government plans to change laws to stop NDAs purporting to prevent staff reporting allegations of illegal harassment and discrimination to the police. 5.   Restraint of Trade (click on link) We consider the impact of two recent cases in this area of UK law. First, the recent and much-anticipated judgment of the UK Supreme Court which has confirmed the circumstances in which courts have the power to strike out offending words from defective non-compete covenants. Second, a recent decision of the UK Employment Appeal Tribunal (the “EAT”) confirming the validity of “bad leaver” provisions contained in a company’s Articles of Association which required the forfeit of deferred earn-out shares and loan notes upon resignation. 6.   Whistleblowing (click on link) We consider the impact of a recent decision of the UK Court of Appeal concerning the application of UK whistleblowing protections to employees of a UK employer working overseas. 7.   SPL/Redundancy Pay (click on link) We report on two UK Court of Appeal cases which have provided welcome guidance for employers on the correct approach on payment for parental leave. Failure to pay a male employee enhanced shared parental pay was found to be neither direct nor indirect sexual discrimination, and did not amount to a breach of the equal pay sex equality clause. However, both employees are seeking permission to appeal to the UK Supreme Court. 8.   One Year On – General Data Protection Regulation (“GDPR”) and Gender Pay Gap Reporting (click on link) We consider the impact of the GDPR one year on including the Information Commissioner’s Office’s (the “ICO”’s) outlook for the future. We also consider the reasons for the reported increase in the gender pay gap following the conclusion of the second full year of gender pay gap reporting. APPENDIX 1.   Political Developments in the UK Following Theresa May’s resignation, the Conservative Party has elected a new leader and the UK has a new Prime Minister, Boris Johnson. The new Prime Minister has undertaken a significant cabinet reshuffle. Along with a number resignations, half of Theresa May’s cabinet are no longer in their roles. The new Government has not announced any changes to employment legislation, although it will be interesting to see whether they uphold the previous Government’s commitment to extend the period of maternity redundancy protection to start at the point at which a woman notifies her employer of her pregnancy, whether orally or in writing, and to last until six months after the end of the maternity leave. As readers will be aware, the UK did not leave the European Union on 29 March 2019 as originally planned. Brexit is now due to happen on 31 October 2019, although there is an impasse at the moment with the European Union having offered a deal that it has said will not be improved, but that has not been passed by Parliament. Boris Johnson has renewed his commitment for the UK to leave the European Union on 31 October 2019, with or without a deal. The only thing that can be said for certain at this stage is that it remains impossible to predict how Brexit will unfold. As we previously reported, it is not currently expected that Brexit will have a substantial immediate impact upon employment rights in the UK, whatever form it takes. 2.   Changes in Corporate Governance Below we summarise the most recent important changes to UK corporate governance. Although the focus is on listed companies, these principles are likely to eventually be applied to private companies, and many non-listed companies are already voluntarily complying with various governance codes as best practice. Action will be required by heads of HR departments, company secretaries, in-house counsel and boards themselves. As we reported in our last alert, a new set of regulations came into force on 1 January 2019 bringing in mandatory reporting of the ratio between CEO pay, including all elements of remuneration, and average staff pay for UK-incorporated companies that are quoted, with 250 or more employees in the group. We still await the publication of the first of these Directors’ remuneration reports as companies are collecting and analysing data now for publication in 2020: the new requirements apply to remuneration reports for financial years beginning on/after 1 January 2019. These regulations also include the following: Section 172(1) statement. All large private and public UK incorporated companies are to include in their strategic report a “section 172(1) statement” to explain how their directors have had regard to the duty to promote the long term success of the company when performing their directors’ duties under section 172. This includes consideration of the interests of employees and other stakeholders: non-employee workers may be relevant. If the company is not quoted, the same information must be published on a free to access website. Statement of engagement with employees. All companies with more than 250 employees in the UK must include in their directors’ report a statement on employee engagement which describes steps taken by the company to have regard to staff interests when taking decisions. Statement of engagement with stakeholders. All large UK incorporated companies must include in their directors’ report a statement summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others and the effect of that regard on the principal decisions taken by the company during the financial year. Statement of corporate governance arrangements. Non-listed UK incorporated companies that have either (1) 2,000 or more employees, or (2) both (i) a turnover of over £200 million and (ii) a balance sheet total over £2 billion, should include in their directors’ report a statement to explain on a comply or explain basis their corporate governance arrangements, including whether they follow any formal code. Unquoted companies must also make the statement available on a website that is maintained by or on behalf of the company and identifies the company in question. The 2018 UK Corporate Governance Code, which applies to companies with a premium listing for all financial years beginning on or after 1 January 2019, also provides for greater employee engagement for listed companies including: (1) appointing a director from the workforce; (2) creating a workforce advisory panel; (3) the creation of a designated non-executive director responsible for employee engagement; or (4) a combination of the foregoing. 3.   The Senior Managers and Certification Regime Major financial institutions in the UK have been subject to the SMCR since 2016, when parallel provisions were introduced by the Prudential Regulation Authority and the FCA. However, from 9 December 2019, a form of the SMCR will be extended to apply to all solo-regulated firms (i.e. UK financial services firms regulated only by the FCA). There will be three levels of regulation: (1) Enhanced, (2) Core, and (3) Limited Scope. Under the Senior Managers Regime, individuals performing certain functions will be classed as “Senior Managers”. Prior to being permitted to perform a Senior Manager function, individuals will need to be approved as being “fit and proper” by initially both their firm and the FCA, and subsequently annually by their firm. If a breach of a regulatory requirement occurs in the area for which the Senior Manager is responsible, and the Senior Manager did not take reasonable steps to prevent that breach from occurring, they could be held personally accountable. Each Senior Manager must have a Statement of Responsibility setting out that Manager’s area of responsibility. The Certification Regime will mean that individuals and their firms are responsible for certification of individuals as being “fit and proper”, rather than the FCA. This new regime covers a wider range of people than those covered by the Approved Persons Regime, including anyone who could pose a risk of significant harm to the firm or its customers. In addition to the Senior Managers Regime and the Certification Regime, a third limb, the Conduct Rules, will apply to these firms. This is backed up by certain training requirements. The initial steps a firm needs to undertake are: Type of Firm Determine whether firm is an (1) Enhanced, (2) Core or (3) Limited Scope firm. Senior Managers Regime Identify which staff are Senior Managers, then formally and transparently allocate responsibilities amongst them. Certification Regime Identify those staff who will be subject to the Certification Regime, and then assess their fitness and propriety. Conduct Rules Train all staff, save for ancillary staff, in the Conduct Rules. The key dates are as follows: 9 December 2019 Senior Managers and Certified staff must be identified and trained in the Conduct Rules by this date. 9 December 2020   Certified staff must be assessed and, if appropriate, certified as being fit and proper by this date. All other staff, apart from ancillary staff, must be trained in the Conduct Rules by this date. 4.   #MeToo and Use of NDAs The #MeToo movement continues to gather pace. As previously reported, the use of NDAs has already come under scrutiny from the UK Parliament and the Solicitors’ Regulation Authority, of England and Wales (“SRA”). In particular, the use of NDAs and confidentiality provisions in settling claims in relation to harassment has come under the spotlight and become a political issue. The use of these clauses remains lawful, but there are calls for government action to regulate them. The Women and Equalities Committee of the UK Parliament published a report on 11 June 2019 which found that a series of measures needs to be introduced. Measures proposed include: (i) to strengthen corporate governance requirements to require employers to name senior managers at board level to oversee anti-discrimination and harassment policies and procedures, and the use of NDAs in discrimination and harassment cases; (ii) that an employer should pick up the legal of costs of a successful employee; and (iii) that the payment awarded in relation to the cost of legal advice prior to entering into a settlement agreement should reflect the actual cost of that advice and should be made even if the employee decides not to sign the agreement. On 21 July 2019, the UK Government published a response to its consultation on proposals to prevent the misuse of confidentiality clauses. The UK Government has committed to change laws on NDAs so that employers will be banned from drawing up NDAs which prevent individuals reporting allegations of illegal harassment and discrimination to police, regulated health and care professionals, or legal professionals. There will also be new requirements for the limitations of a confidentiality clause to be clear to those signing them, and for the mandatory independent legal advice on a settlement agreement to include the limitations of any confidentiality clause. Further, confidentiality clauses that do not comply with the new legal requirements will be void. However, this new legislation will be brought forward “when Parliamentary time allows” and it will be interesting to see whether the new UK Government follows through with these changes. As previously reported, while settlement agreements containing non-disclosure provisions remain a lawful and appropriate means by which UK employers can resolve disputes in which allegations of sexual harassment have been made, care should be taken to ensure that: (i) NDAs are not used in circumstances in which the subject of the NDA may feel unable to notify regulators or law enforcement agencies of conduct which might otherwise be reportable; (ii) lawyers do not fail to notify the SRA of misconduct, or a serious breach of regulatory requirements; and (iii) lawyers do not use NDAs as a means of improperly threatening litigation or other adverse consequences. 5.   Restraint of Trade An armoury of weapons is available to an employer who wishes to guard against the loss of a key employee. We report below on the first case concerning post-termination restrictions to reach the UK Supreme Court in over 100 years. We also consider financial disincentives, which are typically less discussed but still a useful tool for employers. Restrictive covenants: The UK Supreme Court has handed down its much-anticipated judgment in Tillman v Egon Zehnder [2019] UKSC 32. Ms Tillman’s employment contract included a number of post-termination restrictions, including a non-compete clause that meant she could not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company” for a period of six months. She tried to extricate herself from these non-compete restrictions by arguing that a clause restricting her from being interested in a competitor business had the effect of restraining her from even holding any shareholding in a competitor and was thus an unreasonable restraint of trade. We previously reported on the UK Court of Appeal judgment, where it was found that the non-compete restrictive covenant was unenforceable. Whilst the UK Supreme Court agreed that the construction of the clause prohibited Ms Tillman from holding shares in a competitor, it held that the words “or interested’” could be severed from the offending clause rendering the non-compete clause enforceable. This case is good news for employers who are looking to enforce restrictive covenants as the decision confirms that the courts have the power to strike out offending words from defective covenants, rendering the remaining restrictions enforceable so long as where removing the offending words from the covenant will not result in any major change in the overall effect of the restriction. Bad leaver provisions: In Nosworthy v Instinctif Partners Ltd UKEAT/0100/18/RN, the UK EAT confirmed that a bad leaver provision in a Company’s Articles of Association that required an employee to forfeit deferred earn-out shares and loan notes if she resigned was not invalid as she was not put at a serious disadvantage. Further, it was found that the provision was not void as a penalty clause, because the employer’s argument was not reliant upon a breach of contract by the employee but rather on provisions in the Articles that applied to bad leavers regardless of breach. The bad leaver provisions were clear as to the consequences of voluntary resignation. Ultimately, the deterrent effect of a bad leaver provision in an incentive scheme can be reduced by a new employer who is willing to make good the departing employee’s loss. Hence post-termination restrictive covenants remain an important tool for preventing a departing employee from engaging in unfair competition. 6.   Whistleblowing and Territorial Jurisdiction The UK Court of Appeal overturned the UK EAT’s decision in Foreign and Commonwealth Office and others v Bamieh [2019] EWCA Civ 803 and found that the employment tribunal did not have territorial jurisdiction over whistleblowing claims brought by an FCO employee working at an international mission in Kosovo against individual co-workers. The claimant worked as an international prosecutor employed by the FCO and was seconded to EULEX in Kosovo. She claimed that the reason her contract was not renewed was that she had made protected disclosures and she subsequently brought claims against the FCO for unfair dismissal and whistleblowing detriment. In addition, she brought whistleblowing detriment claims against two individual co-workers who were also FCO secondees. The UK Court of Appeal examined the factual reality of the relationships, and found that there was not a sufficient connection to British employment law, given that, in relation to the claims against the individual co-workers: (i) the co-workers worked together in Kosovo, (ii) it was an international mission, (iii) they were seconded separately, and (iv) that the whistleblowing detriment stemmed from “the conduct of their EULEX roles”. A degree of uncertainty remains however as to the correct approach for the employment tribunal to take in relation to jurisdiction over individual respondents in claims under the Equality Act 2010, such as discrimination. Leave to appeal to the UK Supreme Court has been sought, which will hopefully bring more clarity. 7.   Enhanced Provisions Relating to Shared Parental Leave and Parental Pay Failure to pay male employee enhanced shared parental pay was not direct or indirect sex discrimination The UK Court of Appeal in (i) Ali v Capita Customer Management Ltd ET/1800990/2016 and (ii) Hextall v Chief Constable of Leicestershire Police [2019] EWCA Civ 900 ruled that employers can enhance maternity pay while only offering statutory shared parental pay for partners. It was found that this was neither direct discrimination nor indirect discrimination, nor a breach of the equal pay sex equality clause. In Ali, the claim of direct discrimination failed because it was found that the correct comparator should be a female colleague on shared parental leave, and not a female on maternity leave. The purpose of statutory maternity leave is for the protection of the mother’s health during pregnancy and thereafter, and also the protection of the special relationship between the mother and child during the period following childbirth. Before the UK Court of Appeal in Hextall, the employer agreed that the claim should be characterised as an equal pay claim. Mr Hextall’s case was that there was a breach of his terms of work as modified by the sex equality clause implied into all terms of work by the UK Equality Act 2010. His claim was that his terms of work had been modified by the sex equality clause to include a term entitling him to take care of his new-born baby at the same rate of pay as mothers on maternity leave. The UK Court of Appeal rejected this claim as the UK Equality Act 2010 provides that the sex equality clause does not have effect in relation to terms of work affording special treatment to women in connection with childbirth or pregnancy. Whilst this provides an element of clarity for the time being, we understand that the claimants in both cases are seeking permission to appeal to the UK Supreme Court. Periods of part-time parental leave must not reduce average pay for redundancy pay purposes In RE v Praxair MRC SAS (C-486/18) the ECJ has held that the calculation of compensation payments for dismissal and redeployment of an employee who was on part-time parental leave must be carried out on the basis of the full-time salary and not take into account periods of part-time parental leave. Whilst the UK does not explicitly recognise the concept of part-time parental leave, this case provides useful guidance and confirms that EU law requires any benefits such as redundancy pay or holiday pay to be calculated on the basis of an individual’s normal salary. Any periods of parental leave in which pay is either reduced or suspended should be ignored. 8.   One Year On – GDPR and Gender Pay Gap Reporting GDPR – One year on: There is much to be done before the GDPR is truly embedded in organisations and its impact is fully understood. Reports to the ICO of personal data breaches have increased manifold, though fewer than one in five required the organisation to act or led to enforcement or penalties. Similarly, data protection concerns received from the public have almost doubled to 41,000. The ICO stresses the importance of resourcing and board level engagement with Data Protection Officers. On enforcement, the ICO has shown its willingness to deploy the full range of tools at its disposal: requisitioning information, making inspections, compelling action, setting penalties and issuing fines. Looking ahead, the ICO states its mission is to uphold “information rights for the UK public in the digital age” and “trust and confidence in how data is used”, so its priorities will include online data usage and security, artificial intelligence, surveillance, facial recognition, political campaigns using personal data, freedom of information, and children’s privacy. In addition to ICO written and interactive guidance, ICO statutory codes for data sharing, direct marketing, age-appropriate design, and journalism are in various stages of development and consultation. Gender Pay Gap Reporting – One Year on: As regular readers of our alerts will be aware, we have previously reported on the requirement for, uptake and reception of gender pay gap reporting (January 2018 client alert, September 2017 client alert, 2016 Year-End client alert). The second year of reports showed a median gender pay gap of 9.6%. However, 45% of reporting employers had seen an increase in their gender pay gap over the year, while a further 7% saw no change. Overall, 78% of companies had a gender pay gap in favour of men, with 14% reporting a pay gap in favour of women and only 8% reporting no difference. It is possible that one of the causes of the increasing gender pay gap is employers recruiting more women into lower paid positions within organisations as a long-term bid to tackle wage disparity. One of the most influential factors in these statistics is the gender balance across each pay quartile, so where more women are entering companies in junior positions this will be reflected in the gender pay gap reporting. In January 2019, the government confirmed that it will not be making any immediate changes to the regime, although it had taken on board some of the comments on the limitations of the regime. The UK Parliament Business, Energy and Industrial Strategy committee recommended a number of enhancements and extensions to the rules, however the government has said that this is a five year plan and so it will take time to see an impact in the numbers. The response by the government demonstrates that, while it is desirable to have action plans which set out how businesses intend to close the gender pay gap within their organisation, employers ultimately have the freedom to produce an action plan relevant to their individual situation. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other developments.  Please feel free to contact the Gibson Dunn lawyer with whom you usually work or the following members of the Labor and Employment team in the firm’s London office: James A. Cox (+44 (0)20 7071 4250, jcox@gibsondunn.com) Georgia Derbyshire (+44 (0)20 7071 4013, gderbyshire@gibsondunn.com) Charlotte Fuscone (+44 (0)20 7071 4036, cfuscone@gibsondunn.com) Heather Gibbons (+44 (0)20 7071 4127, hgibbons@gibsondunn.com) Sarika Rabheru (+44 (0)20 7071 4267, srabheru@gibsondunn.com) Thomas Weatherill (+44 (0)20 7071 4164, tweatherill@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 |
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 10, 2019 |
Three Gibson Dunn Partners Named Among California’s Top Labor & Employment Lawyers for 2019

