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April 7, 2021 |
New York State Legalizes Recreational Marijuana, Places Limits on Employers’ Ability to Take Drug Use Into Account When Making Employment Decisions

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On March 31st, 2021, New York became the 16th state to legalize marijuana for recreational use with the enactment of Senate Bill S854A.  Under the new law, it is legal for individuals 21 and older to possess and purchase up to three ounces of marijuana.  At their place of residence, individuals are also permitted to possess up to five pounds of the drug.  While the law takes effect immediately, it is expected to take the state as long as two years to fully implement it, including setting up a system to license marijuana retailers.  The law also modifies the state’s existing medical marijuana program, in place since 2014, by expanding the types of medical conditions for which marijuana can be prescribed.

Restrictions on Employers’ Hiring and Disciplinary Policies

Of particular importance to employers, the law creates new restrictions on an employer’s ability to discipline or terminate employees for using marijuana, as well as limits on employers’ ability to refuse to hire a prospective employee for consuming the drug.  Specifically, it is now unlawful for employers to refuse to hire, employ or license, or to discharge from employment or otherwise discriminate against an individual in compensation, promotion, or terms, conditions or privileges of employment because that individual uses cannabis as permitted under state law.  N.Y. Lab. Law § 201-d(2).  However, the law allows employers to take action based on an employee’s or a prospective employee’s use of marijuana where required by federal or state law, or when an employee is impaired while on the job.  N.Y. Lab. Law § 201-d(4-a).

These restrictions build on existing provisions of New York’s medical marijuana law, which treats a person’s status as a certified user of medical marijuana as a disability that employers must accommodate where reasonably possible.  See N.Y. Pub. Health Law § 3369.  They also come on the heels of a law that took effect in New York City in May 2020, prohibiting employers from testing job applicants for marijuana usage.  See N.Y.C. Admin. Code § 8-107(31)(a).  New York City’s law exempts employers in certain cases, such as where the applicant is being considered for a safety-sensitive position.  N.Y.C. Admin. Code § 8-107(31)(b).

Trend in State and Local Laws

With the enactment of S854A, New York becomes the third state in 2021 to liberalize its laws governing marijuana use.  In February 2021, New Jersey also legalized recreational marijuana, and starting in July 2021 residents of South Dakota will be permitted to use marijuana for certain medical reasons.  Both New Jersey’s and South Dakota’s laws also place restrictions on when employers can take action based on an employee’s or job applicant’s marijuana use.  See N.J. Stat. § 24:6I-52(a); S.D. Codified Laws § 34-20G-22.

In total, 19 states and the District of Columbia now have laws restricting employers’ ability to take marijuana usage into account when making employment decisions.  These laws vary widely both in how extensively they limit employers’ actions, as well as in the number and types of exceptions they allow, creating a patchwork of different legal obligations across the country that employers must navigate.  New York’s new restrictions are among the most extensive in the nation, and will require many employers to make significant changes to longstanding drug testing and employment policies.

Takeaways for Employers

  • Employers in New York State should review their policies governing drug use among employees and job applicants to ensure they are in compliance with the new restrictions on basing employment decisions on a person’s consumption of marijuana.
  • Employers with operations in multiple states should closely examine applicable state and local laws to ensure they are in compliance with the unique limitations on how marijuana use is treated in the workplace in different jurisdictions. A uniform, one-size-fits-all policy on drug use is, in many cases, no longer feasible for employers with nationwide operations.
  • Employers should closely monitor developments in this area as states and cities adopt new laws. The rules governing how marijuana use is treated when making employment decisions are changing rapidly across the country, and employers may find that longstanding employment practices need to be adjusted as this trend continues.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Labor and Employment practice group, or the following:

Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Blake Lanning* – Washington, D.C. (+1 202-887-3794, blanning@gibsondunn.com)

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

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)

*Mr. Lanning is admitted only in Indiana, and is currently practicing under the supervision of members of the District of Columbia Bar.

© 2021 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 5, 2021 |
Gibson Dunn Wins Six Awards at 2021 Benchmark Litigation US Awards Ceremony

Benchmark Litigation recognized Gibson Dunn at its 2021 Benchmark US awards ceremony with six awards. Gibson Dunn was named East Coast Appellate Firm of the Year, California Antitrust Firm of the Year and California Labor & Employment Firm of the Year.  Additionally, Los Angeles partner Theane Evangelis was named California Labor & Employment Litigator of the Year and Washington, D.C. partner Richard Parker was named East Coast Antitrust Litigator of the Year. Finally, Soundgarden et al. v. UMG Recordings, Inc, in which Gibson Dunn represented UMG, was named an Impact Case. The publication noted, “The firm continues to enjoy a coveted position as one of the nation’s strongest and most in-demand litigation institutions.” The awards were presented on March 31, 2021. Theane Evangelis serves as Co-Chair of the firm’s Class Actions Practice Group and as Vice Chair of the California Appellate Practice Group. She has played a lead role in a wide range of appellate, constitutional, media and entertainment, and crisis management matters, as well as a variety of employment, consumer and other class actions. Richard Parker is a leading antitrust lawyer who has successfully represented clients before both enforcement agencies and the courts. As an experienced antitrust trial and regulatory lawyer, Richard has been involved in many major antitrust representations, including merger clearance cases, cartel matters, class actions, and government civil investigations.  He has extensive experience representing clients in matters before the Federal Trade Commission (FTC)  and the U.S. Department of Justice Antitrust Division.

March 1, 2021 |
California Supreme Court Issues Important Decision Regarding an Employer’s Obligation to Provide and Record Meal Periods

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The California Supreme Court’s February 25, 2021 opinion in Donohue v. AMN Services, LLC is the most significant decision construing an employer’s duty to provide and record meal periods in nearly a decade. California employers may wish to assess their meal period policies and practices, including relating to the recordation of meal periods, in light of the Court’s guidance in Donohue.

Donohue reaffirmed the key holding of Brinker Restaurant Corp. v. Superior Court, 53 Cal. 4th 1004 (2012), as the Court once again made clear that employers need not force employees to take full meal periods, so long as such meal periods are provided. But at the same time, the Court held that whenever timekeeping records show that an employee failed to take a compliant meal period, a rebuttable presumption arises under which it is presumed that the employer failed to provide a proper meal period. This means that employers will have the burden to prove they provided compliant meal periods for any shifts in which timekeeping records show that a meal period was short, late, or not recorded at all.

After Donohue, employers seeking to minimize potential litigation may wish to consider, among other options, ensuring that they have robust timekeeping systems that track the amount of time employees spend taking meal periods and automatically prompt employees to confirm they voluntarily chose to take a short or late meal period, or to skip the meal period entirely.

Donohue’s Key Holdings

  • Reaffirming the core teachings of Brinker, the Court in Donohue explained that “[a]n employer is liable [for failing to provide meal periods] only if it does not provide an employee with the opportunity to take a compliant meal period,” that an “employer is not liable if the employee chooses to take a short or delayed meal period or no meal period at all,” that an “employer is not required to police meal periods to make sure no work is performed,” and that “the employer’s duty is to ensure that it provides the employee with bona fide relief from duty and that this is accurately reflected in the employer’s time records.” Donohue slip op. at 27–28.
  • With respect to recordation of meal periods, the Court held that “employers cannot engage in the practice of rounding time punches—that is, adjusting the hours that an employee has actually worked to the nearest preset time increment.” Id. at 1.
  • The Court expressly did not address the use of time rounding policies outside the context of meal periods, but suggested that “the practical advantages of rounding polices may diminish further” as “technology continues to evolve” and “technological advances may help employers to track time more precisely.” Id. at 19, 21.
  • The Court adopted the rebuttable presumption discussed by Justice Werdegar in her concurring opinion in Brinker. Under this presumption, “[i]f an employer’s records show no meal period for a given shift over five hours, a rebuttable presumption arises that the employee was not relieved of duty and no meal period was provided.” Id. at 21–22.
  • The Court further explained that this presumption applies not only to records showing “missed meal periods” but also when records show “short and delayed meal periods.” Id. at 24. And “the presumption goes to the question of liability and applies at the summary judgment stage, not just at the class certification stage.” Id.
  • Significantly, “[a]pplying the presumption does not mean that time records showing missed, short, or delayed meal periods result in ‘automatic liability’ for employers.” Id. at 26. To the contrary, employers “can rebut the presumption by presenting evidence that employees were compensated for noncompliant meal periods or that they had in fact been provided compliant meal periods during which they chose to work.” Id. at 26–27.
  • And the Court specifically held that “[e]mployers may use a timekeeping system like” the electronic timekeeping system used by the employer in Donohue—which “included a dropdown menu for employees to indicate whether they were provided a compliant meal period but chose to work” and “triggered premium pay for any missed, short, or delayed meal periods”—without rounding time punches for meal periods. Id. at 28.

Key Takeaways

Donohue makes clear that even where an employer’s records are imperfect, there is no automatic liability. Rather, employers may rebut the presumption that they did not provide compliant meal periods with evidence showing employees were provided proper meal periods. But to avoid unnecessary litigation, among other options, employers might consider adopting timekeeping systems that adequately track meal periods and do not engage in any rounding of time employees spend taking meal periods.

Employers may also want to consider, as one option, implementing timekeeping systems that can flag when meal periods are recorded as short, late, or missed, and create a follow-up process to determine and document whether employees voluntarily chose not to take a full meal period. In fact, the California Supreme Court indicated that the electronic timekeeping system used by the employer in Donohue, which “included a dropdown menu for employees to indicate whether they were provided a compliant meal period but chose to work, and the system triggered premium pay for any missed, short, or delayed meal periods due to the employer’s noncompliance,” would suffice under the law so long “as the system does not round time punches.” Donohue slip op. at 28.

Finally, while Donohue did not address rounding policies outside the context of meal periods, the Court suggested that technological advances may render such policies obsolete. Given that observation, employers may wish to explore recording work time to the minute without any rounding.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment practice group, or the following:

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) Michele L. Maryott – Orange County (+1 949-451-3945, mmaryott@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com) Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com) Tiffany Phan – Los Angeles (+1 213-229-7522, tphan@gibsondunn.com) Emily Sauer – Los Angeles (+1 213-229-7704, esauer@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 1, 2021 |
Scope of Employer Liability for Discriminatory Conduct Under New York City Law Narrowed by Court of Appeals

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Plaintiffs alleging claims of employment discrimination often prefer to file suit in New York City if they can plead a violation of the New York City Human Rights Law (“City HRL”), which was enacted with the “desire that [it] meld the broadest vision of social justice with the strongest law enforcement deterrent.”[1]  Its application was nevertheless recently narrowed by the New York Court of Appeals in Doe v. Bloomberg L.P.  That decision clarified as a matter of first impression that, despite the City HRL’s liberal construction and the availability of vicarious liability against a company for the actions of its employees, no such vicarious liability can be imposed on a company’s shareholders, agents, limited partners, or employees, because these individuals are not themselves deemed “employers” under the statute.  As a result, “those individuals may incur liability” under the City HRL “only for their own discriminatory conduct, for aiding and abetting such conduct by others, or for retaliation against protected conduct.”[2]

Background on the City HRL

The City HRL prohibits employment discrimination within New York City based on a wide variety of protected characteristics,[3] providing additional protections—and an additional cause of action—on top of those already available under state and federal anti-discrimination laws.  In oft-quoted language addressing its enactment in 1991, Mayor David Dinkins described the City HRL as “the most progressive” such statute “in the nation,” which “reaffirm[ed] New York’s traditional leadership in civil rights.”[4]  That sentiment was underscored by a 2005 statutory amendment codifying that “similarly worded provisions of federal and state civil rights laws” provide “a floor below which the [City HRL] cannot fall, rather than a ceiling above which [it] cannot rise.”[5]  As a result, the City HRL is often invoked by plaintiffs bringing similar state and federal causes of action.

One crucial distinction between the City HRL and its federal and state counterparts is that although employers “are not normally subject to vicarious liability for the wrongs of corporate employees,”[6] the City HRL imposes such liability.  With some exceptions, under other anti-discrimination statutes employers typically only face liability where their own conduct is at issue or where they have failed to take reasonable steps to address and prevent discrimination in their workplaces.  Under Title VII, for example, employers may be vicariously liable for their employee’s discriminatory conduct, but such claims are subject to an affirmative defense that the employer has enacted sufficient policies and procedures to respond to complaints of discrimination.[7]  No such affirmative defense exists under the City HRL.[8]  Rather, an “employer” can be vicariously liable “based upon the [discriminatory] conduct of [its] employees or agents” under the City HRL “where:

(1)    the employee or agent exercised managerial or supervisory responsibility; or

(2)    the employer knew of the employee’s or agent’s discriminatory conduct, and acquiesced in such conduct or failed to take immediate and appropriate corrective action . . . ; or

(3)    the employer should have known of the employee’s or agent’s discriminatory conduct and failed to exercise reasonable diligence to prevent such discriminatory conduct.”[9]

But the City HRL does not provide a functional definition for the word “employer,” giving little guidance as to whom that term encompasses.  Myriad tests and arguments have been offered over the years, “generating confusion as courts have endeavored to determine who is an employer in the context of the extensive—and at times strict—liability imposed” by the City HRL.[10]  The Court of Appeals’ recent Doe decision provides significant guidance.

Facts and Procedural History of Doe v. Bloomberg L.P.

The plaintiff in Doe, a former employee of Bloomberg L.P., filed a complaint asserting claims against Bloomberg L.P., her supervisor, and Michael Bloomberg.  Doe alleged that her supervisor sexually harassed her for years, but she did not allege any “personal participation” in these acts by Mr. Bloomberg.[11]  Rather, her claim as set forth in her complaint against Mr. Bloomberg arose solely from his role as the “co-founder, chief executive officer, and president” of Bloomberg L.P., as a result of which Doe argued that Mr. Bloomberg was her “employer”[12] and could be held vicariously liable for the acts of her supervisor.

As the case made its way through the courts, the definition of “employer” for purposes of the City HRL was resolved in many different ways by different jurists.  The trial court initially dismissed the claims against Mr. Bloomberg, finding that he could not be held liable as an employer, before subsequently reversing its own decision upon reargument and reinstating the claims against him.[13]  Next, the reinstatement of the claims against Mr. Bloomberg was reversed by the Appellate Division, First Department, which split 3-2 in holding that Mr. Bloomberg could not be held liable as an employer because there was no allegation that he “encouraged, condoned or approved the specific conduct which gave rise to the claim.”[14]  The Appellate Division dissenters, meanwhile, would have held that an individual is an employer under the City HRL if he or she has either an ownership interest in the corporate defendant or the power to do more than carry out others’ personnel decisions.[15]  Finally, the Court of Appeals affirmed that Mr. Bloomberg was not Doe’s employer while rejecting the reasoning and tests set forth by both the Appellate Division’s majority and dissenting opinions.

The Doe Court’s Legal Analysis

In a 6-1 decision, the Court of Appeals held that “where a plaintiff’s employer is a business entity, the shareholders, agents, limited partners, and employees of that entity are not employers” for purposes of being held vicariously liable under the City HRL.[16]  Instead, “those individuals may incur liability” under the City HRL “only for their own discriminatory conduct, for aiding and abetting such conduct by others, or for retaliation against protected conduct.”[17]

The majority opinion reasoned that the statute expressly distinguishes between agents, employees, owners, and employers in various ways, “demonstrat[ing] that employees, agents, and others with an ownership stake are not employers within the meaning of the City HRL.”[18]  It also observed that the law generally does not view a company’s shareholders, agents, and employees as “employers” or “subject [them] to vicarious liability for the wrongs of corporate employees.”[19]  Moreover, designating shareholders as employers for the purpose of imposing vicarious liability “would go against the principles underlying the legal distinction” between a company and its owners because “[t]he law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability.”[20]  While acknowledging the “broad vicarious liability” imposed on employers by the City HRL, which remains “substantially broader than that provided by its state counterpart,” the Court of Appeals nonetheless narrowly construed the law’s use of the term “employer.”[21]  Although the majority did not provide an affirmative test for determining who is an “employer” under the City HRL, it concluded that the term, pursuant to its “ordinary meaning,” “does not extend to individual owners, officers, employees, or agents of a business entity.”[22]  Accordingly, the Court of Appeals determined that Mr. Bloomberg was not Doe’s employer under the City HRL and thus could not be held vicariously liable for the discriminatory conduct that she alleged.[23]


Doe provides an important clarification concerning the extent of employer liability under the City HRL and brings the City HRL closer in line with similar state and federal causes of action.  Under the rule announced by the Court, a business entity’s “individual owners, officers, employees, or agents” are not themselves “employers,” and therefore cannot be held vicariously liable for the actions of the company’s employees.  Nevertheless, they can continue to be held personally liable for their own discriminatory conduct, for aiding and abetting such conduct by others, or for retaliation against protected conduct.  In addition, “the unique provisions of the City HRL” continue to “provide for broad vicarious liability” for “employers”—that is, for the business entities themselves—when their employees violate the City HRL.[24]


   [1]   Williams v N.Y.C. Hous. Auth., 61 A.D.3d 62, 68–69 (1st Dep’t 2009) (internal quotation marks omitted).

   [2]   Doe v. Bloomberg, L.P., 2021 WL 496608, at *4 (N.Y. Feb. 11, 2021).

   [3]   N.Y.C. Admin. Code § 8-101 (listing protected characteristics including “race, color, creed, age, national origin, immigration or citizenship status, gender, sexual orientation, disability, marital status, partnership status, caregiver status, sexual and reproductive health decisions, uniformed service, any lawful source of income, status as a victim of domestic violence or status as a victim of sex offenses or stalking”).

   [4]   Comm. on Gen. Welfare, Committee Report at 2 (Aug. 17, 2005) (quoting Remarks by Mayor David N. Dinkins at Public Hearing on Local Laws, June 18, 1991, at 1).

   [5]   Local Civil Rights Restoration Act of 2005, N.Y.C. Local Law No. 85 (2005).

   [6]   Doe, 2021 WL 496608, at *5.

   [7]   See, e.g., Faragher v. City of Boca Raton, 524 U.S. 775 (1998); Burlington Indus., Inc. v. Ellerth, 524 U.S. 742 (1998); see also, e.g., Vance v. Ball State Univ., 570 U.S. 421, 428 (2013); Totem Taxi v. N.Y. State Human Rights Appeal Bd., 65 N.Y.2d 300, 305 (1985).

   [8]   See Zakrzewska v. New Sch., 14 N.Y.3d 469, 481 (2010).

   [9]   N.Y.C. Admin. Code. § 8-107.

  [10]   Doe, 2021 WL 496608, at *2.

  [11]   Id. at *1; id. at *10 (Rivera, J., dissenting).

  [12]   Id.

  [13]   See Doe v. Bloomberg, L.P., 178 A.D.3d 44, 47 (2019).

  [14]   Id. at 48.

  [15]   Id. at 53 (Manzanet-Daniels, J. dissenting).

  [16]   Doe, 2021 WL 496608, at *4.

  [17]   Id.

  [18]   Id.

  [19]   Id. at *5.

  [20]   Id. (quoting Walkovszky v. Carlton, 18 N.Y.2d 414 (1966)).

  [21]   Id.

  [22]   Id.

  [23]   Id. at *6.

  [24]   Id. at *5.

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

Mylan L. Denerstein – New York (+1 212-351-3850, mdenerstein@gibsondunn.com) Akiva Shapiro – New York (+1 212-351-3830, ashapiro@gibsondunn.com) Michael Nadler – New York (+1 212-351-2306, mnadler@gibsondunn.com)

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

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)

© 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 26, 2021 |
Big data, ethics and financial services: risks, controls and opportunities

London partners Susy Bullock, Matthew Nunan, Michelle Kirschner and James Cox are the authors of "Big data, ethics and financial services: risks, controls and opportunities," [PDF] published by the Butterworths Journal of International Banking and Financial Law in February 2021.

February 11, 2021 |
2020 Year-End ERISA Disputes Update

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With the emergence of COVID-19, 2020 was a year of significant and unprecedented change in daily life and the economy. In particular, 2020 was a busy year for Employee Retirement Income Security Act (“ERISA”) lawsuits—across industries—implicating employers’ retirement and healthcare plans. Not only were there significant decisions on a number of key issues impacting these lawsuits, but COVID-19 also triggered new and different legal exposure for plan sponsors and administrators. Recognizing the importance of this area of law to its clients, in 2020, Gibson Dunn launched an ERISA Disputes Practice Area, bringing together the Firm’s deep knowledge base and significant experience from across a variety of its award-winning practice groups, including: Executive Compensation & Employee Benefits, Class Actions, Labor & Employment, Securities Litigation, FDA & Health Care, and Appellate & Constitutional Law.

This 2020 year-end update summarizes key legal opinions and provides helpful analysis to assist plan sponsors and administrators navigating this unprecedented time.

Section I highlights four notable opinions from the United States Supreme Court addressing ERISA’s statute-of-limitations, Article III standing, and ERISA preemption. The Court also remanded a case to the Second Circuit concerning the pleading standard for alleging a breach of the duty of prudence under ERISA on the basis of a failure to act on insider information.

Section II provides a summary of hot topics in ERISA class-action litigation, including notable developments in fiduciary breach litigation and a growing trend of COBRA notice litigation.

Section III addresses evolving procedural issues, including the standard of review of benefits claim decisions, and an emerging circuit split on the arbitrability of claims brought on behalf of plans.

Section IV offers an overview of key issues in health plan litigation, including trends in behavioral health and residential treatment coverage disputes, and updates on assignments and anti-assignment clauses.

I.   Significant Activity in the Supreme Court

2020 saw a significant rise in ERISA cases reaching the United States Supreme Court. In fact, the Court decided four ERISA cases in 2020, which is more than the Court has decided in any other year of the statute’s 45-year existence. These decisions provide helpful guidance to litigants on important topics in ERISA litigation. In Intel Corp. Investment Policy Committee v. Sulyma, 140 S. Ct. 768 (2020), the Court resolved a circuit conflict regarding when employers and plan fiduciaries can invoke the three-year statute of limitations period under Section 413(2) for an alleged breach of fiduciary duty. In Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020), addressing fiduciary breach claims against a defined-benefit pension plan, the Court clarified when participants in an ERISA plan have Article III standing to sue for statutory violations. In Rutledge v. Pharmaceutical Care Management Ass’n, 141 S. Ct. 474 (2020), the Court again addressed the scope of ERISA preemption, particularly with respect to state regulations of health care and prescription drug costs, as well as state regulations of intermediaries. Finally, in Retirement Plans Committee of IBM v. Jander, 140 S. Ct. 592 (2020), the Supreme Court was expected to address whether the “more harm than good” pleading standard from Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 430 (2014), can be satisfied by generalized allegations that the harm resulting from the inevitable disclosure of an alleged fraud generally increases over time, but instead, in a per curiam decision, declined to rule on the merits and remanded the case to the Second Circuit.

A.   Intel Corp. Investment Policy Committee, et al. v. Sulyma Addresses Statute of Limitations

In Intel Corp. Investment Policy Committee, et al. v. Sulyma, 140 S. Ct. 768 (2020), the Supreme Court addressed the circumstances in which employers and plan fiduciaries can invoke ERISA’s three-year statute of limitations for an alleged breach of fiduciary duty, unanimously holding that in order to trigger the three-year limitations period, an employee must have become “aware of” the plan information and that a fiduciary’s disclosure of plan information alone does not meet the “actual knowledge” requirement.

The plaintiff, a former employee of Intel, sued Intel’s investment committee, administrative committee and finance committee (collectively, “Intel”), alleging that his retirement plans improperly overinvested in alternative investments. Id. at 774. Under Section 413(1) of the Employment Retirement Income Security Act of 1974 (ERISA), breach of fiduciary duty claims may be brought within six years of the breach or violation. However, Section 413(2) of ERISA shortens the limitations period to “three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.” 29 U.S.C. § 1113(2). Plaintiff filed suit within six years of the alleged breaches but more than three years after petitioners had disclosed their investment decisions to him. Sulyma, 140 S. Ct. at 774. While Intel provided records showing that the plaintiff had received numerous disclosures explaining the extent to which his retirement plans were invested in alternative assets, the plaintiff testified in a deposition that he didn’t remember reviewing the disclosures and also stated in a declaration that he was unaware that his account was invested in alternative investments. Id. at 775.

The Court unanimously affirmed the Ninth Circuit’s decision holding that a plaintiff does not necessarily have “actual knowledge” based on receipt alone of information if he did not read it. Id. at 779. While the disclosure of information to plaintiff is “no doubt relevant in judging whether he gained knowledge of that information,” to meet § 1113(2)’s “actual knowledge” requirement, the plaintiff must have become aware of that information. Id. at 777. The Court emphasized that its decision does not foreclose any of the “usual ways” to prove actual knowledge at any stage in litigation—including through proof of willful blindness—and that the decision will not prevent defendants from using circumstantial evidence to show actual knowledge. Id. at 779.

Gibson Dunn submitted an amicus brief on behalf of the National Association of Manufacturers, the American Benefits Counsel, the ERISA Industry Committee, and the American Retirement Association in support of petitioner: Intel Corp. Investment Policy Committee.

As we discussed in our Appellate Update on the Sulyma decision, we expect the Court’s holding to lead to an uptick in lawsuits against employers and plan fiduciaries, based on allegations that the three-year limitations period is inapplicable because they did not read or cannot recall reading plan documents.

B.   Thole v. U.S. Bank N.A. Addresses Article III Standing

As we reported in our Appellate Update, in June of last year, the Supreme Court held that participants in a fully funded defined-benefit pension plan lacked Article III standing to sue under ERISA for breach of fiduciary duties because they had no “concrete stake in the lawsuit.” Thole v. U.S. Bank N.A., 140 S. Ct. 1615, 1619 (2020). The plaintiffs in Thole alleged that the plan fiduciaries “violated ERISA’s duties of loyalty and prudence by poorly investing the assets of the plan,” resulting in a loss of $750 million. Id. at 1618. Defendants moved to dismiss for lack of standing, which the district court granted. Id. at 1619. The Eighth Circuit “affirmed on the ground that the plaintiffs lack[ed] statutory standing [under ERISA].” Id.

