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May 17, 2019 |
In the Wake of International Protectionism, France Strengthens Its Enforcement Scheme Applicable to Foreign Investments

Click for PDF On May 16, 2019, the French Constitutional Court (Conseil constitutionnel) cleared most of the provisions of the ambitious so-called “Pacte” Statute on the development and transformation of businesses. Pacte addresses a number of significant legal issues. Among them, in the wake of international protectionism and EU regulation on establishing a framework for the screening of foreign direct investments (see Gibson Dunn’s alert of March 5, 2019), Pacte significantly strengthens the French enforcement scheme applicable to foreign investments. Government Approval Required for Foreign Investments in Strategic Business Sectors Existing French regulation requires foreign investors, prior to making an investment in one of 14 specified sectors[1], irrespective of its size, to obtain an authorization from the French Minister of the Economy. The affected business sectors comprise those impacting France’s public order, public safety or national defense interests. Since November 29, 2018, are also covered certain R&D activities regarding cybersecurity and artificial intelligence as well as the hosting of data pertaining to sensitive businesses. During the discussions in Parliament on Pacte, the French Government indicated it would further broaden the scope of the business sectors affected to better protect “industries of the future” and innovation. The authorization process applies to EU and non-EU investors who acquire: directly or indirectly a controlling stake in a company whose registered office is located in France; or all or part of a line of business of a company whose registered office is located in France. It applies also to non-EU investors who acquire more than 33.33% of the stock or voting rights of a company whose registered office is located in France. The Minister of the Economy may order an investor in breach of this process to withdraw from the investment, to modify the scope of its investment or to revert it. Failure to abide by the Minister’s order exposes the investor to a fine in a maximum amount equal to two times the investment amount (in addition to the potential cancellation of the investment). Pacte Strengthens the Sanctioning Power of the French Minister of the Economy Under Pacte, the French Minister of the Economy is entrusted with a new power of injunction against an investor in breach of either the authorization process or the terms of the authorization[2]. The Minister may, thus, without delay and without any requirement for a prior Court approval, force the investor, under a daily penalty[3], to abide by the process (or by the conditions imposed as part of the authorization), to revert the investment at its cost or to modify its terms. The Minister may also now withdraw its authorization. If an investment has been made without authorization, the Minister may appoint a representative in charge of ensuring that -within the conduct of the acquired business- France’s interests will be protected; to this effect, the representative will be empowered to block any management decision likely to undermine these interests. In situations where France’s interests are or may be compromised, the Minister of the Economy may take new additional interim protective measures and: suspend voting rights attached to the fraction of the share capital held in violation of the authorization process; freeze or restrict distributions and remunerations pertaining to the share capital held in violation of the authorization process; and suspend, restrict or temporary prohibit the disposal of all or part of the assets falling within the ambit of the strategic business sectors. While none of these measures is subject to a prior Court approval, the investor must be given a formal notice and a 15-day delay to present its arguments, except in case of an emergency, exceptional circumstances or imminent breach of public order, public security or national defense. Effective implementation of the Minister’s extended powers will be outlined in decrees to be released later this year by the French government which will be important to monitor. Pacte Increases Fines Against Non-Complying Investors In addition, Pacte increases the amount of the fines that may be imposed by the Minister on an investor in breach of either the process or the terms of the authorization. The maximum fine that can be inflicted may amount to the higher of the following: two times the amount of the investment, 10 percent of the annual turnover (excluding taxes) of the company engaged in the strategic business sector, or 5 million euros for legal entities and 1 million euros for individuals. Pacte Improves the French Parliament’s Information on Foreign Investments Eventually, in line with the EU Regulation, Pacte aims at improving transparency regarding foreign investments and compels: the Minister of the Economy to disclose annually to the Parliament statistical no-names data regarding the screening of foreign investments in France; and the French government to provide annually to certain members of the Parliament (e.g., the chairmen of the Commissions in charge of economic matters and the secretary (rapporteurs) of the finance Commissions) a report containing qualitative and statistical information on measures taken to protect and promote national interests and strategic business sectors as well as on the screening of foreign investments and the outcomes achieved thanks to the new legislation.    [1]   The list of the 14 covered business sectors is as follows: 1°) gambling industry (except casinos); 2°) private security services; 3°) research and development or manufacture of means of fighting the illegal use of toxics; 4°) wiretapping and mail interception equipment; 5)° security of information technology systems and products; 6°) security of the information systems of companies managing critical infrastructure; 7°) dual-use items and technology; 8°) cryptology goods and services; 9°) companies dealing with classified information; 10°) research, development and sale of weapons; 11°) companies that have entered into supply contract with the French Ministry of Defense regarding goods or services involving dual-use items and technology, cryptology goods and services, classified information or research, development and sale of weapons; 12°) activities related to goods, products or services, essential to preserve French interests in relation to public order, public security and national defense (such as energy supply water supply, electronic communication networks and services); 13°) R&D in relation to business sectors 4°), 8°), 9°) or 12°) regarding cybersecurity, artificial intelligence, robotics; 14)° data hosting with respect to data pertaining to business sectors 11°) to 13°).    [2]   The Minister may in particular order the investor to dispose of all or part of the concerned business.    [3]   The amount of which will be defined by a decree to be released later by the French government. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the Paris office by phone (+33 1 56 43 13 00) or by email (see below): Nicolas Baverez –nbaverez@gibsondunn.com Benoît Fleury – bfleury@gibsondunn.com Jean-Philippe Robé – jrobe@gibsondunn.com Nicolas Autet – nautet@gibsondunn.com © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 16, 2019 |
Impact of CFTC’s Proposed Amendments to Swap Data Reporting Requirements on Reporting and Non-Reporting Counterparties

Click for PDF On May 13, 2019, the Commodity Futures Trading Commission (the “Commission” or the “CFTC”) published a notice of proposed rulemaking titled Proposed Amendments to the Commission’s Regulations Relating to Certain Swap Data Repository and Data Reporting Requirements (the “Proposal”).[1]  The Proposal seeks to modify existing swap data reporting requirements in Part 23 of the Commission’s regulations for swap dealers (“SDs”) and major swap participants (“MSPs”), Parts 43 and 45 of the Commission’s regulations for “reporting parties” and “reporting counterparties” (as such terms are defined in the Commission’s regulations),[2] and Part 49 of the Commission’s regulations for swap data repositories (“SDRs”).  The Proposal is the first rulemaking adopted by the CFTC following its Division of Market Oversight’s (the “Division”) July 2017 comprehensive analysis of the CFTC’s swap data reporting regulations, which was titled the Roadmap to Achieve High Quality Swaps Data (the “Roadmap”).[3]  In the Roadmap, the Division solicited public feedback on potential improvements to the CFTC’s swap data reporting regime in a manner that would achieve the CFTC’s regulatory goals of swap data transparency under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)[4] without imposing unnecessary burdens on market participants. Consistent with the Roadmap’s goals, the CFTC’s expressed objectives in adopting the Proposal are to “improve the accuracy of data reported to, and maintained by, SDRs,” “require reporting counterparties to verify the accuracy of swap data pursuant to […] SDR procedures,” and “provide enhanced and streamlined oversight over SDRs and data reporting generally.”[5]  The CFTC notes that the Proposal is the first of three planned rulemakings as described in the Roadmap.[6]  While most of the Proposal’s amendments are intended to modify Part 49 of the Commission’s regulations, which covers SDR registration requirements, SDR operational duties, and the CFTC’s oversight over SDRs generally, the Proposal also would make certain substantive amendments to the swap data reporting requirements for SDs and MSPs under Part 23 and reporting counterparties (and non-reporting counterparties) under Parts 43 and 45 (the “Counterparty Reporting Rules”).[7]  This Client Alert focuses on the Proposal’s modifications to the Counterparty Reporting Rules.  With respect to the Counterparty Reporting Rules, the Proposal notes that current swap data that is available to the CFTC lacks accuracy.  This view has been specifically echoed by CFTC Chairman J. Christopher Giancarlo and several other past and current CFTC Commissioners.