The Daily Journal named Los Angeles partners Catherine Conway and Jesse Cripps and Orange County partner Michele Maryott  to its 2019 list of Top Labor and Employment Lawyers in California. The list was published on July 10, 2019. Cathy Conway is Co-Chair of the firm’s Labor and Employment Practice Group.  She has sealed her reputation as a leading labor and employment litigator with more than 40 years trial experience representing major companies in high-stakes employment cases.  Her practice focuses on complex employment litigation, including class actions with an emphasis on wage and hour litigation trials.  She has trial experience in state and federal litigation, including wage and hour claims, employment discrimination, sexual harassment, wrongful discharge, unfair competition, protection of employer trade secrets and unfair business practice litigation under California Business and Professions Code Section 17200. Jesse Cripps handles the full range of labor and employment matters under both federal and state law, specializing in the defense of high-risk, complex and class action employment litigation.  His representative matters include the defense of statewide and nationwide employment class actions, the representation of employers in high-stakes non-compete and trade secret disputes, and the defense of discrimination, retaliation, and whistleblowing claims.  He also represents employers in matters involving reductions in force, family and medical leave, federal contract compliance, and occupational safety and health.  In addition to his courtroom experience, he also spends time counseling clients on preventative planning under state and federal laws. Michele Maryott has litigated a wide range of labor and employment matters, including defending employers against wage and hour and discrimination class actions, and retaliation, sexual harassment, wrongful termination and whistleblower claims in federal and state courts, as well as in administrative proceedings and arbitrations. Her recent successes include defeating certification of a putative class of more than 70,000 employees in a wage and hour class action brought against a major healthcare company, which was unanimously affirmed by the California Court of Appeal in a published opinion. Profiles of Catherine Conway, Jesse Cripps, and Michele Maryott were published in the Daily Journal on July 10, 2019.

June 21, 2019 |
New York State Enacts Important Changes to Harassment and Discrimination Law

Click for PDF On June 19, 2019, the New York State legislature voted to pass bill A08421, a new law which changes the legal landscape governing discrimination and harassment in the workplace.  New York State Governor Andrew Cuomo is expected to sign the bill into law. At its core, this bill: Provides broader protection to employees of all protected categories who have been the victim of harassment in the workplace; Lowers the burden for employees to plead and prove that conduct in the workplace amounts to harassment under New York law; Eliminates certain defenses that are available to employers under federal law; and Prohibits mandatory arbitration and certain types of non-disparagement clauses for all discrimination and harassment claims. Summary of Changes Inspired by the Me Too and Times Up movements, the New York State legislature explained that its aim with this bill was to translate the work and goals of those movements into policy to enact further protections for all workers—of all protected categories—against all types of harassment (not just sexual harassment).  With that goal in mind, the New York legislature explained that “[i]t is time for New York State law to abandon the protection of those who would discriminate and sexually harass in the workplace and recognize and serve victims of discrimination.” This section summarizes the changes to the law, the majority of which will take effect on August 19, 2019. The New York State Human Rights Law, N.Y. Exec. Law § 292 et seq. (“NYSHRL”) now applies to all private employers within New York State. The NYSHRL now expressly prohibits harassment based on any protected characteristic, not just sexual harassment. Specifically, employers are prohibited from subjecting any individual to harassment “because of an individual’s age, race, creed, color, national origin, sexual orientation, gender identity or expression, military status, sex, disability, predisposing genetic characteristics, familial status, marital status, domestic violence victim status, or because the individual has opposed” forbidden practices. The new law alters the standard for sexual harassment, and all other harassment, claims in New York State. Previously, consistent with the well-established standard for harassment under federal law, employees had to plead and prove that the harassment was “severe or pervasive.” The new standard in New York defines harassing conduct as any conduct that subjects an employee to “inferior terms, conditions or privileges of employment because of an individual’s membership in one or more of the[] protected categories.” The new bill is intended to eliminate employers’ ability to rely on certain defenses previously allowed under the U.S. Supreme Court’s decisions in the seminal Faragher/Ellerth cases. Employees are not required to report internally before bringing a claim for harassment. And an employee does not need to demonstrate the existence of an individual to whom the employee’s treatment must be compared. Employers are explicitly authorized to defend against harassment claims by demonstrating that the harassing conduct does not rise above the level of what a reasonable victim of discrimination with the same protected characteristic would consider “petty slights or trivial inconveniences.” In October 2018, the NYSHRL was amended to prohibit mandatory arbitration of sexual harassment claims (except where inconsistent with federal law), and to prohibit employers from requiring non-disclosure agreements when settling sexual harassment claims. Those changes have now been extended to all claims of discrimination or harassment based on any protected characteristic. The bill mandates that reasonable attorneys’ fees be awarded to the prevailing party with respect to all claims for employment discrimination.  Previously, the award of attorneys’ fees was at the discretion of the court. The bill also now allows for punitive damages—without limitation—in all employment discrimination actions related to private employers, not just those based on sex discrimination. In addition to the provisions described above, the new bill increases the statute of limitations under which a victim of sexual harassment must file an administrative complaint with the New York State Department of Human Rights from one to three years. Takeaways for Employers This new law is a continuation of the changes to the law that took effect in October 2018, and together the changes have resulted in a significant alteration of discrimination and harassment law in New York State. Previously, the NYSHRL was interpreted consistently with federal law. That will likely no longer be the case going forward. In those cases in which an employee brings claims under federal law, the NYSHRL, and the New York City Human Rights Law (“NYCHRL”), a court may now have to apply three different legal standards, further complicating the litigation of these types of cases. In addition, the elimination of the “severe and pervasive” standard will arguably make it easier for employees to plead and prove sexual harassment and other harassment claims, and we expect that the true contours of the new standard will need to be worked out by the courts. We expect that the revised legal standard, coupled with the expansion of actionable harassment claims beyond just sexual harassment, will result in an increase in these types of claims (or, at a minimum, an increase in the number of threatened claims). With the availability of punitive damages and attorneys’ fees in all discrimination claims, the potential damages in these actions also will meaningfully increase. Employers should review their form employment, confidentiality, arbitration, separation, settlement and other agreements in light of these new requirements regarding arbitration and non-disclosure provisions. There remains an open question as to whether the prohibition on mandatory arbitration agreements would survive a legal challenge in light of the Federal Arbitration Act—and the NYSHRL itself states that the arbitration ban does not apply “where inconsistent with federal law”—and employers should consult counsel with respect to their approach to arbitration agreements. Employers should also ensure that their harassment and discrimination prevention training complies with the new requirements and that their procedures for preventing harassment and discrimination are consistent with current best practices. Gibson Dunn lawyers are available to assist in addressing any questions you may have about this development.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Labor and Employment practice group, or the following authors in New York: Gabrielle Levin (+1 212-351-3901, glevin@gibsondunn.com) Mylan L. Denerstein (+1 212-351-3850, mdenerstein@gibsondunn.com) Alexandra Grossbaum (+1 212-351-2627, agrossbaum@gibsondunn.com) Please also feel free to contact any of the following members of the Labor and Employment group: Catherine A. Conway – Co-Chair, Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Eugene Scalia – Washington, D.C. (+1 202-955-8206, escalia@gibsondunn.com) Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Jessica Brown – Denver (+1 303-298-5944, jbrown@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Michele L. Maryott – Orange County (+1 949-451-3945, mmaryott@gibsondunn.com) Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com) Greta B. Williams – Washington, D.C. (+1 202-887-3745, gbwilliams@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.

June 3, 2019 |
Supreme Court Holds That Title VII’s Administrative Exhaustion Requirement Is Not A Jurisdictional Prerequisite To Suit

Click for PDF Decided June 3, 2019 Fort Bend County, Texas v. Davis, No. 18-525 Today, the Supreme Court unanimously held that Title VII’s requirement that employment-discrimination plaintiffs present their claims to the Equal Employment Opportunity Commission (“EEOC”) before filing suit is a mandatory claim-processing rule subject to ordinary principles of waiver and forfeiture, not a jurisdictional prerequisite that can be raised at any point during the litigation. Background: Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., requires employees to file a charge with the EEOC before suing an employer for discrimination. When it receives a charge, the EEOC must notify the employer and investigate the allegations. If the EEOC chooses not to sue, or if the EEOC cannot complete its investigation within 180 days, the employee is entitled to a “right-to sue” notice. That notice allows the employee to sue the employer for the claim(s) presented in the charge. In this case, an employer litigated a religious-discrimination claim for five years before arguing that the plaintiff did not properly raise the claim in her EEOC charge. The district court agreed, reasoned that Title VII’s charge-filing requirement is a non-waivable jurisdictional rule, and dismissed the case for lack of jurisdiction. The Fifth Circuit reversed, reasoning that the charge-filing requirement is a waivable claim-processing rule, and that the employer forfeited any arguments based on that rule by raising them too late in the litigation. Issue:  Is Title VII’s charge-filing requirement a non-waivable jurisdictional rule or a waivable claim-processing rule? Court’s Holding:  Title VII’s charge-filing requirement is a mandatory claim-processing rule that speaks to a plaintiff’s procedural obligations and “must be timely raised to come into play.” It is “not a jurisdictional prescription delineating the adjudicatory authority of courts” that may be raised at any point in the litigation. “[A] rule may be mandatory without being jurisdictional, and Title VII’s charge-filing requirement fits that bill.” Justice Ginsburg, writing for the unanimous Court What It Means: The decision does not change Title VII’s requirement that employees file a charge with the EEOC before suing an employer for discrimination. However, because this charge-filing requirement is a claim-processing rule, not a jurisdictional rule, employers must promptly raise any exhaustion-related defenses or risk waiver. The opinion might lead to increased litigation risks and costs for employers, as federal courts can exercise subject-matter jurisdiction over Title VII claims even when the plaintiff has failed to file a proper charge with the EEOC. The Court did not address whether the charge-filing requirement or other mandatory claim-processing rules are subject to equitable exceptions based on concerns for fairness and justice. As always, Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Related Practice: Labor and Employment Catherine A. Conway +1 213.229.7822 cconway@gibsondunn.com Jason C. Schwartz +1 202.955.8242 jschwartz@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.  

May 1, 2019 |
New York Amends Election Law to Provide Three Hours of Paid Time Off to Employees

Click for PDF On April 1, 2019, New York State amended its Election Law § 3-110, to provide all employees in New York with three hours of paid time off to vote.  The amendments provide: All registered voters with three hour of paid time off to vote in any election; Paid time off must be provided regardless of an employee’s schedule; An employee must provide at least two days of advance notice of the need to vote; and Employees must post a notice setting forth these requirements no less than 10 days before every election. A.    Summary of the Changes Previously, New York law required employers to compensate employees for two hours of the employee’s time off to vote; only mandated time off to vote if the employee did not have four consecutive hours in which to vote between the opening or closing of the polls and the employee’s workday; allowed employers to designate that any requested time off to vote be taken at the beginning or end of an employee’s workday; and required employees to provide between two and ten days’ notice of their need for paid time off vote. These amendments to New York law provide employees who are registered to vote with more paid time off to vote, remove the requirement that an employee not have sufficient time to vote before or after work while the polls are open, and relaxes the employee’s advance notice requirement from ten days to two days.  Employers are still allowed to designate an employee’s time off to vote to the beginning or end of an employee’s shift.  The Election Law also maintains a posting requirement for employers, requiring that at least ten days prior to an election, the employer must conspicuously post in a place where it can be seen by employees coming and going from work a notice setting forth the provisions of New York Election Law § 3-110.  The notice must remain posted until the polls close. B.    Reminder to Update Employment Policies / Employee Handbooks The amendment to the Election Law is one of many recent changes in New York employment law.  Other recent changes include: New York State Paid Family Leave; Sexual harassment prevention and training requirements; Sick and safe leave; Accommodation requests; Lactation room requirements; and Increases to the minimum wage and salary basis threshold for exempt employees. In light of these changes, we strongly recommend that employers with employees in New York review their employment handbooks and policies to ensure compliance with current law.  Gibson Dunn is available to assist with reviewing and recommending changes to employment policies and employee handbooks. Gibson Dunn lawyers are available to assist in addressing any questions you may have about this development.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Labor and Employment practice group, or the following authors in New York: Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Alexandra Grossbaum – New York (+1 212-351-2627, agrossbaum@gibsondunn.com) Please also feel free to contact any of the following members of the Labor and Employment group: Catherine A. Conway – Co-Chair, Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Eugene Scalia – Washington, D.C. (+1 202-955-8206, escalia@gibsondunn.com) Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Jessica Brown – Denver (+1 303-298-5944, jbrown@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Michele L. Maryott – Orange County (+1 949-451-3945, mmaryott@gibsondunn.com) Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@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.