The Supreme Court, in a 5-4 decision authored by Justice Kavanaugh, affirmed on the ground that plaintiffs lacked Article III standing. Id. The Court explained that “[t]here is no ERISA exception to Article III” and that the plaintiffs lacked standing “for a simple, commonsense reason: They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives.” Id. at 1622. Accordingly, the Court reasoned that the plaintiffs did not have a “concrete stake in the lawsuit” as “[w]inning or losing [the] suit would not change the plaintiffs’ monthly pension benefits.” Id.

In so ruling, the Court rejected each of the four theories plaintiffs raised to demonstrate their standing. Id. at 1619–21. First, the Court rejected plaintiffs’ argument, based on trust-law principles, that they have an equitable or property interest in the plan. Id. at 1619–20. The Court reasoned that “a defined-benefit plan is more in the nature of a contract” than a trust as “[t]he plan participants’ benefits are fixed and will not change, regardless of how well or poorly the plan is managed.” Id. at 1620. Second, the Court held that plaintiffs lacked standing to sue “as representatives of the plan itself” because they had not been “legally or contractually appointed to represent the plan.” Id. Third, the Court found that even though ERISA affords all participants “a general cause of action to sue” it does not “affect the Article III standing analysis.” Id. Fourth, and finally, the Court rejected plaintiffs’ argument that defined-benefit plans will not be “meaningfully regulate[d]” if plan participants lack standing to sue as employers have “strong incentives” to manage plans and the Department of Labor can “enforce ERISA’s fiduciary obligations.” Id. at 1621.

In a concurring opinion, Justice Thomas, joined by Justice Gorsuch, objected to the Court’s “practice of using the common law of trusts as the ‘starting point’ for interpreting ERISA” and recommended that the Court “reconsider our reliance on loose analogies in both our standing and ERISA jurisprudence.” Id. at 1623. The concurrence called for the Court to return to a “simpler framework” for standing, and one in which the party must show injury to private rights. Justice Thomas stated there was no such injury in Thole because the private rights the petitioners alleged were violated did not belong to them; they belonged to the plan, and petitioners had no legal or equitable ownership interest in the plan assets. Id.

The Supreme Court’s decision in Thole is welcome news to plan sponsors, fiduciaries, and administrators, all of whom can now rely on this decision to argue that participants of ERISA plans cannot sue for breach of fiduciary duty unless they have a “concrete stake in the lawsuit,” such as a failure by the plan to make required benefits payments. Id. at 1619. In addition, Thole—and in particular Justice Kavanaugh’s forceful statement that “[t]here is no ERISA exception to Article III”—provides strong support for application of Article III requirements and jurisprudence to cases brought under ERISA.

More litigation is ahead on these issues. For instance, a split among district courts has developed on the question of whether participants in defined-contribution plans have standing to bring claims challenging investments in which they did not personally invest. Compare Cryer v. Franklin Templeton Res., Inc., 2017 WL 4023149, at *4 (N.D. Cal. July 26, 2017) (holding plaintiff had standing to sue for funds “in which he did not invest” because “the lawsuit seeks to restore value to and is therefore brought on behalf of the [p]lan”); McDonald v. Edward D. Jones & Co., L.P., 2017 WL 372101, at *2 (E.D. Mo. Jan. 26, 2017) (finding that “a plan participant may seek recovery for the plan even where the participant did not personally invest in every one of the funds that caused an injury to the plan”), with Wilcox v. Georgetown Univ., 2019 WL 132281, at *9–10 (D.D.C. Jan. 8, 2019) (finding that plaintiffs did not have standing to challenge options in which they did not invest); Marshall v. Northrop Grumman Corp., 2017 WL 2930839, at *8 (C.D. Cal. Jan. 30, 2017) (holding that plan participants lacked standing because they failed to allege that they invested in the particular fund). Since the Supreme Court made clear that injuries to the plan do not necessarily confer standing to the plan participants, Thole may support the argument that plaintiffs lack standing to bring suit when they did not personally invest in a challenged plan investment option. It remains to be seen whether, going forward, the courts adopt this interpretation of Thole to set limits on Article III standing in defined-contribution plan suits.

C.   Rutledge v. Pharmaceutical Care Management Association Narrows ERISA Preemption

On December 10, 2020, the Supreme Court issued an 8-0 decision (Justice Barrett did not participate) in Rutledge v. Pharmaceutical Care Management Association holding that ERISA did not preempt an Arkansas statute regulating the rates at which pharmacy benefit managers reimburse pharmacies for prescription drug costs. Justice Sotomayor, who authored the opinion on behalf of the unanimous Court, relied on “[t]he logic of” the Court’s previous decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995), to conclude that the Arkansas law “is merely a form of cost regulation . . . [that] applies equally to all PBMs and pharmacies in Arkansas,” and therefore is not subject to ERISA preemption because it did not have an impermissible connection with or reference to ERISA. 141 S. Ct. 474, 481 (2020). Rutledge is likely to be viewed by regulators as supporting state authority to regulate health care costs without running afoul of ERISA preemption. (Gibson Dunn’s Appellate Update discussing this case can be found here). Gibson Dunn submitted an amicus brief on behalf of the U.S. Chamber of Commerce in support of the Pharmaceutical Care Management Association.

In Rutledge, the Court ruled that “ERISA is . . . primarily concerned with pre-empting laws that require providers to structure benefit plans in particular ways,” which include those that require “payment of specific benefits,” those that bind “plan administrators to specific rules for determining beneficiary status,” and those where “acute, albeit indirect, economic effects of the state law force an ERISA plan to adopt a certain scheme of substantive coverage.” Id. at 480. The Court found that the need for regulatory uniformity—in particular, cost uniformity—is not absolute, and that it does not alone justify application of ERISA preemption: “[N]ot every state law that affects an ERISA plan or causes some disuniformity in plan administration has an impermissible connection with an ERISA plan,” which the Court noted is “especially so if a law merely affects costs.” Id. The following sentence from the Court’s opinion encapsulates its holding: “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.” Id.

The Rutledge decision will impact future litigation regarding the scope of ERISA preemption. In particular, state regulators likely will rely on this decision in seeking to insulate state laws concerning prescription drug prices and pharmacy benefit managers from preemption. The reach of Rutledge, however, likely will be tested even beyond this immediate context, because state regulators can be expected also to defend other state laws and regulations on the basis that they merely impact health care costs and lack the necessary connection with ERISA plans under Rutledge. States may also attempt to enact new statutes and issue regulations of those health care intermediaries and other service providers to covered plans.

ERISA preemption will continue to be a hot area this year with the Ninth Circuit Court of Appeals hearing argument in Howard Jarvis Taxpayers Association v. CA Secure Choice Retirement Savings Program later this month, for example. In that case, the Ninth Circuit will evaluate whether ERISA preempts California’s state-run auto-IRA program, which transfers portions of a person’s paycheck into a retirement account.

D.   Retirement Plans Committee of IBM v. Jander Remands Questions About Dudenhoeffer Pleading Standard to Second Circuit

As we discussed in a recent Securities Litigation Update, in Retirement Plans Committee of IBM v. Jander, 140 S. Ct. 592, 594 (2020), the Supreme Court was slated to address whether the “more harm than good” pleading standard from Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 430 (2014), “can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time.” In Dudenhoeffer, the Court held that, in order to state a claim for breach of the duty of prudence under ERISA on the basis of a failure to act on insider information, a complaint must plausibly allege an alternative action that the fiduciaries could have taken that would not have violated securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. 573 U.S. at 428.

In Jander, plaintiffs, IBM employees who participated in an employee stock ownership plan (ESOP) sponsored by IBM, sued IBM’s retirement plan fiduciary committee for breach of fiduciary duty, alleged that IBM misrepresented the value of its microelectronics division, thereby artificially inflating the value of company stock, and caused a drop in the stock price upon selling the microelectronics division. Jander v. Ret. Plans Comm. of IBM, 272 F. Supp. 3d 444, 446–47 (S.D.N.Y. 2017). Plaintiffs’ claims were dismissed by the district court on the basis that the complaint lacked context-specific allegations as to why a prudent fiduciary couldn’t have concluded that plaintiff’s hypothetical alternatives were more likely to do more harm than good, failing to satisfy the Dudenhoeffer pleading standard. Id. at 449–54.

The Second Circuit reversed, holding that plaintiffs had pled a plausible claim for violation of ERISA’s duty of prudence based on (1) the fiduciaries’ knowledge that the stock was inflated through accounting violations; (2) their power to disclose these accounting violations; and (3) their failure to promptly disclose the true value of the microelectronics division. Jander v. Ret. Plans Comm. of IBM, 910 F.3d 620, 628–31 (2d Cir. 2018). Ultimately, the Second Circuit held that if the fiduciaries knew that disclosure of the insider information was inevitable, then delaying this disclosure would cause more harm than good to the ESOP. Id. at 630.

In a per curiam decision issued on January 14, 2020, the Supreme Court declined to rule on the merits in Jander, and vacated and remanded the case for the Second Circuit to address two unresolved issues raised by the parties: (1) whether ERISA ever imposes a duty on a fiduciary for an ESOP to act on inside information, and (2) whether ERISA requires disclosures that are not otherwise required by the securities laws. 140 S. Ct. at 594–95. Justice Kagan (joined by Justice Ginsburg) and Justice Gorsuch issued concurring opinions, articulating differing views on how these questions should be resolved on remand. See id. at 595–96 (Kagan, J. concurring); id. at 596–97 (Gorsuch, J. concurring). On remand, the Second Circuit reinstated its original opinion, again reversing the district court’s decision. Jander v. Ret. Plans Comm. of IBM, 962 F.3d 85, 86 (2d Cir. 2020) (per curiam).

While not purporting to break new ground, the Court nevertheless noted two things. First, the Court explained that the Dudenhoeffer “more harm than good” standard is the correct standard to apply to ESOP fiduciaries. See 140 S. Ct. at 594. Second, the Court made clear that ERISA’s fiduciary duty of prudence does not require fiduciaries to act in a way that violates securities laws. See id. However, the opinion leaves unresolved whether there may be circumstances in which ESOP fiduciaries are required to act on the basis of inside information to benefit an ESOP, and whether the Dudenhoeffer standard requires ESOP fiduciaries to disclose information that is not required by federal securities laws. See id. at 594–95.

In recent cases following Jander, at least one district court has concluded that the Second Circuit’s decision should be classified as an outlier because “the overwhelming majority of circuit courts to consider an imprudence claim based on inside information post-Dudenhoeffer [have] rejected the argument that public disclosure of negative information is a plausible alternative.” Burke v. Boeing Co., No. 19-cv-2203, 2020 WL 6681338, at *5 (N.D. Ill. Nov. 12, 2020). Given this circuit split, plaintiffs may be more likely to target the Second Circuit for stock-drop and similar suits. However, in a recent decision from the Second Circuit, the court affirmed dismissal of an imprudence claim brought by a plaintiff who argued that two alternative actions—earlier disclosure and closure of the fund to additional investment—were “on par with those found sufficient in Jander.” Varga v. Gen Elec. Co., No. 20-1144, --- F. App’x ----, 2021 WL 391602, at *2 (Feb. 4, 2021). The court found plaintiff’s allegations insufficient, conclusory, and not consistent with those in Jander, concluding that she had “failed to adequately plead alternative actions that the fiduciaries could have taken.” Id. at *2–3. Thus, while Jander remains good law in the Second Circuit, the Varga decision suggests that courts will still look closely at plaintiffs’ allegations of plausible alternative actions in the context of motions to dismiss.

II.   Class Actions Continued To Be a Significant Focus of ERISA Litigation in 2020

The year 2020 was again a busy period in ERISA class-action litigation, particularly fiduciary-breach litigation. While large plans continue to be the primary targets of these lawsuits, plaintiffs are also targeting smaller plans—and some cases attempting to aggregate these claims by suing administrators or service providers to multiple plans. We discuss below two important circuit splits in the field of ERISA fiduciary-breach class actions, and also an emerging area of litigation concerning the required contents of COBRA notices.

A.   Hot Topics in ERISA Fiduciary Breach Litigation

We continued to see significant activity in ERISA fiduciary-breach litigation in 2020, including on issues concerning (1) whether plaintiffs can state a fiduciary-breach claim based on offering a particular mix of investment options in a plan, and (2) whether single-stock funds are per-se imprudent under ERISA. We also may see changes regarding the rules governing whether investing in environmental, social, and corporate governance (“ESG”) funds could constitute a fiduciary breach under ERISA.

As to the first issue, the Seventh, Third, and Eighth Circuits have all recently addressed whether plaintiffs can state a fiduciary-breach claim by alleging that a plan offered certain underperforming investment options, as well as other unobjectionable options. In Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020), the Seventh Circuit held that plaintiffs failed to allege a fiduciary breach by claiming that defendants provided investment options that were “too numerous, too expensive, or underperforming,” when the defendant also offered low-cost index funds, among other options that the plaintiffs found unobjectionable. Id. at 991–92. A few months after the Seventh Circuit’s decision in Divane, the Eighth Circuit appeared to adopt a more plaintiff-friendly interpretation by holding that plaintiffs could state a claim by alleging that “fees were too high” and that the defendants “should have negotiated a better deal.” Davis v. Wash. Univ. of St. Louis, 960 F.3d 478, 483 (8th Cir. 2020); see also Sweda v. Univ. of Pennsylvania, 923 F.3d 320, 330 (3d Cir. 2019) (stating that “a meaningful mix and range of investment options” does not necessarily “insulate[] plan fiduciaries from liability for breach of fiduciary duty”). These holdings may suggest to plaintiffs that the Third and Eighth Circuits will be more receptive to these types of claims, prompting an increase in fee-suit litigation in those jurisdictions.

Additionally, a circuit split may have recently developed concerning whether single-stock funds are per se imprudent plan offerings under ERISA. In May 2020, the Fifth Circuit affirmed the dismissal of a putative fiduciary breach class action in Schweitzer v. Investment Committee of Phillips 66 Savings Plan, 960 F.3d 190 (5th Cir. 2020). The court held that defendants satisfied their fiduciary duties to diversify and to act prudently because they provided plan participants with an array of investment options that “enable[d] participants to create diversified portfolios.” Id. at 196–98. Accordingly, the Fifth Circuit in Schweitzer rejected plaintiffs’ claim that “a single-stock fund is imprudent per se.” Id. at 197–98. But only a few months later, the Fourth Circuit held the opposite, concluding that defendants breached their fiduciary duty when offering a single-stock fund. Stegemann v. Gannett Co., 970 F.3d 465, 468 (4th Cir. 2020). The Fourth Circuit rejected the argument that “diversification must be judged at the plan level rather than the fund level,” holding that “each available fund on a menu must be prudently diversified.” Id. at 476–77 (emphasis added). In dissent, Judge Niemeyer argued that “the majority merge[d] the duties of diversification and prudence,” and, in effect, made it impossible for an employer to “ever prudently offer a single-stock, non-employer fund.” Id. at 484, 488. No other court has yet adopted the Fourth Circuit’s standard. Defendants in Stegemann filed a petition for a writ of certiorari, and on January 4, 2021, the Supreme Court called for a response from plaintiffs, indicating that the Justices may be interested in hearing the case.

Last, in the final year of the Trump administration, the Department of Labor (“DOL”) proposed and adopted a new rule that ERISA fiduciaries must make investment decisions “based solely on pecuniary factors”; and an investment intended “to promote non-pecuniary objectives” at the expense of sacrificing returns or taking on additional risk would constitute a breach of the fiduciary’s duty. Financial Factors in Selecting Plan Investments, 85 Fed. Reg. 72,846, 72,851, 72,848 (Nov. 13, 2020). Though the final version of the rule does not explicitly reference ESG funds, the DOL’s press release announcing the rule expressly stated that the rule’s purpose was to provide further guidance “in light of recent trends involving [ESG] investing.” U.S. Dep’t of Labor, U.S. Department of Labor Announces Final Rule to Protect Americans’ Retirement Investments (Oct. 30, 2020), https://www.dol.gov/newsroom/releases/ebsa/ebsa20201030. The new rule took effect on January 12, 2021, 85 Fed. Reg. at 72,885, and there have not yet been any cases addressing when and whether investment in an ESG fund could constitute a fiduciary breach. Notably, the new rule appears to conflict with many of the Biden administration’s stated environmental goals, and the DOL rule may be a target for reversal by the new administration.[1]

B.   Growing Challenges Related to COBRA Notice

The year 2020 also saw a rise in COBRA notice litigation. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) allows employees and their dependents the opportunity to continue to participate in their employer’s group health plan when coverage would otherwise be lost due to a termination of employment or other “qualifying event[s].” 29 U.S.C. § 1163. And plan administrators are required to provide notice to employees informing them of their right to elect COBRA coverage. 29 C.F.R. § 2590.606-4. COBRA mandates that the notice include specific information and be “written in a manner calculated to be understood by the average plan participant.” Id. § 2590.606-4(b)(4). Plaintiffs have filed numerous class actions against employers alleging technical violations in the language of the notices, seeking statutory penalties up to $110 per day for each participant that received inadequate notice.

Many COBRA notice lawsuits have been filed in Florida, with others filed in venues that include New York and South Carolina. The number of such lawsuits has recently been spurred by COVID-19 layoffs. Plaintiffs’ allegations are substantially similar across cases, and generally allege that COBRA notices were deficient for one or more of the following reasons:

  1. Notice failed to identify the name, address, and telephone number of the plan administrator;
  2. Notice failed to identify the qualifying event;
  3. Notice failed to explain how to enroll in COBRA coverage;
  4. Notice failed to provide all the required explanatory language regarding the coverage;
  5. Notice was not written in a manner calculated to be understood by the average plan participant; and/or
  6. Notice failed to comply with the model notice created by the Department of Labor (“DOL”).

The influx of COBRA notice litigation highlights the importance for employers of reviewing their COBRA notices to assess whether any changes may be necessary to ensure compliance with statutory guidelines and regulations. To assist employers, the DOL has issued model notices on its website that employers can review against their own notices to ensure they are in compliance. Employers who have outsourced COBRA administration should also periodically check in with their third-party administrators to confirm compliance with all guidelines and regulations and may want to consider clearly assigning responsibility for compliance with notice requirements in their vendor agreements.

III.   Key Decisions on Important ERISA Procedural Issues

The courts also issued important guidance this year to ERISA practitioners, plan sponsors, and plan administrators concerning ERISA procedural issues. In particular, the courts issued rulings concerning the standard of review for benefits claims, and provided further guidance on the ability to compel arbitration of claims brought by participants on behalf of a plan. Both of these topics are discussed below.

A.   The Evolving Abuse of Discretion Standard of Review

In 2020, courts continued to wrestle with the degree of deference owed to benefit determinations made by plan administrators. The well-established rule is that a court reviews the plan administrator’s decision de novo unless the terms of the benefit plan give the administrator discretion to interpret the plan and award benefits. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). Where the plan terms grant this discretion to the administrator, courts review the administrator’s determinations under a deferential “abuse of discretion” standard (or arbitrary and capricious review, as some circuits call it). Id. Because it is common for benefit plans to give the administrator this discretion, the deferential standard often applies, and the Supreme Court has repeatedly parried attempts by plaintiffs to strip administrators of this deference. See Metro. Life Ins. Co. v. Glenn, 554 U.S. 105, 115 (2008) (abuse of discretion standard applies even when administrator has conflict of interest); Conkright v. Frommert, 559 U.S. 506, 522 (2010) (abuse of discretion standard applies even when court of appeals found previous related interpretation by administrator to be invalid).

Last year, plaintiffs persisted in their efforts to curtail the deferential abuse of discretion standard, and they found success in some instances. For example, in Lyn M. v. Premera Blue Cross, 966 F.3d 1061 (10th Cir. 2020), even though the plan gave the administrator discretion, the court nonetheless held that a de novo standard applied because plan members “lacked notice” of the discretion. Id. at 1065. The administrator failed to disclose the document granting discretion, and the plan summary it did disclose “said nothing about the existence” of that document. Id. at 1067. To preserve plan discretion under Lyn M., plan documents—including the summary plan description that plans are required to provide to their members—should disclose either the grant of discretion to the administrator or the precise document conferring that discretion.

Additionally, even when an abuse of discretion standard is found to apply, courts have developed ways to limit the degree of deference given to plan administrators. The Ninth Circuit, for example, continues to apply varying degrees of “skepticism” to the administrators’ determinations—as part of abuse of discretion review—when certain factors such as a conflict of interest are present. The precise degree of skepticism applied may provide a focal point for appellate review. In Gary v. Unum Life Insurance Co. of America, 831 F. App’x 812 (9th Cir. 2020), the circuit held that the district court “applied the incorrect level of skepticism to its abuse-of-discretion review.” Id. at 814. The district court had applied a “moderate degree” of skepticism because it found that the plan administrator had a structural conflict of interest (based on the district court’s belief that the administrator was responsible both for assessing and paying out claims) and had failed to afford the plaintiff a “full and fair review.” Id. at 813. But the Ninth Circuit held that, viewing the evidence in the light most favorable to the plaintiff, the circumstances in the case called for an even “higher degree of skepticism.” Id. This heightened skepticism was warranted, in the court’s view, because it found that the administrator’s consultants had “cherry-picked certain observations from medical records numerous times,” the administrator had not conducted an in-person examination of the plaintiff, and the administrator had reversed in part its initial decision denying benefits in full. Id. at 814. This decision suggests that, at least in the Ninth Circuit, courts may limit the degree of deference afforded to administrators—even under an abuse of discretion review—in particular circumstances.

However, not all circuits have been so receptive to plaintiffs’ efforts. The Eighth Circuit recently clarified its case law in this area, holding that, despite what an older circuit decision may have suggested and whatever other circuits may hold, a plan administrator’s delay in deciding an appeal of a benefits denial does not warrant de novo review. McIntyre v. Reliance Standard Life Ins. Co., 972 F.3d 955, 960, 964–65 (8th Cir. 2020). As with a conflict of interest, such delay is just a factor to be considered when applying abuse of discretion review. Id. at 965. The First Circuit also recently reaffirmed “the importance of giving deference” to plan administrators. Arruda v. Zurich Am. Ins. Co., 951 F.3d 12, 24 (1st Cir. 2020). The plaintiff in Arruda argued that courts can find an administrator’s decision arbitrary even when the administrator “relied on several independent experts” and a record consistent with its benefits determination. Id. at 21–22, 24. The First Circuit disagreed, finding this proposal to be “in considerable tension with” the abuse of discretion standard. Id. at 24.

Last year also saw circuit courts rebuff creative attempts by plaintiffs to avoid abuse of discretion review. For instance, in Ellis v. Liberty Life Assurance Co. of Boston, 958 F.3d 1271 (10th Cir. 2020), petition for cert. filed, (U.S. Jan. 8, 2021) (No. 20-953), all parties agreed that the plan conferred discretion on the administrator, and the plan provided that it was governed by the law of Pennsylvania, but the plaintiff sought de novo review on the ground that a Colorado statute prohibited grants of discretion in insurance policies. Id. at 1275. The court rejected the plaintiff’s argument that Colorado law should apply, holding that the law of the state selected by a plan’s choice-of-law provision normally applies, “to effectuate ERISA’s goals of uniformity and ease of administration.” Id. at 1280. Notably, the court observed that this choice-of-law question “could be avoided if ERISA preempts the Colorado statute,” but it declined to resolve this preemption issue, leaving it open for future litigation. Id. at 1279.

Finally, in Davis v. Hartford Life & Accident Insurance Co., 980 F.3d 541 (6th Cir. 2020), once again all parties agreed that the plan conferred discretion to the administrator, but the plaintiff contended that the administrator exercised no discretionary authority because a different company in the same corporate family had actually made the decision to terminate benefits. See id. at 545–46. But the Sixth Circuit found this argument “d[id] not add up as a factual matter.” Id. at 546. Even though the plan’s decisionmakers received their salaries from the other company, they were still adjudicating claims under the administrator’s policies, not the other company’s policies. Id. This precedent presents a potential obstacle for future plaintiffs who try to use the structure of a plan administrator’s corporate family as a backdoor means of securing de novo review.

B.   A Possible Split on Arbitrability of ERISA § 502(a)(2) Claims

Arbitrability of ERISA section 502(a)(2) fiduciary-breach claims brought on behalf of a plan continued to be a hot topic in 2020 as courts applied key appellate decisions in this space from 2018 and 2019. In 2018, the Ninth Circuit held that section 502(a)(2) claims belong to the Plan, not the individual employee(s), and thus individual arbitration agreements that bound plan participants to arbitrate could not be used to compel the arbitration of claims brought on behalf of the plan. Munro v. Univ. of S. Cal., 896 F.3d 1088, 1092 (9th Cir. 2018). One year later, the court accordingly held that § 502(a)(2) claims are, in fact, arbitrable when the Plan has agreed to arbitration. Dorman v. Charles Schwab Corp., 780 F. App’x 510, 513–14 (9th Cir. 2019). According to the Ninth Circuit, “[t]he relevant question is whether the Plan agreed to arbitrate the § 502(a)(2) claims,” and when a “Plan [does] consent in the Plan document to arbitrate all ERISA claims,” a mandatory arbitration agreement is enforceable. Id. (emphasis added). Hence, in the Ninth Circuit, even when an individual employee has “agreed to arbitrate their claims in their employment contracts,” a § 502(a)(2) claim belongs to the plan and “that claim is not subject to arbitration unless the plan itself has consented.” Ramos v. Natures Image, Inc., 2020 WL 2404902, at *6–7 (C.D. Cal. Feb. 19, 2020) (emphasis added). Meanwhile, as noted in one of our recent class action updates, the Supreme Court has continued to enforce arbitration provisions in various contexts, and these decisions can be brought to bear in ERISA cases as well.