[8] To address these concerns regarding accuracy and data quality, the Proposal includes specific amendments to the Counterparty Reporting Rules.  In particular, the Proposal, if adopted, would establish:  (1) new swap data accuracy verification requirements for reporting counterparties within certain timeframes depending on the type of reporting counterparty (i.e., different requirements for SDs/MSPs versus non-SDs/MSPs); (2) revisions to existing swap data error and omission rules for reporting counterparties; and (3) enhanced requirements for SDs and MSPs in terms of their written policies and procedures for swap data reporting under Parts 43 and 45 of the Commission’s regulations.  In the sections below, we have summarized each of these three proposed amendments to the Counterparty Reporting Rules and its impact on the reporting counterparties. The Proposal’s comment period deadline is July 29, 2019.  Since the Proposal and two anticipated proposed rulemakings that are expected to follow will address interconnected issues, the CFTC plans to re-open the comment period for the Proposal at the same time it issues each anticipated rulemaking so that commenters can provide comments on the three rulemakings altogether. Please contact a member of Gibson Dunn’s Derivatives Team if you have any questions regarding the Proposal. 1.    Swap Data Verification The Proposal, if adopted, would establish new swap data accuracy verification requirements for reporting counterparties within certain timeframes depending on the type of reporting counterparty.  The Proposal’s amendments relating to data verification fall under Part 45 of the Commission’s regulations, which generally focuses on the duties of reporting counterparties to report swap data to SDRs for regulatory purposes.  The current Counterparty Reporting Rules do not explicitly require reporting counterparties to verify the data reported with the relevant SDR.  However, the Proposal would create a mandate that all reporting counterparties must verify their swap data for accuracy and completeness with reports provided by the SDR.[9]  Effectively, the Proposal would require a reporting counterparty to reconcile their internal books and records for each open swap against any and all open swaps reflected in an open swap report received from an SDR.[10]  Further, reporting counterparties would be required to conform to any swap data verification policies and procedures enacted by an SDR.[11] The Proposal includes specific timing requirements for reporting counterparty data verification as well as the timing of the frequency of the open swaps reports to be distributed by the SDR.  The open swaps reports must be distributed by the SDR to SD, MSP and DCO reporting counterparties on a weekly basis and to non-SD and non-MSP reporting counterparties on a monthly basis.[12]  Upon receipt and review of the open swaps report, reporting counterparties must submit either a (i) verification of data accuracy[13] or (ii) notice of discrepancy in response to every open swaps report received from an SDR within the following timeframes:  (a) 48 hours of the SDR’s providing the open swaps report if the reporting counterparty is a SD or MSP; or (b) 96 hours of the SDR’s providing the open swaps report for non-SD/MSP reporting counterparties.[14]  In the event that the reporting counterparty finds no discrepancies between its books and records and the data in the SDR’s open swap report, the reporting counterparty must nonetheless submit a verification of data accuracy indicating that the swap data is complete and accurate to the SDR in accordance with the aforementioned timing requirements.[15]  If, however, the reporting counterparty finds a discrepancy in the swap data (i.e., over-reporting or under-reporting), the reporting counterparty must submit a notice of discrepancy to the SDR in accordance with the timing outlined above.[16] The Commission explains that the Proposal’s swap data verification rules aim to improve swap data quality by facilitating the swift resolution of any discrepancies between the swap data maintained by an SDR and the information on record with a reporting counterparty.  However, the data verification requirements of the Proposal would impose new and notable obligations on all reporting counterparties (including smaller, non-SD/non-MSP reporting counterparties) that are not in existence under today’s reporting rules.  In particular, the Proposal would require reporting counterparties to review the SDR’s policies and procedures around the verification process, to build comprehensive systems to verify the swap data reported to the SDR by comparing its internal records against open swaps reports received from the SDR, and to send verification or discrepancy notices to the SDR within relatively short timeframes.  As reporting counterparties already report information to SDRs under the Counterparty Reporting Rules, the Commission expressed its belief that SDRs and reporting counterparties would coordinate with one another to implement a system which is efficient and convenient for both parties, with particular attention to not be unnecessarily burdensome to non-SD/MSP and non-derivatives clearing organization reporting counterparties.[17]  Further, many reporting counterparties report swap data to more than one SDR and given that each SDR will have its own unique policies and procedures, the verification process will differ between SDRs. 2.    Changes to Errors and Omissions Reporting If adopted, the Proposal would also revise the swap data error and omission correction requirements for reporting counterparties.[18]  Currently, the error and omission correction requirements under Part 43 and those under Part 45 have substantive differences from one another.  For example, Part 43 requires a reporting counterparty that “becomes aware of an error or omission in the swap transaction and pricing data” to “promptly notify the other party of the error and/or correction” while Part 45 does not have a similar notification requirement for the reporting counterparty to provide such notice.[19]  The Proposal would seek to fix the gaps between the two rules and would require reporting counterparties to correct any errors and omissions to which they may be aware, including, but not limited to, errors or omissions present in the swap data in the open swaps reports provided as part of the verification process specific in the Proposal.  For example, Proposed regulations 43.3(e)(1) and 45.14(b)(1) provide that to the extent that a reporting counterparty becomes aware of any error or omission in swap data previously reported to an SDR, the reporting counterparty must submit corrected swap data to the SDR.[20]  The error and omissions correction requirements would apply regardless of the state of the swap.  In other words, it would include the correction of live swaps and swaps that are no longer active (i.e., which are commonly referred to as “dead trades”). In addition, the Proposal would establish specific error and correction procedures for reporting counterparties.  In particular, the Proposal would retain the current error and correction procedure in the Counterparty Reporting Rules that requires reporting counterparties to correct swap data “as soon as technologically practicable” following discovery of the errors or omissions.[21]  The Proposal would modify the “as soon as technologically practicable” timing requirement by creating a backstop of three business days after the discovery of the error or omission.[22]  In the event that the reporting counterparty is unable to correct errors or omissions within three business days of discovery, the Proposal would require the reporting counterparty to immediately inform the Director of DMO, or such other CFTC employees whom the Director of DMO may designate, in writing, of the errors or omissions and provide an initial assessment of the scope of the errors or omissions and an initial remediation plan for correcting the errors or omissions.[23]  Proposed regulations 43.3(e)(1)(iii) and 45.14(b)(1)(iii) would require that a reporting counterparty conform to the SDR’s policies and procedures for correction of errors and omissions that the SDRs would be required to create under the Proposal.[24] The Proposal would also establish new requirements for non-reporting counterparties.  Proposed regulations 43.3(e)(2) and 45.14(b)(2) would require a non-reporting counterparty that “by any means becomes aware” of an error or omission in swap data previously reported to an SDR, or the omission of swap data for a swap that was not previously reported to an SDR as required, to notify its counterparty to the swap (i.e., the reporting counterparty) as soon as technologically practicable following discovery of the errors or omissions, but no later than three business days following the discovery of the errors or omissions.[25]  This section of the Proposal also specifies that a non-reporting counterparty that does not know the identity of the reporting counterparty for a swap must notify the SEF or DCM where the swap was executed of the errors or omissions as soon as technologically practicable following discovery of the errors or omissions, but no later than three business days after the discovery.[26]  In the Proposal, the Commission expressed its hope that the requirement to correct all swap data, regardless of status, would ensure that reporting counterparties establish and maintain properly functioning reporting systems to prevent the reporting of errors or omissions. The Proposal’s modifications to the errors and omissions correction requirements would notably make Parts 43 and 45 of the Commission’s regulations consistent in this regard.  In particular, the Proposal would remove the counterparty notification requirement set forth in current CFTC regulation 43.3(e)(1)(i).  However, the Proposal would create a more definitive timeframes in which reporting counterparties are required to correct errors and omissions and in which non-reporting counterparties are required to notify their counterparties of any such errors or omissions.  