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 2, 2019 |
Six Gibson Dunn Partners Named Top Employment Lawyers

Six Gibson Dunn partners were recognized in the 2019 Guide to World-Class Employment Lawyers by Human Resource Executive (HRE) magazine and Lawdragon. Orange County partner Michele Maryott and Washington, D.C. partners Eugene Scalia and Jason Schwartz were named among the 100 Most Powerful Employment Lawyers in the United States. Palo Alto partner Stephen Fackler was included among the Top 20 Lawyers in Employee Benefits, and Los Angeles partner Jesse Cripps was named among the 40 Up and Comers in Employment Law. Los Angeles partner Catherine Conway was named to the Corporate Employment Lawyers Hall of Fame. This is the 12th annual guide to leading corporate, defense-side employment lawyers produced by Lawdragon and HRE.

February 28, 2019 |
Gibson Dunn Named Appellate and Labor & Employment Management Firm of the Year

Benchmark Litigation recognized Gibson Dunn as Appellate Firm of the Year and Labor & Employment Management Firm of the Year at its 2019 United States Awards dinner. The awards recognize the country’s most distinguished litigators and firms for their work in the last year.  Benchmark Litigation also recognized Lawson v. Grubhub as one of the labor & employment impact cases of the year. The awards were presented on February 28, 2019 in New York and March 14, 2019 in San Francisco.

January 29, 2019 |
Illinois Supreme Court Finds BIPA Violations Actionable, Even With No “Actual Injury”

Click for PDF On January 25, 2019, in Rosenbach v. Six Flags Entertainment Corporation, the Illinois Supreme Court unanimously held that a plaintiff may be “aggrieved” under Illinois’ Biometric Information Privacy Act (“BIPA”)—with statutory standing to sue for significant statutory damages—even without alleging an “actual injury” caused by the BIPA violation.[1]  In so holding, the Court reversed the appellate court’s contrary conclusion and—at least for now—appears to have put to rest one outstanding question in several federal and state court proceedings regarding the scope and availability of BIPA’s private right of action.  The Court’s decision is likely to lead to an increase in BIPA litigation in Illinois.  Other states, including Texas and Washington, have biometric privacy statutes,[2] but the Illinois law is the only one that allows for a private right of action. BIPA Background  Illinois enacted BIPA in 2008 in response to the increasing use of “biometric-facilitated financial transactions” in Illinois.  BIPA regulates the “collection, use, safeguarding, handling, storage, retention, and destruction of biometric identifiers and information,” including retina or iris scans, fingerprints, voiceprints, and scans of hand or face geometry.[3]  Among other requirements, BIPA requires private entities to develop and follow a written, publicly-available policy for the retention and destruction of biometric identifiers, and to provide certain disclosures in writing and obtain a release before acquiring an individual’s biometric identifier or information.[4] Persons “aggrieved by a violation” of BIPA have a private right of action under the statute and may sue for statutory remedies, including the greater of actual or liquidated damages of $1,000 (for negligent violations) or $5,000 (for intentional or reckless violations).[5] BIPA’s private right of action has energized the Illinois plaintiffs’ bar, which in the last few years has  filed dozens of proposed class action lawsuits against companies for their allegedly improper collection of alleged biometric information.  Plaintiffs in these cases have generally fallen into two categories: (1) employees of companies that allegedly utilize biometric information, such as fingerprints, for time keeping purposes; and (2) customers of companies that use alleged biometric information to enhance the consumer experience. The Rosenbach plaintiff fell into this second group.  Plaintiff Stacy Rosenbach—on behalf of her minor son, a customer of Six Flags Entertainment Corporation (“Six Flags”)—sued Six Flags after her son registered for a season pass at the amusement park.  Six Flags allegedly captured the thumbprints of season pass holders to facilitate entry into the park and limit loss from the unauthorized use of passes by non-pass-holders.  In her suit against Six Flags, Rosenbach alleged that Six Flags violated BIPA by capturing her son’s thumbprint without first providing written notice, obtaining written consent, and publishing a policy explaining how her son’s thumbprint would be used, retained, and destroyed.[6]  She alleged no actual harm beyond the violation of BIPA’s requirements. The Issue in Rosenbach v. Six Flags The question presented to the Illinois Supreme Court was whether a plaintiff is “aggrieved” under BIPA, and thus potentially eligible for statutory remedies including liquidated damages, when the only injury she alleges is that the defendant collected her biometric identifiers or biometric information without providing the required disclosures and obtaining written consent as required by the Act.[7]  The Second District Appellate Court held that a “technical violation” of the statute, without more, did not render a plaintiff “aggrieved” under BIPA.  Specifically, the appellate court stated that “there must be an actual injury, adverse effect, or harm in order for the person to be ‘aggrieved,’” and a “technical violation” alone does not suffice.[8]  If a “violation” were “actionable” by itself, the appellate court concluded, that “would render the word ‘aggrieved’ superfluous.”[9] The Court’s Holding Reversed.  The Illinois Supreme Court held that a plaintiff is “aggrieved” under BIPA—and has statutory standing to sue—when the plaintiff alleges a violation of her BIPA rights, even if the violation caused no “actual injury or adverse effect.”[10]  In other words, the “[t]he violation, in itself, is sufficient to support the individual’s or customer’s statutory cause of action.”[11] The Court found that BIPA creates a substantive right to control one’s own biometric information.  No-injury BIPA violations are not merely “technicalities,” the Court held,  but “real and significant” harms to important rights created by the Illinois legislature.[12]  The Court also reasoned that the private right of action and remedies exist to prevent and deter violations of individuals’ BIPA rights.  Requiring would-be plaintiffs to wait to sue until they have suffered “actual injury” would defeat these purposes of the statute.[13] Because the Rosenbach plaintiff alleged violations of his BIPA rights—Six Flags allegedly collected his fingerprints for use in a season pass without providing the statutorily mandated notices or publishing a data retention policy—the Supreme Court reversed the appellate court’s contrary decision and remanded the case to the trial court. What to Expect Expect more class action litigation on BIPA claims from the Illinois plaintiffs’ bar.   Companies that do business in Illinois and collect or use biometric identifiers or biometric information should examine their policies for BIPA compliance. Biometric identifier is defined to mean “a retina or iris scan, fingerprint, voiceprint, or scan of hand or face geometry.[14]  Writing samples, signatures, photographs, demographic data, physical descriptions, and biological samples used for scientific testing are not biometric identifiers.[15] Biometric information is any information “based on an individual’s biometric identifier used to identify an individual.”[16] BIPA Basics:  Private entities may not collect biometric information or identifiers (“biometrics”) without first:  (1) providing written notice of the collection that describes the purpose and terms of the collection and storage, and (2) obtaining written consent.[17] Private entities may not sell, rent, or disclose biometrics without prior written consent.[18] Private entities also must develop and make publicly available a data retention policy that sets forth a “retention schedule and guidelines for permanently destroying [biometrics] when the initial purpose for collecting or obtaining [them] has been satisfied or within 3 years of the individual’s last interaction with the private entity, whichever occurs first.”[19] Private entities must store and protect biometrics according to the reasonable standard of care of the entities’ industry and in a manner that is as protective or more protective than the manner in which the entity stores and protects other sensitive information.[20] Expect additional developments in the federal courts regarding whether BIPA plaintiffs have Article III standing.  Post-Rosenbach, BIPA plaintiffs need not allege an “actual injury” beyond the statutory violation to state a claim under the statute.  But to satisfy the Article III standing requirements necessary to pursue a claim in federal court, plaintiffs may need to allege more than a statutory violation.  To date, federal courts have been split on what type of injury, short of economic harm, may be sufficient to create Article III standing for BIPA plaintiffs.[21] Expect additional litigation over the scope of Illinois’ standing doctrine.  Amici for Six Flags urged the Illinois Supreme Court to consider an alternate ground for affirmance:  that Rosenbach lacked standing to sue under the Illinois constitution.  The Court did not address the issue.  In lieu of a statutory standing argument, more BIPA defendants may press a state constitutional standing argument in an effort to void plaintiffs’ claims. Look for additional changes in BIPA’s terms.  This year, the Illinois State Senate will consider a bill narrowing the impact of BIPA.[22] [1] 2019 IL 123186 (Ill. Jan. 25, 2019). [2] See Tex. Bus. & Com. Code § 503.001 et seq.; Wash. Rev. Code § 19.375.010 et seq. [3] 740 Ill. Comp. Stat. 14/5(a), (b), (g). [4] 740 Ill. Comp. Stat. 14/15(a), (b). [5] 740 Ill. Comp. Stat. 14/20. [6] Rosenbach, 2019 IL 123186 at ¶¶ 4-9. [7] Id. ¶ 14. [8] Rosenbach v. Six Flags Entm’t Corp., 2017 IL App (2d) 170317, at ¶ 20 (Ill. App. Ct. 2017). [9] Id. at ¶ 23. [10] Rosenbach, 2019 IL 123186 at ¶ 33. [11] Id. ¶ 33. [12] Id. ¶ 34. [13] Id. ¶ 37. [14] 740 Ill. Comp. Stat. 14/10. [15] Id. [16] Id. [17] 740 Ill. Comp. Stat. 14/15(b). [18] 740 Ill. Comp. Stat. 14/15(c). [19] 740 Ill. Comp. Stat. 14/15(a). [20] 740 Ill. Comp. Stat. 14/15(e). [21] Compare e.g., Monroy v. Shutterfly, 2017 WL 4099846, *8 n.5 (N.D. Ill. Sept. 15, 2017) (collection and violation of privacy interest create Article III standing for BIPA claimant) with Santana v. Take-Two Interactive Software, Inc., 717 F. App’x 12, 17 (2d Cir. 2017) (collection of biometrics without adequate notices creates no “risk of real harm” and therefore does not create Article III standing for BIPA claimant) and Rivera v. Google, Inc., No. 16-cv-02714, 2018 WL 6830332, at *6 (N.D. Ill. Dec. 29, 2018) (alleged privacy violation does not create Article III standing for BIPA claimant). [22] S.B. 3053, 2018 Reg. Sess. (Ill. 2018). 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 Privacy, Cybersecurity and Consumer Protection or Labor and Employment practice groups, or the authors: Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Erin Morgan – Washington, D.C. (+1 202-887-3577, emorgan@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Privacy, Cybersecurity and Consumer Protection Group: Alexander H. Southwell – Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall – Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Richard H. Cunningham – Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com) H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Shaalu Mehra – Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Labor and Employment Group: Catherine A. Conway – Co-Chair, Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@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 25, 2019 |
Law360 Names Gibson Dunn Among Its Employment 2018 Practice Groups of the Year

Law360 named Gibson Dunn one of its five Employment Groups Of The Year [PDF] for 2018. The practice group “prides itself on working at the vanguard of workplace law and certainly did so last year, winning major gig economy rulings and conducting #MeToo-related probes for prominent companies.” The firm’s Employment practice was profiled on January 25, 2019. The Labor and Employment group covers the full range of labor and employment matters, including: wage and hour class actions; employment discrimination class actions; whistleblower litigation; noncompete agreements and trade secrets, appeals; post-trial briefings and litigation management; labor-management relations; ERISA and employee benefits; and occupational safety and health.  With a Labor and Employment Practice Group that covers a complete range of matters, we are known for our unsurpassed ability to help the world’s preeminent companies tackle their most challenging labor and employment matters.