A circuit split may now be emerging on this issue. In Smith v. Greatbanc Trust Co., the U.S. District Court for the Northern District of Illinois rejected the Ninth Circuit’s holding in Dorman, even though in Smith (like Dorman) the plan documents indicated that the plan agreed to arbitrate. 2020 WL 4926560, at *3–4 (N.D. Ill. Aug. 21, 2020), appeal docketed, No. 20-2708 (7th Cir. Sept. 9, 2020). The court in Smith concluded that failure to notify a former employee (who remained a participant in the plan) of changes to the plan that compelled arbitration was inconsistent with ERISA’s notice requirements, and that, to the extent the arbitration agreement served as a “waiver of a party’s right to pursue statutory remedies,” the agreement was unenforceable. Id. (quoting Am. Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 235–36 (2013)). The case is now pending appeal.

These decisions provide important guidance for employers considering amending their plans (or other plan-related documents, such as administrative services contracts) to include arbitration provisions. Under the Ninth Circuit’s Dorman decision, arbitration provisions in the plan documents can be used to bind the plan and to compel arbitration of claims brought on behalf of the plan. The Smith decision, however, underscores the importance of providing plan participants notice of any changes to plans, such as the addition of arbitration provisions, that would potentially impact participants’ rights to pursue statutory remedies.

IV.   ERISA Health Plan Litigation

Finally, litigation concerning health plans remains a substantial part of the ERISA litigation landscape. In 2020, the federal courts of appeals addressed a significant number of disputes over behavioral-health coverage and issued a wide range of decisions addressing plan participants’ ability to assign their rights to providers.

A.   Behavioral Health and Residential Treatment

ERISA disputes over behavioral-health coverage and residential treatment remained a significant source of litigation and appeals in 2020. Appellate decisions in this area mainly involved individual claims by patients challenging coverage determinations. Last year the courts of appeals decided at least 9 cases involving the denial of coverage for behavioral-health treatment, each of which involved individual claims by patients.

In disputes over individual coverage, the appellate courts in 2020 tended to afford significant deference to plan administrators’ determinations that behavioral-health treatment—and in particular residential treatment—was not medically necessary or did not qualify as emergency care. For example:

  • In Doe v. Harvard Pilgrim Health Care, Inc., the First Circuit affirmed a district judge’s application of de novo review when she found that a patient’s residential treatment for psychological illness was medically unnecessary because medical experts had concluded that the patient did not require 24-hour supervision, her condition could be managed at a lower level of care, and medication had improved her condition before treatment. 974 F.3d 69, 72–74 (1st Cir. 2020).
  • In Tracy O. v. Anthem Blue Cross Life & Health Insurance, the Tenth Circuit concluded that Anthem did not act arbitrarily and capriciously in denying coverage for a residential stay at a psychiatric facility because Anthem reasonably relied on four doctors’ conclusions that the patient’s condition had not significantly deteriorated and that her behavior could be managed in an outpatient setting. 807 F. App’x 845, 853–55 (10th Cir. 2020).
  • In Brian H. v. Blue Shield of California, the Ninth Circuit affirmed a district judge’s determination that Blue Shield had not abused its discretion because it reasonably relied on expert opinions that a patient’s stay at a residential-treatment facility was not medically necessary because he would not have posed a danger to himself or others if treated in a less intensive setting. 830 F. App’x 536, 537 (9th Cir. 2020).
  • In Meyers v. Kaiser Foundation Health Plan, Inc., the Ninth Circuit affirmed a district judge’s conclusion that Kaiser (regardless of whether de novo or abuse-of-discretion review applied) properly denied coverage for a patient’s out-of-network residential treatment because it did not meet the plan’s requirements for out-of-network coverage: It did not qualify as emergency services and, even if the treatment was unavailable in-network, the patient did not obtain Kaiser’s permission prior to treatment. 807 F. App’x 651, 653–54 (9th Cir. 2020).
  • In Todd R. v. Premera Blue Cross Blue Shield of Alaska, 825 F. App’x 440, 441–42 (9th Cir. 2020), the Ninth Circuit, vacating the district court’s de novo judgment for the plaintiffs, held that a plan administrator correctly determined that a medical policy’s criteria for residential treatment were not met but remanded for the district court to consider in the first instance the plaintiff’s argument that those criteria were improper.

In each of these decisions, the court of appeals accorded deference to individual denials of coverage by administrators. By contrast, in Katherine P. v. Humana Health Plan, Inc., 959 F.3d 206, 209 (5th Cir. 2020), the Fifth Circuit determined that the district judge improperly granted summary judgment to the plan administrator. The Fifth Circuit reaffirmed prior precedent holding that when review of a coverage determination is de novo, the ordinary summary-judgment standard applies and a material dispute of fact should be decided by a bench trial. Id. The panel thus vacated the district judge’s grant of summary judgment to a plan administrator and remanded for the district judge to decide a dispute of material fact about whether treatment at a level of care less intense than partial hospitalization had been unsuccessful in controlling the plaintiff’s eating, purging, and compulsive exercise. Id. at 209–10; see also Lyn, 966 F.3d at 1064 (remanding for district court to apply de novo review to residential treatment claim rather than abuse of discretion standard).

Given the broad judicial deference ordinarily accorded to plan administrators’ medical determinations, plaintiffs have sought other grounds for challenging denials of coverage for behavioral healthcare. One common strategy is to invoke the federal Mental Health Parity and Addiction Equity Act, and related state parity acts, which require that health plans provide equal coverage for mental illnesses and physical illnesses. In Stone v. UnitedHealthcare Insurance Co., for instance, the plaintiff alleged that the health plan and its administrator violated the federal and California mental health parity acts when they refused to cover her daughter’s out-of-state residential-care treatment, but the Ninth Circuit affirmed the judgment for the defendants. 979 F.3d 770, 774–77 (9th Cir. 2020). Because the plan imposed the same limitations on out-of-state mental- and physical-health treatments, the plaintiff had not shown that the defendant treated mental health less favorably than physical health. Id. at 777.

More novel theories have met skepticism in the courts of appeals. In I.M. v. Kaiser Foundation Health Plan, Inc., for example, the plaintiff alleged that Kaiser breached its fiduciary duty to him by excluding coverage for residential treatment for eating disorders from its plans and inhibiting physicians from referring him to a residential-treatment facility. 2020 WL 7624925, at *2 (9th Cir. Dec. 22, 2020). The Ninth Circuit disagreed, finding no evidence in the record that Kaiser had erected barriers to residential treatment. Id.

B.   Assignments and Anti-Assignment Clauses

The assignment of benefits remains a critical issue in ERISA health plan litigation. Under ERISA § 502(a), only “a participant or beneficiary” may sue an insurer to recover benefits owed to her or to enforce her rights under her plan. 29 U.S.C. § 1132(a)(1)(B). Ordinarily, this would mean that a patient herself would have to sue an insurer under § 502(a). However, courts have deemed it permissible for participants to “assign” their benefits to healthcare providers. See, e.g., Plastic Surgery Ctr. v. Aetna Life Ins. Co., 967 F.3d 218, 228 (3d Cir. 2020). Once a participant has validly assigned her benefits to a healthcare provider, that provider can stand in the shoes of the participant and bring suit against an insurer for non-payment under § 502(a). Id. The appellate courts in 2020 addressed a variety of issues related to the assignment of benefits

1.   Scope of the Rights Conveyed

Appellate courts continue to grapple with the scope of the rights conveyed by an assignment. Decisions in 2020 reflect at least two distinct approaches. In American Colleges of Emergency Physicians v. Blue Cross & Blue Shield of Georgia, the Eleventh Circuit took a blanket approach, holding categorically that “the assignment of the right to payment includes the right to seek equitable relief.” 833 F. App’x 235, 240 (11th Cir. 2020). The Sixth and Ninth Circuits, in contrast, held that the scope of an assignment of benefits depends on the specific language used; where an assignment’s language appears to encompass only causes of actions for benefits, then additional potential causes of action under ERISA are not included. See DaVita Inc v. Amy’s Kitchen, Inc., 981 F.3d 664, 678–79 (9th Cir. 2020) (holding that assignment of “any cause of action . . . for purposes of creating an assignment of benefits” did not include the right to seek equitable relief); DaVita, Inc. v. Marietta Mem’l Hosp. Emp. Health Benefit Plan, 978 F.3d 326, 344 (6th Cir. 2020) (concluding that identical language did not include the right to bring breach-of-fiduciary-duty claims under § 1104(a)(1)(B)); see also McKennan v. Meadowvale Dairy Emp. Benefit Plan, 973 F.3d 805, 808–09 (8th Cir. 2020) (holding that an assignment of “any and all causes of action” did not include the right to challenge the rescission of the assignor’s coverage, at least where deceased assignor failed to comply with plan provisions as to third-party representatives). These decisions can be a mixed bag for plans, insurers, and administrators. The Eleventh Circuit’s approach allows providers to bundle benefits claims with equitable claims, while protecting insurers against having to litigate separate claims by patients and providers as to the same underlying treatment. The opposite is true for the Sixth and Ninth Circuit decisions: Where the assignment excludes equitable relief, providers have fewer arrows in their quiver to use against insurers, but insurers could face multiple lawsuits for the same treatment.

2.   Waivability of Assignment Issues

Courts sometimes treat the existence and scope of an assignment as a jurisdictional question—going to the existence of Article III standing—that therefore cannot be waived. Cell Sci. Sys. Corp. v. La. Health Serv., 804 F. App’x 260, 264 (5th Cir. 2020) (stating that the existence “of valid and enforceable assignments of benefits” is necessary for Article III standing). In the Sixth Circuit’s DaVita decision, however, the court held that a defendant had waived the argument that one of the plaintiff’s claims fell outside of the scope of the assignment. 978 F.3d at 345. The panel explained that “[t]he question of whether [a patient] has transferred their interest to [a provider] . . . deals not with Article III standing” but with Federal Rule of Civil Procedure 17’s requirement that an action “‘must be prosecuted in the name of the real party in interest.’” Id. The court thus found Article III standing without deciding the dispute about the scope of the assignment. Id. at 341 n.8.

3.   Anti-Assignment Clauses

In recent years, ERISA health plans have increasingly elected to include “anti-assignment” clauses. See Plastic Surgery Ctr., 967 F.3d at 228. These clauses bar patients from assigning their benefits to providers, or place certain limits on the scope of what claims can be assigned (or in what circumstances), putting providers back in the position of having to bill patients directly. Id. Should the patient prove unable or unwilling to pay, providers must then either rely on the patient to bring an ERISA suit or sue the patient directly. Id.

Many circuits have addressed these clauses, and they have unanimously determined that the clauses are, in general, permissible and enforceable. See Am. Orthopedic & Sports Med. v. Indep. Blue Cross Blue Shield, 890 F.3d 445, 453 (3d Cir. 2018). Still, appellate decisions in 2020 reflect multiple strategies through which providers have attempted to avoid the effect of anti-assignment clauses, with varying degrees of success:

  • In Beverly Oaks Physicians Surgical Center, LLC v. Blue Cross & Blue Shield of Illinois, the Ninth Circuit held that an insurer had waived its right to invoke an anti-assignment clause by failing to raise it during the administrative claim process. 983 F.3d 435, 440–42 (9th Cir. 2020). The court also held that the plaintiff had pleaded sufficient facts to adequately allege that insurer was “equitably estopped from raising” the anti-assignment clause because the insurer had promised the provider that it was eligible to receive payment under plan. Id. at 442–43.
  • In Cell Science, by contrast, the Fifth Circuit rejected an argument that an insurer was estopped from invoking anti-assignment clause. 804 F. App’x at 264–66. The court emphasized that there was “no indication from the record that [the insurer] either misrepresented or misled [the provider] with respect to its intention to enforce the anti-assignment clause in its plan.” Id. at 265.
  • In King v. Community Insurance Co., the Ninth Circuit held that an assignment fell outside of the scope of the plan’s anti-assignment clause. 829 F. App’x 156, 159–60 (9th Cir. 2020). The plan expressly allowed payments to “providers” and forbade beneficiaries from assigning benefits to “anyone else.” Id. at 159. The Ninth Circuit rejected the insurer’s argument that the phrase “anyone else” meant anyone other than the beneficiary. Id. at 160. The court also held that the anti-assignment clause was unenforceable because it was not properly included in any plan document. Id. at 160–62.


[1] Congress may also attempt to take action against the rule. The Congressional Review Act provides a procedure for Congress to pass a Joint Resolution of Disapproval within 60 legislative working days that, if signed by the President, deems recent administrative rulemaking to not have had any effect. The DOL’s new rule is still within that 60-day timeframe.

The following Gibson Dunn lawyers assisted in the preparation of this alert: Karl Nelson, Geoffrey Sigler, Katherine Smith, Heather Richardson, Lucas Townsend, Jennafer Tryck, Matthew Rozen, Jennifer Roges, Luke Zaro, Daniel Weiss, Jialin Yang, Christopher Wang, Robert Batista, Zachary Copeland, and Brian McCarty.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:

Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Geoffrey Sigler – Washington, D.C. (+1 202-887-3752, gsigler@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com) Heather L. Richardson – Los Angeles (+1 213-229-7409,hrichardson@gibsondunn.com) Lucas C. Townsend – Washington, D.C. (+1 202-887-3731, ltownsend@gibsondunn.com) Jennafer M. Tryck – Orange County (+1 949-451-4089, jtryck@gibsondunn.com) Matthew S. Rozen – Washington, D.C. (+1 202-887-3596, mrozen@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 10, 2021 |
Webcast: COVID-19 Vaccines: Employer Strategies and Considerations

Please join the authors of An Employer Playbook for the COVID “Vaccine Wars”: Strategies and Considerations for Workplace Vaccination Policies (Dec. 2020) for the latest information and trends relating to workplace vaccination policies and programs. Topics will include whether to mandate COVID-19 vaccinations or merely encourage them; pros and cons of both approaches; pertinent EEOC, OSHA, and CDC guidance; ways to minimize obstacles to employee vaccination including whether to provide vaccinations on site; issues relating to incentives programs; how to handle employees who cannot be, or claim they cannot be, vaccinated; how to build buy-in and plan for conflict resolution; workplace mask and social distancing requirements for vaccinated workers; how the National Labor Relations Act may be implicated; and whether there is a role for waivers or risk disclosures to reduce potential liability.

View Slides (PDF)

PANELISTS: Jessica Brown is a partner in the Denver office of Gibson, Dunn & Crutcher and a member of the firm’s Labor and Employment and White Collar Defense and Investigations Practice Groups. Ms. Brown advises corporate clients regarding COVID-19 liability risks, workplace vaccination policies, Colorado Equal Pay for Equal Work Act Transparency Rules, anti-harassment, whistleblower complaints, reductions in force, mandatory arbitration programs, return-to-work protocols, and matters that intersect with intellectual property law, such as noncompete agreements and trade secrecy programs. She has assisted clients to conduct audits of their pay practices for purposes of compliance with state and federal equal pay and wage and hour laws. In addition, Ms. Brown has defended nationwide and state-wide class action and individual lawsuits alleging, for example, gender discrimination under Title VII, failure to permit facility access under the Americans with Disabilities Act, and failure to compensate workers properly under the Fair Labor Standards Act. She has been ranked by Chambers USA as a leading Labor and Employment lawyer in Colorado for 16 consecutive years and is currently ranked in Band 1. She also is the current President of the Colorado Bar Association. Lauren Elliot is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the firm’s Life Sciences, Product Liability, and Labor and Employment Practice Groups. Ms. Elliot has defended pharmaceutical and biotech companies in cases involving a broad spectrum of well-known life sciences products including vaccines. She served as national counsel to Wyeth (now Pfizer) in close to 400 product liability actions in which plaintiffs alleged that childhood vaccines cause autism spectrum disorders. She also often assesses product liability risks in connection with planned corporate acquisitions on behalf of acquiring companies. Legal Media Group has named Ms. Elliot to its Expert Guides Guide to the World’s Leading Women in Business Law for Product Liability three times and she has served two terms as a member of the Product Liability Committee for the Association of the Bar of the City of New York. Ms. Elliot also has spent close to a decade defending labor and employment claims in class actions and individual lawsuits alleging violations of state labor laws and the Fair Labor Standards Act.
MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

February 2, 2021 |
Brian Ascher and Molly Senger Named Among LMG’s 2020 Rising Stars Americas

Euromoney Legal Media Group named New York partner Brian Ascher and Washington D.C. partner Molly Senger among its 2020 Rising Stars Americas in their respective practice areas. Ascher was named one of two Rising Stars in the Media and Entertainment category and was also recognized nationally in the United States category. Senger was named one of two Rising Stars in the Labor and Employment category. The awards were announced on January 28, 2021. Brian Ascher’s practice focuses on complex civil litigation, including contract, profit participation, trade secrets, and other intellectual property disputes.  He also has significant experience in litigating founder disputes and First Amendment cases. Molly Senger has represented clients in a wide range of employment litigation matters, including cases involving allegations of trade secret misappropriation, wage-and-hour violations, whistleblowing, race, age, and disability discrimination, and sexual harassment.

January 21, 2021 |
Five Gibson Dunn Attorneys Named Among Washingtonian Magazine’s 2020 Top Lawyers

Washingtonian magazine named five Washington, D.C. partners to its 2020 Top Lawyers, which features “Washington’s top legal talent,” in their respective practice areas:

  • Miguel Estrada was named a Top Lawyer in the Supreme Court category – Miguel has argued 24 cases before the United States Supreme Court, and briefed many others.
  • Theodore Olson was named a Top Lawyer in the Supreme Court category – Ted is one of the nation’s premier appellate and United States Supreme Court advocates. He has argued 65 cases in the Supreme Court and has prevailed in over 75% of those cases.
  • Jason Schwartz was named a Top Lawyer in the Employment Defense category – Jason is co-chair of the firm’s Labor & Employment Practice Group. His practice includes sensitive workplace investigations, high-profile trade secret and non-compete matters, wage-hour and discrimination class actions, Sarbanes-Oxley and other whistleblower protection claims, executive and other significant employment disputes, labor union controversies, and workplace safety litigation.
  • Patrick Stokes was named a Top Lawyer in the Criminal Defense-White Collar category – Patrick’s practice focuses on internal corporate investigations, compliance reviews, government investigations, and enforcement actions regarding corruption, securities fraud, and financial institutions fraud.
  • Joseph Warin was named a Top Lawyer in the Criminal Defense-White Collar category – Joe is co-chair of the firm’s global White Collar Defense and Investigations Practice Group. His practice includes representation of corporations in complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation.
The list was published in December 2020.

January 20, 2021 |
UK Employment Update – January 2021

Click for PDF

In this update, we look back at the key developments in UK employment law over the course of 2020 and look forward to anticipated developments in 2021.

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.   Coronavirus Job Retention Scheme (“CJRS”) (click on link)

In this update we describe the current offering under the CJRS, which is set to remain operational until 30 April 2021.

2.   Vicarious Liability (click on link)

We consider two decisions of the UK Supreme Court in 2020, which consider vicarious liability in relation to: (i) the actions of a doctor who was found to be an independent contractor; and (ii) the criminal actions of an employee who leaked the personal data of almost 100,000 employees. The “employer” was not held to be vicariously liable in either case.

3.   Transfer of Undertakings (click on link)

We consider two important decisions from the last year related to the operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (“TUPE”) which protect the rights of employees in situations such as the sale of a business as a going concern.

4.   Post-termination Restrictive Covenants (click on link)

We consider two decisions looking at the enforceability of post-employment restrictive covenants, including a Court of Appeal decision which considered the circumstances in which a new employer would be liable for inducing a breach of contract by a new hire.

We also consider a recent High Court decision which considered the enforceability of restrictive covenants against a recent joiner who left during her probationary period.

5.   Forthcoming Changes (click on link)

We briefly outline changes to the off-payroll and IR35 system, designed to prevent workers from avoiding tax by operating as contractors, and report on developments in gender and ethnicity pay gap reporting and racial and ethnic diversity in business as well as notable government consultations for employment contracts.


1.   Coronavirus Job Retention Scheme (“CJRS”)

We have addressed the introduction of and updates to the UK government’s CJRS mechanism to support employment levels through the COVID-19 pandemic in past publications; these updates are available on the Gibson Dunn website – March 20, 2020, March 27, 2020, May 18, 2020, June 2, 2020, and webcast of December 1, 2020.

If employers cannot maintain their UK workforce because their operations have been affected by COVID-19, they can put their employees onto “furlough”, a temporary leave of absence, and apply for a government grant to cover a portion of the usual wages. There have been various alterations to the finer detail of the CJRS (including the level of contribution to be made by employers as opposed to under grant, changes which took place between August and October 2020) but the essential position at the time of writing is:

  • Employees can be put on full-time furlough or “flexible furlough”, when employees work part-time and are regarded as being on furlough when they are not working.
  • Employers have to pay for hours worked but can claim the grant for hours not worked.
  • The grant amounts to the lower of 80% of wage costs or £2,500 per calendar month for those hours.
  • Employers must pay for employer national insurance contributions and employer pension contributions on all amounts paid to the employee, including the amount paid by the grant.
  • Employers are still free to top up wages, above the level of the grant, if they wish.
  • Since 1 December 2020, the CJRS cannot be used for employees who are under notice of termination.

The CJRS is set to run until 30 April 2021. This month the government is due to determine whether employers should contribute more towards employee costs. The government will shortly begin publishing information about employers who claim under the CJRS, in order to deter fraudulent claims.

2.   Vicarious Liability

As reported previously, the boundaries to 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, have been expanding. However, two decisions of the UK Supreme Court in 2020 signal limits to this expansion and some helpful clarity for employers.

2.1   Vicarious Liability and Employment Status

In Barclays Bank plc (Appellant) v Various Claimants (Respondents), a bank had engaged a doctor to conduct medical examinations of prospective employees as part of the bank’s recruitment process. The Supreme Court held that the doctor was acting as an independent contractor rather than an employee, therefore the bank was not vicariously liable for sexual assaults he was alleged to have committed during these examinations.

The key question for the court was whether the doctor was acting as an independent contractor, carrying on business on his own account, or if his relationship to the bank was akin to employment. In circumstances where the doctor had other clients, remained free to refuse examinations, did not receive a retainer from the bank and carried his own medical liability insurance, it was clear that he was an independent contractor.

2.2   Vicarious Liability and Data Protection

In WM Morrison Supermarkets plc (Appellant) v Various Claimants (Respondents), the UK Supreme Court held that Morrison was not liable for data breaches by an employee who leaked the personal data of almost 100,000 employees.

The employee was authorised to transmit payroll data for Morrison’s workforce to its external auditors. He did so, but kept a copy of the data on a USB stick, which he later shared online. The employee has since been criminally convicted for his actions. Some of the affected individuals brought claims against Morrison for misuse of private information, breach of confidence and breach of its statutory duty under the Data Protection Act 1998, for which they alleged Morrison was either primarily or vicariously liable.

The question for the Supreme Court was whether the employee’s wrongful disclosure of the data was so closely connected with the task(s) that he was authorised to do that it could fairly and properly be considered to have been done whilst acting in the course of his employment. The Court found that this was not so and that, as a consequence, the employer was not vicariously liable for his actions: the disclosure was part of a personal vendetta by the employee, and the employee was not furthering his employer’s business when he committed the wrongdoing.

What this means for employers

Employers will take some comfort from these Supreme Court decisions. The Barclays Bank decision confirms that employers are unlikely to be held vicariously liable for the actions of true third party contractors.

The Morrison Supermarkets decision also makes clear that employers are unlikely to be held liable for employees’ wrongful acts where they are the result of a personal vendetta; the mere opportunity to commit wrongful acts, provided by employment, is insufficient alone to render employers vicariously liable. However, employers should continue to be mindful of the potential vicarious liability under data protection legislation for employees’ activities that do satisfy the “close connection” test. Safeguarding personal data and keeping risk of data breaches to a minimum should remain a priority.

3.   Transfer of Undertakings

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) protect: (i) employees working in a business or undertaking that is in the UK, that is sold or transferred; (ii) employees in Great Britain who carry out activities that are subject to insourcing, outsourcing or transfer to a different outsourced contractor (a so-called “service provision change”); and (iii) those employees who are otherwise affected by that sale, transfer, insourcing or outsourcing. In essence, these employees’ contracts of employment are transferred to the recipient of the business, undertaking, or service provision change, who steps into the shoes of the previous employer and must, generally speaking, continue to employ them on their pre-transfer terms and conditions of employment. TUPE also provides other protections for affected employees, including the right to be informed and consulted in advance of a transfer.

3.1   Contractual Changes

Under regulation 4(4) of TUPE, variations to a contract of employment for which the sole or principal reason is the relevant transfer are void (unless certain specific exceptions apply). In Ferguson and others v Astrea Asset Management Ltd, the Employment Appeal Tribunal (“EAT”) held that regulation 4(4) applies to such variations, irrespective of whether they are beneficial or detrimental to the employee. In this case, two months prior to the transfer by way of service provision change from one property management company to another, the owner-directors of the first company varied their own employment terms to their advantage (in particular, guaranteed bonuses of 50% of salary, termination payments of a month’s salary for each year worked, and enhanced notice periods). The EAT held that regulation 4(4) rendered these variations void; the second company was not bound by them.

In arriving at its decision, the EAT cited the aim of the Acquired Rights Directive (2001/23/EC) (on which TUPE is based) as safeguarding employees’ rights, rather than improving them, and distinguished earlier case law on the bases that the variation occurred post-transfer and before regulation 4(4) was in force, and the Court of Appeal had not said that advantageous changes could not be declared void.

What this means for employers

In the context of TUPE transfers, the EAT decision provides helpful clarity to transferees on the enforceability of transfer-related contractual changes, confirming that where senior executives attempt tactical pre-transfer changes to their own terms and conditions, transferees will not be bound by the new terms. Difficult questions about whether such a variation is to the benefit or detriment of the employee are not necessary. However, outsourcing agreements should continue to contain provisions to render void any changes to terms and conditions made by the service provider once notice has been served to terminate the contract.