With respect to non-reporting counterparties, the current rules require that when a non-reporting counterparty “discovers” an error or omission it must “promptly notify” the reporting counterparty of such error or omission.  The Proposal would create more stringent requirements in this regard such that non-reporting counterparties that merely become “aware” of an error or omission by “any means” must notify the reporting counterparty “as soon as technologically practicable” but no later than three business days.  Further the Proposal clarifies that the non-reporting counterparty’s notification obligation with respect to omissions extends to data that was not reported to an SDR (but that presumably should have been reported). 3.    SD and MSP Requirements The Proposal would also establish enhanced requirements for SDs and MSPs with respect their written policies and procedures for swap data reporting under parts 23, 43, and 45 of the Commission’s regulations.  Under the current regime, SDs and MSPs are required to report all information and swap data required for swap transactions when they are reporting counterparties for purposes of regulatory and real-time public reporting.[27]  SDs and MSPs are also required to implement electronic systems and procedures necessary to transmit electronically all information and swap data required to be reported in accordance with Part 43 and Part 45.[28]  The Proposal would require each SD and MSP to establish, maintain and enforce written policies and procedures that are reasonably designed to ensure that the SD and MSP comply with all obligations to report swap data to an SDR, which would include any requirements under Part 43 and Part 45, as well as any rules established by the SDR.[29]  The preamble to the Proposal sets forth specific content that would be expected to be included in the SD or MSP’s policies and procedures.[30] The Proposal also would require SDs and MSPs to review their policies and procedures on an annual basis and to update them as needed to reflect the requirements in Part 43 and Part 45.[31]  The Commission believes that the annual review requirement in the Proposal would ensure that SDs’ and MSPs’ policies and procedures remain current and effective over time.  SDs and MSPs are currently expected to establish policies and procedures related to all of their swap market activities, including their swap data reporting obligations.[32]  The Proposal’s amendments to Part 23 would make the expectations around these policies and procedures explicit by creating new obligations and setting forth guidance around content regarding reporting policies and procedures, rather than merely cross-referencing Parts 43 and 45 as we see under the current regulations. [1]      Certain Swap Data Repository and Data Reporting Requirements, 84 Fed. Reg. 21044 (May 13, 2019). [2]      See 17 C.F.R. § 43.3(a)(3) (sets forth the determination of which counterparty to a swap transaction is the “reporting party” and has the obligation to report swap data to an SDR for purposes of real-time public reporting); 17 C.F.R. § 45.8 (sets forth the determination of which counterparty to a swap transaction is the “reporting counterparty” and has the obligation to report swap data to an SDR for purposes of regulatory reporting).  For purposes of this Client Alert, the term “reporting counterparty” will refer to both a “reporting party” under Part 43 and a “reporting counterparty” under Part 45. [3]      Division of Market Oversight, Roadmap to Achieve High Quality Swaps Data, U.S. Commodity Futures Trading Commission, July 10, 2017, available at http://www.cftc.gov/idc/groups/public /@newsroom/documents/file/dmo_swapdataplan071017.pdf. [4]      Dodd-Frank Wall Street Reform and Consumer Protection Act, 124 Stat. 1376, Pub. Law 111-203 (July 21, 2010), as amended. [5]      Proposal at 21044. [6]      Proposal at 21045. [7]      The Proposal also includes proposed amendments to the reporting requirements for derivatives clearing organizations (“DCOs”), swap execution facilities (“SEFs”), and designated contract markets (“DCMs”) to the extent that these entities are also reporting counterparties.  This Client Alert is focused on the Proposal’s specific impact on the Counterparties and, for that reason, does not discuss the proposed amendments impacting DCOs, SEFs, and DCMs. [8]      Speech by Commissioner J. Christopher Giancarlo, Making Market Reform Work for America (Jan. 18, 2017), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-19 (“The CFTC has faced many challenges in optimizing swap data ranging from data field standardization and data validation to analysis automation and cross-border data aggregation and sharing.  Market participants vary significantly in how they report the same data field to SDRs.  Those same SDRs vary in how they report the data to the CFTC”). Statement by Commissioner Scott D. O’Malia, SIFMA Compliance and Legal Society Annual Seminar (Mar. 19, 2013), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-22 (“In a rush to promulgate the reporting rules, the Commission failed to specify the data format reporting parties must use when sending their swaps to SDRs.  In other words, the Commission told the industry what information to report, but didn’t specify which language to use.  This has become a serious problem. . . .  The end result is that even when market participants submit the correct data to SDRs, the language received from each reporting party is different.  In addition, data is being recorded inconsistently from one dealer to another.”). Speech by Commissioner Dan M. Berkovitz, Proposed Amendments to the Commission’s Regulations Relating to Certain Swap Data Repository and Data Reporting Requirements (Apr. 25, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement042519 (“Accurate, complete, and timely information is therefore vital to any successful swap data reporting regime.  These objectives were central to post-crisis reform efforts, and they must remain the primary considerations as the Commission moves to enhance its reporting rules”). [9]    Proposal at 21098.  Proposed § 45.14(a) addresses the verification of swap data accuracy against the SDR’s open swaps report. [10]   Proposal at 21098.  Proposed § 45.14(a)(1) addresses a reporting counterparty’s requirement to verify the accuracy and completeness against the open swap reports from the SDR. [11]   Proposal at 21103.  Proposed § 49.11 would set forth rules around such SDR policies and procedures relating to verification of swap data accuracy and would require the SDR to verify the accuracy of the data with reporting counterparties. [12]   Proposal at 21103.  Proposed §§ 49.11(b)(2) and (3) address the timing obligations for SDRs to distribute open swaps reports to reporting counterparties. [13]   For purposes of clarification, examples of unsatisfactory verification may include:  (i) failure to perform the verification in a timely manner and (ii) providing a verification of data accuracy indicating that the swap data was complete and accurate for swap that was not correct when verified. [14]   Proposal at 21098.  Proposed § 45.14(a)(2) addresses the timing in which such verification against the open swap reports from the SDR must occur.  This proposed requirement would also treat DCO reporting counterparties in the same way it does SD and MSP reporting counterparties. [15]   Proposal at 21098.  Proposed § 45.14(a)(3) addresses the requirement to submit a verification of data accuracy regardless of whether there are discrepancies identified.  Such verification would be required to be submitted in the form and manner required by the SDR’s swap data verification policies and procedures. [16]   Proposal at 21098.  Proposed § 45.14(a)(4) addresses the requirement to submit a notice of discrepancy in the event of any inconsistencies.  Such notice of discrepancy would need to be submitted in the form and manner required by the SDR’s swap data verification policies and procedures. [17]   Proposal at 21068. [18]   Proposal at 21097-21099.  Proposed §§ 43.3(e) and 45.14(b) address the error and omission correction requirements for Parts 43 and 45 of the CFTC’s regulations. [19]   17 C.F.R. § 43.3(e)(1)(i). [20]   Proposal at 21098-21099. [21]   17 C.F.R. §§ 43.3(e)(3), 43.3(e)(4), 45.14(a). [22]   Proposal at 21098-21099.  Proposed §§ 43.3(e)(1)(i) and 45.14(b)(1)(i) address the timing for errors and corrections. [23]   Proposal at 21098-21099.  Proposed §§ 43.3(e)(1)(ii) and 45.14(b)(1)(ii) address the requirement to notify the Director of the Division of Market Oversight if the error correction timing cannot be met. [24]   Proposal at 21098-21099. [25]   Proposal at 21098-21099.  The Proposal makes clear that the non-reporting counterparty is not only responsible for notifying the reporting counterparty of errors or omissions in the data that is reported, but also to notify the reporting counterparty of data that was not reported to an SDR. [26]   Proposal at 21099-21099.  Proposed §§ 43.3(e)(2) and 45.14(b)(2) would also require that if the reporting counterparty, SEF or DCM, as applicable, and the non-reporting counterparty agree that the swap data for a swap is incorrect or incomplete, the reporting counterparty, SEF or DCM, as applicable, must correct the swap data in accordance with proposed § 43.3(e)(1) or § 45.14(b)(1), as applicable. [27]   See 17 C.F.R. §§ 23.204(a), 23.205(a). [28]   See 17 C.F.R. §§ 23.204(b), 23.205(b). [29]   Proposal at 21097. [30]   With respect to Part 45, the Proposal explains that such policies and procedures would include, but not be limited to: (i) the reporting process and designation of responsibility for reporting swap data, (ii) reporting system outages or malfunctions (including the use of back-up systems), (iii) verification of all swap data reported to an SDR, (iv) training programs for employees responsible for reporting under Part 45, (v) control procedures relating to reporting under Part 45 and designation of personnel responsible for testing and verifying such policies and procedures; and (vi) reviewing and assessing the performance and operational capability of any third party that carries out any duty required by Part 45 on behalf of the SD or MSP as well as any rules established by the SDR.  