January 24, 2019 |
UK Employment Update – January 2019

Click for PDF In this, our 2018 end of year alert, we look back at key developments in UK employment law over the past twelve months and look forward to anticipated key developments in the year ahead. A brief overview of developments and key cases from 2018 which we believe will be of interest to our clients is provided below, with more detailed information on each topic available by clicking on the links to the appendix. 1.    Employment Status (click on link) We consider recent developments in the law regarding ‘worker status’ in the UK and look at how the Government responded to recommendations on employment status made in the Taylor Review in its Good Work Plan. 2.    Good Work Plan (click on link) The Government’s Good Work Plan sets out a number of proposed reforms to UK employment laws and policy changes to ensure that workers can access fair and decent work, that both employers and workers have the clarity they need to understand their employment relationships, and that the enforcement system is fair and fit for purpose. We consider these below. 3.    Vicarious Liability (click on link) We consider the impact of two recent decisions of the UK Court of Appeal which look at vicarious liability in both the legal spheres of Employment and Data Protection. In relation to Employment, it was held that there was a sufficient connection between a managing director’s job and his drunken assault on an employee to render the company vicariously liable for his actions. With regards to Data Protection, it was held that an employer was vicariously liable for the criminal actions of an employee who leaked the personal data of almost 100,000 employees, notwithstanding that the employer was held to have taken appropriate steps to mitigate the risk of such criminal actions occurring, and that the employee’s actions were undertaken with the express intention of causing damage to the employer. 4.    Sexual Harassment and #metoo (click on link) The #metoo movement has had a significant impact on the use of non-disclosure agreements (“NDAs”) in situations involving allegations of sexual harassment. We consider the circumstances in which it remains appropriate to use NDAs in connection with the settlement of such claims and allegations. 5.    Data Protection (click on link) More than six months have now passed since the General Data Protection Regulation (the “GDPR”) became effective in May 2018. Given the potentially significant fines for non-compliance, businesses subject to the GDPR have been investing heavily in GDPR compliance programmes. However, uncertainty still surrounds the GDPR and how it should operate in practice. We consider the enforcement action taken by the Information Commissioner’s Office (the “ICO”) during 2018 and the approach the ICO has said it intends to take with respect to enforcement in the future. We also consider recent guidance on the territorial scope of the GDPR as well as the implications of Brexit on the European and UK data protection regimes. 6.    Other News and Areas to Watch (click on link) APPENDIX 1.   Employment Status The question of employment status has vexed the UK courts in recent years. Employment law in the UK is unusual in that it recognises three different ways of working: (i) as an employee under a contract of employment; (ii) as an individual who may not be classed as an employee but who otherwise provides services personally in circumstances which may attract ‘worker’ status; and (iii) finally, as a self-employed independent contractor providing services to a client. The distinction between these three categories has been called into question in a spate of recent cases, some involving the gig economy. We previously considered the different employment rights afforded to individuals in these three categories of working relationship in a prior alert. This year, the eagerly awaited judgment from the UK Supreme Court in the case of Pimlico Plumbers Ltd and another v Smith [2018] UKSC 29 gave further guidance on the approach to be taken by the UK courts when determining whether an individual who performs services for a client but who is not an employee should nevertheless enjoy protection under UK law as a ‘worker’. As we indicated in our previous alert, the obligation to perform services personally is a necessary requirement for ‘worker’ status. When considering this issue, the UK Supreme Court highlighted the need to consider the terms of the contract between the parties in full (such that a contractual right of substitution in the Pimlico Plumbers contract was overridden by other clauses of the contract which indicated that the services were to be performed personally). Other relevant factors which contributed to the finding of ‘worker’ status in this case were tight control over the plumber’s attire and administrative aspects of his job, onerous terms as to amount and timing of payment, and a suite of covenants restricting the plumber’s working activities following termination. As a consequence, care should be taken when engaging an independent contractor to ensure that the arrangements are documented clearly and that the terms of engagement (whether individually or taken as a whole) are not consistent with worker status. 2.   Good Work Plan The Good Work Plan, published in December 2018, builds on the response given by the Government in relation to the Taylor Review in February 2018, and reports on the progress of the issues raised in various consultations. In it, the Government responds to recommendations on employment status made in the Taylor Review by promising to (i) “bring forward detailed proposals” on how the employment status framework for employment rights and tax should be aligned, and (ii) provide legislation to “improve the clarity” of the employment status tests, “reflecting the reality of modern working practices”. Unfortunately, however, no further information has been given about what this will entail. The Government has also laid down three statutory instruments implementing the Good Work Plan that will become effective from 6 April 2020 and which: (i) provide that the written statement of employment particulars must be given from day one of employment; (ii) change the rules for calculating a week’s pay for holiday pay purposes, increasing the reference period for variable pay from 12 weeks to 52 weeks; (iii) abolish a perceived loophole known as the Swedish Derogation, which allows agency workers to be paid less than if they were directly hired provided they have a contract of employment with the agency and are paid between assignments; (iv) extend the right to a written statement to workers (previously just employees); and (v) lower the percentage required for a valid employee request for the employer to negotiate an agreement on informing and consulting its employees from 10% to 2% (while keeping the minimum 15-employee threshold for initiating proceedings in place). From April 2019, the limit on financial penalties for breaches of employment law which have aggravating factors will be increased from £5,000 to £20,000. 3.   Vicarious Liability Update As reported previously, the boundaries of the law on vicarious liability, which determines the circumstances in which an employer will be deemed liable for the acts of its officers and employees, continue to expand. We highlight below two recent decisions of the UK Court of Appeal in the field of vicarious liability: 3.1    Vicarious Liability and Employment: Overturning a decision by the UK High Court, the UK Court of Appeal held that a company was vicariously liable for an assault carried out by the managing director on another employee. In Bellman v Northampton Recruitment Ltd [2018] EWCA Civ 2214, the managing director punched an employee several times at an unscheduled drinking session after the office Christmas party. The UK Court of Appeal confirmed that, when considering the issue of vicarious liability, the UK courts should focus on the “field of activities” assigned to the perpetrator and ask whether the actions for which the employer is claimed to be vicariously liable fell within his or her “field of activities”. In the present case, the managing director’s seniority and the way in which he asserted that authority at the event at which the assault took place were both significant factors leading the court to conclude that the employer was responsible for the assault which he carried out at an unofficial out-of-office event. This decision restores the UK Supreme Court’s broader application of the “close connection” test to incidents of assault by an employee in Mohamud v WM Morrison Supermarkets Plc [2016] UKSC which we reported on previously. 3.2   Vicarious Liability and Data Protection: In a decision that is likely to have far-reaching consequences for employers, the UK Court of Appeal upheld a controversial UK High Court judgment that an employer, Morrisons Plc, was vicariously liable for the criminal actions of an employee, notwithstanding that it had taken appropriate steps to mitigate the risk of such actions occurring. In the first group litigation after a data breach in the UK, Morrisons is liable in damages to over 5,000 individuals. A disgruntled employee of Morrisons leaked the personal details of almost 100,000 employees to the internet. The UK High Court found that Morrisons was not directly liable for the breaches of the Data Protection Act 1998 (the “DPA 1998“), which has since been superseded by the GDPR and the Data Protection Act 2018 (the “DPA 2018“) (which sits alongside the GDPR in the UK and, amongst other things, confirms the UK’s approach to certain flexibilities and exemptions permitted by the GDPR), misuse of private information, and/or breaches of confidence. However, it found that Morrisons was vicariously liable for the employee’s actions. Morrisons appealed to the UK Court of Appeal, however, the appeal was dismissed. The UK Court of Appeal held that (i) it was not implicit that Parliament had intended to exclude vicarious liability from the scope of the DPA 1998 and (ii) the UK High Court had been correct to find that there had been a “seamless and continuous sequence” of events between the breach and the employment relationship. The misuse of the personal data by the employee in this case was found to be within his “field of activities” as there was an “unbroken chain” of events between his work activities and the data leak. Referring to the decision in Bellman, the UK Court of Appeal said it also made no difference that the tort took place away from the workplace. What this means for employers: The UK Court of Appeal’s judgment, whilst concerned with the provisions of the DPA 1998, applies equally to the equivalent duties and responsibilities under  the GDPR. In particular, in order to mitigate vicarious liability risks it may not be sufficient for UK employers to simply comply with their obligation under the GDPR to implement “appropriate technical and organisational measures” to ensure that personal data in their possession is appropriately secured. Hence, employers should also consider appropriate insurance coverage, whether by public liability policy or a bespoke cyber insurance policy. It remains to be seen how effective these policies will be, and they are unlikely to cover the entire exposure. 4.   Sexual Harassment and the #metoo Movement The #metoo movement has increased the social and political pressure upon UK employers to tackle issues of sexual harassment head on, particularly where perpetrated by those in authority. While settlement agreements and associated non-disclosure provisions remain both useful and appropriate when resolving employment disputes, care must be taken in situations involving allegations of sexual harassment, especially where those allegations have been upheld against the perpetrator or continue to be maintained by the alleged victim. In particular, the use of NDAs or settlement agreements to prevent an employee from repeating, publishing or reporting allegations of sexual harassment has been called into question over the last year. The Women and Equalities Committee of the UK Parliament (“WEC“) conducted an Inquiry into Sexual Harassment in the Workplace (the “Inquiry“) in 2018, highlighting five points in respect of which they called upon the Government to take action: (i) putting sexual harassment at the top of the agenda; (ii) requiring regulators to take a more active role; (iii) making enforcement processes work better for employees; (iv) cleaning up the use of NDAs, and (v) collecting more robust data. The Solicitors Regulation Authority (the “SRA“) subsequently issued a Warning Notice reminding lawyers that NDAs must not: (i) prevent anyone from notifying regulators or law enforcement agencies, of conduct which might otherwise be reportable; (ii) improperly threaten litigation, or (iii) prevent someone who has entered into an NDA from keeping or receiving a copy of the NDA. Further, in December, the UK Government responded to the Inquiry and said that a statutory code of practice on sexual harassment should be introduced, and acknowledged that NDAs require better regulation. The Government committed to consult on how best to achieve this and enforce any new provisions, but noted the lack of data and research on this issue. As a result, in November 2018, the WEC launched a new inquiry into the wider use of NDAs in cases where any form of harassment or discrimination is alleged. The findings of this are expected in Spring 2019. In the circumstances, and while settlement agreements containing non-disclosure provisions remain a lawful and appropriate means by which UK employers can resolve disputes in which allegations of sexual harassment have been made, care should be taken to ensure that: (i) NDAs are not used in circumstances in which the subject of the NDA may feel unable to notify regulators or law enforcement agencies of conduct which might otherwise be reportable; (ii) lawyers do not fail to notify the SRA of misconduct, or a serious breach of regulatory requirements, and (iii) lawyers do not use NDAs as a means of improperly threatening litigation or other adverse consequences. 5.   Data Protection 5.1   Enforcement: In a recent speech, the UK’s Information Commissioner revealed that the number of complaints the ICO has received from the public regarding their personal data has increased from 19,000 since the GDPR came into effect, compared to 9,000 in a comparable period predating the GDPR. There have also been more breach reports – more than 8,000 since the GDPR came into effect and reports became mandatory in certain circumstances. The ICO’s headcount has also increased to almost 700, which is 60% higher than in 2016. These increases in complaints and resources have yet to result in increased enforcement action. The ICO has issued one enforcement notice, requiring the deletion of data subjects’ personal data by the entity in default. This enforcement action is notable because it was taken against a Canadian entity and so demonstrates that the ICO will take action against foreign entities which are subject to the GDPR. More recently, the ICO has issued monetary penalties to organisations across the finance, manufacturing and business services sectors for non-payment of the data protection fees all data controllers are required to pay unless certain exemptions apply. The ICO has not yet issued an administrative fine for a breach of the GDPR or DPA 2018. It has however recently imposed the maximum possible fine on an organisation under the DPA 1998, and in doing so indicated that the fine would have been significantly higher had the GDPR been in force when the breach occurred. The ICO has produced a draft Regulatory Action Policy, which sets out the approach the ICO intends to take with respect to enforcement. Although this policy remains subject to Parliamentary approval, organisations regulated by the ICO will be relieved to hear that although the ICO will consider each case on its merits, as a general principle it is the more serious, high-impact, intentional, wilful, neglectful or repeated breaches that can expect to attract stronger regulatory action, and so they are unlikely to attract the highest administrative fines if they have taken sensible and appropriate measures to comply with the GDPR and the DPA 2018. 5.2   Territorial Scope: The GDPR has extraterritorial effect, and may apply both to organisations established in the EU and to organisations not established in the EU. Where an organisation is established in the EU, the GDPR applies to the processing of personal data in the context of the EU establishment’s activities, regardless of where the processing takes place. Where an organisation is not established in the EU, the GDPR applies to processing activities relating to the offering of goods or services to or the monitoring of the behaviour of individuals located in the EU. The European Data Protection Board (the “EDPB“), an EU body which is made up of the head of each European data protection authority and the European Data Protection Supervisor (the EU’s independent data protection authority) (and which is tasked, amongst other things, with ensuring consistent application of the GDPR across the EU) has recently issued guidelines (currently subject to public consultation) on the territorial application of the GDPR, which are intended to provide clarity as to how the GDPR applies in practice. We have set out below some items of particular interest: 5.2.1   The meaning of “Establishment”: An establishment implies the real and effective exercise of an activity through stable arrangements. The EDPB has confirmed that in some circumstances the presence of a single employee or agent in the EU may be sufficient to constitute a stable arrangement. However, the notion of establishment has its limits, and it is not possible to conclude that an organisation is established in the EU merely because its website is accessible in the EU. In addition, the EDPB does not deem a data processor in the EU to be an establishment of a data controller merely by virtue of its status as a data processor. 5.2.2   Data controller-data processor arrangements: Where an organisation subject to the GDPR uses a data processor which is not subject to the GDPR (for example, because that processor is not established in the EU), it will need to ensure that it puts in place a contract with the data processor which complies with the requirements of Article 28 of the GDPR. The processor will thereby become indirectly subject to some obligations under the GDPR. Where an organisation subject to the GDPR acts as a data processor, processing personal data on behalf of a data controller not subject to the GDPR, it will similarly need to ensure that it puts in place a contract with the data controller which complies with the requirements of Article 28 of the GDPR (save insofar as they relate to the provision of assistance to the controller in complying with the controller’s obligations under the GDPR). 5.2.3   “Targeting” data subjects in the EU: An organisation which is not otherwise established in the EU will not become subject to the GDPR merely because it processes the personal data of individuals in the EU; an element of “targeting” those individuals must also be present, such that it is apparent that the organisation envisages offering goods or services to data subjects in the EU. Factors to be considered in this regard include (amongst others) whether the EU or an EU member state is mentioned in connection with the goods or services, whether the organisation uses a language or currency which is not used in its home country but which is used in the EU, and whether the organisation offers the delivery of goods in the EU. This concept of “intention to target” is not relevant to the application of the GDPR with regard to the monitoring of data subjects’ behaviour in the EU – such monitoring may be subject to the GDPR irrespective of any intention (or absence thereof) to do so. 5.3   GDPR and Brexit: On the day the UK leaves the EU, the GDPR will be transposed into UK law as domestic legislation. This means that data protection standards in the UK will not change dramatically after Brexit, at least initially. However, Brexit may affect the way in which the GDPR applies to businesses, and certain businesses may find themselves subject to both the “UK GDPR” and the GDPR proper, depending on the nature and structure of their European operations. Separately, Brexit will have ramifications for personal data transfers, and particularly transfers from the EU to the UK. Currently, there are no restrictions on such data transfers. However, if the UK leaves the EU without the European Commission (“EC“) having formally recognised its data protection laws as adequate, whether as a result of a no-deal Brexit or simply the failure to make an adequacy decision by the end of any transition period, and in the absence of any applicable derogation, adequate safeguards would need to be put in place in respect of any personal data transfers from the EU to the UK. This would typically involve the transferor and recipient entities entering into model clauses approved by the EC, although other options are available. 6.   Other news and areas to watch 6.1   Brexit: Whilst it is impossible to predict, at the date of writing, how Brexit will unfold, we can say that Brexit is not expected to have a substantial impact upon employment rights in the UK for the moment, irrespective of the form it takes. A white paper issued in July 2018 by the UK Government indicated that there is no intention to repeal or amend employment or equality laws in the UK, including those which derive from or implement European employment laws. The paper states: “existing workers’ rights enjoyed under EU law will continue to be available in UK law at the day of the withdrawal” and proposed that the UK will commit to a “non-regression of labour standards” in order to maintain a strong trading relationship with the EU. Possible areas for reform post-Brexit could include compensation limits in discrimination claims (which are currently uncapped), as well as provisions for the accrual of statutory vacation and calculation of statutory vacation pay. We are happy to answer any questions which clients may have relating to Brexit and employment law. 6.2   Simplification of tax on termination payments: Since 6 April 2018, any payment in lieu of notice (including a non-contractual payment) has been treated as earnings and subject to tax and class 1 National Insurance Contributions (“NICs“). However, from 6 April 2020, all termination payments above the £30,000 threshold will be subject to class 1A NICs (employer liability only). 6.3   Large and medium sized companies engaging workers through PSCs are to become responsible for PAYE and NICs: In a move that will significantly impact those large and medium-sized companies engaging workers via personal services companies (“PSCs“) from April 2020, the responsibility for operating off-payroll working rules, and deducting any tax and NICs due, will move from individuals to the organisation, agency or other third party paying an individual’s PSC. Organisations will have to reconsider whether there is any material benefit in using PSC structures for their indirectly engaged workforce as opposed to directly engaged self-employed contractors. 6.4   Pay reporting: A new set of regulations that came into force on 1 January 2019 bring in mandatory reporting of the ratio between CEO pay, including all elements of remuneration, and average staff pay for UK incorporated companies that are listed on the London Stock Exchange, an exchange in an EEA member state, the New York Stock Exchange or NASDAQ, and have an average number of UK employees above 250 in their group, all of which will be effective for accounting periods beginning on or after 1 January 2019. Further, the Government launched a consultation on ethnicity pay reporting, looking in particular at the sort of information that employers should be required to publish. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other developments.  Please feel free to contact the Gibson Dunn lawyer with whom you usually work or the following members of the Labor and Employment team in the firm’s London office: James A. Cox (+44 (0)20 7071 4250, jacox@gibsondunn.com) Georgia Derbyshire (+44 (0)20 7071 4013, gderbyshire@gibsondunn.com) Heather Gibbons (+44 (0)20 7071 4127, hgibbons@gibsondunn.com) Sarika Rabheru (+44 (0)20 7071 4267, srabheru@gibsondunn.com) Thomas Weatherill (+44 (0)20 7071 4164, tweatherill@gibsondunn.com)