3.2   Long-term disability benefits

In ICTS (UK) Limited v Visram, the Court of Appeal considered whether an employee was entitled to benefit from a long-term disability benefits (“Disability Benefit”) policy when he could not restart his old job, as opposed to taking another appropriate role.

Under the terms of an insurance-backed Disability Benefit scheme, during periods of illness the employee was entitled to two thirds of his salary, with payment being conditional on the employee remaining employed, and to continue until the earlier of his return to work, death or retirement. The Court held that on closer inspection of the terms of the scheme, “return to work” was properly construed as return to the work the employee did before he became sick; had the parties intended that the benefit be available until the employee could return to any remunerated full-time work they could have specified this in the terms.

The case also raises the issue of liability for Disability Benefit where an employee has transferred to a new employer under TUPE. The claimant in this case had transferred to a new employer during his long-term sick leave; since employees who transfer under TUPE do so on their existing terms and conditions, including contractual benefits, the transferee employer was liable to provide the benefit until the employee’s return to his prior role, his death, or his retirement.

The transferee employer had dismissed the employee during his sickness absence. The employee then succeeded in claims for unfair dismissal and disability discrimination, hence the Employment Tribunal awarded compensation on the basis that benefits under the Disability Benefit plan should have continued until death or retirement. The EAT and Court of Appeal both upheld this finding.

What this means for employers

This case serves to remind employers and their advisors of the importance of specificity in drafting contractual benefit entitlement provisions, and the need to consider the nature of employee’s benefits and impact any termination may have on them prior to taking action. It is also a reminder of the full reach of contractual burden transferee employers take on in the context of TUPE transfers and the need to conduct full due diligence to identify potential liabilities around employees off sick and Disability Benefit.

4.   Post-Termination Restrictive Covenants

4.1   Restrictive Covenants and Breach of Contract

Post-termination restrictive covenants are commonly included in the contracts of employment of senior and other key employees. Should that employee commit a breach of their restrictive covenants, for example, by joining a competitor in breach of a non-compete covenant then the new (competitor) employer will not ordinarily be liable to the former employer in respect of that employee’s breach. However, should that new (competitor) employer induce that employee to breach the terms of their former contract of employment then both the new (competitor) employer and employee may be liable to the former employer.   To bring a claim for inducing a breach of contract, a claimant must show that the third party knowingly and intentionally induced and procured the breach without reasonable justification. The Court of Appeal in Allen t/a David Allen Chartered Accountants v Dodd & Co, held that an accountancy firm was not liable for inducing breach of contract when it recruited a tax adviser in breach of his 12-month contractual post-termination restrictions, where the firm had received legal advice in advance of the recruitment that the employee’s restrictive covenants were unlikely to be enforceable. The firm was advised that the covenants were unenforceable due to lack of consideration and an unreasonably long duration and that the non-solicitation and non-dealing restrictions “probably” and “on balance” failed, allowing the tax adviser to contact the clients of David Allen, his former employer.

In the High Court the judge found that parts of the restrictive covenants were enforceable and the employee had breached them. However, the accountancy firm had been entitled to rely on the legal advice it had received. David Allen appealed on the grounds that the legal advice received by the accountancy firm had been equivocal, and therefore the new employer was aware that there was a risk that the restrictive covenants would turn out to be enforceable.

In reaching its decision to dismiss the appeal, the Court of Appeal noted that the fact that the legal advice had been equivocal did not prevent the firm from honestly relying on it. It acknowledged that lawyers rarely provide unequivocal advice, and therefore responsibly sought legal advice should be able to be relied upon, even if it later turns out to be incorrect. Further, the required level of knowledge for inducement was that of knowledge of a legal outcome, not just knowledge of a fact. This level of knowledge could not be proven where the numerous breach of contract cases in the courts have shown that it is often difficult to predict legal outcomes. The Court did not opine on legal advice that merely states that it is arguable no breach will be committed, but advice that states it is more probable than not that there will be no breach is enough to rely upon.

What this means for employers

Employers can take comfort in this decision which confirms that they are entitled to rely on legal advice even where it is equivocal. Unless it can be proven that they knew their actions would breach the contract, as opposed to “might” breach the contract, liability for inducement to breach will not be made out.

4.2   Restrictive Covenants as Unlawful Restraint of Trade

Post-termination restrictive covenants will only be enforceable in the UK to the extent that they protect a legitimate business interest (such as an employer's trade connections with customers or suppliers, confidential information and maintaining the stability of its workforce) and do so in a manner which is reasonable (lasting no longer and being no wider in scope than is reasonably necessary to protect the employer’s legitimate business interest). Restrictive covenants commonly take the form of “non-competes” (the most onerous form of restrictive covenant, which prevent the employee from working in a competing business for a restricted period of time), “non-solicit” and “non-dealing” restrictions which prevent an employee from soliciting and/or dealing with certain clients or customers of the business during a restricted period after leaving and “non-poaching” restrictions which prevent an employee from poaching or attempting to poach former colleagues during a restricted period after leaving.

In Quilter Private Client Advisers Ltd v Falconer and another, the High Court found that the non-compete, non-solicitation and non-dealing clauses in a financial adviser’s employment contract were an unreasonable restraint of trade and therefore invalid. Whilst the Court did find that the adviser had breached her employment contract in a number of ways, including via misuse of confidential information, her 9-month non-compete was unreasonable in the context of leaving employment within a six month probation period. In addition, her 12-month non-dealing and non-solicitation clauses, which covered anyone who had been a client of the employer at any time in the 18 months prior to termination, were held to be unreasonable and excessive given the nature of her client relationships during her period of employment.

What this means for employers

This case serves to highlight the importance of tailoring the drafting of restrictive covenants to both the circumstances of the business and the restricted employee. Particular care should be taken as to the scope and duration of restrictive covenants which an employer would seek to enforce against an employee who leaves during their probationary period.

5.   Forthcoming Changes

5.1   Off-payroll working and IR35

We have previously reported that changes to the IR35 legislation (which governs the payroll tax arrangements for certain individuals who supply services through an intermediary, usually a personal service company (“PSC”)) were due to take place in April 2020 (link). However, these changes have been postponed until April 2021 in recognition of the COVID-19 disruption. On 1 July 2020, MPs voted against a proposed amendment to the Finance Bill to delay the changes until 2023-2024. Should the changes now go ahead as expected in a matter of months, medium and large sized end-user clients will take over responsibility from the intermediary for assessing whether, but for the intermediary’s presence, the individual would be deemed an employee of the end-user client for tax purposes and, if so, for paying such taxes.

5.2   Gender Pay Gap

Similarly to the IR35 postponement, as we previously noted in March 2020 (link), the Government Equalities Office and the Equality and Human Rights Commission (EHRC) suspended enforcement of the gender pay gap deadlines for the reporting year 2019/20 due to the pressures of the COVID-19 pandemic. The requirement to report for 2020/21 has not yet been suspended, and on 14 December 2020 the government published a new set of guidance for employers, though the reporting requirements remain unchanged.

5.3   Ethnicity Pay Gap and racial and ethnic diversity in the boardroom

Amid a global surge in debate on racial equality, a petition to the UK Parliament calling for mandatory ethnicity pay gap reporting for UK firms with 250 or more staff has obtained enough signatures to mean it ought to be debated in Parliament. The government had said it would respond by the end of 2020 in light of the consultation it ran between 2018 and 2019, but we still await a response. In a leaked report obtained by the BBC in December from the government’s 2018 pay gap reporting consultation exercise, three quarters of employers (of 321 responders) wanted large firms to be forced to release ethnicity pay gap data.

Whilst gender pay gap reporting was enacted through regulations, the government would need to pass a new Act of Parliament to create any new ethnicity pay reporting scheme. Despite reporting not yet being mandatory, two in three UK companies surveyed recently by PwC (link) are now collecting data on ethnicity, with over one fifth now calculating their ethnicity pay gap; those not collecting data or calculating were concerned about data protection, systems capabilities, low response rates, or unease about posing the questions. Given how multifaceted information about ethnicity can be, it is not yet clear exactly what information would need to be provided under any new mandatory scheme.

Legal and General Investment Management (“LGIM”) has urged FTSE 100 boards to include at least one black, Asian or other minority ethnic member by January 2022 or suffer “voting and investment consequences” – LGIM would vote not to re-elect their nomination committee chair. It will also demand more transparency around race and ethnicity data, including ethnicity pay data and inclusive hiring policies. LGIM is the largest fund manager in the UK, holding an interest in most FTSE 100 companies.

Meanwhile, the Confederation of British Industry has announced a new campaign, “Change the Race Ratio”, in partnership with a number of firms and charitable and academic organisations. This incorporates commitments: (i) to ensure FTSE 100 and 250 boards have at least one racially and ethnically diverse member (by end 2021 and by 2024 respectively); (ii) to increase racial and ethnic diversity in senior leadership, by setting and publishing targets; (iii) to increase transparency, via published target action plans and progress reports and with ethnicity pay gaps disclosed by 2022; and (iv) to create an inclusive, open and supportive environment through recruitment, development and support processes, more diversity in suppliers/partners, and use of data. The campaign offers support to businesses to sign up to the commitments and thereby increase inclusion in business.

In December, Liz Truss MP, Minister for Women and Equalities, gave a speech at the Centre for Policy Studies setting out the government's new approach to tackling inequality, consisting of the "biggest, broadest and most comprehensive equality data project yet", to look across the UK and identify where people are held back and what the biggest barriers are. This will not be limited to the Equality Act 2010's nine protected characteristics (which include sex and race). While Ms. Truss acknowledged that people in these groups suffer discrimination, she suggested that the focus on protected characteristics has led to a narrowing of the equality debate that overlooks socio-economic status and geographic inequality. Initial findings will be reported this summer.

5.4   Government consultations for employment contracts

On 4 December 2020, the government launched two consultations, both of which are expected to close on 26 February this year. One pertains to measures to extend the ban on exclusivity clauses in employment contracts for employees under the Lower Earnings Limit (currently £120 per week), which would prevent employers from contractually restricting low earning employees from working for other employers – it appears this stems from the fact low earners have been particularly adversely affected by the COVID-19 pandemic and many employers are currently unable to offer their employees sufficient hours. The second consultation relates to measures to reform post-termination non-compete clauses in employment contracts (previously discussed at section 4 of this update), including proposals to: (i) require employers to confirm in writing to employees the exact terms of a non-compete clause before their employment commences; (ii) introduce a statutory limit on the length of non-compete clauses; and (iii) ban the use of post-termination non-compete clauses altogether. We will report in due course on any developments following the government consultations.

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)

© 2021 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 14, 2021 |
2020 Year-End German Law Update

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In 2020, the COVID-19 pandemic taught the world another lesson about the unpredictability of life. Each country responded to the challenges posed by the pandemic in its own way. The German Government in its familiar technocratic and sober approach quickly unlocked massive financial resources to mitigate any immediate economic damage. It supported a further relaxation of the purse strings at EU level and put legislative acts in place that helped manage the uncertainty in the most affected industries for now. Hit by a second wave of the pandemic in an unexpectedly hard way, Germany is now left wondering whether the country really was smart in the spring or just lucky. The new year 2021 will provide the answer to this question.

The disruption caused by the pandemic is not over; it has just started. On a positive note, we have seen an unprecedented move towards more efficient means of communication through the use of new media and the leveraging of technology in general. For example, long overdue changes to the handling of annual shareholder meetings of German joint stock corporations were implemented within weeks to facilitate the annual reporting season under lock-down conditions. By providing short term work allowances to compensate for losses in remuneration resulting from temporary cuts in working hours, the German system helped employers to hold onto their highly-skilled work force in the hope of a quick recovery thereby avoiding immediate hardship for those hit hard by the imposed restrictions. A speedy process to amend legislation addressing topics from suspending rent payments and interest payments to the temporary relaxation of insolvency filing obligations flanked by a coherent communication strategy added to the sentiment of most Germans of having been governed well, so far.

2021 will be different and bigger challenges certainly lie in wait. Instead of throwing hundreds of billions of Euros at the problem, German politicians will now have to explain to the public who is going to pick up the bill for all the important measures taken. The inadequate accords reached with the twenty-seven European Union members states that remain after Brexit designed to stabilize the weakest member state economies will require rigorous implementation and oversight. To date, hope rests on what has been a series of blink-decisions taken in face of an imminent European crisis coupled with the expectation that this will all result in a more aligned and more integrated European Union. A very optimistic scenario, indeed.

Apart from the emergency measures triggered by the COVID-19 pandemic, the EU and Germany have set and started to implement an ambitious agenda with regard to the regulation of international trade (by the introduction of tightened rules on foreign direct investments), antitrust laws (responding to the topics of market dominance in the digital age), consumer protection (with the introduction of collective redress within the EU), increased corporate responsibility in the white collar area (with the long-discussed introduction in Germany of criminal corporate liability), and the fight against money laundering and tax evasion.

And, finally, Angela Merkel’s term ends in the fall of 2021. She will have been the longest serving Chancellor in German history. This brings a 16-year era to an end that served Germany well and also helped Europe to navigate through difficult waters. She is expected to leave a temporary vacuum in German and European leadership that comes at the wrong time and is difficult to be filled in the short term.

Is this a dramatic crisis? No. Should we be concerned? Maybe. Should we act? Yes.

There are many things that each of us can do to turn the many challenges ahead into something new and potentially better. Here is our favorite list: First, stay healthy, look after yourself and your loved ones. Second, take informed and careful decisions each day to tackle the problems ahead, instead of rushing to beat “long-term-trends” with blurry visionary steps or short-sighted activism. Third, stay connected with the world, avoid narrow-minded thinking and a further fragmentation of the world, while staying connected to your local community. Learn where you can, challenge where you can, and help where you can. We are all in this together and only when we join forces, will we navigate the challenging times ahead of us.

At Gibson Dunn, we are proud and honored to be at your side to help solve your most complex legal questions and to continue our partnership with you in the coming year in Germany, in Europe and the world. We trust you will find this German Law Year-End Update insightful and instructive for the best possible start in 2021.


Table of Contents

  1. Corporate, M&A
  2. Tax
  3. Financing and Restructuring
  4. Labor and Employment
  5. Real Estate
  6. Compliance / White Collar
  7. Data Privacy - Regulatory Activity and Private Enforcement on the Rise
  8. Technology
  9. Antitrust and Merger Control
  10. International Trade, Sanctions and Export Control
  11. Litigation
  12. Update on COVID-19 Measures in Germany

1.         Corporate, M&A

1.1       Next Round - Virtual-only Shareholder’s Meetings of Stock Corporations in 2021

The temporary COVID-19-related legislation of March 2020 allowing to hold virtual-only shareholders’ meetings of stock corporations in 2020[1] has been extended until the end of 2021 by means of an executive order of the German Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz) issued in October 2020. While the legal framework of the temporary regime for virtual-only meetings remained unchanged, the regulator strongly appealed to the management of the relevant corporations to use the emergency instrument of a virtual-only meeting in a responsible manner, taking into account the specific individual circumstances due to the pandemic situation.

In addition to this mere moral appeal by the executive branch, just before year-end and somewhat surprisingly, the parliamentary legislator modified the March 2020 legislation with regard to the shareholders’ right to information in virtual-only meetings as a concession to the widespread criticism in the aftermath of the March 2020 legislation. The March 2020 legislation had reduced the shareholders’ right to information to a mere possibility to submit questions in electronic form prior to the meeting, leaving it up to management in its sole discretion as to whether and in which manner to answer such questions. Additionally, it allowed management to set a submission deadline of up to two days prior to the meeting.

The October legislation, addressing widespread criticism raised not only by shareholder activists and institutional investors but also by legal scholars, restored the shareholder’s right to ask questions in the 2021 season for shareholders’ meetings taking place after February 28, 2021: It will again constitute a genuine information right requiring management to duly answer all shareholders’ questions submitted in time prior to the meeting. In addition, the cut-off deadline for the submission of shareholders’ questions may not exceed one day.

Furthermore, the parliamentary legislator also clarified in its last minute amendments that counter-motions by shareholders that are submitted for publication with the company at least 14 days prior to the shareholders’ meeting must be dealt with in the virtual-only shareholders’ meeting if the submitting shareholder has duly registered for the virtual shareholders meeting.

The virtual-only format is available to shareholders’ meetings of stock corporations which are held by December 31, 2021. In light of the current pandemic, the extensive use of the virtual-only format and the frequently observed extraordinary high participation-rate of shareholders in 2020, it can be expected that most stock corporations will again hold their shareholders’ meetings in a virtual-only format in 2021.

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1.2       Legislative Initiative to Strengthen Market Integrity after the Wirecard Scandal

In the aftermath of the spectacular collapse of German payment solutions provider Wirecard last summer, the German Government on December 16, 2020 presented a draft bill (Regierungsentwurf) for an Act on the Strengthening of the Financial Market Integrity (Finanzmarktintegritätsstärkungsgesetz - FISG) which aims to restore and strengthen trust in the German financial market.

The draft bill provides for new rules designed to bolster both the internal (in particular, via the supervisory board) and external (e.g. by strengthening the independence of external auditors and their supervision) corporate governance of companies of public interest, including listed companies.

This includes, in particular, the explicit obligation for the management board of a listed stock corporation to implement an adequate and effective internal control and risk management system. Furthermore, the draft bill also aims to strengthen the accounting and audit expertise present in the supervisory board of listed companies: Whereas the law currently only requires that, at least, one supervisory board member shall have expertise in the fields of accounting and auditing, the draft bill requires that, at least, one board member has expertise in the fields of accounting and, at least, one other board member has expertise in the fields of auditing, thus increasing the minimum number of experts to, at least, two board members. In addition, the establishment of an audit committee by the supervisory board shall no longer be discretionary but becomes compulsory for companies of public interest, including all listed companies.

In order to strengthen the independence of the auditor as part of a company’s external safeguards, the draft bill suggests the tightening of the mandatory external rotation. The external rotation of the auditor shall occur no later than after ten years for all companies of public interest, including listed companies, thus eliminating national exemptions from the EU audit regime, which currently allow for a maximum term of 24 years, and introduces further restrictions on non-audit services that can be provided by the auditor.

In reaction to the widespread criticism leveled at the response of Germany’s Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) to the events that led to Wirecard’s collapse and the perceived failure of the supervisory and enforcement procedures and mechanisms in financial reporting, the draft bill also proposes revisions to the current supervisory and enforcement procedures, including further-reaching competences for the financial regulator BaFin itself.

Last but not least, the draft bill provides for increased civil liability for damages caused by auditors as well as a tightening of criminal and administrative penalties for misrepresentations made by company representatives and statutory auditors in connection with the preparation and audit of company accounts.

The Government’s draft bill essentially corresponds to a joint ministerial draft of October 26, 2020 by the Federal Ministry of Finance (Bundesministerium für Finanzen) and the Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz), which had been met with widespread criticism arguing that the proposals were not going far enough and failed to address the shortcomings of the current system which were also identified by the EU’s securities market regulator, the European Securities and Markets Authority (ESMA), in its special report on the Wirecard collapse published in November 2020. It remains to be seen whether and to which extent this criticism will be taken up by the lawmaker in the upcoming parliamentary process by providing for more fundamental changes and reforms.

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1.3       German Foreign Direct Investment Control – Rule-Tightening in Light of COVID-19 and the EU Screening Regulation

In December 2020, for the very first time, the German Federal government officially prohibited the indirect acquisition of a German company with specific expertise in satellite/radar communications and 5G millimeter wave technology by a Chinese state-owned defense group. The decision is the culmination of an eventful year which has seen various changes to the rules on foreign direct investments (the “FDIs”) in light of, inter alia, COVID-19 and the application of the EU Screening Regulation[2].

Below is an overview of the five key changes that have become effective over the course of 2020:

    1. Extension of the catalog of select industries triggering a mandatory filing with the German Ministry of Economy and Energy (Bundesministerium für Wirtschaft und Energie, BMWi) upon acquisition of 10% or more of the voting rights in a German company by a non-EU/non-EFTA acquirer to include (i) personal protective equipment, (ii) pharmaceuticals that are essential for safeguarding the provision of healthcare to the population as well as (iii) medical products and in-vitro-diagnostics used in connection with life-threatening and highly contagious diseases.
    2. No more gun-jumping: All transactions falling under the cross-sector review that require a mandatory notification (i.e., FDIs of 10% or more of the voting rights by a non-EU/non-EFTA investor in companies active in one or more of the conclusively listed select industries) may only be consummated upon conclusion of the screening process (condition precedent).
    3. Introduction of penalties (up to five years imprisonment or criminal fine (in case of willful infringements and attempted infringements) or an administrative fine of up to EUR 500,000 (in case of negligence)) for certain actions pending (deemed) clearance by the BMWi, namely: (i) enabling the investor to, directly or indirectly, exercise voting rights, (ii) granting the investor dividends or any economic equivalent, (iii) providing or otherwise disclosing to the investor certain security-relevant information on the German target company, and (iv) the non-compliance with enforceable restrictive measures (vollziehbare Anordnungen) imposed by the BMWi.
    4. Implementation of the EU-wide cooperation mechanism as required under the EU Screening Regulation.
    5. Expansion of the grounds for screening under German FDI rules to include public order or security (öffentliche Ordnung oder Sicherheit) of a fellow EU member state as well as effects on projects or programs of EU interest, and tightening of the standard under which an FDI may be prohibited or restrictive measures may be imposed from “endangering” (Gefährdung) to “likely to affect” (voraussichtliche Beeinträchtigung) the public order or security, so as to reflect the EU Screening Regulation.

For additional details on these and other changes in 2020 to foreign investment control and an overview on the overall screening process in Germany, please refer to our respective client alerts published in May 2020[3] and November 2020[4].

Further changes to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV) are announced for 2021. In particular, the catalog of critical industries are to be extended further. Based on earlier announcements by the BMWi, artificial intelligence, robotics, semiconductors, biotechnology and quantum technology will likely be added to the catalog of critical industries.

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1.4       Gender Quota for (Certain) Management Boards on the Horizon

Five years after the (first) Management Position Act (Führungspositionen-Gesetz) for the first time implemented a mandatory female quota for the composition of supervisory boards of certain German companies in 2016,[5] the German government coalition parties now support a mandatory quota also for management boards. In the future, under the contemplated Second Management Position Act (Zweites Führungspositionen-Gesetz) (i) listed companies, (ii) which are subject to the 50% employee co-determination under the Co-Determination Act (Mitbestimmungsgesetz) and (ii) whose management board consists of more than three members, must appoint at least one female management board member whenever a position becomes vacant.

The new management board quota will only apply with regard to the rather limited number of companies who meet all of the above criteria. However, it is nevertheless a strong signal by the German coalition parties to a German business community in which voluntary commitments to increase gender equality have failed to gain significant momentum in the past. Under the 2015 Management Position Act which had introduced the mandatory gender quota for supervisory boards, companies were, in addition, requested to set themselves gender targets for the composition of their management boards. Rather than taking the opportunity to consider voluntary targets in line with the specific circumstances of a company, a large number of affected companies simply set the target at “zero” year after year. By contrast, the mandatory 30% gender quota for the composition of supervisory boards has not just been met but even exceeded and is currently polling at approximately 37%.

For all companies in which governmental authorities hold a majority, the contemplated Second Management Position Act will also (i) provide for a mandatory 30% female quota for the composition of supervisory boards and (ii) introduce a minimum number of mandatory female management board members. In addition, public law corporations (Körperschaften des öffentlichen Rechts) primarily active in the health and insurance sectors which typically employ a large number of female staff, will be required to appoint at least one female board member if the board is composed of two or more members.

The draft legislation was approved by the cabinet in early January 2021 and will now be submitted to the German Parliament. The new gender quota should in any event come into force prior to the German federal elections in autumn 2021.

While a number of corporations welcome the move towards more gender equality as Germany is lagging behind in comparison to, in particular, Scandinavian and UK companies, others oppose the quota law arguing undue interference with the right of the supervisory board to appoint the best available candidate. It will be interesting to see if and how investors position themselves.

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1.5       New Developments on Taxation of Remuneration for Supervisory Board Members

As a consequence of a ruling by the German Federal Fiscal Court (Bundesfinanzhof, BFH) late in 2019, the tax classification of compensation paid to supervisory board members has been modified in terms of value-added tax (VAT). In order to avoid potential adverse tax effects based on the incorrect tax treatment of supervisory board compensation, both individual supervisory board members and the companies they serve should be familiar with the ruling.

Previously, the tax authorities presumed without further differentiation between fixed or variable supervisory board compensation that members of supervisory boards were engaged in independent entrepreneurial activity and their remuneration was to be charged with VAT. It was irrelevant whether the respective member of the supervisory board was an elected member, served on the board as a shareholder delegate or in a capacity as an employee representative. At least in those cases where supervisory board members receive a fixed compensation for their service, future invoices will no longer be permitted to charge a VAT component.

The respective ruling by the BFH applied an earlier decision of the European Court of Justice (ECJ) taken on June 13, 2019 at the national level and confirmed the ECJ’s view that supervisory board members who receive fixed remuneration are not qualified as independent. The ECJ held in its decision that supervisory board members, who act on behalf of and in the sphere of responsibility of the supervisory board, do not bear any economic risk for their activities and therefore do not perform entrepreneurial activities due to a lack of independence. The BFH followed the argumentation of the ECJ and agreed that supervisory board members who receive a fixed remuneration which is neither dependent on their attendance at meetings nor on the services actually performed, cannot be classified as entrepreneurs. The BFH left it open whether independent entrepreneurial activities can be deemed to exist in cases where a variable remuneration is agreed with the individual member of the supervisory board.

For the individual supervisory board member, such classification as a dependent activity means, at least, in the case of fixed remuneration, that he or she may no longer add a VAT element to the remuneration in invoices issued to the company. Otherwise the supervisory board member would owe such tax, while the company would not be able to deduct such an incorrectly added tax component as an input tax deductible. Likewise, input tax amounts incurred in connection with the activity as a supervisory board member (e.g. VAT on travel expenses or office supplies) would no longer be recoverable due to the lack of independence of the supervisory board member.