With respect to Part 43, the Proposal explains that such policies and procedures would include, but not be limited to:  (i) the reporting process and designation of responsibility for reporting swap transaction and pricing data, (ii) reporting system outages or malfunctions (including use of back-up systems), (iii) training programs for employees responsible for reporting under Part 43, (iv) control procedures relating to reporting under Part 43 and designation of personnel responsible for testing and verifying such policies and procedures, (v) reviewing and assessing the performance and operational capability of any third party that carries out any duty required by Part 43 on behalf of the SD or MSP; and (vi) the determination of whether a new swap transaction or amendment, cancelation, novation, termination, or other lifecycle event of an existing swap, is subject to the real-time reporting requirements under Part 43.  Proposal at 21073. [31]   Proposal at 21097. [32]   See, e.g., 17 C.F.R. § 3.3(d)(1) (requiring a chief compliance officer to administer each of the registrant’s policies and procedures relating to its business as an SD/MSP that are required to be establish pursuant to the Act and the Commission’s regulations); 17 CFR § 3.2(c)(3)(ii) (requiring the National Futures Association to assess whether an entity’s SD/MSP documentation demonstrates compliance with the Section 4s Implementing Regulation to which it pertains which includes § 23.204 and § 23.205). The following Gibson Dunn lawyers assisted in preparing this client update: Jeffrey Steiner, Carl Kennedy and Erica Cushing. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions and Derivatives practice groups, or any of the following: Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Carl E. Kennedy – New York (+1 212-351-3951, ckennedy@gibsondunn.com) Erica N. Cushing – Denver (+1 303-298-5711, ecushing@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 16, 2019 |
Webcast: Insuring the Deal: Key Considerations when Utilizing Transactional Insurance

Join a panel of seasoned Gibson Dunn partners and an Aon transactional insurance specialist for a presentation regarding the use of transactional insurance products in public and private M&A transactions, with particular focus on the use of representation and warranty insurance when acquiring a company. The webinar discusses complex issues, market developments, the claims process and key considerations. View Slides (PDF) PANELISTS: Matthew Dubeck is a partner in the Los Angeles office of Gibson, Dunn & Crutcher, where he practices in the firm’s Mergers and Acquisitions, Private Equity and Securities Regulation and Corporate Governance Practice Groups. He advises companies, private equity firms and investment banks across a wide range of industries, focusing on public and private merger transactions, stock and asset sales and joint ventures and strategic partnerships. Mr. Dubeck also advises public companies with respect to corporate governance matters. Jonathan Whalen is a partner in the Dallas office of Gibson, Dunn & Crutcher. He is a member of the firm’s Mergers and Acquisitions, Capital Markets, Energy and Infrastructure, and Securities Regulation and Corporate Governance Practice Groups. Mr. Whalen’s practice focuses on a wide range of corporate and securities transactions, including mergers and acquisitions, private equity investments, and public and private capital markets transactions. Matthew Wiener is the head of Aon’s Transaction Liability team for the Southwest region and the national leader for its energy practice. In this role, Mr. Wiener is responsible for the development and implementation of transactional-based risk solutions, including the deployment of insurance capital for M&A transactions through representations and warranties, litigation, tax and other contingent liabilities insurance. MCLE INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

May 14, 2019 |
First Quarter 2019 Update on Class Actions

Click for PDF This update provides an overview and summary of key class action developments during the first quarter of 2019 (January through March), as well as an important decision concerning class arbitration that the Supreme Court issued in April. Part I summarizes the Supreme Court’s three recent opinions concerning the Federal Arbitration Act, Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019), New Prime, Inc. v. Oliveira, 139 S. Ct. 532 (2019), and Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275 (U.S. Apr. 24, 2019). Part II covers the Supreme Court’s decision in Frank v. Gaos, 139 S. Ct. 1041 (2019), which remanded the closely watched case and directed the lower courts to assess whether the plaintiffs have Article III standing, rather than providing the much-anticipated guidance on the propriety of cy pres-only class action settlements. Part III discusses the Supreme Court’s decision in Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019), that the 14-day deadline to seek permission to appeal a class certification order under Rule 23(f) is not subject to equitable tolling. Part IV addresses a mandamus petition pending in the Ninth Circuit regarding Northern District of California Judge William H. Alsup’s local policy of barring parties from engaging in class settlement discussions before class certification has been granted. I.  The Supreme Court Issues Three Decisions on the Federal Arbitration Act Arbitration has been a hot topic at the Supreme Court in the first few months of 2019, with the high court issuing three notable decisions on the Federal Arbitration Act (“FAA”). Who Decides Arbitrability?  First, on January 8, the Court decided Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).  Writing for a unanimous Court in his first opinion, Justice Kavanaugh held that courts may not decline to enforce agreements delegating arbitrability issues to an arbitrator, even if the court concludes that the claim of arbitrability is “wholly groundless.”  Id. at 531. The defendants in the underlying antitrust lawsuit had sought to compel arbitration based on a clause in their contracts with the plaintiff that purported to require arbitration of any “dispute arising under or related to” the contracts, with an exception for “actions seeking injunctive relief.”  Id. at 528 (quotation marks and citation omitted).  Although the plaintiff had sought damages as well as injunctive relief, the defendants argued that arbitration was required because damages were the predominant form of relief requested.  Id.  Relying on a purported exception to the rule that parties may delegate arbitrability decisions to arbitrators, the Fifth Circuit held that the trial court properly declined to refer the arbitrability issue to an arbitrator because the plaintiff’s claim for injunctive relief made the defendants’ request for arbitration “wholly groundless.”  Id. The Supreme Court reversed, holding that courts must enforce agreements to delegate arbitrability issues to an arbitrator, even if the court concludes that a claim of arbitrability is “wholly groundless,” because that exception has no basis in either the text of the FAA or in the line of Supreme Court cases that expressly allowed parties to delegate arbitrability decisions to the arbitrator.  Id. at 531.  The Court was also skeptical that the “wholly groundless” exception would promote efficiency, as the plaintiff had argued.  Rather, the Court noted that such an exception would “inevitably spark collateral litigation” over whether a claim of arbitrability was merely “groundless” as opposed to “wholly groundless.”  Id. at 530-31.  As has been a theme with the Court in recent years, the Henry Schein decision again emphasized the importance of enforcing arbitration agreements as drafted and avoiding exceptions that would permit judicial second-guessing. Just one week after its decision in Henry Schein, the Court issued the opinion in New Prime, Inc. v. Oliveira, 139 S. Ct. 532 (2019), which we previewed in our third quarter 2018 update.  Writing for another unanimous Court (8-0, with Justice Kavanaugh taking no part in the decision), Justice Gorsuch held that it is up to courts—not arbitrators—to decide the applicability of Section 1 of the FAA (9 U.S.C. § 1), which exempts from arbitration any disputes involving “contracts of employment” of certain transportation workers.  The Court also held that the § 1 exemption applies not only to employer-employee agreements but also to independent contractor agreements. We Meant What We Said In Stolt-Nielsen.  Next, the Court decided Lamps Plus, Inc. v. Varela, No. 17-988, 2019 WL 1780275 (U.S. Apr. 24, 2019), which built upon the Court’s earlier holding in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662 (2010), that class arbitration so fundamentally changes the nature of dispute resolution that the parties must expressly agree to it. In Stolt-Nielsen, the parties had stipulated that their contract was silent on the issue of class arbitration.  The Court thus held that “a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so”—silence is not enough.  Stolt-Nielsen, 559 U.S. at 684.  Following this decision, the parties in Lamps Plus never stipulated that the agreement was “silent” on this issue, and the plaintiffs attempted to infer an agreement to class arbitration from various provisions in the agreement.  In its 5-4 decision, the Court held that an agreement that is ambiguous on whether it allows class arbitration is not sufficient; the FAA preempts state laws that require class arbitration when an arbitration agreement is ambiguous as to whether the parties consented to such a procedure.  Lamps Plus, 2019 WL 1780275, at *6. Lamps Plus involved a dispute over the availability of class arbitration in an employment dispute.  The defendant-employer argued that the agreement required individual arbitration because, among other reasons, it provided that the plaintiff must arbitrate claims or controversies that “I may have against the Company.”  