January 16, 2019 |
2018 Trade Secrets Litigation Roundup

Click for PDF 2018 marked an exciting year of trade secret developments and demonstrated the federal government’s increased involvement in protecting trade secrets, a trend expected to continue in 2019. Courts continued to construe the Defend Trade Secrets Act (DTSA)—including first impression rulings under the whistleblower and attorneys’ fees provisions—and juries doled out significant damages awards in trade secrets cases. Massachusetts passed a new trade secrets bill. The Trump administration imposed tariffs on China in response to the alleged theft of trade secrets, and also charged nine Iranian nationals for a series of coordinated cyber intrusions. Jason Schwartz, Greta Williams, Mia Donnelly and Aaron Smith highlight these and other notable trade secrets developments from 2018 in their article “2018 Trade Secrets Litigation Roundup” published by BBNA. Reproduced with permission, January 15, 2019, from Copyright 2019 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.  Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update.  Please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Washington, D.C. office: Jason C. Schwartz (+1 202-955-8242, jschwartz@gibsondunn.com) Greta B. Williams (+1 202-887-3745, gbwilliams@gibsondunn.com) Mia C. Donnelly (+1 202-887-3617, mdonnelly@gibsondunn.com) Please also feel free to contact any of the following practice group leaders and members: Labor and Employment Group: Catherine A. Conway – Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Intellectual Property Group: Wayne Barsky – Los Angeles (+1 310-557-8183, wbarsky@gibsondunn.com) Josh Krevitt – New York (+1 212-351-2490, jkrevitt@gibsondunn.com) Mark Reiter – Dallas (+1 214-698-3360, mreiter@gibsondunn.com) Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Michael Sitzman – San Francisco (+1 415-393-8200, msitzman@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection Group: Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@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 13, 2019 |
Gibson Dunn Named a 2018 Law Firm of the Year

Gibson, Dunn & Crutcher LLP is pleased to announce its selection by Law360 as a Law Firm of the Year for 2018, featuring the four firms that received the most Practice Group of the Year awards in its profile, “The Firms That Dominated in 2018.” [PDF] Of the four, Gibson Dunn “led the pack with 11 winning practice areas” for “successfully securing wins in bet-the-company matters and closing high-profile, big-ticket deals for clients throughout 2018.” The awards were published on January 13, 2019. Law360 previously noted that Gibson Dunn “dominated the competition this year” for its Practice Groups of the Year, which were selected “with an eye toward landmark matters and general excellence.” Gibson Dunn is proud to have been honored in the following categories: Appellate [PDF]: Gibson Dunn’s Appellate and Constitutional Law Practice Group is one of the leading U.S. appellate practices, with broad experience in complex litigation at all levels of the state and federal court systems and an exceptionally strong and high-profile presence and record of success before the U.S. Supreme Court. Class Action [PDF]: Our Class Actions Practice Group has an unrivaled record of success in the defense of high-stakes class action lawsuits across the United States. We have successfully litigated many of the most significant class actions in recent years, amassing an impressive win record in trial and appellate courts, including before the U. S. Supreme Court, that have changed the class action landscape nationwide. Competition [PDF]: Gibson Dunn’s Antitrust and Competition Practice Group serves clients in a broad array of industries globally in every significant area of antitrust and competition law, including private antitrust litigation between large companies and class action treble damages litigation; government review of mergers and acquisitions; and cartel investigations, internationally across borders and jurisdictions. Cybersecurity & Privacy [PDF]: Our Privacy, Cybersecurity and Consumer Protection Practice Group represents clients across a wide range of industries in matters involving complex and rapidly evolving laws, regulations, and industry best practices relating to privacy, cybersecurity, and consumer protection. Our team includes the largest number of former federal cyber-crimes prosecutors of any law firm. Employment [PDF]: No firm has a more prominent position at the leading edge of labor and employment law than Gibson Dunn. With a Labor and Employment Practice Group that covers a complete range of matters, we are known for our unsurpassed ability to help the world’s preeminent companies tackle their most challenging labor and employment matters. Energy [PDF]: Across the firm’s Energy and Infrastructure, Oil and Gas, and Energy, Regulation and Litigation Practice Groups, our global energy practitioners counsel on a complex range of issues and proceedings in the transactional, regulatory, enforcement, investigatory and litigation arenas, serving clients in all energy industry segments. Environmental [PDF]: Gibson Dunn has represented clients in the environmental and mass tort area for more than 30 years, providing sophisticated counsel on the complete range of litigation matters as well as in connection with transactional concerns such as ongoing regulatory compliance, legislative activities and environmental due diligence. Real Estate [PDF]: The breadth of sophisticated matters handled by our real estate lawyers worldwide includes acquisitions and sales; joint ventures; financing; land use and development; and construction. Gibson Dunn additionally has one of the leading hotel and hospitality practices globally. Securities [PDF]: Our securities practice offers comprehensive client services including in the defense and handling of securities class action litigation, derivative litigation, M&A litigation, internal investigations, and investigations and enforcement actions by the SEC, DOJ and state attorneys general. Sports [PDF]: Gibson Dunn’s global Sports Law Practice represents a wide range of clients in matters relating to professional and amateur sports, including individual teams, sports facilities, athletic associations, athletes, financial institutions, television networks, sponsors and municipalities. Transportation [PDF]: Gibson Dunn’s experience with transportation-related entities is extensive and includes the automotive sector as well as all aspects of the airline and rail industries, freight, shipping, and maritime. We advise in a broad range of areas that include regulatory and compliance, customs and trade regulation, antitrust, litigation, corporate transactions, tax, real estate, environmental and insurance.