If the supervised company is entitled to an unrestricted input tax deduction, this new jurisprudence should not have any adverse economic impact on the company, provided correct invoices are issued. Industries which are not entitled to deduct input tax or only entitled to deduct it to a limited extent - such as banks, insurance companies or non-profit organizations – actually benefit if the supervisory board member issues invoices without VAT.

The tax authorities have so far not yet published any guidelines in response to the new case law. It therefore remains to be seen whether the tax authorities will draw a distinction between fixed and variable compensation when qualifying the activities of a supervisory board member for VAT purposes. It would also be conceivable that the tax authorities would now generally assume that a supervisory board member's services are deemed to be a dependent activity which is generally not subject to VAT.

However, since a short-term response to the case in the administrative guidelines is to be expected in the near future, the ruling should be applied to fixed compensation and VAT should not be included in any future invoice. In the case of variable compensation and in view of the previous administrative practice, the invoicing of a separate VAT component would continue to be required until the tax authorities have communicated their new position on the matter or - if variable compensation is also to be accounted for without VAT - legal action may become necessary. It also remains to be seen whether the tax authorities will apply the new case law retrospectively and whether and how it would take into account considerations of the protection of legitimate expectations (Vertrauensschutz).

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2.         Tax

2.1       Taxation of Transactions involving German Registered IP

In a decree issued on November 6, 2020, the German tax authorities expressed their opinion that transactions between non-German parties, which relate to IP registered in a German register, are subject to tax in Germany. The tax provision the German tax authorities are referring to has been in existence for almost 100 years but in practice this provision has not been applied to transactions where both contracting parties reside outside of Germany. The German tax authorities now deviate from past practice and take the view that such extraterritorial transactions with German registered IP are taxable in Germany. In essence, such interpretation of the German tax authorities creates a taxable nexus in Germany only by virtue of the German registration of IP. As a consequence, royalties paid by a non-German licensee to a non-German licensor for German registered IP are subject to German withholding tax at a flat rate of 15.8%. A potential upfront tax relief under European directives or applicable double tax treaties may be applicable but requires a formal application by the licensor and a certification by the German tax authorities prior to payment of the royalties. If the withholding tax was not withheld, which is the typical case for German registered IP, the licensee as well as the licensor may be held liable for the payment of the withholding tax.

Only two weeks after the issuance of the decree, the German government released a draft tax bill on November 20, 2020 recognizing the far reaching interpretation of the tax authorities. Under the draft tax bill German tax for registered IP in Germany would only apply if the IP is exploited through a German permanent establishment or facility of the licensee; the pure registration of IP in a German register would not be sufficient anymore to become taxable in Germany. It is still unclear if and to what extent the draft tax bill becomes effective and, therefore, the November 6 decree remains for now the only currently valid administrative guidance on the taxation of IP registered in Germany.

Affected tax payers are well advised to closely monitor the further legislative process.

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2.2       Anti-Tax-Avoidance Directive

In 2016, the EU enacted the Anti-Tax-Avoidance Directive (ATAD) containing a package of legally binding measures to combat tax avoidance to be implemented into national law by all EU member states by 2018/2019. Germany has so far delayed implementation, exposing itself to EU infringement proceedings for failure to implement ATAD into national law in time. Almost one year after publication of the first draft bill, Germany is now considering implementing ATAD requirements in early 2021. Implementation has been delayed because Germany wanted to introduce several measures beyond a one-to-one implementation of the Directive, such as new rules on cross-border intercompany financing or exit taxation for individuals.

As part of the most relevant gap between existing German tax rules and ATAD requirements, Germany will introduce rules which limit the deduction of operating expenses for certain hybrid arrangements between related parties. Significant changes under ATAD regarding the current controlled foreign corporation (CFC) rules (Außensteuergesetz) will be a new control criterion and introduction of a shareholder-based approach. Control shall be deemed to exist if a German-resident shareholder, alone or jointly with related persons, holds a majority stake in the foreign company. The current concept of domestic control by adding up the participations of all German taxpayers will be abandoned. The current CFC rules, according to which a foreign company is considered as lowly taxed if the income tax is below 25%, shall, however, be retained.

This has evoked strong criticism by commentators since even in many developed countries the income tax rate is below 25% and CFC regulations in Germany can therefore be triggered too easily.

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2.3       New Anti-Treaty Shopping Rule

The European Court of Justice (ECJ) has consistently declared Germany’s attempts at creating a treaty-overriding anti-abuse provision to be a violation of EU fundamental freedoms. On November 20, 2020, the German government released a draft tax bill and launched another attempt at making the anti-abuse provision compatible with EU law. The draft law takes into account recent ECJ case law and provisions under the ATAD. Under the new wording of the anti-abuse provision a foreign company has no claim for relief from withholding tax to the extent that it is owned by persons, which would not be entitled for such relief, had they been the direct recipients of the income, and as far as the source of income is not materially linked to economic activity of this foreign company. Receiving the income and its onward transfer to investors or beneficiaries as well as any activity that is not carried out using business substance commensurate with the business purpose cannot be regarded as an economic activity. Withholding tax relief shall be given in so far as the foreign company proves that none of the main purposes of its interposition is obtaining a tax advantage or if the shares in the foreign company are materially and regularly traded on a recognized stock exchange.

If the new rule becomes law, it could in the future be harmful for a holding company to be interposed between its parent and a German income source even if the holding company and the parent are in different countries and both German tax treaties applicable to the holding and the parent company provide for the same withholding tax benefits. In such case it may be required to create a sufficient economic link between the German income source and the economic activity of the holding company in order to avoid the application of the anti-treaty shopping rule. An active management holding company should be regarded as a sufficient economic activity and such holding company should not to fall under the new rules. Further clarifications in that respect by the German tax authorities are expected in the first half of 2021.

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3.         Financing and Restructuring

With the COVID-19 pandemic hitting the German economy hard, the areas of financing and restructuring saw some of the most significant changes and sustained reform in 2020. The initial legislative response focused, in particular, on providing new sources of emergency funding and a temporary relaxation of the traditionally strict German insolvency filing obligations for companies perceived to be in financial disarray through no fault of their own due to the effects of the pandemic.[6]

On December 17, 2020, the German Parliament then adopted the Act on the Continued Development of Restructuring and Insolvency Law (Sanierungs- und Insolvenzfortentwick­lungsgesetz – SanInsFoG) to address (i) the fear of a large-scale “insolvency wave” upon the originally scheduled expiry of the COVID-19 pandemic triggered partial suspension of the insolvency filing requirement due to over-indebtedness on December 31, 2020,[7] and (ii) the implementation of the European Union Directive (EU) 2019/1029 of June 23, 2019 on preventive restructuring frameworks, the discharge of debt and measures to increase the efficiency of restructuring and insolvency proceedings (the “Restructuring Framework Directive”) into German law which would have been due by July 2021.

This reform of German restructuring and insolvency law, which was pushed through the parliamentary process in a very short period of time, has been labeled by many commentators as potentially the most significant reform of the German restructuring landscape since the introduction of the German Insolvency Code (Insolvenzordnng, InsO) in 2001.

A selection of key changes introduced by the SanInsFoG reform which came into effect on January 1, 2021 are highlighted in the below sections:

3.1       Reform of the German Insolvency Code (InsO) by the SanInsFoG

  • The insolvency reason of over-indebtedness (Überschuldung) was modified in such a way that the period for the necessary continuation prognosis (Fortführungsprognose), during which a mathematically over-indebted company must be able to meet its obligations when they fall due, was shortened to twelve months only. Before the reform, the relevant period was the current and the following business year.
  • If certain special requirements during the period of the pandemic are met, the prognostication period is shortened further to only four months in order to deal with the economic effects of the pandemic which makes reliable long term planning difficult if not impossible. This provision is designed further to soften the effects of the pandemic and applies only from January 1, 2021 to December 31, 2021.
  • The suspension of the insolvency filing obligation under the COVInsAG was further extended for all of January 31, 2021. The suspension applies to all over-indebted and/or illiquid companies (i) who filed an application for public support under the “November and December COVID-relief funds” (November- und Dezemberhilfen) but the respective funds were not yet paid out or (ii) such application was not possible for technical or legal reasons even though a business was entitled to apply. The extension does not apply if the receipt of such funds would not be sufficient to cure the existence of the insolvency reason or such application would clearly be unsuccessful.
  • For the insolvency reason of over-indebtedness only, the previous maximum period for mandatory insolvency filing of three weeks was extended to a maximum of six weeks.
  • The prognostication period for the determination of impending illiquidity (drohende Zahungsunfähigkeit) is now as a general rule twenty-four months.
  • Certain provisions relevant for the liability of the managing directors in times of distress were removed from various corporate statutes and concentrated in modified form in a new provision of the Insolvency Code (§ 15b InsO). The legislator, in particular, clarified and extended the payments permitted by the management of a debtor company after the time an insolvency reason has already occurred if a timely filing is later made.
  • The provisions on future access to own administration by management (Eigenverwaltung) and so-called protective umbrella proceedings (Schutzschirmverfahren) in the Insolvency Code were modified and partly restricted to address past undesirable developments. However, exceptions apply for entities who became insolvent due to the pandemic: (i) Illiquid entities may rely on the protective umbrella proceedings which otherwise are only available in case of impending illiquidity, and (ii) companies may under certain specific circumstances continue to avail themselves of the less restrictive pre-reform rules on own administration by management if such proceedings are applied for during the year 2021.

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3.2       Introduction of a New Pre-Insolvency Restructuring Tool Kit

The core piece of the SanInsFoG is the new, stand-alone act called the Business Stabilization and Restructuring Act (Unternehmensstabilisierungs- und -restrukturierungsgesetzStaRUG, the “Restructuring Act”). This Restructuring Act contains the German rules to transpose the requirements of the Restructuring Framework Directive into local German law, but partly goes beyond such minimum requirements.

Without any claims to be complete, clients and their management ought to be aware of the following key items in the Restructuring Act:

  • The Restructuring Act introduces a general obligation for management to install continuous supervision and early warning systems that enable management to detect any developments endangering their company’s existence or financial wellbeing.
  • Once a company is faced with impending illiquidity, and has opted for voluntary pre-insolvency restructuring proceedings, management of the debtor has to conduct the business with the care of prudent business person in restructuring and thus, in particular, has to safeguard the interests of the community of creditors. Conflicting shareholder instructions may not be complied with.
  • In voluntary pre-insolvency restructuring proceedings, management of the company must draw up a detailed, descriptive (darstellend) and executive (gestaltend) restructuring plan in order to restructure the company’s business or individual types of liabilities or contractual obligations. Measures may, for example, include haircuts and amendments of the rights of secured or unsecured creditors, but a comparative calculation/analysis needs to be attached which outlines the effects of the restructuring on individual creditors compared to a regular insolvency situation. It should be noted that claims of employees (including pension claims) may not be restructured or changed as part of the restructuring plan.
  • Approval of the restructuring plan requires a majority of 75% of the voting rights per creditor group. Subject to additional requirements, non-consenting creditors can be overruled via a court approved cross-class cram-down.
  • The court may upon request of the restructuring company further impose a temporary three-month moratorium on individual enforcement measures. Such moratorium may under certain circumstances be extended to a maximum period of eight months.
  • The handling of the entire pre-insolvency restructuring can be assisted or facilitated by the involvement of two newly-created functional experts appointed by the competent court, the so-called restructuring agent (Restrukturierungsbeauftragter) and the restructuring moderator (Sanierungsmoderator). In addition, the competent court may appoint a so-called creditor’s advisory committee (Gläubigerbeirat) ad officium if the proposed restructuring plan affects all creditors (except for creditors of exempt claims such as claims of employees) and, thus, is of such general application to all groups of creditors that the proceedings are akin to universal proceedings (gesamtverfahrensartige Züge). Such creditor advisory committee may also include members that are unaffected by the restructuring plan like e.g. employee representatives or others.
  • If illiquidity or over-indebtedness occurs during the restructuring proceedings, management is obliged to immediately inform the restructuring court, but the formal duty to file for insolvency is suspended. Such insolvency filings do remain possible, though, and the restructuring court may close the restructuring matter to allow for formal insolvency proceedings. Failure to inform the restructuring court duly or timely may incur personal liability for management.
  • The tools, procedures and restructuring measures contained in the Restructuring Act are mostly new and untested. It can thus be expected that the need for specialist advice for distressed companies will generally increase.

The need for additional expert assistance and the relatively heavy load of technical and procedural safeguards may pose a challenge in particular for small and medium-sized distressed businesses who suffer heavily from the pandemic and who may not have the financial and other resources to benefit from the Restructuring Act. It therefore remains to be seen whether and how the new Restructuring Act will stand the test of time in this regard. It can be expected, though, that the Restructuring Act will offer interesting options and restructuring potential, at least, for bigger and more sophisticated players in the German or international business arena. We would thus recommend that interested circles, i.e. German managing directors and board members but also investors or shareholders, familiarize themselves with the fundamentals of the Restructuring Act.

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4.         Labor and Employment

4.1       Employers’ Options during the COVID-19 Pandemic

The German lawmaker has enacted several support measures and subsidies for companies to cope with the ongoing COVID-19 pandemic, especially enhancing short-time work options. In a nutshell, short-time work means that working hours are reduced (even down to zero) and that the state pays between 60% and 87% of the net income lost by the affected employees. Currently, such a scheme can be extended to 24 months with the government even covering the social security costs.

Companies that make use of this generous scheme are not barred from carrying out redundancy measures. However, the narrative for such lay-offs is different: A termination for business reasons requires a permanent, not only a temporary loss of work. Regardless of these strict requirements, we have seen an uptick of redundancies during the pandemic.

For a more detailed insight we would refer to our client alert on the topic.[8]

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4.2       Reclassification Risk of Crowd-Workers into De-Facto Employees

The German Federal Labor Court (Bundesarbeitsgericht, BAG) has recently held that crowd-workers, i.e. freelancers hired over an online platform, can be classified as employees of the platform (9 AZR 102/20). This would entitle them to certain employee-protection rights, such as protection against dismissal, continued payment of remuneration and vacation claims.

In this particular case, the crowd-worker was considered an employee because the platform controlled the details of the work (place, date and contents) and featured a rating system that incentivized him to continuously perform activities for the platform operator. In the opinion of the court that sufficed to show that the crowd-worker was integrated in the platform operator’s business, making him an employee.

While the ruling will not render the business model of crowd-working platforms entirely impossible, especially platform operators using incentive systems should have these arrangements double-checked to mitigate the risk of costly reclassification of their crowd-workers.

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4.3       Pension Claims in Insolvency (Distressed M&A)

The European Court of Justice (ECJ) has issued an important ruling concerning the liability of acquirers of insolvent companies for occupational pensions. According to German case law, such acquirers have not been liable for their new employees’ rights with regard to occupational pension schemes as far as these rights had been accrued prior to insolvency. Instead, such claims are covered by the German Insolvency Protection Fund (Pensionssicherungsverein, PSV), which secures them to a certain extent, but not always entirely.

The plaintiffs in the underlying German court proceedings sued the acquirer for acknowledgement of their full pension claims disregarding reductions due to the insolvency. The ECJ now ruled on September 9, 2020 that the limited liability of the acquirer regarding occupational pension claims was only in line with European Union law if national law provided a certain minimum protection regarding the part not covered by the acquirer (C-674/18 and C-675/18). Regrettably, the ruling does not make it entirely clear who would be liable for a possible difference in benefits – the acquirer or the PSV. According to the few publications available so far, it appears more convincing that the PSV would have to cover said deficit. However, due to the lack of certainty, investors ought to take this potential risk into account when acquiring insolvent businesses.

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5.         Real Estate

5.1       Conveyance requires Domestic German Notary

The transfer of title to German real estate requires (i) the agreement in rem between the transferor and the acquiror on the transfer (conveyance) and (ii) the subsequent registration of the transfer in the competent land register. To be effective, the conveyance needs to be declared in the presence of both parties before a competent agency. While a notary appointed in Germany fulfills this criterium, it is disputed among German scholars whether the conveyance may also be effectively declared before a notary public abroad.

In its decision of February 13, 2020, the German Federal Supreme Court (BundesgerichtshofBGH) held that the conveyance may not be effectively declared before a notary who has been appointed outside of Germany. Engaging a notary abroad for the conveyance to get the benefit of (often considerably) lower notarial fees abroad, is thus not a viable option. In case of a sale of real estate under German law, additional notarial fees for the conveyance, however, may be avoided if the conveyance is included in the notarial real estate sale agreement recorded by a German notary.

The feasibility of a notarization before a notary public abroad is still disputed with respect to the notarization of the sale and transfer or the pledging of shares in a German limited liability company (GmbH). It remains to be seen whether this decision on real estate conveyance may also impact the dispute and arguments on the permissibility of foreign notarization of share sales and transfers or pledges.

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5.2       Update regarding Commercial Lease Agreements

Further developments of potential relevance for the real estate world, which were triggered by the COVID-19 pandemic, are discussed in the context of the continuing legal impact of the pandemic in sections 12.3 and 12.4 below.

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6.         Compliance / White Collar

6.1       Corporate Sanctions Act: Extended Liability for Criminal Misconduct

The German Federal Government is still pursuing its plan to implement a corporate criminal law into German law. After the Federal Council (Bundesrat) had demanded some changes to the previous draft bill, the Federal Government introduced its draft to Parliament on October 21, 2020. Unlike many other countries, German criminal law does not currently provide for corporate criminal liability. Corporations may only be fined for an administrative offense. Based on the draft bill, corporations will be responsible for business-related criminal offenses committed by their leading personnel and will be liable for fines of up to 10% of the annual – worldwide and group-wide – turnover. In addition to this fine, profits can be disgorged and the corporation will be named in a sanctions register as a convicted party for up to 15 years.

Furthermore, if implemented, public prosecutors would be legally obliged to open investigations against the corporation on the basis of a reasonable suspicion (currently, it is in their discretion), and a written legal framework for internal investigations will be established. A corporation will benefit from considerable mitigation of the sanction if it carries out an internal investigation that meets certain criteria (such as a cooperation with the authorities in an uninterrupted and unlimited manner, organizational separation between investigation and criminal defense, and adherence to fair trial standards).

In view of these developments, corporations should not only revise existing compliance systems to prevent corporate criminal misconduct, but also set up an action plan to be prepared for criminal investigations under the planned Corporate Sanctions Act. Considering that the current legislative period will end in the autumn of 2021, it is expected that a final resolution on the Corporate Sanctions Act will soon be reached by the legislator.

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6.2       Money Laundering: The German Government’s Intensified Fight for AML Compliance

In the past, the FATF (Financial Action Task Force) and others have often portrayed Germany as being too lenient in its efforts to combat money laundering, and the German regulatory framework was branded as containing too many loopholes. Recent developments surrounding the collapse of German pay service provider Wirecard have done little to assuage such views.

In response to such criticism, Germany has recently increased its efforts towards introducing a more forceful AML framework. A prime example of Germany’s new-found vigor in this regard is the fact that the German government opted not only to implement the 5th EU Money Laundering Directive, but to go above and beyond the minimum requirements set by the EU. As already discussed in sections 1.4, 5.2 and 6.2 of last year’s client alert, a number of legislative changes came into effect.[9]

In addition, the German government issued two distinct resolutions, namely the eleven points “National Strategy Package” and – in direct conjunction with the Wirecard collapse – the “16-Points Action Plan”. The corresponding changes are not limited to the German Criminal Code and the Anti Money Laundering Act (Geldwäschegesetz, GwG), but extend to establishing an improved organization of the German AML authorities.

The provision on money laundering in the German Criminal Code (section 261) will, according to the current Ministry of Justice draft bill, undergo a fundamental change. Pursuant to the intended legislation, the scope of section 261 of the German Criminal Code will be significantly broadened as any criminal wrongdoing may in the future constitute a predicate offense for money laundering.

Under the current state of the law, only a limited set of criminal offenses may give rise to money laundering. Importantly, criminal acts committed abroad may serve as predicate offenses for money laundering as well. The new legislation extends the scope of relevant prior offenses to certain acts which under EU law is required to be rendered punishable under the respective local criminal laws of the member states, irrespective of whether such act is in fact punishable in the jurisdiction at the place it is committed. Moreover, the offense of grossly-negligent money laundering has been re-introduced into the draft after a heated debate in this regard.

As supporting measures to the amended Anti Money Laundering Act, the German government decided to subject numerous economic players to (new or partially enhanced) AML requirements, including private financial institutions, crypto currency traders, real estate agencies and notaries who would be burdened with extended new obligations to disclose AML-related concerns regarding their customers and clients. These measures are mainly reflected in this year’s draft of a regulation on obligations to report certain facts surrounding real estate (Verordnung zu den nach dem Geldwäschegesetz meldepflichtigen Sachverhalten im Immobilienbereich).

Key German AML institutions were – as a direct result of the aforementioned government’s resolutions – significantly strengthened:

  • The Financial Intelligence Unit’s (FIU) personnel was more than doubled, and its data access rights were significantly expanded. In addition, a high level government body was established between German federal and local state authorities.
  • The German Federal financial supervisory authority BaFin was requested to ensure that companies and persons under its supervision implement any statutory obligations, and BaFin’s related supervisory competences were broadened.
  • The transparency registry which may be accessed by members of the public was established, collecting key relevant data including the UBO. Registration in the transparency register is mandatory for all companies with business activities in or related to Germany.

The German business community and relevant AML specialists should, at least, inform themselves or gain an in depth understanding of the new and extended regulatory framework. New monitoring systems need to be put in place to follow up on future predicate offenses. Therefore, relevant risk factors including those arising from new business models such as crypto currency trading have to be evaluated as a first step prior to implementing the new provisions.

While Germany has failed to implement new European AML requirements by December 3, 2020, the corresponding draft bill is expected to come into force soon.

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6.3       Cross-Border European Investigations: The European Public Prosecutor’s Office

To fight crimes against the fiscal interests of the European Union, the European Public Prosecutor’s Office (“EPPO”) is expected to become operative in 2021. The EPPO will act both on a centralized level with European Prosecutors based in Luxembourg having a supervisory and coordinating function and on a decentralized level with European Delegated Public Prosecutors situated in the participating EU member states having the same powers as national prosecutors to investigate specific cases. Its activities will focus on the prosecution of offenses to the detriment of the EU such as subsidy fraud, bribery and cross-border VAT evasion.

After the originally intended start of the new authority was delayed at the end of 2020, it is anticipated that investigation activities will start in 2021. In addition to the existing national criminal prosecution authorities and European institutions such as OLAF, Europol and Eurojust, a genuine European criminal prosecution authority will enter the stage and possibly bring about a shift in European enforcement trends. It is to be hoped that crimes affecting the EU’s financial interests will be pursued in a more robust manner and that international coordination of investigations will be significantly improved.

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7.         Data Privacy - Regulatory Activity and Private Enforcement on the Rise

The German Data Protection Authorities (“DPAs”) have certainly had a busy year. While, the trend towards higher fine levels for GDPR violations continues, the German DPAs have also initiated a number of investigations and issued guidance on a variety of issues, such as COVID-19 related data privacy concerns, the consequences of the “Schrems II” ruling of the Court of Justice of the European Union (judgment of July 16, 2020, case C-311/18)[10] and the use of video conferencing services and other technological tools in the context of working from home.

With regard to fines, in 2020 the German DPAs issued fines in the total amount of EUR 36.6 million (approx. USD 44.8 million). In October 2020, the Hamburg Data Protection Authority imposed a record-breaking fine in the amount of EUR 35.3 million (approx. USD 43.2 million) on a retail company for comprehensively and extensively collecting sensitive personal data from its employees, including health data and data about the employees’ personal lives, without having a sufficient legal basis to do so. This was the highest fine ever issued by a German DPA.

However, for companies it may well pay off to push back against such fines: The District Court (Landgericht) of Bonn largely overturned a fining decision issued by the German Federal Commissioner for Data Protection and Freedom of Information against a German telecommunications service provider in December 2019. While the court confirmed a violation of the GDPR, the court significantly reduced the fine in the amount of EUR 9.5 million (approx. USD 11.6 million) to EUR 900,000 (approx. USD 1.1 million).

Another important trend is the increasing number of private enforcements in the context of data protection violations. In particular, consumers are seeking judicial help to enforce information and access requests as well as compensation claims for material or non-material damages suffered as a result of GDPR violations, especially in the employment context. But German courts are apparently not (yet) prepared to award larger amounts to plaintiffs for this kind of GDPR violations. For example, in a case where an employee requested damages in the amount of EUR 143,500 (approx. USD 175,800) the Labor Court of Düsseldorf has awarded damages in the amount of only EUR 5,000 (approx. USD 6,000). Nevertheless, companies are well advised to keep an eye on future developments as courts may raise the amount of damages awarded if an increasing number of cases were to show that current levels of damages awarded are not sufficient to have a deterrent effect.

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8.         Technology

8.1       Committee Report on Artificial Intelligence

In November 2020, the German AI inquiry committee (Enquete-Kommission Künstliche Intelligenz des Deutschen Bundestages, hereafter the “Committee”) presented its final report, which provides broad recommendations on how society can benefit from the opportunities inherent in AI technologies while acknowledging the risks they pose. The Committee was set up in late 2018 and comprises 19 members of the German Parliament and 19 external experts.

The Committee’s work placed a focus on legal and ethical aspects of AI and its impact on the economy, public administration, cybersecurity, health, work, mobility, and the media. The Committee advocates for a “human-centric” approach to AI, a harmonious Europe-wide strategy, a focus on interdisciplinary dialog in policy-making, setting technical standards, legal clarity on testing of products and research, and the adequacy of digital infrastructure.

At a high level, the Committee’s specific recommendations relate to (1) data-sharing and data standards; (2) support and funding for research and development; (3) a focus on “sustainable” and efficient use of AI; (4) incentives for the technology sector and industry to improve scalability of projects and innovation; (5) education and diversity; (6) the impact of AI on society, including the media, mobility, politics, discrimination and bias; and (7) regulation, liability and trustworthy AI.