The plaintiff-employee, on the other hand, argued that the agreement was ambiguous in part because it provided that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings.”  The Ninth Circuit applied California contract law and found the agreement ambiguous, which led the court to apply a doctrine that requires contractual ambiguities to be resolved against the drafter.  Varela v. Lamps Plus, Inc., 701 F. App’x 670 (9th Cir. 2017). Writing for the Court, Chief Justice Roberts emphasized that “arbitration ‘is a matter of consent, not coercion,’” and therefore “courts may not infer consent to participate in class arbitration absent an affirmative ‘contractual basis for concluding that the party agreed to do so.’”  Lamps Plus, 2019 WL 1780275, at *5–6 (quoting Stolt-Nielsen, 559 U.S. at 681, 684).  The Court also noted that class arbitration is generally not contemplated by the FAA, id. at *7, and that arbitration loses many of its advantages (“lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes”) when done on a classwide basis.  Id. at *5.  The Court found that California’s anti-drafter interpretation doctrine is grounded in public policy and invoked only once a court finds that it cannot discern the parties’ intent.  Id. at *6–7.  But, the Court held a public-policy consideration cannot trump the FAA’s consent requirement, and California’s rule was therefore preempted.  Id. at *7. Justice Thomas joined the majority in full, but also filed a concurring opinion to state his view that the contract at issue was not “ambiguous” and therefore Stolt-Nielsen foreclosed the availability of class arbitration.  Id. at *8–9.  Justice Thomas would not have evaluated whether “California’s contra proferentem rule, as applied here, ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives’ of the FAA” because he “remain[s] skeptical of this Court’s implied pre-emption precedents.”  Id. at *9 (citations omitted). Justices Kagan, Ginsburg, Breyer, and Sotomayor each filed a dissenting opinion.  Writing the principal dissent, Justice Kagan emphasized the capacious language in the contract providing that “any and all disputes, claims, or controversies” must be arbitrated.  Id. at *16.  In her view, this language was “broad enough to cover both individual and class actions.”  Id. at *17.  Alternatively, Justice Kagan wrote that the contract is ambiguous and California courts would therefore apply the anti-drafter doctrine to permit class arbitration.  Id. at *17–19.  This approach is correct, she asserted, because that interpretive rule does not facially discriminate against arbitration.  Id. Lamps Plus marks a substantial victory for class-action defendants, as plaintiffs will no longer be able to seek classwide arbitration with an unsuspecting defendant based on supposed ambiguities in an arbitration agreement.  As a result, defendants can now enjoy greater assurance that arbitration agreements calling for individual, bilateral arbitration will not be construed to require aggregate dispute resolution.  But as the intervening seven years between Stolt-Nielsen and Lamps Plus demonstrate, plaintiffs’ attorneys will continue to seek ways to evade individual arbitration. II.  The Supreme Court Remands for Standing Analysis Under Spokeo, Rather than Weighing in on the Propriety of Cy Pres-Only Class Action Settlements The Supreme Court also issued a decision this past quarter in the Frank v. Gaos, 139 S. Ct. 1041 (2019), a case we previously discussed in our 2017 fourth quarter update, and in our first, second, and third quarter updates in 2018.   In its decision, the Supreme Court ended up not addressing the issue it had granted certiorari to decide—the propriety of cy pres-only settlements that provide no direct compensation to class members.  Instead, at the urging of the Solicitor General, the Court vacated and remanded “for the courts below to address the plaintiffs’ standing in light of Spokeo.”  Id. at 1046. The plaintiff, Paloma Gaos, had alleged that “Google’s transmissions of user’s search terms in referrer headers” violated the Stored Communications Act (SCA), which provides a private right of action when “a person or entity providing an electronic communication service to the public . . . knowingly divulge[s] to any person or entity the contents of a communication while in electronic storage by that service,” 18 U.S.C. § 2702(a)(1).  Gaos, 139 S. Ct. at 1044.  After initially dismissing the complaint for lack of standing in a pre-Spokeo decision, the district court permitted the SCA claim to proceed.  Relying on the Ninth Circuit’s decision in Edwards v. First American Corp., 610 F.3d 514 (2010), the district court determined that Gaos established standing in her amended complaint by alleging a violation that was “specific to her (i.e., based on a search she conducted).”  Gaos, 139 S. Ct. at 1044. The putative class action was consolidated with another complaint; the parties reached a classwide settlement.  Id. at 1045.  The terms of that settlement included Google agreeing to pay $8.5 million, with most of the funds to be distributed not to absent class members but to six cy pres recipients.  Id.  The cy pres recipients were selected by class counsel and Google to “promote public awareness and education . . . related to protecting privacy on the internet.”  139 S. Ct. at 1044. Five class members objected to the settlement, and two of them appealed the approval of the settlement to the Ninth Circuit.  The objectors took issue “with the choice of cy pres recipients because Google has in the past donated to at least some” of them, three others had “previously received Google settlement funds,” and another three were “organizations housed at class counsel’s alma maters.”  In re Google Referrer Header Privacy Litig., 869 F.3d 737, 744 (9th Cir. 2017). The Ninth Circuit affirmed and the Supreme Court thereafter granted certiorari to determine whether the cy pres-only settlement was fair, reasonable, and adequate under Rule 23(e)(2).  Gaos, 193 S. Ct. at 1045.  The case attracted significant attention from the class actions bar, as well as from non-profits who receive cy pres donations, leading to the filing of over twenty amicus briefs. The most influential amicus brief proved to be the Solicitor General’s, which urged the Court to vacate the Ninth Circuit decision and remand the case so the lower courts could address the standing issue.  The district court had found standing based on the Ninth Circuit’s decision in Edwards, which had held “that the violation of a statutory right automatically satisfies the injury-in-fact requirement whenever a statute authorizes a person to sue to vindicate that right.”  Gaos, 139 S. Ct. at 1046.  But in between the district court’s decision and the Ninth Circuit’s ruling on the cy pres issue, the Supreme Court abrogated Edwards in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), holding that “Article III standing requires a concrete injury even in the context of a statutory violation.”  Id. at 1549.  The Ninth Circuit, however, did not address Spokeo in its opinion in Goas. Noting that it is “a court of review, not first view,” the Supreme Court remanded the issue of Article III standing back to the lower courts, explaining that “no court in this case has analyzed whether any named plaintiff has alleged SCA violations that are sufficiently concrete and particularized to support standing.”  Gaos, 139 S. Ct. at 1046. Justice Thomas dissented, contending a plaintiff need only allege invasion of a private right to establish standing, and the Stored Communications Act and state law created such private rights.  Id. at 1047.  On the merits, he opined that the cy pres settlement provided class members with no meaningful relief, rendering it unfair and unreasonable under Rule 23(e)(2).  Id. at 1048. Depending on how the standing issue is resolved on remand, Gaos may make a return trip the Supreme Court in the near future, as the propriety of cy pres-only class action settlements remains an important and unresolved issue. III.  The Supreme Court Rejects Equitable Tolling Under Rule 23(f) The Supreme Court also resolved a circuit split over whether Federal Rule of Civil Procedure 23(f)’s 14-day deadline for seeking permission to appeal a class certification order is subject to equitable tolling.  In Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019), the Court unanimously answered “no” to this question. As previewed in our past updates in 2017 and 2018, Lambert involved claims that Nutraceutical’s marketing of a dietary supplement violated California consumer-protection laws.  Id. at 713.  The district court initially certified a class but then decertified it in February 2015.  Id.  Instead of appealing the decertification decision within Rule 23(f)’s fourteen-day window, Lambert informed the district court that he would move for reconsideration.  Id.  He filed that motion twenty days after the decertification order and sought appellate review only after the court denied his bid for reconsideration.  Id.  Over Nutraceutical’s objection, the Ninth Circuit deemed Lambert’s petition for review timely, reasoning that Rule 23(f)’s deadline was “non-jurisdictional” and was equitably tolled.  Id. A unanimous Supreme Court reversed.  Id. at 718.  Writing for the Court, Justice Sotomayor first held that Rule 23(f)’s time limitation was a nonjurisdictional claim-processing rule.  Id. at 712, 714.  The Court then turned to whether the rule was mandatory or subject to tolling.  Id. at 714.  Looking to “whether the text of the rule le[ft] room for such flexibility,” the Court found clear guidance in the Federal Rules of Procedure and Federal Rules of Appellate Procedure.  Id. at 714–15.  First, Rule 23(f) imposed a time limitation without qualification, and Federal Rule of Appellate Procedure 5 “single[d] out Civil Rule 23(f) for inflexible treatment.”  Id. at 715.  Second, Rule 23(f)’s deadline was expressly carved out from the other rules providing for tolling under Rule 26—“express[ing] a clear intent to compel rigorous enforcement of Rule 23(f)’s deadline, even where good cause for equitable tolling might otherwise exist.”  Id. Lambert continues the Supreme Court’s trend of enforcing the Federal Rules as written in class actions.  