January 11, 2019 |
2018 Year-End German Law Update

Click for PDF Looking back at the past year’s cacophony of voices in a world trying to negotiate a new balance of powers, it appeared that Germany was disturbingly silent, on both the global and European stage. Instead of helping shape the new global agenda that is in the making, German politics focused on sorting out the vacuum created by a Federal election result which left no clear winner other than a newly formed right wing nationalist populist party mostly comprised of so called Wutbürger (the new prong for “citizens in anger”) that managed to attract 12.6 % of the vote to become the third strongest party in the German Federal Parliament. The relaunching of the Grand-Coalition in March after months of agonizing coalition talks was followed by a bumpy start leading into another session of federal state elections in Bavaria and Hesse that created more distraction. When normal business was finally resumed in November, a year had passed by with few meaningful initiatives formed or significant business accomplished. In short, while the world was spinning, Germany allowed itself a year’s time-out from international affairs. The result is reflected in this year’s update, where the most meaningful legal developments were either triggered by European initiatives, such as the General Data Protection Regulation (“GDPR”) (see below section 4.1) or the New Transparency Rules for Listed German Companies (see below section 1.2), or as a result of landmark rulings of German or international higher and supreme courts (see below Corporate M&A sections 1.1 and 1.4; Tax – sections 2.1 and 2.2 and Labor and Employment – section 4.2). In fairness, shortly before the winter break at least a few other legal statutes have been rushed through parliament that are also covered by this update. Of the changes that are likely to have the most profound impact on the corporate world, as well as on the individual lives of the currently more than 500 million inhabitants of the EU-28, the GDPR, in our view, walks away with the first prize. The GDPR has created a unified legal system with bold concepts and strong mechanisms to protect individual rights to one’s personal data, combined with hefty fines in case of the violation of its rules. As such, the GDPR stands out as a glowing example for the EU’s aspiration to protect the civic rights of its citizens, but also has the potential to create a major exposure for EU-based companies processing and handling data globally, as well as for non EU-based companies doing business in Europe. On a more strategic scale, the GDPR also creates a challenge for Europe in the global race for supremacy in a AI-driven world fueled by unrestricted access to data – the gold of the digital age. The German government could not resist infection with the virus called protectionism, this time around coming in the form of greater scrutiny imposed on foreign direct investments into German companies being considered as “strategic” or “sensitive” (see below section 1.3 – Germany Tightens Rules on Foreign Takeovers Even Further). Protecting sensitive industries from “unwanted” foreign investors, at first glance, sounds like a laudable cause. However, for a country like Germany that derives most of its wealth and success from exporting its ideas, products and services, a more liberal approach to foreign investments would seem to be more appropriate, and it remains to be seen how the new rules will be enforced in practice going forward. The remarkable success of the German economy over the last twenty five years had its foundation in the abandoning of protectionism, the creation of an almost global market place for German products, and an increasing global adoption of the rule of law. All these building blocks of the recent German economic success have been under severe attack in the last year. This is definitely not the time for Germany to let another year go by idly. We use this opportunity to thank you for your trust and confidence in our ability to support you in your most complicated and important business decisions and to help you form your views and strategies to deal with sophisticated German legal issues. Without our daily interaction with your real-world questions and tasks, our expertise would be missing the focus and color to draw an accurate picture of the multifaceted world we are living in. In this respect, we thank you for making us better lawyers – every day. ________________________ TABLE OF CONTENTS 1.      Corporate, M&A 2.      Tax 3.      Financing and Restructuring 4.      Labor and Employment 5.      Real Estate 6.      Compliance 7.      Antitrust and Merger Control 8.      Litigation 9.      IP & Technology 10.    International Trade, Sanctions and Export Controls ________________________ 1.       Corporate, M&A 1.1       Further Development regarding D&O Liability of the Supervisory Board in a German Stock Corporation In its famous “ARAG/Garmenbeck”-decision in 1997, the German Federal Supreme Court (Bundesgerichtshof – BGH) first established the obligation of the supervisory board of a German Stock Corporation (Aktiengesellschaft) to pursue the company’s D&O liability claims in the name of the company against its own management board after having examined the existence and enforceability of such claims. Given the very limited discretion the court has granted to the supervisory board not to bring such a claim and the supervisory board’s own liability arising from inactivity, the number of claims brought by companies against their (former) management board members has risen significantly since this decision. In its recent decision dated September 18, 2018, the BGH ruled on the related follow-up question about when the statute of limitations should start to run with respect to compensation claims brought by the company against a supervisory board member who has failed to pursue the company’s D&O liability claims against the board of management within the statutory limitation period. The BGH clarified that the statute of limitation applicable to the company’s compensation claims against the inactive supervisory board member (namely ten years in case of a publicly listed company, otherwise five years) should not begin to run until the company’s compensation claims against the management board member have become time-barred themselves. With that decision, the court adopts the view that in cases of inactivity, the period of limitations should not start to run until the last chance for the filing of an underlying claim has passed. In addition, the BGH in its decision confirmed the supervisory board’s obligation to also pursue the company’s claims against the board of management in cases where the management board member’s misconduct is linked to the supervisory board’s own misconduct (e.g. through a violation of supervisory duties). Even in cases where the pursuit of claims against the board of management would force the supervisory board to disclose its own misconduct, such “self-incrimination” does not release the supervisory board from its duty to pursue the claims given the preponderance of the company’s interests in an effective supervisory board, the court reasoned. In practice, the recent decision will result in a significant extension of the D&O liability of supervisory board members. Against that backdrop, supervisory board members are well advised to examine the existence of the company’s compensation claims against the board of management in a timely fashion and to pursue the filing of such claims, if any, as soon as possible. If the board of management’s misconduct is linked to parallel misconduct of the supervisory board itself, the relevant supervisory board member – if not exceptionally released from pursuing such claim and depending on the relevant facts and circumstances – often finds her- or himself in a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. In such a situation, the supervisory board member might consider resigning from office in order to avoid a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. Back to Top 1.2       Upcoming New Transparency Rules for Listed German Companies as well as Institutional Investors, Asset Managers and Proxy Advisors In mid-October 2018, the German Federal Ministry of Justice finally presented the long-awaited draft for an act implementing the revised European Shareholders’ Rights Directive (Directive (EU) 2017/828). The Directive aims to encourage long-term shareholder engagement by facilitating the communication between shareholders and companies, in particular across borders, and will need to be implemented into German law by June 10, 2019 at the latest. The new rules primarily target listed German companies and provide some major changes with respect to the “say on pay” provisions, as well as additional approval and disclosure requirements for related party transactions, the transmission of information between a stock corporation and its shareholders and additional transparency and reporting requirements for institutional investors, asset managers and proxy advisors. “Say on pay” on directors’ remuneration: remuneration policy and remuneration report Under the current law, the shareholders determine the remuneration of the supervisory board members at a shareholder meeting, whereas the remuneration of the management board members is decided by the supervisory board. The law only provides for the possibility of an additional shareholder vote on the management board members’ remuneration if such vote is put on the agenda by the management and supervisory boards in their sole discretion. Even then, such vote has no legal effects whatsoever (“voluntary say on pay”). In the future, shareholders of German listed companies will have two options. First, the supervisory board will have to prepare a detailed remuneration policy for the management board, which must be submitted to the shareholders if there are major changes to the remuneration, and in any event at least once every four years (“mandatory say on pay”). That said, the result of the vote on the policy will continue to remain only advisory. However, if the supervisory board adopts a remuneration policy that has been rejected by the shareholders, it will then be required to submit a reviewed (not necessarily revised) remuneration policy to the shareholders at the next shareholders’ meeting. With respect to the remuneration of supervisory board members, the new rules require a shareholders vote at least once every four years. Second, at the annual shareholders’ meeting the shareholders will vote ex post on the remuneration report (which is also reviewed by the statutory auditor) which contains the remuneration granted to the present and former members of the management board and the supervisory board in the past financial year. Again, the shareholders’ vote, however, will only be advisory. Both the remuneration report including the audit report, as well as the remuneration policy will have to be made public on the company’s website for at least ten years. Related party transactions German stock corporation law already provides for various safeguard mechanisms to protect minority shareholders in cases of transactions with major shareholders or other related parties (e.g. the capital maintenance rules and the laws relating to groups of companies). In the future, in the case of listed companies, these mechanisms will be supplemented by a detailed set of approval and transparency requirements for transactions between the company and related parties. Material transactions exceeding certain thresholds will require prior supervisory board approval. A rejection by the supervisory board can be overcome by shareholder vote. Furthermore, a listed company must publicly disclose any such material related party transaction, without undue delay over media providing for a Europe-wide distribution. Identification of shareholders and facilitation of the exercise of shareholders’ rights Listed companies will have the right to request information on the identity of their shareholders, including the name and both a postal and electronic address, from depositary banks, thus allowing for a direct communication line, also with respect to bearer shares (“know-your-shareholder”). Furthermore, depositary banks and other intermediaries will be required to pass on important information from the company to the shareholders and vice versa, e.g. with respect to voting in shareholders’ meetings and the exercise of subscription rights. Where there is more than one intermediary in a chain, the intermediaries are required to pass on the respective information within the chain. In addition, companies will be required to confirm the votes cast at the request of the shareholders thus enabling them to be certain that their votes have been effectively cast, including in particular across borders. Transparency requirements for institutional investors, asset managers and proxy advisors German domestic institutional investors and asset managers with Germany as their home member state (as defined in the applicable sector-specific EU law) will be required (i) to disclose their engagement policy, including how they monitor, influence and communicate with the investee companies, exercise shareholders’ rights and manage actual and potential conflicts of interests, and (ii) to report annually on the implementation of their engagement policy and disclose how they have cast their votes in the general meetings of material investee companies. Institutional investors will further have to disclose (iii) consistency between the key elements of their investment strategy with the profile and duration of their liabilities and how they contribute to the medium to long-term performance of their assets, and, (iv) if asset managers are involved, to disclose the main aspects of their arrangement with the asset manager. The new disclosure and reporting requirements, however, only apply on a “comply or explain” basis. Thus, investors and asset managers may choose not to make the above disclosures, provided they give an explanation as to why this is the case. Proxy advisors will have to publicly disclose on an annual basis (i) whether and how they have applied their code of conduct based again on the “comply or explain” principle, and (ii) information on the essential features, methodologies and models they apply, their main information sources, the qualification of their staff, their voting policies for the different markets they operate in, their interaction with the companies and the stakeholders as well as how they manage conflicts of interests. These rules, however, do not apply to proxy advisors operating from a non-EEA state with no establishment in Germany. The present legislative draft is still under discussion and it is to be expected that there will still be some changes with respect to details before the act becomes effective in mid-2019. Due to transitional provisions, the new rules on “say on pay” will have no effect for the majority of listed companies in this year’s meeting season. Whether the new rules will actually promote a long-term engagement of shareholders and have the desired effect on the directors’ remuneration of listed companies will have to be seen. In any event, both listed companies as well as the other addressees of the new transparency rules should make sure that they are prepared for the new reporting and disclosure requirements. Back to Top 1.3       Germany Tightens Rules on Foreign Takeovers Even Further After the German government had imposed stricter rules on foreign direct investment in 2017 (see 2017 Year-End German Law Update under 1.5), it has now even further tightened its rules with respect to takeovers of German companies by foreign investors. The latest amendment of the rules under the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, “AWV“) enacted in 2018 was triggered, among other things, by the German government’s first-ever veto in August 2018 regarding the proposed acquisition of Leifeld Metal Spinning, a German manufacturer of metal forming machines used in the automotive, aerospace and nuclear industries, by Yantai Taihai Corporation, a privately-owned industry group from China, on the grounds of national security. Ultimately, Yantai withdrew its bid shortly after the German government had signaled that it would block the takeover. On December 29, 2018, the latest amendment of the Foreign Trade and Payments Ordinance came into force. The new rules provide for greater scrutiny of foreign direct investments by lowering the threshold for review of takeovers of German companies by foreign investors from the acquisition of 25% of the voting rights down to 10% in circumstances where the target operates a critical infrastructure or in sensitive security areas (defense and IT security industry). In addition, the amendment also expands the scope of the Foreign Trade and Payments Ordinance to also apply to certain media companies that contribute to shaping the public opinion by way of broadcasting, teleservices or printed materials and stand out due to their special relevance and broad impact. While the lowering of the review threshold as such will lead to an expansion of the existing reporting requirements, the broader scope is also aimed at preventing German mass media from being manipulated with disinformation by foreign investors or governments. There are no specific guidelines published by the German government as it wants the relevant parties to contact, and enter into a dialog with, the authorities about these matters. While the German government used to be rather liberal when it came to foreign investments in the past, the recent veto in the case of Leifeld as well as the new rules show that in certain circumstances, it will become more cumbersome for dealmakers to get a deal done. Finally, it is likely that the rules on foreign investment control will be tightened even further going forward in light of the contemplated EU legislative framework for screening foreign direct investment on a pan-European level. Back to Top 1.4       US Landmark Decision on MAE Clauses – Consequences for German M&A Deals Fresenius wrote legal history in the US with potential consequences also for German M&A deals in which “material adverse effect” (MAE) clauses are used. In December 2018, for the first time ever, the Supreme Court of Delaware allowed a purchaser to invoke the occurrence of an MAE and to terminate the affected merger agreement. The agreement included an MAE clause, which allocated certain business risks concerning the target (Akorn) for the time period between signing and closing to Akorn. Against the resistance of Akorn, Fresenius terminated the merger agreement based on the alleged MAE, arguing that the target’s EBITDA declined by 86%. The decision includes a very detailed analysis of an MAE clause by the Delaware courts and reaffirms that under Delaware law there is a very high bar to establishing an MAE. Such bar is based both on quantitative and qualitative parameters. The effects of any material adverse event need to be substantial as well as lasting. In most German deals, the parties agree to arbitrate. For this reason, there have been no German court rulings published on MAE clauses so far. Hence, all parties to an M&A deal face uncertainty about how German courts or arbitration tribunals would define “materiality” in the context of an MAE clause. In potential M&A litigation, sellers may use this ruling to support the argument that the bar for the exercise of the MAE right is in fact very high in line with the Delaware standard. It remains to be seen whether German judges will adopt the Delaware decision to interpret MAE clauses in German deals. Purchasers, who seek more certainty, may consider defining materiality in the MAE clause more concretely (e.g., by reference to the estimated impact of the event on the EBITDA of the company or any other financial parameter). Back to Top 1.5       Equivalence of Swiss Notarizations? The question whether the notarization of various German corporate matters may only be validly performed by German notaries or whether some or all of these measures may also be notarized validly by Swiss notaries has long since been the topic of legal debate. Since the last major reform of the German Limited Liability Companies Act (Gesetz betreffend Gesellschaften mit beschränkter Haftung – GmbHG) in 2008 the number of Swiss notarizations of German corporate measures has significantly decreased. A number of the newly introduced changes and provisions seemed to cast doubt on the equivalence and capacity of Swiss notaries to validly perform the duties of a German notary public who are not legally bound by the mandatory, non-negotiable German fee regime on notarial fees. As a consequence and a matter of prudence, German companies mostly stopped using Swiss notaries despite the potential for freely negotiated fee arrangements and the resulting significant costs savings in particular in high value matters. However, since 2008 there has been an increasing number of test cases that reach the higher German courts in which the permissibility of a Swiss notarization is the decisive issue. While the German Federal Supreme Court (Bundesgerichtshof – BGH) still has not had the opportunity to decide this question, in 2018 two such cases were decided by the Kammergericht (Higher District Court) in Berlin. In those cases, the court held that both the incorporation of a German limited liability company in the Swiss Canton of Berne (KG Berlin, 22 W 25/16 – January 24, 2018 = ZIP 2018, 323) and the notarization of a merger between two German GmbHs before a notary in the Swiss Canton of Basle (KG Berlin, 22 W 2/18 – July 26, 2018 = ZIP 2018, 1878) were valid notarizations under German law, because Swiss notaries were deemed to be generally equivalent to the qualifications and professional standards of German-based notaries. The reasons given in these decisions are reminiscent of the case law that existed prior to the 2008 corporate law reform and can be interpreted as indicative of a certain tendency by the courts to look favorably on Swiss notarizations as an alternative to German-based notarizations. Having said that and absent a determinative decision by the BGH, using German-based notaries remains the cautious default approach for German companies to take. This is definitely the case in any context where financing banks are involved (e.g. either where share pledges as loan security are concerned or in an acquisition financing context of GmbH share sales and transfers). On the other hand, in regions where such court precedents exist, the use of Swiss notaries for straightforward intercompany share transfers, mergers or conversions might be considered as an alternative on a case by case basis. Back to Top 1.6       Re-Enactment of the DCGK: Focus on Relevance, Function, Management Board’s Remuneration and Independence of Supervisory Board Members Sixteen years after it has first been enacted, the German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK), which contains standards for good and responsible governance for German listed companies, is facing a major makeover. In November 2018, the competent German government commission published a first draft for a radically revised DCGK. While vast parts of the proposed changes are merely editorial and technical in nature, the draft contains a number of new recommendations, in particular with respect to the topics of management remuneration and independence of supervisory board members. With respect to the latter, the draft now provides a catalogue of criteria that shall act as guidance for the supervisory board as to when a shareholder representative shall no longer be regarded as independent. Furthermore, the draft also provides for more detailed specifications aiming for an increased transparency of the supervisory board’s work, including the recommendation to individually disclose the members’ attendance of meetings, and further tightens the recommendations regarding the maximum number of simultaneous mandates for supervisory board members. Moreover, in addition to the previous concept of “comply or explain”, the draft DCGK introduces a new “apply and explain” concept, recommending that listed companies also explain how they apply certain fundamental principles set forth in the DCGK as a new third category in addition to the previous two categories of recommendations and suggestions. The draft DCGK is currently under consultation and the interested public is invited to comment upon the proposed amendments until the end of January 2019. Since some of the proposed amendments provide for a rather fundamentally new approach to the current regime and would introduce additional administrative burdens, it remains to be seen whether all of the proposed amendments will actually come into force. According to the current plan, following a final consultancy of the Government Commission, the revised version of the DCGK shall be submitted for publication in April 2019 and would take effect shortly thereafter. Back to Top 2.         Tax On November 23, 2018, the German Federal Council (Bundesrat) approved the German Tax Reform Act 2018 (Jahressteuergesetz 2018, the “Act”), which had passed the German Federal Parliament (Bundestag) on November 8, 2018. Highlights of the Act are (i) the exemption of restructuring gains from German income tax, (ii) the partial abolition of and a restructuring exemption from the loss forfeiture rules in share transactions and (iii) the extension of the scope of taxation for non-German real estate investors investing in Germany. 2.1       Exemption of Restructuring Gains The Act puts an end to a long period of uncertainty – which has significantly impaired restructuring efforts – with respect to the tax implications resulting from debt waivers in restructuring scenarios (please see in this regard our 2017 Year-End German Law Update under 3.2). Under German tax law, the waiver of worthless creditor claims creates a balance sheet profit for the debtor in the amount of the nominal value of the payable. Such balance sheet profit is taxable and would – without any tax privileges for such profit – often outweigh the restructuring effect of the waiver. The Act now reinstates the tax exemption of debt waivers with retroactive effect for debt waivers after February 8, 2017; upon application debt waivers prior to February 8, 2017 can also be covered. Prior to this legislative change, a tax exemption of restructuring gains was based on a restructuring decree of the Federal Ministry of Finance, which has been applied by the tax authorities since 2003. In 2016, the German Federal Fiscal Court (Bundesfinanzgerichtshof) held that the restructuring decree by the Federal Ministry of Finance violates constitutional law since a tax exemption must be legislated by statute and cannot be based on an administrative decree. Legislation was then on hold pending confirmation from the EU Commission that a legislative tax exemption does not constitute illegal state aid under EU law. The EU Commission finally gave such confirmation by way of a comfort letter in August 2018. The Act is largely based on the conditions imposed by a restructuring decree issued by the Federal Ministry of Finance on the tax exemption of a restructuring gain. Under the Act, gains at the level of the debtor resulting from a full or partial debt relief are exempt from German income tax if the relief is granted to recapitalize and restructure an ailing business. The tax exemption only applies if at the time of the debt waiver (i) the business is in need of restructuring and (ii) capable of being restructured, (iii) the waiver results in a going-concern of the restructured business and (iv) the creditor waives the debt with the intention to restructure the business. The rules apply to German corporate income and trade tax and benefit individuals, partnerships and corporations alike. Any gains from the relief must first be reduced by all existing loss-offsetting potentials before the taxpayer can benefit from tax exemptions on restructuring measures. Back to Top 2.2       Partial Abolition of Loss Forfeiture Rules/Restructuring Exception Under the current Loss Forfeiture Rules, losses of a German corporation will be forfeited on a pro rata basis if within a period of five years more than 25% but not more than 50% of the shares in the German loss-making corporation are transferred (directly or indirectly) to a new shareholder or group of shareholders with aligned interests. If more than 50% are transferred, losses will be forfeited in total. There are exceptions to this rule for certain intragroup restructurings, built-in gains and business continuations, especially in the venture capital industry. On March 29, 2017, the German Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) ruled that the pro rata forfeiture of losses (a share transfer of more than 25% but not more than 50%) is incompatible with the constitution. The court has asked the German legislator to amend the Loss Forfeiture Rules retroactively for the period from January 1, 2008 until December 31, 2015 to bring them in line with the constitution. Somewhat surprisingly, the legislator has now decided to fully cancel the pro rata forfeiture of losses with retroactive effect and with no reference to a specific tax period. Currently pending before the German Federal Constitutional Court is the question whether the full forfeiture of losses is constitutional. A decision by the Federal Constitutional Court is expected for early 2019, which may then result in another legislative amendment of the Loss Forfeiture Rules. The Act has also reinstated a restructuring exception from the forfeiture rules – if the share transfer occurs in order to restructure the business of an ailing corporation. Similar to the exemption of restructuring gains, this legislation was on hold until the ECJ’s decision (European Court of Justice) on June 28, 2018 that the restructuring exception does not violate EU law. Existing losses will not cease to exist following a share transfer if the restructuring measures are appropriate to avoid or eliminate the illiquidity or the over-indebtedness of the corporation and to maintain its basic operational structure. The restructuring exception applies to share transfers after December 31, 2007. Back to Top 2.3       Investments in German Real Estate by Non-German Investors So far, capital gains from the disposal of shares in a non-German corporation holding German real estate were not subject to German tax. In a typical structure, in which German real estate is held via a Luxembourg or Dutch entity, a value appreciation in the asset could be realized by a share deal of the holding company without triggering German income taxes. Under the Act, the sale of shares in a non-German corporation is now taxable if, at some point within a period of one year prior to the sale of shares, 50 percent of the book value of the assets of the company consisted of German real estate and the seller held at least 1 percent of the shares within the last five years prior to the sale. The Act is now in line with many double tax treaties concluded by Germany, which allow Germany to tax capital gains in these cases. The new law applies for share transfers after December 31, 2018. Capital gains are only subject to German tax to the extent the value has been increased after December 31, 2018. Until 2018, a change in the value of assets and liabilities, which are economically connected to German real estate, was not subject to German tax. Therefore, for example, profits from a waiver of debt that was used to finance German real estate was not taxable in Germany whereas the interest paid on the debt was deductible for German tax purposes. That law has now changed and allows Germany to tax such profit from a debt waiver if the loan was used to finance German real estate. However, only the change in value that occurred after December 31, 2018 is taxable. Back to Top 3.         Financing and Restructuring – Test for Liquidity Status Tightened On December 19, 2017, the German Federal Supreme Court (Bundesgerichtshof – BGH) handed down an important ruling which clarifies the debt and payable items that should be taken into account when determining the “liquidity” status of companies. According to the Court, the liquidity test now requires managing directors and (executive) board members to determine whether a liquidity gap exceeding 10% can be overcome by incoming liquidity within a period of three weeks taking into account all payables which will become due in those three weeks. Prior to the ruling, managing directors had often argued successfully that only those payables that were due at the time when the test is applied needed be taken into account while expected incoming payments within a three week term could be considered. This mismatch in favor of the managing directors has now been rectified by the Court to the disadvantage of the managing directors. If, for example, on June 1 the company liquidity status shows due payables amounting to EUR 100 and plausible incoming receivables in the three weeks thereafter amounting to EUR 101, no illiquidity existed under the old test. Under the new test confirmed by the Court, payables of EUR 50 becoming due in the three week period now also have to be taken into account and the company would be considered illiquid. For companies and their managing directors following a cautious approach, the implications of this ruling are minor. Going forward, however, even those willing to take higher risks will need to follow the court determined principles. Otherwise, delayed insolvency filings could ensue. This not only involves a managing directors and executive board members’ personal liability for payments made on behalf of the company while illiquid but also potential criminal liability for a delayed insolvency filing. Managing directors are thus well advised to properly undertake and also document the required test in order to avoid liability issues. Back to Top 4.         