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8.2       Proposed German Legislation on Autonomous Driving

The German government announced plans to pass a law on autonomous vehicles by mid-2021. The new law is intended to regulate the deployment of connected and automated vehicles (“CAV”) in specific operational areas by the year 2022 (including Level 5 “fully automated vehicles”), and will define the obligations of CAV operators, technical standards and testing, data handling, and liability for operators. The proposed law is described as a temporary legal instrument pending agreement on harmonized international regulations and standards.

Moreover, the German government also plans to create, by the end of 2021, a “mobility data room”, described as a cloud storage space for pooling mobility data coming from the car industry, rail and local transport companies, and private mobility providers such as car sharers or bike rental companies. The idea is for these industries to share their data for the common purpose of creating more efficient passenger and freight traffic routes, and support the development of autonomous driving initiatives in Germany.

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9.         Antitrust and Merger Control

9.1       Enforcement Overview 2020

The German Federal Cartel Office (Bundeskartellamt), Germany’s main antitrust watchdog, has had another very active year in the areas of cartel prosecution, merger control, consumer protection and its focus on the digital economy.

On the cartel prosecution side, the Bundeskartellamt concluded several investigations in 2020 and imposed fines totaling approximately EUR 358 million against 19 companies and 24 individuals from various industries including wholesalers of plant protection products, vehicle license plates, and aluminum forging. It is of note that the fining level decreased by more than 50 % compared to 2019. While the Bundeskartellamt received 13 notifications under its leniency program, the increasing risks associated with private follow-on damage claims clearly reflect on companies’ willingness to cooperate with the Bundeskartellamt under its leniency regime. The authority stressed that it is continuing to explore alternative means to detect illegitimate cartel conduct, including through investigation methods like market screening and the expansion of its anonymous whistle-blower system.

In 2020, the Bundeskartellamt also reviewed approximately 1,200 merger control filings (i.e., approximately 14 % less than in 2019). As in previous years, more than 99 % of these filings were concluded during the one-month phase one review. Only seven merger filings required an in-depth phase-two examination. Of those, five were cleared in phase-two (subject to conditions in two of these cases), and two phase-two proceedings are still pending.

Looking ahead to the year 2021, the Bundeskartellamt will likely continue to focus on the digital economy and conclude its sector inquiry into online advertising. The agency also announced to go live with its competition register in Q1 of 2021 for public procurement purposes. This database will list companies that were involved in competition law infringements and other serious economic offenses.

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9.2       Paving the Way for Private Enforcement of Damages

In its Otis decision (C-435/18 of December 12, 2019), the European Court of Justice (ECJ) paved the way for private enforcement in cases concerning antitrust damages. The ECJ held that even a party not active on the market related to the one affected by the cartel may seek damages if there is a causal link between the damages incurred and the violation of Article 101 of the Treaty on the Functioning of the European Union (TFEU). The ECJ also reaffirmed that the scope of the right to compensation under Article 101 TFEU, i.e. the “who,” “what” and “why”, is governed by EU law while the national laws of the member states determine how to enforce the right.

Private enforcement of cartel damages is gaining momentum. Since the Otis decision, German courts, in particular the German Federal Supreme Court (Bundesgerichtshof, BGH), have further explored the course set by the ECJ in several antitrust damages cases concerning the so-called rail cartel.

The BGH held that Article 101 TFEU and, therefore, also the right to damages under German law, does not require the claimant to prove that a certain business transaction has directly been affected by the cartel at issue. Instead, it is sufficient if the claimant establishes that the cartel infringement is abstractly capable of causing damages to the claimant. As a result, courts only need to evaluate one long-lasting cartel infringement instead of individual breaches. The BGH further clarified in its decisions that the extent of an impairment by a cartel is a question of “how” a claimant would be compensated and, therefore, subject to German procedural law. As a consequence, the BGH encouraged courts to exercise judicial discretion when weighing the parties’ factual submissions and assessing cartel damages.

The BGH also ruled that the passing-on defense could apply if the claimant had received public grants which otherwise would not or not in such an amount have been paid to the claimant if the cartel had not existed. The court explained, however, that the defense may be barred when the damage is scattered to the downstream market level. In this case, it is inappropriate for the initiator of the cartel to walk free only because the individual damages were too minor to prompt claims for damages.

In the future, businesses will do well to monitor these ongoing developments as private enforcement actions of damages further gather pace and may develop into a sharp sword to police anti-competitive practices of other market players.

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9.3       Adoption of the “GWB Digitalization Act” expected for 2021

The draft bill for the 10th Amendment of the German Competition Act, also known as “GWB Digitalization Act” endorsed by the German Federal Government on September 9, 2020 is currently undergoing the legislative procedure in the German Parliament. The adoption of the bill is expected for early 2021. Having said that, the final discussions of the bill originally scheduled for December 17, 2020 were postponed until January 14, 2021.

As reported in our Year-End Alert 2019,[11] the draft bill addresses topics such as market dominance in the digital age and introduces a number of new procedural simplifications. For example, the bill currently foresees that companies, which depend on data sets of market-dominating undertakings or platforms, would have a legal claim to data access against such undertakings or platforms. Further, the draft bill introduces a rebuttable presumption whereby it is presumed that direct suppliers and customers of a cartel are affected by the cartel in case of transactions during the duration of the cartel with companies participating in the cartel.

Compared to the draft bill discussed in our Year-End Alert 2019, the governmental revision contains certain changes, in particular in the area of merger control. Thus, the draft bill currently features an increase of the two domestic turnover thresholds by EUR 5 million (approx. USD 6 million), i.e. from EUR 25 million to EUR 30 million (from approx. USD 30.6 million to approx. USD 36.8 million), and from EUR 5 million to EUR 10 million (from approx. USD 6.1 million to approx. USD 12.3 million), respectively. Additionally, a new provision was introduced in the legislative procedure, whereby the German Federal Cartel Office (Bundeskartellamt,) may require companies, which are deemed to reduce competition through a series of small company acquisitions in markets in which the Bundeskartellamt conducted sector inquiries, to notify every transaction in one or more specific sectors provided that certain thresholds are met. This notification obligation can be imposed on a company, if (i) the company has generated global turnover of more than EUR 500 million in the last business year, (ii) there are reasonable grounds for the presumption that future mergers could significantly impede effective domestic competition in the sectors for which the obligation has been imposed and (iii) the company has a market share of at least 15% in Germany in the sectors for which the obligation has been imposed. However, a notification will only be required if the target company has (i) generated turnover of more than EUR 2 million in the last business year and (ii) has generated more than two-thirds of its turnover in Germany. The notification obligation lasts for three years.

In light of the recent publication of the draft regulation on an EU Digital Markets Act by the European Commission, it remains to be seen how the German legislator will react to the proposals put forward by the Commission and how the national legislative procedure will evolve.

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10.       International Trade, Sanctions and Export Control

10.1     The New Chinese Export Control Law and its Impact on German Companies

The challenges, which German companies, specifically those with a U.S. parent or another U.S. nexus, face in light of the EU Blocking Statute’s prohibition to comply with certain U.S. sanctions on Iran and on Cuba, are well documented.[12] While 2021 might see calmer waters in the West due to the expected (yet far from certain) return to a more multilateral focus of the incoming Biden Administration, further complications await the German export business community in the East.

On December 1, 2020, a comprehensive new Chinese export control law went into effect. Generally speaking, the Chinese export control law reflects key elements of U.S. and EU/German export control related law. Particularly, licensing requirements for the export of controlled Chinese goods (including technologies) are determined on the basis of lists of goods and a catch-all clause.

As early as December 4, 2020, China's Ministry of Commerce along with other authorities already published the first such lists of goods in the area of “commercial cryptography”, i.e. regarding goods and technologies which can be used for encryption, inter alia, in telecommunication applications, VPN equipment or quantum cryptographic devices.

It is likely that any significant restrictions on, inter alia, exports of certain U.S. origin items and technology to China will eventually be mirrored in the respective Chinese lists to also impose significant restrictions on the export of certain Chinese origin items and technology to the U.S. For many German-based companies with a diversified supply chain this raises the unenviable prospect that they may use suppliers whose sourced goods originate in the U.S. and in China, respectively, which feature on each of the respective lists. This conflict may eventually limit the number of counterparties the German company can export the final product to without jeopardizing either supply chain. It may also limit the possibility of cooperation (e.g. technology transfer) with U.S. and/or Chinese suppliers and customers alike.

Further, China's new Export Control Law contains regulation comparable to the (U.S.) concept of “deemed export” via the definition of “exports”, which applies when a Chinese person transfers listed goods to a foreign person. Depending on how extensively this is interpreted by the Chinese authorities, this could, for example, result in Chinese export control law also applying to transfers by Chinese individuals located in Germany to a German person. Therefore, the details of this potential extraterritorial effect of Chinese export control law, as well as a vague reference to an extension of Chinese export control law to re-exports of listed goods and technologies or goods and technologies covered by the catch-all regime, raises numerous questions that will presumably only be clarified in time by the publication of specific regulations or guidance by the Chinese authorities.

Additionally, the EU is also taking initial steps to further strengthen its defense mechanisms against perceived and potential interference with its sovereignty by the extraterritorial effects of U.S. and Chinese export control laws. Specifically, the EU Parliament requested a study[13] on extraterritorial sanctions on trade and investments and European responses, that, inter alia, suggests the establishment of an EU agency of Foreign Assets Control (EU-AFAC) with the aim of more efficient and effective enforcement of, inter alia, the EU Blocking Statute, which might also come to include parts of the Chinese export control law.

In any case, any German export control compliance department would be well-advised to update its Internal Compliance Program to be able to identify conflicting compliance obligations early and establish a process to swiftly resolve them - without breaching applicable anti-boycott regulations – in order to avoid the supply-chain-management of the company being negatively impacted.

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10.2     Update on the German Rules regarding Foreign Direct Investment Control

For a summary of the recent reforms of German foreign investment control laws, reference is made to section 1.3 above.

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11.       Litigation

11.1     Establishment of Commercial Courts in Germany - An Emerging Forum for International Commercial Disputes?

Over the past few years, Germany has taken several efforts to become a more attractive forum venue for international disputes. In 2010, three District Courts (Landgerichte) in Cologne, Bonn and Aachen had established English-speaking divisions for civil disputes. Since January 2018, the Frankfurt district court has allowed oral hearings in international commercial disputes to be conducted in English, provided the parties agree. The same now applies for the district courts in Mannheim and Stuttgart where two civil and two commercial divisions specially established for this purpose have started their work in November 2020. The civil divisions consist of three professional judges, respectively. The commercial divisions offer a combination of legal and industry-specific expertise and are led by one professional judge and two honorary judges from the local business community. All divisions have been equipped with state-of-the-art technical equipment, allowing for video-conferences and video testimonies of witnesses and experts.

Provided that the district court in Mannheim or in Stuttgart has jurisdiction (or the parties agree), the Commercial Courts in Mannheim or Stuttgart may hear corporate disputes, post-M&A disputes as well as disputes concerning mutual commercial transactions. Additionally, the court in Mannheim is available for disputes resulting from banking and financial transactions. While the Commercial Court in Stuttgart does not limit its jurisdiction to a certain litigation value, the court in Mannheim (its patent division enjoys global recognition) requires an amount in dispute of at least EUR 2 million. To ensure an effective review at the appellate level, the Higher District Courts (Oberlandesgerichte) in Stuttgart and Karlsruhe have also established specialized appeal panels responsible for dealing with appeals and complaints against the decisions of the new Stuttgart and Mannheim Commercial Courts.

The new Commercial Courts are supposed to let international litigants benefit from the high quality of the German court system and the advantages of its procedural rules. Overall, the duration of court proceedings in Germany is fairly short. There is no “American-style” discovery process. Costs are moderate by international standards, and must be borne by the losing party. Hearings are usually held in public, but the public can be excluded when business secrets are discussed. Additionally, parties may decide whether or not to allow for an appeal.

Despite these benefits, it remains to be seen whether the Commercial Courts in practice will measure up to these high expectations: Even though oral hearings may be conducted in English and a translation of English appendices is no longer required, every written submission must still be filed in German, and the decisions the court renders are in German as well. In any case, the new Commercial Courts seem to be a further step into the right direction towards a more international business-friendly approach.

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11.2     Directive for Collective Redress – Class Action at EU-Level

On December 4, 2020, following an agreement between the EU-institutions in June 2020, the EU-Parliament has approved the “Directive on representative actions for the protection of the collective interests of Consumers” (the “Directive”)[14], introducing the possibility of collective redress across the borders within the EU. The Directive aims to strengthen the protection of EU-consumer rights in case of mass damages, covering both domestic and cross-border infringements, especially with regard to data protection, energy, telecoms, travel and tourism, environment and health, airline rights and financial services. The EU Member States need to implement the Directive into their national laws within two years and six months, i.e. by mid-2023.

Under the Directive, collective legal actions may only be taken by “qualified entities” on behalf of consumers against traders, seeking injunction and/or redress measures. For the purpose of cross-border representative actions, the qualified entities may only be designated (by the Member State) if they comply with EU-wide criteria (i.e. non-profit, independent, transparent and ensure a legitimate interest in consumer protection). To prevent abusive litigation, the defeated party has to bear the costs of the proceedings (“loser pays”) and courts or administrative authorities may dismiss manifestly unfounded cases. Consumers can join the action by either opt-in or opt-out mechanisms, depending on the decision regarding procedure which each Member State takes.

Even though the legal orders of many Member States already provide for the possibility of collective redress, the Directive assures (i) a harmonized approach to collective redress and (ii) mandatory redress measures in every Member State such as compensation, repair or price reduction without the need to bring a separate action. Therefore, the Directive goes beyond some existing regulations, which only allow declaratory actions or injunctive relief. At the same time, individual actions by plaintiffs remain possible and unregulated at the EU level. As the diesel emissions lawsuits in Germany demonstrate, this can lead to waves of mass actions and a massive clogging of court dockets.

Even though the deadline for the implementation of the Directive is still sometime down the road, the adoption of laws and regulations in the Member States to implement the Directive will need to be closely monitored by companies and law firms, in particular with regard to the various Member States’ chosen path on such issues as opt-in vs. opt-out and discovery or disclosure of documents.

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11.3     German Courts and the COVID-19 Pandemic

COVID-19 has affected all areas of life, including the court system. Over the year 2020, German courts had to learn how to litigate despite the pandemic and conduct oral hearings, as well as litigation in general, as safe as possible for everyone involved.

During the first wave of the pandemic in spring 2020, non-urgent matters were mostly postponed. Some courts in areas particularly troubled by the virus were forced to close their buildings to the public. However, the German administration of justice was never completely suspended or paused.

During the summer of 2020, with fewer COVID-19 cases, court proceedings started to normalize and courts developed concepts to continue with litigation despite the pandemic. In appropriate cases, courts tried to avoid oral hearings and, with the parties’ consent, conducted the proceedings in writing only. Courts also slowly started to hold oral hearings using video conferencing tools. While the German Rules of Civil Procedure (Zivilprozessordnung, ZPO) allow this method since 2001, German Courts were reluctant to use it before the pandemic. However, in the vast majority of cases, German Courts still conduct oral hearings despite the COVID-19 situation. Most courts adhere to hygiene concepts for these hearings, such as wearing face masks, keep sufficient distance between the individuals and ventilate the court room frequently.

For the year 2021, we expect that more and more courts elect to conduct the proceedings in writing or by videoconference. If an oral hearing is necessary nevertheless, the courts now have hygienic routines in place. Thus, unless we see a dramatic change in the COVID-19 infection rates, we do not expect that German courts will need to reduce their working speed in 2021.

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12.       Update on COVID-19 Measures in Germany

As in other jurisdictions, the COVID-19 pandemic has led to a large variety of legislative measures in Germany, which were aimed at mitigating the impact of the pandemic on the economy. These measures included in particular a moratorium for continuing obligations (temporary right to refuse performance under certain contracts), a temporary deferral of payment for consumer loans, the Special Program 2020 set up by the Kreditanstalt für Wiederaufbau (KfW) and the introduction of the Economic Stabilization Fund (Wirtschaftsstabilisierungsfonds). While many of these state measures and programs are still in place unchanged, others have been amended and adapted in time and some have lapsed without replacement. The following summary therefore gives a short overview on the current status of the COVID-19-induced state measures and programs in Germany. Most of the measures mentioned in this alert have already been covered in more detail in previous alerts published throughout 2020, that can be found here.[15]

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12.1     Economic Stabilization Fund (Wirtschaftsstabilisierungsfonds)

The Act on the Introduction of an Economic Stabilization Fund (Gesetz zur Errichtung eines Wirtschaftsstabilisierungsfonds - WStFG) entered into force on March 28, 2020. This act provides the statutory framework for state stabilizing measures, in particular, guarantees and recapitalization measures, like the acquisition of subordinated debt instruments, profit-sharing rights (Genussrechte), silent partnerships, convertible bonds and the acquisition of shares. After the introduction of the Economic Stabilization Fund was approved under state aid law by the EU Commission in July 2020 and the legal regulations for its implementation were published in the Federal Law Gazette in October 2020, the Economic Stabilization Fund has become fully operational.

Moreover, in July 2020 the new Economic Stabilization Acceleration Act (Wirtschaftsstabilisierungsbeschleunigungsgesetz – WStBG) came into force, which provides for temporary modifications of German corporate law in order to implement the state aid measures by the Economic Stabilization Fund more efficiently. These changes include, inter alia, facilitations for capital measures and transactions (capital increases, capital reductions, etc.) in connection with stabilization measures, which significantly relax minority protection.

Since the introduction of the Economic Stabilization Fund, there have been several high profile cases, in which those measures have been effectively put into action: Deutsche Lufthansa (silent participation in the amount of EUR 5,7 billion and subscription of shares by way of a capital increase amounting to 20% of the share capital), TUI (convertible bond and various other emergency support measures in the amount of EUR 1.3 billion), FTI Touristik (subordinated loan in the amount of EUR 235 million), MV Werften Holding (subordinated loan in the amount of EUR 193 million) and German Naval Yards Kiel (subordinated loan in the amount of EUR 35 million).

Originally, (i) guarantees under the Economic Stabilization Fund could only be granted until December 31, 2020 and (ii) the application period for recapitalization measures was set to run until June 30, 2021. These deadlines have now been extended and (i) guarantees can now be granted until June 30, 2021 and (ii) recapitalizations can be granted until September 30, 2021, respectively.

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12.2     Corporate Law Modifications pursuant to the COVID-19 Pandemic Mitigation Act

The COVID-19 Pandemic Mitigation Act (Gesetz zur Abmilderung der Folgen der COVID-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht) provided for, inter alia, (i) a modification of the Limited Liability Company Act (GmbHG), which facilitates shareholder resolutions in text form or by written vote (circulation procedure) without requiring the consent of all shareholders to such procedure, and (ii) a modification of the Conversion Act (UmwG) with regard to measures requiring the submission of a closing balance sheet, where the balance sheet reference date (Bilanzstichtag) used in such filings can now be up to twelve months old at the time of the register filing instead of a maximum of eight months as under the regular statutory rules.

Both of these COVID-19-induced rules were extended by legislative decree dated October 20, 2020 (Verordnung zur Verlängerung von Maßnahmen im Gesellschafts-, Genossenschafts-, Vereins- und Stiftungsrecht zur Bekämpfung der Bekämpfung der Auswirkungen der COVID-19-Pandemie) and are effective until December 31, 2021.

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12.3     Moratorium for Continuing Obligations and Consumer Loans, Restriction of Lease Terminations

The COVID-19 Pandemic Mitigation Act also introduced a moratorium for substantial continuing obligations (i.e. those which serve to provide goods or services of general interest, such as the supply of energy and water), which allowed obligors to refuse to fulfill their obligations if they were no longer able to meet their obligations as a result of the COVID-19 pandemic. This moratorium was limited to June 30, 2020. It could theoretically have been extended thereafter by legislative decree until September 30, 2020, but the government decided not to make use of the option to extend the moratorium. The moratorium therefore expired on June 30, 2020.

Likewise, the payment deferral for consumer loan agreements, which stipulated that claims of lenders for payment of principal or interest due between April 1 and June 30, 2020 were deferred by three months, was not extended by the government, either. As a result, debtors can no longer defer payment, and in order to avoid a double burden for the debtor, the period of the loan agreement will be extended by three months, unless the lender under such a consumer loan and the debtor have reached another arrangement.

Furthermore, the COVID-19 Pandemic Mitigation Act restricts the landlords’ termination right concerning German real estate lease agreements. Until June 30, 2022, a landlord is not entitled to terminate such a lease agreement solely based on the argument that the tenant is in default with payment of the rent for the period April 1, 2020 through June 30, 2020 if the tenant provides credible evidence that the payment default is based on the impact of the COVID-19 pandemic. The landlord’s other contractual and statutory termination rights as well as its rental payment claims for such period, however, remained unaffected by the COVID-19 Pandemic Mitigation Act. Likewise, the government did not make use of the option to extend the termination restrictions to backlogs in tenants’ payments for the period July 1, 2020 through September 30, 2020.

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12.4     Request for Adjustment of Commercial Lease Agreements

The German Parliament (Bundestag) passed a bill on December 17, 2020 that is supposed to increase the chances of tenants of German commercial property or room leases to successfully request an adjustment of the contractual lease terms or even termination of the lease pursuant to Section 313 German Civil Code (Bürgerliches Gesetzbuch – BGB) due to the COVID-19 pandemic. A request pursuant to Section 313 BGB requires that (i) circumstances that are the mutually accepted basis of the contract have significantly changed since the conclusion of the contract, (ii) the parties would not have entered into the contract or only with different content if they had foreseen this change, and (iii) the party making such a request cannot reasonably be expected to be held to the terms of the contract without adjustments or even at all taking into account all circumstances of the specific case, in particular, the contractual or statutory distribution of risk between the parties.

According to this bill, circumstances that are the mutual basis of the contract are refutably deemed to have significantly changed if the use of such leased premises is significantly restricted due to public measure for the purpose of combating the COVID-19 pandemic. As the tenant still needs to show that the other conditions are fulfilled, in particular, that the balancing of interest under (iii) above is in its favor, it remains to be seen whether this bill has the desired effect. Attempting to find an amicable solution may still be the better option for both the landlord and the tenant.

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12.5     Miscellaneous

In addition to the legislative measures mentioned above, Germany has introduced a varied array of additional programs to stabilize and support the German economy. Particularly noteworthy is the KfW’s Special Program 2020 (“KfW Sonderprogramm 2020 für Investitions- und Betriebsmittelfinanzierung”), which includes the KfW Entrepreneur Loan (“KfW Unternehmerkredit”), the ERP Start-Up Loan – Universal (“EPR Gründerkredit – Universell”) and the KfW Special Program Syndicated Lending (KfW Sonderprogramm “Direktbeteiligung für Konsortialfinanzierung“). The Special Program 2020 was originally set to run until December 31, 2020 and has in the meantime been extended until June 30, 2021. The European Commission has not yet approved the program under state aid law, but this is expected to take place in the near future.

The Immediate Corona Support Program for small(est) enterprises and sole entrepreneurs (Corona Soforthilfe für Kleinstunternehmen und Soloselbstständige) was a one-off payment for three months during the first lockdown in the spring of 2020, that has not been relaunched by the government in connection with the second lockdown in Germany in the fall of 2020. However, similar support has been provided to companies which are particularly affected by the lockdown (most notably restaurants and hotels) through the so-called “November and December COVID-relief” program (November- und Dezemberhilfen).

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12.6     Conclusion

The COVID-19 pandemic is obviously not over yet and it is difficult to predict how things will develop going forward. It is important for companies to keep an eye on the current status of the COVID-19 support measures and programs and how they will be amended or evolve over time. Otherwise, there is the risk that new support programs will be overlooked or deadlines for existing programs will be missed.

The following webpage provides a good overview of the current support measures for businesses in Germany: https://www.bmwi.de/Redaktion/DE/Coronavirus/coronahilfe.html.

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   [1]   Also see our alerts dated March 27, 2020, section III., published under https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/ and dated September 24, 2020, published under https://www.gibsondunn.com/covid-19-german-rules-on-possibility-to-hold-virtual-shareholders-meetings-likely-to-be-extended-until-end-of-2021/.

   [2]   EU Regulation (EU) 2019/452 of March 19, 2019 establishing a framework for screening of foreign direct investments into the EU, available in the English language version under: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0452&from=EN.

   [3]   “German Foreign Investment Control Tightens Further”, available under https://www.gibsondunn.com/german-foreign-investment-control-tightens-further/.

   [4]   “Update on German Foreign Investment Control: New EU Cooperation Mechanism & Overview of Recent Changes”, available under https://www.gibsondunn.com/update-on-german-foreign-investment-control-new-eu-cooperation-mechanism-and-overview-of-recent-changes/.

   [5]      In this context, see section 1.6 of 2015 Year End Alert available under https://www.gibsondunn.com/2015-year-end-german-law-update/.

   [6]   We refer you to our earlier alerts in this regard available at: https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/ and at https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/, as well as more specifically on insolvency filing obligations https://www.gibsondunn.com/temporary-german-covid-19-insolvency-regime-extended-in-modified-form/.

   [7]   Again see our alert at https://www.gibsondunn.com/temporary-german-covid-19-insolvency-regime-extended-in-modified-form/.

   [8]   Available under https://www.gibsondunn.com/covid-19-short-term-reduction-of-personnel-costs-under-german-labor-law/.

   [9]   Available under https://www.gibsondunn.com/2019-year-end-german-law-update/.

[10]   See https://www.gibsondunn.com/the-court-of-justice-of-the-european-union-strikes-down-the-privacy-shield-but-upholds-the-standard-contractual-clauses-under-conditions/.

[11]   Section 7.2 in the Year-End Alert published under https://www.gibsondunn.com/2019-year-end-german-law-update/.