It also realigns the Ninth Circuit with other courts across the country, reminding litigants to not rely on courts’ powers to forgive tardy filings.  But the decision expressly leaves three related questions unanswered.  First, it remains unclear whether a motion for reconsideration filed within Rule 23(f)’s 14-day deadline tolls the time to file for permission to appeal under Rule 23(f) itself, as every circuit to have considered the issue has concluded, but was met with skepticism by some of the Justices during oral argument.  Id. at 717 n.7.  Second, the Court did not decide whether the deadline is tolled if a district court misleads a litigant about the deadline.  Id.  Third, the Court did not decide what happens if there was an “insurmountable impediment to filing timely.”  Id. IV.  The Ninth Circuit Considers District Judge’s Rule Prohibiting Pre-Certification Class Settlement Discussions Finally, parties litigating in the Northern District of California may take special interest in a mandamus petition pending before the Ninth Circuit that challenges Judge William H. Alsup’s policy barring class action settlement discussions before class certification is granted.  See In re: Logitech, Inc., No. 19-70248, Dkt. 1-1 (9th Cir. Jan. 25, 2019).  Judge Alsup’s standing order for class actions limits settlement discussions between opposing counsel until they know what claims are certified for class treatment or until the district court grants a motion under Rule 23(g)(3) for the appointment of interim class counsel.  Id. at 3-4. The plaintiff in Logitech filed suit on behalf of a putative class, alleging various false-advertising claims.  Id. at 1.  After several months of litigating, the parties filed a joint stipulation explaining that pre-certification settlement was appropriate, and requesting that a magistrate judge oversee the process.  Id. at 4.  The plaintiff also filed a motion for appointment of interim class counsel to oversee the settlement process.  Id. at 3-4.  Judge Alsup expressed concern that the resulting settlement would have a “collusive” effect on absent class members pre-certification, and thus the court declined to allow settlement talks to proceed before certification and denied the motion for appointment of interim class counsel.  Id. at 5–7. Logitech argues that Judge Alsup’s policy amounts to an unconstitutional prior restraint on free speech that also violates Rule 23 and the “strong judicial policy that favors settlements, particularly where complex class action litigation is concerned.”  Id. at 10, 19.  It also argued Judge Alsup’s policy does not survive strict scrutiny review because it is not content-neutral—it specifically forbids settlement discussions—and because it is not the least restrictive means “to prevent inappropriately discounted settlements.”  Id. at 12-14 (quotation marks and citation omitted).  Logitech also contended that Rule 23 confirms that parties may engage in pre-certification settlement discussions, as the Advisory Committee Notes state that “if a class has not been certified,” the parties must give the court a sufficient basis in the record to conclude that it will be able to certify the class “after the final hearing” assessing the settlement.  Id. at 20. Judge Alsup filed a response to Logitech’s petition in which he explained the reasoning behind his rule.  See In re: Logitech, Inc., No. 19-70248, Dkt. 4-1 (9th Cir. Feb. 28, 2019).  The court first explained that for absent class members, “there is an important difference between a class settlement struck before a ruling under Rule 23 seeking class certification and one negotiated after a class has been certified.”  Id. at 2.  When parties negotiate a classwide settlement before certification, Judge Alsup noted that “plaintiff’s counsel necessarily negotiates from a position weakened by the uncertainty over whether or not counsel will later win or lose a class certification motion,” which he asserted can prejudice any settlement.  Id. at 2-3.  Thus, absent class members deserve “to have their recovery discounted only on the merits of their claims without further discount based on possible unsuitability of the case for class certification.”  Id. at 4. The Ninth Circuit referred the mandamus petition to a motions panel and oral argument has been set for July 18, 2019. The following Gibson Dunn lawyers prepared this client update: Christopher Chorba, Theane Evangelis, Kahn Scolnick, Bradley Hamburger, Jeremy Smith, Nathan Strauss, Julian Kleinbrodt, Tim Kolesk, Lauren Fischer, and Kory Hines. Gibson Dunn attorneys are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers: Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 14, 2019 |
Supreme Court Holds That iPhone Users Have Standing To Seek Federal Antitrust Damages From Apple For App Store Purchases

Click for PDF Decided May 13, 2019 Apple, Inc. v. Pepper, No. 17-204 Yesterday, the Supreme Court held 5-4 that iPhone users are “direct purchasers” from Apple when they purchase apps on Apple’s App Store, and thus have standing to sue Apple for alleged monopolistic overcharges under Section 2 of the Sherman Act, even though third-party app developers pay for the allegedly monopolized app-distribution services and set the prices for apps charged to iPhone users. Background: A group of iPhone users sued Apple for damages under Section 2 of the Sherman Act, alleging that Apple monopolized the retail market for the sale of apps and unlawfully used its monopoly power to charge consumers higher-than-competitive prices. According to plaintiffs, Apple requires them to purchase iPhone apps from developers exclusively through Apple’s App Store. Although app developers independently set the retail price of each app, Apple charges developers a yearly fee to place their apps in the App Store, along with a commission on each sale. The iPhone users alleged that this arrangement caused them to pay inflated prices for apps and sought antitrust damages from Apple. Under Illinois Brick Co. v. Illinois, 431 U.S. 720, 729 (1977), only direct purchasers, “and not others in the chain of manufacture or distribution,” can sue for damages under federal antitrust law. The district court dismissed the action under Illinois Brick, reasoning that the app developers were the direct purchasers of Apple’s app-distribution services because they paid the annual fees and commissions charged by Apple. The Ninth Circuit reversed, holding that the iPhone users could sue Apple for allegedly monopolizing and attempting to monopolize the sale of iPhone apps. Issue: “Whether consumers may sue anyone who delivers goods to them for antitrust damages, even when they seek damages based on prices set by third parties who would be the immediate victims of the alleged offense.” Court’s Holding: Yes. Illinois Brick does not bar plaintiffs’ claim for alleged monopoly overcharge damages because iPhone users are properly regarded as direct purchasers. “The [plaintiffs] pay the alleged overcharge directly to [defendant]. The absence of an intermediary is dispositive. Under Illinois Brick, the [plaintiffs] are direct purchasers … and are proper plaintiffs to maintain this antitrust suit.” Justice Kavanaugh, writing for the majority What It Means: The Court’s decision embraces a formal approach to antitrust standing in a claim arising under Section 2 of the Sherman Act that focuses on whether the plaintiff directly contracts with the alleged monopolist, irrespective of whether it directly bears the cost of the alleged monopolistic conduct. In doing so, the decision creates the risk that companies operating “electronic marketplaces” will be subject to suit by both the third-party sellers who pay to use the companies’ services and to end-consumers who purchase the third party’s products or services on the platform. The decision threatens to increase the cost and complexity of antitrust litigation, as courts may be required to engage in the complex task of apportioning antitrust damages among different levels of purchasers of a good or service. Justice Gorsuch, writing for a four-Justice dissent, highlighted some of the difficult questions lower courts must now address, including whether and to what extent third parties pass on alleged monopolistic charges, a question that will need to be addressed as to “all of the tens of thousands of developers who sold apps through the App Store at different prices and times over the course of years.” These increased litigation costs may have a negative financial impact on the e-commerce space as a whole. The Court was careful to note that it was not “assess[ing] the merits of the plaintiffs’ antitrust claims” or any “defenses Apple may have.” Having established standing, plaintiffs must now face the challenge of showing how a claim of charging “too much” overcomes Supreme Court precedent disapproving such claims. The Court’s decision raises the question whether it might overrule Illinois Brick in the future.  Although certain amici argued that the Court should do so here, the Court reasoned that “[i]n light of our ruling in favor of the plaintiffs in this case, we have no occasion to consider that argument.” Time will tell whether the Supreme Court’s formal approach to standing under Section 2 will carry over into substantive Section 1 analysis, e.g., requiring a reevaluation of principal-agent relationships that are not subject to Section 1 strictures under longstanding precedent. Gibson Dunn will be hosting a webcast on the current state of monopoly law and enforcement, including the impact of this decision, on May 23, 2019.  For more details, please click here.  As always, Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Theodore J. Boutrous, Jr. +1 213.229.7804 tboutrous@gibsondunn.com Related Practice: Antitrust and Competition Scott D. Hammond +1 202.887.3684 shammond@gibsondunn.com M. Sean Royall +1 214.698.3256 sroyall@gibsondunn.com Daniel G. Swanson +1 213.229.7430 dswanson@gibsondunn.com

May 14, 2019 |
Cooperation Credit in False Claims Act Cases: Opportunities and Limitations in DOJ’s New Guidance