Labor and Employment 4.1       GDPR Has Tightened Workplace Privacy Rules The EU General Data Protection Regulation (“GDPR”) started to apply on May 25, 2018. It has introduced a number of stricter rules for EU countries with regard to data protection which also apply to employee personal data and employment relationships. In addition to higher sanctions, the regulation provides for extensive information, notification, deletion, and documentation obligations. While many of these data privacy rules had already been part of the previous German workplace privacy regime under the German Federal Data Protection Act (Bundesdatenschutzgesetz – BDSG), the latter has also been amended and provides for specific rules applicable to employee data protection in Germany (e.g. in the context of internal investigations or with respect to employee co-determination). However, the most salient novelty is the enormous increase in potential sanctions under the GDPR. Fines for GDPR violations can reach up to the higher of EUR 20 million or 4% of the group’s worldwide turnover. Against this backdrop, employers are well-advised to handle employee personnel data particularly careful. This is also particularly noteworthy as the employer is under an obligation to prove compliance with the GDPR – which may result in a reversal of the burden of proof e.g. in employment-related litigation matters involving alleged GDPR violations. Back to Top 4.2       Job Adverts with Third Gender Following a landmark decision by the German Federal Constitutional Court in 2017, employers are gradually inserting a third gender into their job advertisements. The Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) decided on October 10, 2017 that citizens who do not identify as either male or female were to be registered as “diverse” in the birth register (1 BvR 2019/16). As a consequence of this court decision, many employers in Germany have broadened gender notations in job advertisements from previously “m/f” to “m/f/d”. While there is no compelling legal obligation to do so, employers tend to signal their open-mindedness by this step, but also mitigate the potential risk of liability for a discrimination claim. Currently, such liability risk does not appear alarming due to the relative rarity of persons identifying as neither male nor female and the lack of a statutory stipulation for such adverts. However, employers might be well-advised to follow this trend, particularly after Parliament confirmed the existence of a third gender option in birth registers in mid-December. Back to Top 4.3       Can Disclosure Obligation Reduce Gender Pay-Gap? In an attempt to weed out gender pay gaps, the German lawmaker has introduced the so-called Compensation Transparency Act in 2017. It obliges employers, inter alia, to disclose the median compensation of comparable colleagues of the opposite gender with comparable jobs within the company. The purpose is to give a potential claimant (usually a female employee) an impression of how much her comparable male colleagues earn in order for her to consider further steps, e.g. a claim for more money. However, the new law is widely perceived as pointless. First, the law itself and its processes are unduly complex. Second, even after making use of the law, the respective employee would still have to sue the company separately in order to achieve an increase in her compensation, bearing the burden of proof that the opposite-gender employee with higher compensation is comparable to her. Against this background, the law has hardly been used in practice and will likely have only minimal impact. Back to Top 4.4       Employers to Contribute 15% to Deferred Compensation Schemes In order to promote company pension schemes, employers are now obliged to financially support deferred compensation arrangements. So far, employer contributions to any company pension scheme had been voluntary. In the case of deferred compensation schemes, companies save money as a result of less social security charges. The flipside of this saving was a financial detriment to the employee’s statutory pension, as the latter depends on the salary actually paid to the employee (which is reduced as a result of the deferred compensation). To compensate the employee for this gap, the employer is now obliged to contribute up to 15% of the respective deferred compensation. The actual impact of this new rule should be limited, as many employers already actively support deferred compensation schemes. As such, the new obligatory contribution can be set off against existing employer contributions to the same pension scheme. Back to Top 5.         Real Estate – Notarization Requirement for Amendments to Real Estate Purchase Agreements Purchase agreements concerning German real estate require notarization in order to be effective. This notarization requirement relates not only to the purchase agreement as such but to all closely related (side) agreements. The transfer of title to the purchaser additionally requires an agreement in rem between the seller and the purchaser on the transfer (conveyance) and the subsequent registration of the transfer in the land register. To avoid additional notarial fees, parties usually include the conveyance in the notarial real estate purchase agreement. Amendment agreements to real estate purchase agreements are quite common (e.g., the parties subsequently agree on a purchase price adjustment or the purchaser has special requests in a real estate development scenario). Various Higher District Courts (Oberlandesgerichte), together with the prevailing opinion in literature, have held in the past that any amendments to real estate purchase agreements also require notarization unless such an amendment is designed to remove unforeseeable difficulties with the implementation of the agreement without significantly changing the parties’ mutual obligations. Any amendment agreement that does not meet the notarization requirement may render the entire purchase agreement (and not only the amendment agreement) null and void. With its decision on September 14, 2018, the German Federal Supreme Court (Bundesgerichtshof – BGH) added another exception to the notarization requirement and ruled that notarization of an amendment agreement is not required once the conveyance has become binding and the amendment does not change the existing real estate transfer obligations or create new ones. A conveyance becomes binding once it has been validly notarized. Before this new decision of the BGH, amendments to real estate purchase agreements were often notarized for the sake of precaution because it was difficult to determine whether the conditions for an exemption from the notarization requirement had been met. This new decision of the BGH gives the parties clear guidance as to when amendments to real estate purchase agreements require notarization. It should, however, be borne in mind that notarization is still required if the amendment provides for new transfer obligations concerning the real property or the conveyance has not become effective yet (e.g., because third party approval is still outstanding). Back to Top 6.         Compliance 6.1       Government Plans to Introduce Corporate Criminal Liability and Internal Investigations Act Plans of the Federal Government to introduce a new statute concerning corporate criminal liability and internal investigations are taking shape. Although a draft bill had already been announced for the end of 2018, pressure to respond to recent corporate scandals seems to be rising. With regard to the role and protection of work product generated during internal investigations, the highly disputed decisions of the Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) in June 2018 (BVerfG, 2 BvR 1405/17, 2 BvR 1780/17 – June 27, 2018) (see 2017 Year-End German Law Update under 7.3) call for clearer statutory rules concerning the search of law firm premises and the seizure of documents collected in the course of an internal investigation. In its dismissal of complaints brought by Volkswagen and its lawyers from Jones Day, the Federal Constitutional Court made remarkable obiter dicta statements in which it emphasized the following: (1) the legal privilege enjoyed for the communication between the individual defendant (Beschuldigter) and its criminal defense counsel is limited to their communication only; (2) being considered a foreign corporate body, the court denied Jones Day standing in the proceedings, because the German constitution only grants rights to corporate bodies domiciled in Germany; and (3) a search of the offices of a law firm does not affect individual constitutional rights of the lawyers practicing in that office, because the office does not belong to the lawyers’ personal sphere, but only to their law firm. The decision and the additional exposure caused by it by making attorney work product created in the course of an internal investigation accessible was a major blow to German corporations’ efforts to foster internal investigations as a means to efficiently and effectively investigate serious compliance concerns. Because it does not appear likely that an entirely new statute concerning corporate criminal liability will materialize in the near future, the legal press expects the Federal Ministry of Justice to consider an approach in which the statutes dealing with questions around internal investigations and the protection of work product created in the course thereof will be clarified separately. In the meantime, the following measures are recommended to maximize the legal privilege for defense counsel (Verteidigerprivileg): (1) Establish clear instructions to an individual criminal defense lawyer setting forth the scope and purpose of the defense; (2) mark work product and communications that have been created in the course of the defense clearly as confidential correspondence with defense counsel (“Vertrauliche Verteidigerkorrespondenz”); and (3) clearly separate such correspondence from other correspondence with the same client in matters that are not clearly attributable to the criminal defense mandate. While none of these measures will guarantee that state prosecutors and courts will abstain from a search and seizure of such material, at least there are good and valid arguments to defend the legal privilege in any appeals process. However, with the guidance provided to courts by the recent constitutional decision, until new statutory provisions provide for clearer guidance, companies can expect this to become an up-hill battle. Back to Top 6.2       Update on the European Public Prosecutor’s Office and Proposed Cross-Border Electronic Evidence Rules Recently the European Union has started tightening its cooperation in the field of criminal procedure, which was previously viewed as a matter of national law under the sovereignty of the 28 EU member states. Two recent developments stand out that illustrate that remarkable new trend: (1) The introduction of the European Public Prosecutor’s Office (“EPPO”) that was given jurisdiction to conduct EU-wide investigations for certain matters independent of the prosecution of these matters under the national laws of the member states, and (2) the proposed EU-wide framework for cross-border access to electronically stored data (“e-evidence”) which has recently been introduced to the European Parliament. As reported previously (see 2017 Year-End German Law Update under 7.4), the European Prosecutor’s Office’s task is to independently investigate and prosecute severe crimes against the EU’s financial interests such as fraud against the EU budget or crimes related to EU subsidies. Corporations receiving funds from the EU may therefore be the first to be scrutinized by this new EU body. In 2018 two additional EU member states, the Netherlands and Malta, decided to join this initiative, extending the number of participating member states to 22. The EPPO will presumably begin its work by the end of 2020, because the start date may not be earlier than three years after the regulation’s entry into force. As a further measure to leverage multi-jurisdictional enforcement activities, in April 2018 the European Commission proposed a directive and a regulation that will significantly facilitate expedited cross-border access to e-evidence such as texts, emails or messaging apps by enforcement agencies and judicial authorities. The proposed framework would allow national enforcement authorities in accordance with their domestic procedure to request e-evidence directly from a service provider located in the jurisdiction of another EU member state. That other state’s authorities would not have the right to object to or to review the decision to search and seize the e-evidence sought by the national enforcement authority of the requesting EU member state. Companies refusing delivery risk a fine of up to 2% of their worldwide annual turnover. In addition, providers from a third country which operate in the EU are obliged to appoint a legal representative in the EU. The proposal has reached a majority vote in the Council of the EU and will now be negotiated in the European Parliament. Further controversial discussions between the European Parliament and the Commission took place on December 10, 2018. The Council of the EU aims at reaching an agreement between the three institutions by the end of term of the European Parliament in May 2019. Back to Top 7.         Antitrust and Merger Control 7.1       Antitrust and Merger Control Overview 2018 In 2018, Germany celebrated the 60th anniversary of both the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB) as well as the German federal cartel office (Bundeskartellamt) which were both established in 1958 and have since played a leading role in competition enforcement worldwide. The celebrations notwithstanding, the German antitrust watchdog has had a very active year in substantially all of its areas of competence. On the enforcement side, the Bundeskartellamt concluded a number of important cartel investigations. According to its annual review, the Bundeskartellamt carried out dawn raids at 51 companies and imposed fines totaling EUR 376 million against 22 companies or associations and 20 individuals from various industries including the steel, potato manufacturing, newspapers and rolled asphalt industries. Leniency applications remained an important source for the Bundeskartellamt‘s antitrust enforcement activities with a total of 21 leniency applications received in 2018 filling the pipeline for the next few months and years. On the merger control side, the Bundeskartellamt reviewed approximately 1,300 merger cases in 2018 – only 1% of which (i.e. 13 merger filings) required an in-depth phase 2 review. No mergers were prohibited but in one case only conditional clearance was granted and three filings were withdrawn in phase 2. In addition, the Bundeskartellamt had its first full year of additional responsibilities in the area of consumer protection, concluded a sector inquiry into internet comparison portals, and started a sector inquiry into the online marketing business as well as a joint project with the French competition authority CNIL regarding algorithms in the digital economy and their competitive effects. Back to Top 7.2       Cartel Damages Over the past few years, antitrust damages law has advanced in Germany and the European Union. One major legislative development was the EU Directive on actions for damages for infringements of competition law, which was implemented in Germany as part of the 9th amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB). In addition, there has also been some noteworthy case law concerning antitrust damages. To begin with, the German Federal Supreme Court (Bundesgerichtshof, BGH) strengthened the position of plaintiffs suing for antitrust damages in its decision Grauzementkartell II in 2018. The decision brought to an end an ongoing dispute between several Higher District Courts and District Courts, which had disagreed over whether a recently added provision of the GWB that suspends the statute of limitations in cases where antitrust authorities initiate investigations would also apply to claims that arose before the amendment entered into force (July 1, 2015). The Federal Supreme Court affirmed the suspension of the statute of limitations, basing its ruling on a well-established principle of German law regarding the intertemporal application of statutes of limitation. The decision concerns numerous antitrust damage suits, including several pending cases concerning trucks, rails tracks, and sugar cartels. Furthermore, recent case law shows that European domestic courts interpret arbitration agreements very broadly and also enforce them in cases involving antitrust damages. In 2017, the England and Wales High Court and the District Court Dortmund (Landgericht Dortmund) were presented with two antitrust disputes where the parties had agreed on an arbitration clause. Both courts denied jurisdiction because the antitrust damage claims were also covered by the arbitration agreements. They argued that the parties could have asserted claims for contractual damages instead, which would have been covered by the arbitration agreement. In the courts’ view, it would be unreasonable, however, if the choice between asserting a contractual or an antitrust claim would give the parties the opportunity to influence the jurisdiction of a court. As a consequence, the use of arbitration clauses (in particular if inconsistently used by suppliers or purchasers) may add significant complexity to antitrust damages litigation going forward. Thus, companies are well advised to examine their international supply agreements to determine whether included arbitration agreements will also apply to disputes about antitrust damages. Back to Top 7.3       Appeals against Fines Risky? In German antitrust proceedings, there is increasing pressure for enterprises to settle. Earlier this year, Radeberger, a producer of lager beer, withdrew its appeal against a significant fine of EUR 338 million, which the Bundeskartellamt had imposed on the company for its alleged participation in the so-called “beer cartel”. With this dramatic step, Radeberger paid heed to a worrisome development in German competition law. Repeatedly, enterprises have seen their cartel fines increased by staggering amounts on appeal (despite such appeals sometimes succeeding on some substantive legal issues). The reason for these “appeals for the worse” – as seen in the liquefied gas cartel (increase of fine from EUR 180 million to EUR 244 million), the sweets cartel (average increase of approx. 50%) and the wallpaper cartel (average increase of approx. 35%) – is the different approach taken by the Bundeskartellamt and the courts to calculating fines. As courts are not bound by the administrative practice of the Bundeskartellamt, many practitioners are calling for the legislator to step in and address the issue. Back to Top 7.4       Luxury Products on Amazon – The Coty Case In July 2018, the Frankfurt Higher District Court (Oberlandesgericht Frankfurt) delivered its judgement in the case Coty / Parfümerie Akzente, ruling that Coty, a luxury perfume producer, did not violate competition rules by imposing an obligation on its selected distributors to not sell on third-party platforms such as Amazon. The judgment followed an earlier decision of the Court of Justice of the European Union (ECJ) of December 2017, by which the ECJ had replied to the Frankfurt court’s referral. The ECJ had held that a vertical distribution agreement (such as the one in place between Coty and its distributor Parfümerie Akzente) did not as such violate Art. 101 of the Treaty on the Functioning of the European Union (TFEU) as long as the so-called Metro criteria were fulfilled. These criteria stipulate that distributors must be chosen on the basis of objective and qualitative criteria that are applied in a non-discriminatory fashion; that the characteristics of the product necessitate the use of a selective distribution network in order to preserve their quality; and, finally, that the criteria laid down do not go beyond what is necessary. Regarding the platform ban in question, the ECJ held that it was not disproportionate. Based on the ECJ’s interpretation of the law, the Frankfurt Higher District Court confirmed that the character of certain products may indeed necessitate a selective distribution system in order to preserve their prestigious reputation, which allowed consumers to distinguish them from similar goods, and that gaps in a selective distribution system (e.g. when products are sold by non-selected distributors) did not per se make the distribution system discriminatory. The Higher District Court also concluded that the platform ban in question was proportional. However, interestingly, it did not do so based on its own reasoning but based on the fact that the ECJ’s detailed analysis did not leave any scope for its own interpretation and, hence, precluded the Higher District Court from applying its own reasoning. Pointing to the European Commission’s E-Commerce Sector Inquiry, according to which sales platforms play a more important role in Germany than in other EU Member States, the Higher District Court, in fact, voiced doubts whether Coty’s sales ban could not have been imposed in a less interfering manner. Back to Top 8.         Litigation 8.1       The New German “Class Action” On November 1, 2018, a long anticipated amendment to the German Code of Civil Procedure (Zivilprozessordnung, ZPO) entered into force, introducing a new procedural remedy for consumers to enforce their rights in German courts: a collective action for declaratory relief. Although sometimes referred to as the new German “class action,” this new German action reveals distinct differences to the U.S.-American remedy. Foremost, the right to bring the collective action is limited to consumer protection organizations or other “qualified institutions” (qualifizierte Einrichtung) who can only represent “consumers” within the meaning of the German Code of Civil Procedure. In addition, affected consumers are not automatically included in the action as part of a class but must actively opt-in by registering their claims in a “claim index” (Klageregister). Furthermore, the collective action for declaratory relief does not grant any monetary relief to the plaintiffs which means that each consumer still has to enforce its claim in an individual suit to receive compensation from the defendant. Despite these differences, the essential and comparable element of the new legal remedy is its binding effect. Any other court which has to decide an individual dispute between the defendant and a registered consumer that is based on the same facts as the collective action is bound by the declaratory decision of the initial court. At the same time, any settlement reached by the parties has a binding effect on all registered consumers who did not decide to specifically opt-out. As a result, companies must be aware of the increased litigation risks arising from the introduction of the new collective action for declaratory relief. Even though its reach is not as extensive as the American class action, consumer protection organizations have already filed two proceedings against companies from the automotive and financial industry since the amendment has entered into force in November 2018, and will most likely continue to make comprehensive use of the new remedy in the future. Back to Top 8.2       The New 2018 DIS Arbitration Rules On March 1, 2018, the new 2018 DIS Arbitration Rules of the German Arbitration Institute (DIS) entered into force. The update aims to make Germany more attractive as a place for arbitration by adjusting the rules to international standards, promoting efficiency and thereby ensuring higher quality for arbitration proceedings. The majority of the updated provisions and rules are designed to accelerate the proceedings and thereby make arbitration more attractive and cost-effective for the parties. There are several new rules on time limitations and measures to enhance procedural efficiency, i.e. the possibility of expedited proceedings or the introduction of case management conferences. Furthermore, the rules now also allow for consolidation of several arbitrations and cover multi-party and multi-contract arbitration. Another major change is the introduction of the DIS Arbitration Council which, similar to the Arbitration Council of the ICC (International Chamber of Commerce), may decide upon challenges of an arbitrator and review arbitral awards for formal defects. This amendment shows that the influence of DIS on their arbitration proceedings has grown significantly. All in all, the modernized 2018 DIS Arbitration Rules resolve the deficiencies of their predecessor and strengthen the position of the German Institution of Arbitration among competing arbitration institutions. Back to Top 9.         IP & Technology – Draft Bill of German Trade Secret Act The EU Trade Secrets Directive (2016/943/EU) on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure has already been in effect since July 5, 2016. Even though it was supposed to be implemented into national law by June 9, 2018 to harmonize the protection of trade secrets in the EU, the German legislator has so far only prepared and published a draft of the proposed German Trade Secret Act. Arguably, the most important change in the draft bill to the existing rules on trade secrets in Germany will be a new and EU-wide definition of trade secrets. This proposed definition requires the holder of a trade secret to take reasonable measures to keep a trade secret confidential in order to benefit from its protection – e.g. by implementing technical, contractual and organizational measures that ensure secrecy. This requirement goes beyond the current standard pursuant to which a manifest interest in keeping an information secret may be sufficient. Furthermore, the draft bill provides for additional protection of trade secrets in litigation matters. Last but not least, the draft bill also provides for increased protection of whistleblowers by reducing the barriers for the disclosure of trade secrets in the public interest and to the media. As a consequence, companies would be advised to review their internal procedures and policies regarding the protection of trade secrets at this stage, and may want to adapt their existing whistleblowing and compliance-management-systems as appropriate. Back to Top 10.       International Trade, Sanctions and Export Controls – The Conflict between Complying with the Re-Imposed U.S. Iran Sanctions and the EU Blocking Statute On May 8, 2018, President Donald Trump announced his decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) and re-impose U.S. nuclear-related sanctions. Under the JCPOA, General License H had permitted U.S.-owned or -controlled non-U.S. entities to engage in business with Iran. But with the end of the wind-down periods provided for in President Trump’s decision on November 5, 2018, such non-U.S. entities are now no longer broadly permitted to provide goods, services, or financing to Iranian counterparties, not even under agreements executed before the U.S. withdrawal from the JCPOA. In response to the May 8, 2018 decision, the EU amended the EU Blocking Statute on August 6, 2018. The effect of the amended EU Blocking Statute is to prohibit compliance by so-called EU operators with the re-imposed U.S. sanctions on Iran. Comparable and more generally drafted anti-blocking statutes had already existed in the EU and several of its member states which prohibited EU domiciled companies to commit to compliance with foreign boycott regulations. These competing obligations under EU and U.S. laws are a concern for U.S. companies that own or seek to acquire German companies that have a history of engagement with Iran – as well as for the German company itself and its management and the employees. But what does the EU prohibition against compliance with the re-imposed U.S. sanctions on Iran mean in practice? Most importantly, it must be noted that the EU Blocking Statute does not oblige EU operators to start or continue Iran related business. If, for example, an EU operator voluntarily decides, e.g. due to lack of profitability, to cease business operations in Iran and not to demonstrate compliance with the U.S. sanctions, the EU Blocking Statute does not apply. Obviously, such voluntary decision must be properly documented. Procedural aspects also remain challenging for companies: In the event a Germany subsidiary of a U.S. company were to decide to start or continue business with Iran, it would usually be required to reach out to the U.S. authorities to request a specific license for a particular transaction with Iran. Before doing so, however, EU operators must first contact the EU Commission directly (not the EU member state authorities) to request authorization to apply for such a U.S. special license. Likewise, if a Germany subsidiary were to decide not to start or to cease business with Iran for the sole reason of being compliant with the re-imposed U.S. Iran sanctions, it would have to apply for an exception from the EU Blocking Statute and would have to provide sufficient evidence that non-compliance would cause serious damage to at least one protected interest. The hurdles for an exception are high and difficult to predict. The EU Commission will e.g. consider, “(…) whether the applicant would face significant economic losses, which could for example threaten its viability or pose a serious risk of bankruptcy, or the security of supply of strategic goods or services within or to the Union or a Member State and the impact of any shortage or disruption therein.” As such, any company caught up in this conflict of interests between the re-imposed U.S. sanctions and the EU Blocking Statute should be aware of a heightened risk of litigation. Third parties, such as Iranian counterparties, might successfully sue for breach of contract with the support of the EU Blocking Regulation in cases of non-performance of contracts as a result of the re-imposed U.S. nuclear sanctions. Finally, EU operators are required to inform the EU Commission within 30 days from the date on which information is obtained that the economic and/or financial interests of the EU operator are affected, directly or indirectly, by the re-imposed U.S. Iran sanctions. If the EU operator is a legal person, this obligation is incumbent on its directors, managers and other persons with management responsibilities of such legal person. Back to Top The following Gibson Dunn lawyers assisted in preparing this client update:  Birgit Friedl, Marcus Geiss, Silke Beiter, Lutz Englisch, Daniel Gebauer, Kai Gesing, Maximilian Hoffmann, Philipp Mangini-Guidano, Jens-Olrik Murach, Markus Nauheim, Dirk Oberbracht, Richard Roeder, Martin Schmid, Annekatrin Schmoll, Jan Schubert, Benno Schwarz, Balthasar Strunz, Michael Walther, Finn Zeidler, Mark Zimmer, Stefanie Zirkel and Caroline Ziser Smith. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime experience. The German offices are comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices: General Corporate, Corporate Transactions and Capital Markets Lutz Englisch (+49 89 189 33 150), lenglisch@gibsondunn.com) Markus Nauheim (+49 89 189 33 122, mnauheim@gibsondunn.com) Ferdinand Fromholzer (+49 89 189 33 121, ffromholzer@gibsondunn.com) Dirk Oberbracht (+49 69 247 411 510, doberbracht@gibsondunn.com) Wilhelm Reinhardt (+49 69 247 411 520, wreinhardt@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 121, sbeiter@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 521, apelster@gibsondunn.com Finance, Restructuring and Insolvency Sebastian Schoon (+49 89 189 33 160, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Alexander Klein (+49 69 247 411 518, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Tax Hans Martin Schmid (+49 89 189 33 110, mschmid@gibsondunn.com) Labor Law Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Real Estate Peter Decker (+49 89 189 33 115, pdecker@gibsondunn.com) Daniel Gebauer (+49 89 189 33 115, dgebauer@gibsondunn.com) Technology Transactions / Intellectual Property / Data Privacy Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Corporate Compliance / White Collar Matters Benno Schwarz (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Antitrust Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Litigation Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) International Trade, Sanctions and Export Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Richard Roeder (+49 89 189 33 218, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 8, 2019 |
Supreme Court Rejects “Wholly Groundless” Exception To Rule That Parties May Refer Arbitrability Disputes To Arbitration