[12]   Available under https://www.gibsondunn.com/new-iran-e-o-and-new-eu-blocking-statute-navigating-the-divide-for-international-business/.

[13]   This study is available under: https://www.europarl.europa.eu/RegData/etudes/STUD/2020/653618/EXPO_STU(2020)653618_EN.pdf.

[14]   See at https://eur-lex.europa.eu/legal-content/en/TXT/PDF/?uri=CELEX:32020L1828&from=DE.

[15]   These earlier alerts are available under https://www.gibsondunn.com/european-and-german-programs-counteracting-liquidity-shortfalls-and-relaxations-in-german-insolvency-law/, under https://www.gibsondunn.com/whatever-it-takes-german-parliament-passes-far-reaching-legal-measures-in-response-to-the-covid-19-pandemic/ and under https://www.gibsondunn.com/corporate-ma-in-times-of-the-corona-crisis-current-legal-developments-for-german-business/.

The following Gibson Dunn lawyers assisted in preparing this client update:  Birgit Friedl, Marcus Geiss, Carla Baum, Silke Beiter, Andreas Dürr, Lutz Englisch, Ferdinand Fromholzer, Daniel Gebauer, Kai Gesing, Franziska Gruber, Selina Grün, Johanna Hauser, Alexander Horn, Markus Nauheim, Patricia Labussek, Wilhelm Reinhardt, Markus Rieder, Richard Roeder, Sonja Ruttmann, Martin Schmid, Annekatrin Schmoll, Benno Schwarz, Ralf van Ermingen-Marbach, Linda Vögele, Friedrich Wagner, Frances Waldmann, Michael Walther, Georg Weidenbach, 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, M&A, finance and restructuring, 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 33 170, 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 33 122, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 170, sbeiter@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 521, apelster@gibsondunn.com) Marcus Geiss (+49 89 189 33 115, mgeiss@gibsondunn.com)

Finance, Restructuring and Insolvency Sebastian Schoon (+49 69 247 411 540, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 122, bfriedl@gibsondunn.com) Alexander Klein (+49 69 247 411 518, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 115, 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 Hans Martin Schmid (+49 89 189 33 110, mschmid@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) Ralf van Ermingen-Marbach (+49 89 189 33 161, rvanermingenmarbach@gibsondunn.com)

Antitrust Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Georg Weidenbach (+69 247 411 550, gweidenbach@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com)

Litigation Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Markus Rieder (+49 89 189 33 160, mrieder@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 33 122, rroeder@gibsondunn.com)

© 2021 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 12, 2021 |
2020 Year-End California Labor and Employment Update

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This past year saw the enactment of a variety of new employment laws in California, including new disclosure requirements for employers and changes to the independent contractor landscape. In addition, the COVID-19 pandemic has touched nearly every sector of society, in nearly every corner of the world, and employment law in California is certainly no exception. The pandemic has ushered in a new legal landscape marked by heightened requirements for employers stretching from 2020 into 2023.

Below, we outline four new laws that require attention from California employers in the new year: (1) the new requirements for California employers in reporting wage and hour data; (2) the continuing evolution of the worker classification standard and the recent passage of Proposition 22; (3) the new COVID-19 notice requirements that will require employers to notify employees of possible exposure; and (4) the new Workers’ Compensation Disputable Presumption under SB 1159. We also highlight California’s current plan for rolling out the recently approved COVID-19 vaccines, a strategy that will no doubt develop more in the next few months as essential workers become eligible to receive the vaccine.


Table of Contents

I.        California Employers Required to File Equal Pay Report to California DFEH (SB 973)

II.       Amendment to ABC Test Under Assembly Bill 2257 and Proposition 22

III.     COVID-19 Notice Requirements Under Assembly Bill 685

IV.      Workers’ Compensation Disputable Presumption Under Senate Bill 1159

V.        COVID-19 Vaccine – Who Will Get It and When?


I.  California Employers Required to File Equal Pay Report to California DFEH (SB 973)

On September 30, 2020, California Governor Gavin Newsom signed Senate Bill 973 (“SB 973”) into law, which requires employers to submit pay and hours data for various categories of employees to California’s Department of Fair Employment and Housing (“DFEH”). The stated goals of SB 973 are to decrease gender and racial pay disparities in California and fill the gap of the currently suspended federal effort to collect data for these purposes.

A.  Background on SB 973 – From President Obama to Governor Newsom

Since the 1960s, employers with 100 or more employees have been required to report certain demographic data to the Equal Employment Opportunity Commission (“EEOC”). The Obama Administration expanded the reporting requirements in 2016, adding hours and pay data to the report, which would be broken down by job category, race, ethnicity and gender. The EEOC collected this data until September 2019, when it announced that it would no longer collect the information. SB 973 was enacted in an effort to continue the Obama Administration’s equal pay policies by imposing largely the same requirements that existed under those policies.

B.  When Does the Law Take Effect?

The law took effect on January 1, 2021, and the first report is due on March 31, 2021, with subsequent reports due each year thereafter. Employers should begin compiling the relevant data as soon as possible to ensure compliance. The DFEH has stated that it intends to issue standard forms that employers will be able to use to prepare the reports.

C.  Who Does the Law Apply To?

The law applies to private employers with 100 or more employees, or employers who are required to file a federal Employer Information Report EEO-1 form. According to current DFEH guidelines, employees both inside and outside of California are counted when determining whether an employer has 100 or more employees. Temporary workers will also count toward the determination of whether an employer meets 100 employees, if the employer is required to include the temporary workers in an EEO-1 report, and if the employer is required to withhold federal social security taxes from their wages.

D.  What Information Does the Report Require?

Employers will need to create a “snapshot,” counting all employees (part and full-time) in a given category during a single pay period of the employer’s choice between October 1 and December 31 of the prior calendar year (the “Reporting Year”). To prepare the report, employers should first count and record the number of employees by race, ethnicity, and gender organized by job categories (which are the same categories used by the federal government in the EEO-1 report).[1]

Second, employers will need to further break down the data by separating employees in each category by pay band.[2] To determine what pay band an employee falls into, the employer should look at the employee’s W-2 earnings for the entire Reporting Year, regardless of whether that employee worked for the full calendar year.

Third, using the same general format, the employer must include the total number of hours worked by each employee counted in each pay band during the Reporting Year.

The employer will be permitted, but not required, to provide clarifying remarks. The report must be in searchable and sortable format. If the employer has multiple establishments, it will need to submit a separate report for each establishment, as well as a consolidated report. Each report should include the employer’s North American Industry Classification System (NAICS) code.

If an employer fails to submit a report, the DFEH may seek an order requiring the employer to comply with the requirements and will be entitled to recover the costs associated with seeking the order for compliance.

E.  What Does the Law Mean For Employers, Besides Additional Reporting?

While the intent is for the DFEH to use the reported data to “more efficiently identify wage patterns and allow for targeted enforcement of equal pay or discrimination laws,” in reality, these goals are more likely to be impeded than helped by the data collected. This is because W-2 data is not a precise—or even remotely reliable—measure of wages paid.

For instance, W-2 compensation reflects an employee’s reported income for a calendar year, which is not necessarily tied to the number of hours worked or the employee’s earnings in that year. Identically compensated employees may have a wide variance in W-2 data in any given year for reasons other than differences in wage rates. For example, if an employee’s compensation package includes equity grants, such compensation will not be reflected on a W-2 until the stock option is exercised or the rights vest, which may be years later (and potentially after unforeseen or unpredictable events that may significantly increase or decrease the value of the equity). Other non-wage compensation, such as reimbursement of relocation expenses or payment of recruitment bonuses, will also be reflected in the W-2, but do not have any meaningful tie to compensation level.

W-2 data also does not report hours worked, or account for employees who worked only part of the year (for example, employees who took a leave of absence, or were hired or quit in the middle of the year). SB 973 tries to account for these potential gaps by requiring employers to report the hours worked by the employee. But many employers do not track hours of exempt employees, and will be forced to either leave that portion blank or estimate hours, which may skew the analysis.

Additionally, the pay data report asks employers to categorize employees based on the federal EEO-1 job categories. But those categories do not account for different skills required between jobs in the same category for which the market dictates different compensation. The job categories also do not account for differences in an employee’s education, training or experience within the same job category, all variables that greatly affect compensation and which the law acknowledges should be considered in evaluating wage rates under the Equal Pay Act.[3]

As a result of these many deficiencies of the reported W-2 data, many employers who are actively and conscientiously working to ensure equitable compensation may nevertheless face allegations of pay discrimination. To reduce this risk, employers should consider providing clarifying remarks, as is permitted by the statute, but should work closely with experienced counsel to determine how much and what kind of clarifying data they should provide.

II.  Amendment to ABC Test Under Assembly Bill 2257 and Proposition 22

In 2018, the California Supreme Court in the Dynamex case articulated a new test for classification of independent contractors, which the legislature codified in Assembly Bill 5 (“AB 5”) a year later—albeit with numerous exemptions of varying complexity. The Legislature this year passed Assembly Bill 2257 (“AB 2257”), which provides still more exemptions than already existed under AB 5, and revises many of the exemptions that AB 5 had put in place the previous year. And just recently, California voters passed Proposition 22, which further narrowed the reach of AB 5. Thus, while 2020 has brought some clarity concerning classification of independent contractors, many questions remain that will need to be addressed in 2021 and thereafter.

A.  History of the Worker Classification Test and the Adoption of the ABC Test

In 2018, the California Supreme Court imported a new legal standard for determining worker classification for purposes of California wage orders: the “ABC test.” In contrast to the flexible, multi-factor analysis that had been in place for nearly three decades, the Court in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), held that companies seeking to classify workers as independent contractors must prove three elements:

  1. The worker remains free from the hiring entity’s control and direction in connection with the performance of the work, both under the contract and in fact;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

On September 18, 2019, Governor Newsom signed AB 5 into law, declaring it “landmark legislation” for “workers and our economy.” AB 5 not only codified the ABC test, but also clarified that this test applies broadly to claims arising under the Labor Code and Unemployment Insurance Code, and not just the narrower wage orders to which Dynamex is limited. But AB 5 also exempted many industries from its otherwise broad reach and permitted those industries to continue using the more employer-friendly test in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989)—the standard before Dynamex.[4] Notably, truck drivers, journalists, and on-demand app-based workers, such as ride-share workers, were not expressly exempted.

B.  AB 2257—Providing More Exemptions to AB 5

On September 4, 2020, AB 2257 was signed into law. Among other things, AB 2257 widened the business-to-business and referral agency exemptions, and introduced 109 additional categories of workers exempted from AB 5. The business-to-business exemption involves business entities such as corporations and partnerships contracting with other businesses to provide services, while the referral agency exemption applies to business entities that perform services through a referral agency. These business entities prefer to be labeled as an independent contractor, and not employee, of the referral agencies. Yet, even though these exemptions were broadened, once again, gig economy workers were not among the many expressly exempted industries.

C.  Prop 22—Creating a Safe Harbor for App-Based Workers and Companies

In November, California voters passed the Protect App-Based Drivers and Services Act (Prop 22) to ameliorate the threat of AB 5 for on-demand, app-based rideshare and delivery companies in California. Prop 22 ensures AB 5 cannot be applied to “app-based workers,” enabling “network compan[ies]” to continue classifying app-based workers as independent contractors.

Companies can classify workers as independent contractors and take advantage of Prop 22’s safe harbor as long as they qualify as a Delivery Network Company or Transportation Network Company and meet the requirements of Prop 22’s four-element independent contractor standard:

  1. The network company does not unilaterally prescribe specific dates, times of day, or minimum number of hours during which the app-based driver must be logged into the network company’s online enabled platform;
  2. The network company does not require the app-based driver to accept any specific rideshare service or delivery service request as a condition of maintaining access to the network company’s online-enabled application or platform;
  3. The network company does not restrict the app-based driver from performing rideshare services or delivery services through other network companies except during engaged time; and
  4. The network company does not restrict the app-based driver from working in any other lawful occupation or business.

Prop 22 also requires network companies to provide workers with certain levels of compensation and specific benefits to ensure the “economic security” of app-based rideshare and delivery drivers. These benefits include hourly compensation of at least 120% of the local minimum wage plus $0.30 per mile; a healthcare subsidy consistent with contributions required under the Affordable Care Act for certain qualifying workers; occupational accident insurance; and protection against discrimination and sexual harassment.

D.  What Questions Remain Regarding Worker Classification After AB 2257 and Prop 22?

While AB 2257 and Prop 22 have provided more clarity regarding the classification of independent contractors in California, many questions remain. Thus, over the next year, we expect to see courts addressing the reaches of both the ABC Test and Prop 22. For example, we expect decisions regarding:  
  • Retroactive Application of Dynamex’s ABC Test: On November 3, 2020, the California Supreme Court heard oral arguments in Vazquez v. Jan-Pro Franchising International, Inc., No. S258191 (filed Sept. 26, 2019), where it is poised to determine whether Dynamex applies retroactively.
  • Federal Preemption of the ABC Test Under the FAAAA: Parties have challenged the ABC Test, both under Dynamex and AB 5, as preempted by federal law. In particular, trucking groups and companies have challenged AB 5 as preempted by the FAAAA, which regulates motor carriers. See California Trucking Association, et al. v. Xavier Becerra, et al., 433 F. Supp. 3d 1154 (S.D. Cal. 2020) (issuing preliminary injunction of AB 5 as applied to motor carriers in California because of FAAAA preemption); see also People v. Superior Court of Los Angeles County (Cal Cartage Transportation Express, LLC), 57 Cal.App.5th 619 (Cal. Ct. App. 2020), petition for review pending (finding that the ABC test is not preempted by the FAAAA).
  • Reach of Prop 22: Parties have already begun filing cases concerning whether Prop 22 can apply retroactively and whether it is a partial repeal of AB 5, among other questions.

The focus on worker classification issues is not likely to fade in 2021. Companies with independent contractor workforces should review their practices and contracts to make sure that they can comply with the applicable legal standard, and should stay apprised of the many developments we expect to see in this area over the coming year.

III.  COVID-19 Notice Requirements Under Assembly Bill 685

On September 17, 2020, Assembly Bill 685 (“AB 685”) was signed into law by Governor Newsom in order to strengthen access to information regarding the spread of COVID-19. AB 685 imposes two new notice requirements on employers regarding COVID-19, effective January 1, 2021. First, employers are required to notify certain employees and representatives concerning a possible exposure to COVID-19. Second, should the number of cases reach an “outbreak” as defined by the State Department of Public Health, the employer must notify the local public health agency.

A.  Notice of Potential Exposure

When an employer is aware of potential exposure to COVID-19 at a worksite, the employer must provide written notice of the potential exposure to all employees who were on the same worksite as the qualifying individual who caused the potential exposure, as well as notice to all employers of subcontracted employees, and to any exclusive representatives (e.g. union representatives) of potentially exposed employees.

1.  What counts as a potential exposure?

If an employee, or an employee of a subcontractor, has been on the premises at the same worksite as a qualifying individual within the infectious period of COVID-19, that is a potential exposure. A qualifying individual is a person who has: (1) a laboratory-confirmed positive case; (2) a diagnosis from a licensed health care provider; (3) received an isolation order from a public health official; or (4) died due to COVID-19. If the individual developed symptoms, the infectious period begins 2 days before the symptoms were first developed, and ends when 10 days have passed since the symptoms first appeared, 24 hours have passed with no fever, and other symptoms have improved. If the individual never developed symptoms, the infectious period begins 2 days before the specimen that tested positive was collected, and ends 10 days after the specimen was collected.[5]

2.  What kind of notice must be provided?

The required notice must be written, and given in a manner normally used by the employer to communicate employment-related information. This could include personal service, email, or text message if it can reasonably be anticipated to be received by the employee within one business day. The notice must be in both English and the language understood by the majority of the employees.

Each notice must include the following information:

  • That the employee may have been exposed to COVID-19;
  • Information regarding COVID-19 related benefits and employee protections, including protections from discrimination and retaliation for disclosing a positive diagnosis; and
  • Information on the disinfection and safety plan that the employer will implement and complete per CDC guidelines.

The notice must not include the name, or any other identifying information, of the qualifying individual.

3.  Are there any penalties for failing to provide notice?

The statute provides that the Division of Occupational Safety and Health (“Cal OSHA”) may issue a citation and civil penalties to employers who fail to provide the required notice of potential exposure, or if the notice does not include information regarding the employer’s disinfection and safety plan.

B.  Notice in Case of an “Outbreak”

AB 685 also requires non-healthcare employers to notify the local public health agency in the jurisdiction of the affected worksite within 48 hours in the case of a COVID-19 outbreak.

1.  What counts as an “outbreak”?

According to the current guidelines from the California Department of Health, a “COVID-19 outbreak in a non-healthcare workplace is defined as at least three COVID-19 cases among workers at the same worksite within a 14-day period.”[6] Whether a COVID-19 case exists is determined consistent with the criteria for a qualifying individual outlined above.

2.  What information must be given to the local public health agency?

The employer must provide the names, total number, occupation and worksite of the employees who are qualifying individuals. In addition, the employer must report the business address of the worksite and the North American Industry Classification System (NAICS) industry code.[7] The employer must continue to notify the agency of any subsequent cases, and the employer must provide the agency with any additional information it might request as part of the investigation.

C.  Takeaways

In order to meet the notice requirements in the time constraints under AB 685, employers should take immediate steps to:

  1. Implement a policy requiring employees working on-site to report COVID-19 positive tests and a process to then track those reports in a manner that will meet the standards required by AB 685 while also preserving employee privacy. This process should seek to incentivize employees to report results swiftly to the employer. The tracking method used should have the capacity to quickly determine what the infectious period is for each case.
  2. Draft a notice template that can be filled out and sent quickly that includes all of the required information.
  3. Implement a strategy for rapidly providing notice to employees (and subcontractors and union representatives) in case of exposure that meets the requirements of AB 685. This will require the capability to determine quickly which employees were on-site with the qualifying individual during the infectious period in order to generate the contact list for the notice that must be received within one business day.
  4. Implement a process to streamline communications with the local public health agency. This may include steps such as designating a point person ahead of time who will manage communications and send required notices to the agency, determining the appropriate contacts at the local health agency, and preparing templates in advance that can be quickly generated.

IV.  Workers’ Compensation Disputable Presumption Under Senate Bill 1159

Governor Newsom also signed Senate Bill 1159 into law on September 17, 2020. The bill creates a disputable (rebuttable) presumption that an illness or death resulting from COVID-19 is an injury that arises out of and in the course of employment, and is thus compensable under California’s workers’ compensation laws. The presumption only applies to certain claims from July 6, 2020 through January 1, 2023.

A.  What Conditions Create a Presumption?

For most employers, the presumption only applies if the employer maintains 5 or more employees, and an employee tests positive for COVID-19 within 14 days after reporting to their specific place of employment during an “outbreak.” A “specific place of employment” means the location where an employee performs work, but does not include the employee’s home or residence, unless the employee provides home health care services to another individual at the employee’s home or residence.

An “outbreak” exists for the purpose of the presumption if one of the following occurs:

  1. For employers with 100 employees or fewer at a specific place of employment, if 4 employees test positive for COVID-19 within 14 calendar days;
  2. For employers with more than 100 employees at a specific place of employment, if 4% of the number of employees who reported to the specific place of employment test positive for COVID-19 within 14 calendar days; or
  3. A specific place of employment is ordered to close by a local public health department, the State Department of Public Health, the Division of Occupational Safety and Health, or a school superintendent due to a risk of infection with COVID-19.

B.  How Can Employers Rebut the Presumption?

Employers can rebut the presumption that the injury or death arose out of employment by submitting evidence which tends to dispute the claims. For example, the employer can offer evidence of the measures it established to reduce potential transmission of COVID-19, or of the employee’s nonoccupational risks of COVID-19 infection.

C.  Are There Any Other Changes to the Workers’ Compensation Process?

Under SB 1159, the claims administrator only has 45 days to deny a claim based on COVID-19 once filed, as opposed to the typical 90 day period. If the claim is not denied, the illness is presumed compensable, and only evidence discovered subsequent to the 45-day period may be used to rebut this presumption. Thus, it is vital that employers work quickly to gather the necessary information as soon as a claim is filed.

D.  Additional Requirement: Report to Claims Administrator

The bill also requires an employer that knows or reasonably should know that an employee has tested positive for COVID-19 to submit a report containing the below information to its workers’ compensation claims administrator within three business days:

  • Notice that an employee has tested positive (the employee should not be identified unless the employee asserts the infection is work-related or has already filed a claim);
  • The date the employee tested positive;
  • The address of the employee’s specific place of employment during the 14-day period before the date the employee tested positive; and
  • The highest number of employees who reported to work at the specific place of employment of the employee who tested positive in the 45-day period preceding the last day that the employee worked.

Reporting this information to a claims administrator provides the claims administrator with information to determine whether an outbreak has occurred. If an employer intentionally submits false or misleading information or fails to submit information when reporting, the Labor Commissioner can impose a civil penalty of up to $10,000.

E.  First Responders and Healthcare Workers

The bill instituted a similar set of provisions for certain first responders such as firefighters, some peace officers, paramedics and EMTs, and healthcare workers, but with a few key distinctions. Crucially, no outbreak at the workplace is required to give rise to the presumption that a positive COVID-19 test arose from the first responder or healthcare worker’s employment, and the presumption is not limited to employers of a certain size. Moreover, healthcare employers may not rebut the presumption through evidence of preventative measures or the employee’s nonoccupational risks, but may rebut the presumption “by other evidence.” Finally, the claim administrator must deny the claim within 30 days of its being filed to avoid a presumption that the injury is compensable, instead of the 45-day period outlined above.

F.  Claims that Arose Before July 6, 2020.

For COVID-19 related claims between March 19, 2020 and July 5, 2020, there is still a disputable presumption that an injury from COVID-19 is presumed to have arisen out of and in the course of employment. An employee must, within 14 days of being present at the place of employment, either test positive for COVID-19 or be diagnosed by a licensed medical doctor, with the diagnosis confirmed by a test within 30 days. The presumption is disputable and may be controverted by other evidence. Employers are not required by the law to report employees who tested positive in this time frame to claim administrators.

G.  Takeaways

To best meet the requirements of SB 1159, several critical steps should be taken:

  1. Review records for confirmed COVID-19 illnesses or deaths from July 6, 2020, through the present. Implement a process to reliably and quickly record and report employee COVID-19 illnesses to your workers’ compensation claims administrator within three business days.
  2. Determine if any “outbreaks” have occurred since July 6, 2020. If there has been no outbreak, there is no presumption (except in the limited cases noted above). Create a method to automatically flag when an outbreak has occurred or might be imminent.
  3. Implement a strategy to dispute the presumption that an infection occurred in the workplace when appropriate. This should include preparing information regarding safety measures taken by the company to prevent transmission of COVID-19. Additionally, the company should employ an appropriate investigation strategy to determine if an employee was subject to any nonoccupational risks of exposure to COVID-19.

V.  COVID-19 Vaccine – Who Will Get It and When?

Finally, perhaps the most pressing question for employers and employees alike is when to expect the vaccines to rollout in California, and what this process will look like. The U.S. Food and Drug Administration has issued Emergency Use Authorization for two COVID-19 vaccines, with the possibility that more vaccines will be authorized in early 2021. California, with guidance from the CDC, has outlined a scalable, three-phased approach, starting with healthcare workers, and ending with the general population.[8]

A.  Phase 1-A: Healthcare Residents and Workers

Due to the currently limited availability of the vaccine, Phase 1-A includes three different tiers in order to provide gradual distribution. The first tier of potential vaccine recipients includes residents of skilled nursing facilities, assisted living facilities, and other similar long-term care settings for medically vulnerable or older populations. Also in the first tier are healthcare workers who come into direct contact with COVID-19 patients, and generally those medical professionals who are most at risk in terms of exposure, which include workers at correctional and psychiatric hospitals, nursing homes, acute care centers, and dialysis centers, as well as paramedics and emergency medical technicians.

The second tier within Phase 1-A includes those healthcare workers who work in intermediate care facilities, primary care clinics, urgent care clinics, rural health centers, correctional facility clinics, as well as home health care workers and public health field staff.

The third tier of healthcare workers includes workers in dental offices, specialty clinics, laboratories, and pharmacy staff not included in higher tiers.

B.  Phase 1-B: Frontline Essential Workers & Adults Age 65 and Older

Phase 1-B is slated to take place once the healthcare workers in Phase 1-A are mostly vaccinated. According to the CDC, this group should include “workers in essential and critical industries” such as teachers, child care workers, and first responders, among others.[9]

Similar to Phase 1-A, the Advisory Committee on Immunization Practices (“ACIP”) has proposed taking a tiered approach within Phase 1-B.[10] This proposal recommends that adults 75 and older as well as non-healthcare “frontline essential workers,” such as first responders, teachers, grocery store workers, food and agriculture workers, and manufacturing employees, among others, should take priority in Phase 1-B. This would then push the remaining essential non-frontline workers, such as those who work in construction, transportation, food services, IT, finance, the legal industry, and the media industry, among others, to Phase 1-C, along with adults age 65 or older (but under age 75) and adults with high-risk medical conditions. “Frontline essential workers,” for purposes of this proposal, has only been defined as including workers “in sectors essential to the functioning of society and are at substantially higher risk of exposure to SARS-CoV-2.”[11] So far, California seems to largely mirror the ACIP’s approach (which is accepted by the CDC), as California’s Community Vaccine Advisory Committee has agreed that non-healthcare frontline workers should be prioritized in Phase 1-B. Moreover, California’s approach separates Phase 1-B into two tiers: the first tier includes workers in education, childcare, emergency services, and food and agriculture industries and individuals age 75 and older, while the second tier within Phase 1-B includes workers in transportation and logistics, the industrial, commercial, and residential facilities and services industry, and critical manufacturing, along with individuals 65 to 74 years of age.[12]

C.  Phase 1-C: Non-Frontline Essential Workers, Adults Age 50 and Older, & High Risk Adults

This group includes adults 50 to 64 years of age, individuals with preexisting conditions that put them at high risk of getting severely ill from COVID-19, and the non-frontline essential workers excluded from Phase 1-B in industries such as water and wastewater, defense, energy, chemical and hazardous materials, financial services, communications and IT, government operations and community-based essential functions.[13]

D.  Remaining Phases

Phases 2 and 3 would include the general public and nonessential workers, although these categories are not fully fleshed out yet, and depend on a substantial increase in vaccine supply.