Click for PDF On May 7, 2019, the U.S. Department of Justice (“DOJ”) released long-awaited guidance on when DOJ will award cooperation credit to targets of False Claims Act (“FCA”) enforcement.  But those familiar with FCA enforcement are unlikely to find any big surprises in the guidance.  Instead, the guidance echoes longstanding DOJ expectations with respect to cooperation and remediation and reaffirms recent DOJ pronouncements regarding how companies may secure credit by identifying individual wrongdoers.  Further, DOJ emphasizes, yet again, that entities seeking maximum cooperation credit should voluntarily self-disclose misconduct.  As to the value of cooperation to defendants, DOJ’s new guidance caps the credit a defendant may receive: under the guidance, the credit may not result in a defendant paying less than single damages.  But DOJ offers little detail on the quantum of cooperation necessary to secure single damages, and the award of cooperation credit remains discretionary.  This discretion creates uncertainty, but may also present FCA defendants with the opportunity to argue for lower settlement payments during settlement negotiations with DOJ.  It remains to be seen which way this discretion cuts in practice. Background DOJ’s guidance results from a long-running effort, started after the issuance of the 2015 Yates Memorandum, to describe in more detail the bases for cooperation credit in a variety of civil and criminal enforcement contexts.  As discussed in a previous Gibson Dunn alert, DOJ announced in June 2018 that it was working to promote more fair and consistent enforcement activities under the FCA, and it pledged to promulgate new and potentially expanded policies on cooperation credit.  In November 2018, Deputy Attorney General Rod Rosenstein likewise signaled a retreat from the “all or nothing” approach to cooperation set forth in the Yates Memorandum, announcing, for example, that partial cooperation credit might be available in civil fraud cases, and that companies need not identify all individuals involved in the misconduct at issue, just those “substantially involved.” Forms of Cooperation The FCA guidance released on Tuesday, which is codified in Section 4-4.112 of DOJ’s Justice Manual, follows those announcements by allowing more flexibility in terms of what defendants can provide to the government in exchange for cooperation credit. Self-Disclosure.  In a press release issued along with the new guidance, Assistant Attorney General Jody Hunt made clear that voluntary self-disclosure—i.e., proactively approaching the government to report potential violations—is still “the most valuable form of cooperation.”  Under the new guidance, such disclosure should be both “proactive” and “timely”—characteristics the guidance leaves open to interpretation.  Disclosure of misconduct going beyond the scope of concerns known to DOJ will further qualify a defendant for credit. Other Forms of Cooperation.  The new DOJ guidance also includes an illustrative, non-exhaustive list of ten forms of cooperation that may earn a defendant “some cooperation credit.”  In addition to voluntary disclosure, defendants may also earn credit for taking other actions that “meaningfully assist[]” DOJ in its FCA investigation.  Such actions include: identifying individuals “substantially involved in or responsible for” misconduct; disclosing facts or evidence relevant to potential misconduct by third parties (or facts or evidence not already known to the government); preserving and disclosing relevant information beyond existing business practices or legal requirements; identifying and making available individuals with relevant information; attributing facts to specific sources and providing updates on any internal investigation; admitting liability or accepting responsibility for the relevant conduct; and assisting in the determination or recovery of losses. The guidance emphasizes that defendants are not required to waive attorney-client privilege or work product protection to be eligible for credit. Not surprisingly, actions that do not qualify for cooperation credit under the guidance include disclosure of information that is required by law or is under “imminent threat” of discovery or investigation, as well as “merely” responding to a subpoena or demand for information.  The guidance does not define terms such as “imminent threat,” potentially opening the door to significant DOJ discretion. The Value of Cooperation Under the new guidance, the “value” of any cooperation also will impact DOJ’s calculus regarding cooperation credit.  To assess value, DOJ will consider four factors relating to the assistance or information provided by a defendant:  (1) timeliness and voluntariness; (2) truthfulness, completeness, and reliability; (3) nature and extent; and (4) significance and usefulness to the government.  In the new guidance, DOJ also emphasizes the importance of remedial measures, such as implementing or improving a compliance program and acknowledging and accepting responsibility. Benefits of Cooperation As noted, one aspect of the new guidance that may be met with disappointment is the general lack of clarification or concrete details regarding the benefits of cooperation. The guidance sets a ceiling for the credit a defendant may receive.  Specifically, cooperation credit may not result in the government receiving less than “full compensation for the losses caused by the defendant’s misconduct,” including damages, interest, the costs of investigation, and any relator’s share.  Further, the guidance lists some non-monetary ways in which DOJ might recognize cooperation, such as notifying another agency of, or publicly acknowledging, the cooperation, or assisting the defendant in qui tam litigation. As members of the FCA defense bar know, double damages are the frequent result when negotiating resolutions of FCA investigations—so the promise of single damages in return for full cooperation has some value.  But the guidance provides no specific information about how much of a benefit defendants might expect for cooperation, nor does it offer a means by which a defendant might quantify, calculate, or estimate the benefit.  This lack of specific information, while contributing to ongoing uncertainty, may also create an opportunity for defendants to advocate for cooperation credit and lower settlement amounts without any fixed set of limitations on what DOJ may agree to provide, aside from the floor of single damages.  Yet, even in the case of single damages, the guidance is silent as to how those single damages must be calculated and whether litigation risk may factor into the calculation.  All of these factors combined create the possibility of robust negotiations over cooperation credit, even under this new framework. DOJ’s silence on the precise benefits of cooperation in the FCA context stands in contrast to cooperation frameworks in other contexts.  For example, under the FCPA Corporate Enforcement Policy (“FCPA Policy”), it is clear that companies that (1) voluntarily disclose, (2) fully cooperate, and (3) timely and appropriately remediate misconduct “will receive a declination” absent aggravating circumstances.  The FCPA Policy defines each of the three elements of cooperation—which are similar in substance to those set out in the new guidance—providing a clearer, albeit not ambiguity-free, roadmap to receiving credit.  Notably, the FCPA Policy also quantifies the value of cooperation, stating, for example, that a defendant that did not initially disclose misconduct but later does can expect to receive “up to a 25% reduction” off the low end of the sentencing guidelines.  DOJ’s guidance in the FCA context is not so explicit. Cooperation Versus “Outsourced” Investigations Although DOJ’s new guidance is unabashed in its solicitation of “meaningful[]” investigative assistance, just how prescriptive DOJ may be without risking exclusion of some evidence it gathers remains an open question. Just over a week ago, Chief Judge McMahon of the U.S. District Court for the Southern District of New York issued an opinion (in a criminal, non-FCA case) stating that she was “deeply troubled” by the government in effect “outsourcing” its investigation to its target, which was seeking to cooperate.  See Mem. Decision and Order Den. Def. Gavin Black’s Mot. for Kastigar Relief, United States v. Connolly, No. 16 Cr. 0370 (CM) (S.D.N.Y. May 2, 2019).  Judge McMahon concluded that the target’s lawyers appeared to have done “everything that the Government could, should, and would have done had the Government been doing its own work,” id. at 24, and that the internal investigation was therefore fairly attributable to the government, id. at 29.  As a result, Judge McMahon held that the individual defendant’s statements to a law firm conducting an investigation on behalf the individual’s corporate employer were effectively compelled statements to the government (under the line of cases beginning with Garrity v. New Jersey, 385 U.S. 493 (1967)).  See Connolly, No. 16 Cr. 0370 (CM), at 21, 28–29. As a criminal case, Connolly involves different considerations (and constitutional protections).  Nevertheless, it suggests that courts may play—and potentially embrace—a role in distinguishing “cooperation” from compulsion in future cases (particularly FCA matters with parallel civil and criminal components). * * * * * Time will tell whether DOJ’s lack of specificity with respect to the benefits of cooperation will limit the impact of the new guidance on cooperation credit in FCA enforcement.  But, at the very least, defendants will have factors to consider—and single damages to hope for—based on DOJ’s latest addition to the Justice Manual. The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, Stuart Delery, John Partridge, Jonathan Phillips, Julie Hamilton and Reid Rector. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success. Our lawyers are available to assist in addressing any questions you may have regarding the above developments. For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the any of the following. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 13, 2019 |
Federal Circuit Update (May 2019)