Click for PDF Decided January 8, 2019 Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272 The Supreme Court held 9-0 that courts may not decline to enforce agreements delegating arbitrability issues to an arbitrator, even if the court concludes that the claim of arbitrability is “wholly groundless.” Background: The Federal Arbitration Act generally permits courts to decide whether a contract requires arbitration of a dispute.  The Act, however, also requires courts to interpret contracts as written, and the Supreme Court has held that an arbitration agreement may “clearly” and “unmistakably” refer the arbitrability issue to an arbitrator.  Here, the defendants in an antitrust lawsuit sought to compel arbitration, citing a clause in their contracts with the plaintiff requiring arbitration of any “dispute arising under or related to” the contracts, “except for actions seeking injunctive relief.”  Although the plaintiff sought both damages and injunctive relief, the defendants argued that arbitration was required because damages were the predominant form of relief requested.  The Fifth Circuit held that the trial court properly declined to refer the arbitrability issue to an arbitrator because the plaintiff’s claim for injunctive relief made the defendants’ request for arbitration “wholly groundless.” Issue: May a court decline to enforce an agreement delegating arbitrability issues to an arbitrator, and resolve arbitrability disputes itself, if it concludes that the claim of arbitrability is “wholly groundless”? Court’s Holding: No.  Courts must enforce agreements to delegate arbitrability issues to an arbitrator, even if the court concludes that a claim of arbitrability is “wholly groundless,” because the Federal Arbitration Act does not contain a “wholly groundless” exception. “The [Federal Arbitration] Act does not contain a ‘wholly groundless’ exception. . . . When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.” Justice Kavanaugh, writing for the unanimous Court What It Means: In Justice Kavanaugh’s first opinion, the Court was “dubious” that recognizing a “wholly groundless” exception would save time and money, as such an exception would “inevitably spark collateral litigation” over whether a claim for arbitration is “groundless,” as opposed to “wholly groundless.” The decision removes an opportunity for plaintiffs to avoid arbitration of threshold issues of arbitrability where a contract has delegated those issues to an arbitrator.    The Court emphasized again the importance of enforcing arbitration agreements as they are drafted and refusing to create exceptions that would permit judicial second-guessing of arbitration agreements.    Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Labor and Employment Practice Catherine A. Conway +1 213.229.7822 cconway@gibsondunn.com Jason C. Schwartz +1 202.955.8242 jschwartz@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.