Overall, it is important to keep in mind that this is an evolving situation. On the state-wide level, there is no definitive guidance as to what exactly separates these frontline essential workers in the first tier of Phase 1-B from the other essential workers in California for purposes of the vaccine rollout. Moreover, the California Department of Public Health has not yet determined the details for allocation in Phase 1-B, as it has not yet released the allocation guidelines that tend to provide clarity to this rapidly changing process. Even if this tiered approach for Phase 1-B is carried out, essential workers will all be covered under Phase 1, whether in groups 1-A, 1-B, or 1-C, thus putting them ahead of the general population and nonessential workers in terms of eventually receiving the vaccine.[14]


[1]  The job categories required by the statute are:

  1. Executive or senior level officials and managers.
  2. First or mid-level officials and managers.
  3. Professionals.
  4. Technicians.
  5. Sales workers.
  6. Administrative support workers.
  7. Craft workers.
  8. Operatives.
  9. Laborers and helpers.
  10. Service workers.

[2]  The pay bands are those used by the United States Bureau of Labor Statistics in the Occupational Employment Statistics survey, and include the following categories:   (1) $19,239 and under; (2) $19,240 - $24,439; (3) $24,440 - $30,679; (4) $30,680 - $38,999; (5) $39,000 - $49,919; (6) $49,920 - $62,919; (7) $62,920 - $80,079; (8) $80,080 - $101,919; (9) $101,920 - $128,959; (10) $128,960 - $163,799; (11) $163,800 - $207,999; and (12) $208,000 and over.

[3]  California Equal Pay Act, California Labor Code § 1197.5 (a): “An employer shall not pay any of its employees at wage rates less than the rates paid to employees of the opposite sex for substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions, except where the employer demonstrates: … (D) A bona fide factor other than sex, such as education, training, or experience.”

[4]  Some of the industry workers specifically exempted by AB 5 include physicians and other medical industry professionals, lawyers, accountants, engineers, architects, securities brokers, real estate agents, as well as certain professional service providers meeting six requirements (including workers in areas such as human resources and marketing, among others), and business-to-business contracting relationships that also satisfy certain conditions.

[5]  Employer Guidance on AB 685: Definitions, Cal. Dep’t of Public Health (last updated Oct. 16, 2020), https://www.cdph.ca.gov/Programs/CID/DCDC/Pages/COVID-19/Employer-Guidance-on-AB-685-Definitions.aspx.

[6]  Employer Guidance on AB 685: Definitions, Cal. Dep’t of Public Health (last updated Oct. 16, 2020), available at https://www.cdph.ca.gov/Programs/CID/DCDC/Pages/COVID-19/Employer-Guidance-on-AB-685-Definitions.aspx.

[7]  Companies can find their codes here: https://www.naics.com/search/.

[8]  State of California COVID-19 Vaccination Plan: Interim Draft, Cal. Dep’t of Pub. Health (Oct. 16, 2020), https://www.cdph.ca.gov/Programs/CID/DCDC/CDPH%20Document%20Library/COVID-19/COVID-19-Vaccination-Plan-California-Interim-Draft_V1.0.pdf.

[9]  How CDC is Making COVID-19 Vaccine Recommendations, Ctrs. for Disease Control and Prevention (last updated Dec. 23, 2020), https://www.cdc.gov/coronavirus/2019-ncov/vaccines/recommendations-process.html; see also Advisory Memorandum On Ensuring Essential Critical Infrastructure Workers’ Ability to Work During the COVID-19 Response, Cybersecurity & Infrastructure Sec. Agency (December 16, 2020), here.

[10]  The Advisory Committee on Immunization Practices’ Updated Interim Recommendation for Allocation of COVID-19 Vaccine – United States, December 2020, Ctrs. for Disease Control and Prevention (last updated December 22, 2020), https://www.cdc.gov/mmwr/volumes/69/wr/mm695152e2.htm.

[11]  ACIP COVID-19 Vaccines Work Group: Phased Allocation of COVID-19 Vaccines, Advisory Comm. on Immunization Practices (Dec. 20, 2020), https://www.cdc.gov/vaccines/acip/meetings/downloads/slides-2020-12/slides-12-20/02-COVID-Dooling.pdf.

[12]  Vaccines, Cal. ALL State Gov’t Website (Jan. 8, 2021), https://covid19.ca.gov/vaccines/#Vaccine-allocation-and-administration.

[13]  Id.

[14]  See Employer Playbook for the COVID “Vaccine Wars,” Gibson, Dunn & Crutcher LLP, https://www.gibsondunn.com/wp-content/uploads/2020/12/an-employer-playbook-for-the-covid-vaccine-wars.pdf.

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

Michele L. Maryott – Orange County (+1 949-451-3945, mmaryott@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com) Daniel Weiss – Los Angeles (+1 213-229-7388, dweiss@gibsondunn.com) Megan Cooney – Orange County (+1 949-451-4087, mcooney@gibsondunn.com) Kat Ryzewska – Los Angeles (+1 310-557-8193, kryzewska@gibsondunn.com)

Please also feel free to contact the following Labor and Employment practice group leaders: 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) © 2021 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 11, 2020 |
Eleven Gibson Dunn Partners Named Top Employment Lawyers

Eleven partners were recognized among the Lawdragon 500 Leading U.S. Corporate Employment Lawyers for 2020, featuring “the nation’s top talent representing Corporate America defending wage and hour, discrimination and a host of other claims; advising on key matters from immigration to executive compensation and employee benefits; and handling union and other labor-management relation matters.”  They are Century City partner Sean Feller – Employee Benefits & Executive Compensation; Denver partner Jessica Brown – Labor & Employment (Litigation); Los Angeles partners Catherine Conway – Hall of Fame Labor & Employment (Litigation), Jesse Cripps – Labor & Employment (Litigation), and Katherine Smith – Labor & Employment (Litigation); Orange County partner Michele Maryott – Labor & Employment (Litigation); Palo Alto partner Stephen Fackler – Employee Benefits & Executive Compensation; and Washington, D.C. partners Baruch Fellner – Hall of Fame Labor & Employment (Litigation), Michael Collins – Employee Benefits & Executive Compensation, Jason Schwartz – Labor & Employment (Litigation), and Greta Williams – Labor & Employment (Litigation). The list was published on December 7, 2020.

December 1, 2020 |
Webcast: Key labour and employment issues for clients in France, Germany and the UK during the current pandemic?

Join our panel of seasoned Gibson Dunn partners from our Paris, Munich and London offices in a discussion concerning the ongoing impact of the current pandemic on employers in Europe.

PANELISTS: Bernard Grinspan - Moderator: A French and New York qualified partner based in the Paris office of Gibson Dunn. For more than twenty years, Mr. Grinspan has advised publicly traded and privately held business entities on mergers and acquisitions, joint ventures and works closely with clients to provide guidance on strategic and financial investments. He plays a major role in the growth of Gibson Dunn’s European practices. He was and continues to be instrumental in the development of the firm’s European offices into high quality legal service providers, capable of advising foreign clients on the laws of their respective jurisdictions. James Cox: A partner in the London office and a member of the firm’s Labor and Employment Practice Group. Mr. Cox has extensive experience in contentious and non-contentious labor and employment matters. Nataline Fleury: A partner in the Paris office and a member of the firm’s Labor and Employment Practice Group. Ms. Fleury heads the employment practice in Paris, which focuses on employment law and social security issues, notably advising French and international clients on employment law aspects of M&A transactions. She has significant expertise in all aspects of employment law, in particular in relation to restructuring transactions, acquisitions and disposals, including the implementation of workforce reduction plans, employment audits, employment contracts, executive earnings programmes, transactional agreements and dealing with employee representatives, in particular for the implementation of collective agreements and codes of compliance. Mark Zimmer: A partner in the Munich office and a member of the firm’s Labor and Employment Practice Group. Mr. Zimmer advises companies on all employment-related matters. He represents his clients in particular in connection with reorganizations, mergers and acquisitions, as well as the hiring and separation of executives.
MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

December 2, 2020 |
Gibson Dunn Named a 2020 Firm of the Year

Law360 named Gibson Dunn a Firm of the Year for 2020 in its November 30, 2020 article "The Firms That Dominated in 2020,” featuring eight firms that received the most Practice Group of the Year awards.  The publication noted that its Firms of the Year are honored “for guiding landmark deals, scoring victories in high-profile disputes and helping companies navigate uncharted legal seas made rough by the coronavirus pandemic.” The firm was named a Practice Group of the Year in the following categories:

  • Appellate [PDF] - Gibson Dunn’s Appellate and Constitutional Law Practice Group’s lawyers participate in appeals in all 13 federal courts of appeals and state appellate courts throughout the United States and have presented arguments in front of the Supreme Court of the United States more than 100 times.
  • Employment [PDF] - Gibson Dunn’s Labor and Employment Practice Group covers a complete range of matters, and we are known for our unsurpassed ability to help the world’s preeminent companies tackle their most challenging labor and employment matters.  Our practice covers the full range of labor and employment matters, including wage and hour class actions; employment discrimination class actions; whistleblower litigation; non-compete agreements and trade secrets; appeals, post-trial briefings and litigation management; labor-management relations; ERISA and employee benefits; and occupational safety and health issues.
  • Energy [PDF] – Our Energy Practice Group has a wide array of experience across all parts of the energy sector – from traditional sources of energy such as oil and gas and electric utilities to renewable forms such as solar and wind. The firm has handled energy-related matters involving numerous practice areas, including mergers, acquisitions and divestitures; debt and project finance; capital markets; joint ventures; fund formation; project and infrastructure development; dispute resolution; commercial arrangements; and all manners of energy-related regulatory and antitrust issues.
  • Life Sciences [PDF] - Gibson Dunn’s Life Sciences Practice Group represents and advises innovative biotechnology, pharmaceutical and medical device companies on a wide range of legal, regulatory and strategic issues, including patent and product liability litigation, U.S. Food and Drug Administration (FDA) investigations and enforcement actions, and corporate transactions and financings.  Many Gibson Dunn lawyers hold advanced scientific degrees and have hands-on experience working in life sciences companies or within the government agencies that regulate the industry.
  • Media & Entertainment – Gibson Dunn’s Media, Entertainment and Technology Group represents both established and emerging media, entertainment and technology companies and handle our clients’ most important and complex corporate and intellectual property transactions, litigation, antitrust, internal investigations and other legal challenges.  Our litigators are well-known for their decades of experience in handling the full array of media and entertainment-related matters, including accounting, contract and profit participation disputes and enforcing film and television distribution agreements.
  • Trials [PDF] - Acclaimed as a litigation powerhouse, Gibson Dunn has a long record of outstanding successes.  The members of our Litigation Practice Group are not just litigators, they are first-rate trial lawyers who have tried cases and argued appeals before the U.S. Supreme Court and state supreme courts in addition to federal and state courts across the United States involving almost every foreseeable area of controversy.

October 16, 2020 |
Benchmark Litigation US 2021 Gives Top Marks to Gibson Dunn

Benchmark Litigation US recognized Gibson Dunn in eight national litigation practice areas in its 2021 edition and named 66 partners as Litigation Stars and Future Stars across the U.S.  Nationally, the firm received Tier 1 rankings in the Appellate, Competition/Antitrust, Commercial, Intellectual Property, Labor and Employment, Securities and White Collar Crime categories.  In addition, the firm received a Tier 2 ranking in Product Liability. The publication also named the firm as one of the “Top 20 Trial Firms” in the nation and named four partners to its annual “Top 100 Trial Lawyers in America” list:  New York partners Mitchell KarlanRandy Mastro and Orin Snyder, and Washington DC partner Richard Parker.  Seven partners were also named to its annual “Top 250 Women in Litigation” list: Los Angles partners Theane Evangelis, Perlette Michèle Jura and Deborah Stein, New York partners Mylan Denerstein and Andrea Neuman, Orange County partner Meryl Young and Washington, DC partner Elizabeth Papez. The main rankings were released October 1, 2020. The Top 100 Trial Lawyer rankings were released October 8, 2020. The Top 250 Women in Litigation rankings were released August 13, 2020.

October 5, 2020 |
Gibson Dunn Ranked in the 2021 UK Legal 500

Gibson Dunn earned 13 practice area rankings in the 2021 edition of The Legal 500 UK. Four partners were named to Legal 500’s Hall of Fame, recognizing individuals who receive consistent feedback from their clients for continued excellence, and four other partners were named Leading Lawyers in their respective practices. The firm was recognized in the following categories:

  • Corporate and Commercial: Corporate Tax
  • Corporate and Commercial: Equity Capital Markets – Mid-High Cap
  • Corporate and Commercial: EU and Competition
  • Corporate and Commercial: M&A: upper mid-market and premium deals, £500m+
  • Dispute Resolution: Commercial Litigation: Premium
  • Dispute Resolution: International Arbitration
  • Dispute Resolution: Public International Law
  • Human Resources: Employment – Employers
  • Projects, Energy and Natural Resources: Oil and Gas
  • Public Sector: Administrative and Public Law
  • Real Estate: Commercial Property – Investment
  • Real Estate: Property Finance
  • Risk Advisory: Regulatory Investigations and Corporate Crime (advice to corporates)
Legal 500’s Hall of Fame for 2021 consists of: Steve Thierbach – Corporate and Commercial: Equity Capital Markets; Philip Rocher – Dispute Resolution: Commercial Litigation; Cyrus Benson – Dispute Resolution: International Arbitration; and Alan Samson – Real Estate: Commercial Property – Investment and Real Estate: Property Finance. The partners named as Leading Lawyers are Sandy Bhogal – Corporate and Commercial: Corporate Tax; Ali Nikpay – Corporate and Commercial: EU and Competition; Jeffrey Sullivan – Dispute Resolution: International Arbitration; and Anna Howell – Projects, Energy and Natural Resources: Oil and Gas. Benjamin Fryer has been named a Next Generation Partner for Corporate and Commercial: Corporate Tax. Additionally, Claibourne Harrison has been named a Rising Star for Real Estate: Commercial Property – Investment, and Mitasha Chandok has been named a Rising Star for Projects, Energy and Natural Resources: Oil and Gas. The guide was published on September 30, 2020. Gibson Dunn’s London office offers full-service English and U.S. law capability, including corporate, finance, dispute resolution, competition/antitrust, real estate, labor and employment, and tax.  Our lawyers advise international corporations, financial institutions, private equity funds and governments on complex and challenging transactions and disputes.

October 5, 2020 |
Law360 Names Eight Gibson Dunn Partners as 2020 MVPs

Law360 named eight Gibson Dunn partners among its 2020 MVPs.  Law360 MVPs feature lawyers who have “distinguished themselves from their peers by securing hard-earned successes in high-stakes litigation, complex global matters and record-breaking deals.” The list was published on October 4, 2020. Gibson Dunn’s MVPs are:

  • Thomas Dupree, a Transportation MVP – Tom is Co-Partner-in-Charge of the Washington, D.C. office.  He is an experienced trial and appellate advocate. He has argued more than 80 appeals in the federal courts, including in all thirteen circuits as well as the United States Supreme Court.  He has represented clients throughout the country in a wide variety of trial and appellate matters, including cases involving punitive damages, class actions, product liability, arbitration, intellectual property, employment, and constitutional challenges to federal and state statutes.
  • Scott Edelman, a Media & Entertainment MVP – Scott is a partner in the Century City office and Co-Chair of the Media, Entertainment and Technology Practice Group.  He has first-chaired numerous jury trials, bench trials and arbitrations, including class actions, taking well over twenty-five to final verdict or decision.  He represents multiple studios, television networks, music companies, production companies and other media-related entities.
  • Shukie Grossman, a Fund Formation MVP – Shukie is a partner in the New York office and Co-Chair of the Investment Funds Practice Group.  His practice focuses on the formation of private investment funds, including domestic and offshore funds focused on buyout, growth equity, infrastructure, real estate, credit and other investment strategies.  He also advises investment firms on their operation, regulation and internal governance arrangements.
  • Andrew Lance, a Hospitality MVP – Andrew is Co-Partner in Charge of the New York office and Head of the Real Estate Practice Group’s Hotel and Hospitality Practice.  His clients include private real estate equity funds, hedge funds, sovereign wealth funds, corporate and individual developers and owners, mortgage and mezzanine lenders, REITs and other public and privately held companies investing in or using real estate.
  • Kristin Linsley, a Technology MVP – Kristin is a partner in the San Francisco office.  She specializes in complex business and appellate litigation across a spectrum of areas, including water and energy law, cybersecurity and technology law, international and transnational law, data and privacy, and complex financial litigation.  She has broad experience in the area of data privacy, cybersecurity, and technology law, representing companies such as Facebook and Expedia with respect to some of their most challenging data security issues.
  • Brian Lutz, a Securities MVP – Brian is a partner in the San Francisco office and Co-Chair of the Securities Litigation Practice Group.  His practice focuses on complex commercial litigation, with an emphasis on corporate control contests, securities class actions, and shareholder actions alleging breaches of fiduciary duties.  He represents and advises clients in connection with shareholder activist matters, mergers and acquisitions, and corporate governance issues, and regularly represents and advises boards of directors and board committees on litigation issues.
  • Rahim Moloo, an International Arbitration MVP – Rahim Moloo is a partner in the New York office.  His practice focuses on assisting clients to resolve complex international disputes in the most effective and efficient way possible.  His experience spans a number of industries, including energy, mining, telecommunications, financial services, infrastructure, construction and consumer products.
  • Jason Schwartz, an Employment MVP – Jason is a partner in the New York office and Co-Chair of the Labor & Employment Practice Group.  His practice includes sensitive workplace investigations, high-profile trade secret and non-compete matters, wage-hour and discrimination class actions, Sarbanes-Oxley and other whistleblower protection claims, executive and other significant employment disputes, labor union controversies, and workplace safety litigation.

October 1, 2020 |
Executive Order on Combating Race and Sex Stereotyping

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On September 22, 2020, President Trump issued an Executive Order “On Combating Race and Sex Stereotyping” (“the EO”), which prohibits government contractors from including certain so-called “divisive concepts” in employee workplace training.[1]  The EO aims to curb workplace training materials “teaching that men and members of certain races, as well as our most venerable institutions, are inherently sexist and racist.” The EO follows on the heels of a September 4 Office of Management and Budget (“OMB”) memorandum, which instructed federal agencies to identify contracts or agency funds being used for such trainings as a first step toward ensuring that agencies “cease and desist from using taxpayer dollars” to fund the targeted trainings.[2]

To accomplish its goal of ending the targeted trainings, the EO requires that federal contracts entered into 60 days after the EO’s September 22 effective date (i.e., contracts entered into on or after November 21, 2020) prohibit contractors from using workplace training that “inculcates . . . any form of race or sex stereotyping or any form of race or sex scapegoating.” The EO defines “race or sex stereotyping” as “ascribing character traits, values, moral and ethical codes, privileges, status, or beliefs to a race or sex, or to an individual because of his or her race or sex.” And the phrase “race or sex scapegoating” is defined to mean “assigning fault, blame, or bias to a race or sex, or to members of a race or sex because of their race or sex.”

The EO further states that federal contractor workplace trainings may not “inculcate” what are described as “divisive concepts,” which are defined to include that:

  • one race or sex is inherently superior to another race or sex;
  • an individual, by virtue of his or her race or sex, is inherently racist, sexist, or oppressive, whether consciously or unconsciously;
  • an individual should be discriminated against or receive adverse treatment solely or partly because of his or her race or sex;
  • members of one race or sex cannot and should not attempt to treat others without respect to race or sex;
  • an individual’s moral character is necessarily determined by his or her race or sex;
  • an individual, by virtue of his or her race or sex, bears responsibility for actions committed in the past by other members of the same race or sex;
  • any individual should feel discomfort, guilt, anguish, or any other form of psychological distress on account of his or her race or sex; or
  • meritocracy or traits such as a hard work ethic are racist or sexist, or were created by a particular race to oppress another race.

An OMB memorandum issued on September 28—while primarily focused on federal agency training requirements—reiterates that unless specifically exempted, “every government contract must include the provisions” required by the EO.[3]

Thus, unless exempted by rule, regulation, or order, federal contractors must include the training prohibitions in their own subcontracts or purchase orders, and they must enforce those requirements as directed by the Secretary of Labor.  If a contractor is threatened with or becomes involved in litigation with a subcontractor or vendor, it may request that the federal government intervene.

Notably, while most Executive Orders include language directing the relevant agency and Federal Acquisition Regulatory Council to issue regulations implementing the Order’s requirements, the EO does not specifically require the promulgation of regulations to implement this new contract clause.  It is not immediately clear whether agencies will adopt regulations to implement the requirement, notwithstanding the lack of an express directive in the EO, or how agencies will consistently implement the new contract clause requirement in the absence of such regulations.  In addition, neither the EO nor the September 28 OMB memorandum provide further clarity as to whether the requirement will apply only to new contracts awarded on or after November 21, as the express language of the EO seems to suggest, or whether agencies also must insert the clause into any new contract modifications or task orders issued on or after that date.

Notice Requirements

The applicable federal agency’s contracting officer must provide a contractor with a notice of the new training requirements, which the contractor must post “in conspicuous places available to employees and applicants for employment.”  The contractor is also required to provide the notice to any labor union or worker representative with which it has a collective bargaining or similar agreement.

Penalties and Enforcement

Federal contractors failing to abide by these requirements may be subject to enforcement action by the Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”), which is tasked with enforcing the EO. The EO directs the OFCCP to establish a hotline and investigate complaints regarding the use of prohibited trainings. On September 28, the OFCCP announced that it had established such a hotline (and an email address) to receive complaints.[4] Violations of the EO may result in cancellation, termination, or suspension of the relevant contract, as well as suspension or debarment from future federal contracts.

Within 30 days of the EO, the Director of OFCCP must publish a request for information in the Federal Register, seeking information about employee training from federal contractors, subcontractors, and their employees.  While the EO states that the request should seek “copies of any training, workshop, or similar programing having to do with diversity and inclusion as well as information about the duration, frequency, and expense of such activities,” it provides no detail regarding how the OFCCP should use this information.

The EO instructs the Attorney General to “continue to assess the extent to which workplace training that teaches the divisive concepts set forth” in the EO “may contribute to a hostile work environment and give rise to potential liability under Title VII.” It is not clear why this responsibility is assigned to the Attorney General instead of the Equal Employment Opportunity Commission (“EEOC”)—the agency that is otherwise principally tasked with the enforcement of Title VII. But the EO directs the Attorney General and EEOC to jointly issue guidance “to assist employers in better promoting diversity and inclusive workplaces consistent with Title VII” “if appropriate.”

Application to Grant Recipients

The EO also directs federal agencies to identify grant programs for which the agencies may require grant recipients to certify that their trainings comply with the EO’s requirements.


Assuming the EO’s requirements are fully implemented in new federal contracts after 60 days, they will have a significant impact on private federal contractors’ unconscious bias training, which could in some circumstances run afoul of the new prohibitions. Such trainings—which have become an increasingly popular part of companies’ diversity and inclusion initiatives—focus on identifying employees’ possible unconscious biases about various demographic groups and providing strategies to interrupt and reduce the role of those potential biases in decision-making and interactions in the workplace.  Notably, the EO expressly states that “[n]othing in this order shall be construed to prohibit discussing, as part of a larger course of academic instruction, the divisive concepts” referenced in the EO “in an objective manner and without endorsement.” Therefore, it is possible that current unconscious bias training, to the extent it might arguably be in tension with the EO, could be modified to describe unconscious bias as an academic concept in an “objective manner and without endorsement.”

Companies entering new federal contracts will be required to cease any prohibited training or run the risk of contract cancellation or sanctions up to and including debarment for future contracts. Federal contractors also will be required to include the training prohibitions in new contracts with their own subcontractors and vendors and prominently post notices describing them.

The EO is likely to be subject to legal challenge, and it is possible the EO will be delayed, enjoined, or invalidated. The EO also may be revoked by an incoming Democratic administration if President Trump is not reelected.

In the interim, private entities contracting with the federal government should inform relevant personnel of the new requirements and review any unconscious bias training or other similar training with the EO in mind.


   [1]   Exec. Order No. 13,950 (2020), available at https://tinyurl.com/y2emrxng (last visited Sept. 30, 2020).

   [2]   Memorandum for the Heads of Executive Departments and Agencies, M-20-34, U.S. Office of Mgmt and Budget, Training in the Federal Government (Sept 4, 2020), available at https://tinyurl.com/y6njnbuw (last visited Sept. 30, 2020).

  [3]   Memorandum for the Heads of Executive Departments and Agencies, M-20-37, U.S. Office of Mgmt and Budget, Ending Employee Trainings that Use Divisive Propaganda to Undermine the Principle of Fair and Equal Treatment for All (Sept 28, 2020), available at https://tinyurl.com/yb55hm39 (last visited Sept. 30, 2020).

  [4]   See News Release, U.S. Dep’t of Labor, U.S. Department of Labor Launches Hotline to Combat and Sex Stereotyping by Federal Contractors (Sept. 28, 2020), available at https://tinyurl.com/y975y2tj (last visited Sept. 30, 2020).

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments.  Please contact the lawyer with whom you usually work in the firm’s Labor and Employment or Government Contracts practice groups, or the authors:

Jason C. Schwartz - Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Katherine V.A. Smith - Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com) Molly T. Senger - Washington, D.C. (+1 202-955-8571, msenger@gibsondunn.com) Lindsay M. Paulin - Washington, D.C. (+1 202-887-3701, lpaulin@gibsondunn.com)

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

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)

© 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.