Click for PDF This edition of Gibson Dunn’s Federal Circuit Update summarizes key filings for certiorari or en banc review, as well as additional new Federal Circuit processes to address scheduling conflicts, for the period February through April 2019.  We also summarize recent Federal Circuit decisions concerning the patent eligibility of method of treatment claims, the impact of an inventor’s subjective views on the on-sale and prior use bars, and the constitutional and statutory standing requirements to appeal IPR decisions. Federal Circuit News Supreme Court: Decisions are pending from the Supreme Court for one patent case and one trademark case from the Federal Circuit.  In March, the Supreme Court also granted certiorari over an additional patent case from the Federal Circuit. Case Status Issue Amicus Briefs Filed Return Mail Inc. v. United States Postal Service, No. 17-1594 Argued on February 20, 2019. Whether the government is a “person” who may petition to institute review proceedings under the Leahy-Smith America Invents Act. 11 Iancu v. Brunetti, No. 18-302 Argued on April 15, 2019. Whether Section 2(a) of the Lanham Act’s prohibition on the federal registration of “immoral” or “scandalous” marks is facially invalid under the free speech clause of the First Amendment. 10 Iancu v. NantKwest Inc., No. 18-801 Petition for certiorari granted on March 4, 2019. Whether the phrase “[a]ll the expenses of the proceedings” in 35 U.S.C. § 145 encompasses the personnel expenses the PTO incurs when its employees, including attorneys, defend the agency in Section 145 litigation. – Noteworthy Petitions for a Writ of Certiorari: Acorda Therapeutics, Inc. v. Roxane Labs., Inc. (No. 18-1280):  Question presented:  “whether objective indicia of nonobviousness may be partially or entirely discounted where the development of the invention was allegedly ‘blocked’ by the existence of a prior patent, and, if so, whether an ‘implicit finding’ that an invention was ‘blocked,’ without a finding of actual blocking, is sufficient to conclude that an infringer has met its burden of proof.”  Acorda is represented by Ted Olson, Thomas Hungar, Amir Tayrani, and Jessica Wagner of Gibson Dunn. Ariosa Diagnostics Inc. v. Illumina Inc. (No. 18-109):  Question presented:  “Do unclaimed disclosures in a published patent application and an earlier application it relies on for priority enter the public domain and thus become prior art as of the earlier application’s filing date, or, as the Federal Circuit held, does the prior art date of the disclosures depend on whether the published application also claims subject matter from the earlier application?” RPX Corp. v. ChanBond LLC (No. 17-1686):  Question presented:  “Can the Federal Circuit refuse to hear an appeal by a petitioner from an adverse final decision in a Patent Office inter partes review on the basis of lack of a patent-inflicted injury in fact when Congress has (i) statutorily created the right to have the Director of the Patent Office cancel patent claims when the petitioner has met its burden to show unpatentability of those claims, (ii) statutorily created the right for parties dissatisfied with a final decision of the Patent Office to appeal to the Federal Circuit, and (iii) statutorily created an estoppel prohibiting the petitioner from again challenging the patent claims?” HP Inc. v. Berkheimer (No. 18-415):  Question presented:  “whether patent eligibility is a question of law for the court based on the scope of the claims or a question of fact for the jury based on the state of the art at the time of the patent.”  On January 7, 2019, the Supreme Court invited the U.S. Solicitor General to file a brief expressing the views of the United States.  Mark Perry of Gibson Dunn continues to serve as co-counsel for HP in this matter. Hikma Pharmaceuticals USA Inc. v. Vanda Pharmaceuticals Inc. (No. 18-817):  Question presented:  “whether patents that claim a method of medically treating a patient automatically satisfy Section 101 of the Patent Act, even if they apply a natural law using only routine and conventional steps.”  On March 18, 2019, the Supreme Court invited the U.S. Solicitor General to express the views of the United States. Other Federal Circuit News On March 22, 2019, the New York Intellectual Property Law Association held the 97th Annual Dinner in Honor of the Federal Judiciary.  The Honorable Kathleen O’Malley of the Federal Circuit was honored with the 17th Annual Outstanding Public Service Award. The annual Federal Circuit Bench and Bar Conference will take place June 12–15, 2019, at the Broadmoor in Colorado Springs, CO. Federal Circuit Practice Update New Process for Notifying Counsel of Accepted Scheduling Conflicts: On December 10, 2019, the Federal Circuit announced revisions to its process for advising it of scheduling conflicts.  Those changes were summarized in our January 2019 newsletter. The Federal Circuit has now issued a follow-up announcement, discussing the new process for notifying counsel of accepted scheduling conflicts: The Federal Circuit will continue to review Responses to Notice to Advise of Scheduling Conflicts to determine whether conflicts are accepted. Only accepted conflict dates will be indicated on the public docket.  Submitted conflict dates that are not accepted will not be listed on the public docket. The non-acceptance of a submitted conflict date does not mean that oral argument necessarily will be scheduled on that date. The Federal Circuit’s notice can be found here. Key Case Summaries (February 2019–April 2019) Natural Alternatives Int’l, Inc. v. Creative Compounds, LLC, No. 18-1295 (Fed. Cir. Mar. 15, 2019): Claims to treatment methods using existing products in new ways are patent eligible. Natural Alternatives’ patents relate to the use of the amino acid beta-alanine as a supplement to increase muscle capacity.  The district court granted judgment on the pleadings that the claims are ineligible as directed to the natural law that ingesting beta-alanine (a natural substance) will increase the carnosine concentration in human tissue and thereby increase muscle capacity. The Federal Circuit (Moore, J., joined by Wallach, J.; Reyna, J., dissenting in part) reversed.  The majority reasoned that the claims not only “embody” the “discovery” that administering certain quantities of beta-alanine alters a human’s natural state, but also require that an infringer actually administer the dosage claimed in the manner claimed to provide the described benefits.  Citing Vanda Pharms. Inc. v. West-Ward Pharms. Int’l Ltd. (Fed. Cir. 2018)—addressed in our January 2019 Update and pending petition for writ of certiorari—the majority reasoned that, because the claims specify a compound and dosages, they go “far beyond merely stating a law of nature, and instead set[] forth a particular method of treatment,” rendering them patent eligible at step one of the Alice inquiry.  The decision thus continues the Federal Circuit’s recent practice of distinguishing claims written as “methods of treatment” (held patent eligible) from those worded in “diagnostic” terms (held ineligible in Mayo).  The majority also ruled that “factual impediments” exist in analyzing step two of the Alice inquiry, such that disputed questions of eligibility “may not be made on a motion for judgment on the pleadings.”  This is challenged in the pending HP Inc. v. Berkheimer certiorari petition prepared by Gibson Dunn (see above). Endo Pharmaceuticals Inc. v. Teva Pharmaceuticals USA, Inc., Nos. 2017-1240, 1455-1887 (Fed. Cir. Mar. 28, 2019):  Claims to treatments relying on natural laws can be patent eligible. Two weeks after Natural Alternatives was decided, another Federal Circuit panel (Wallach, Clevenger, and Stoll, JJ.) continued the Court’s view that “methods of treatment” can avoid ineligibility under Mayo and Alice.  In Endo, the claims relied on the relationship between the body’s rate of clearing the metabolite creatine and the rate for clearing opioids.  The method required measuring a patient’s creatine clearance rate and then administering an opioid based on that rate.  Citing Vanda Pharmaceuticals, the panel reversed the district court’s finding of ineligibility.  As the panel reasoned, method of treatment claims like in Endo and Vanda can be distinguished from Mayo in that, while the claims in Mayo merely required “giving [a] drug to a patent with a certain disorder,” the claims in Endo and Vanda require giving a specific dose of the drug based on specific testing.  According to the panel, such claims are eligible because they are “directed to a specific method of treatment for specific patients using a specific compound at specific doses to achieve a specific outcome” whether or not steps are governed by natural laws. Barry v. Medtronic, Inc., No. 2017-2463 (Fed. Cir. Jan. 24, 2019):  An inventor’s subjective and unclaimed “intended purpose” for an invention can determine public use and on-sale bars. More than a year before filing, Dr. Barry successfully used his claimed surgical method on three patients.  He then saw each patent for follow-up appointments that he deemed necessary to determine if his method worked, with two of the appointments also falling outside the pre-AIA Section 102(b) grace period.  It was only after the third of these appointments, which was within the Section 102(b) grace period, that Dr. Barry felt confident that his invention functioned for its intended purpose.  Accordingly, the district court held that his earlier actions did not constitute invalidating public use or sales (i.e., that the invention was not “ready for patenting” earlier). The Federal Circuit majority (Taranto, J., joined by Moore, J.) affirmed that the invention was not “ready for patenting” before the critical date and that the surgeries fell in the experimental-use exception to “on sale” and “public use” bars.  The majority concluded that Dr. Barry did not reduce his invention to practice until the final postoperative follow-up because that follow up was “reasonably needed” to determine if the invention worked for its “intended purpose.” In dissent, Chief Judge Prost argued that the “ready for patenting” requirement that defines the statutory bars is distinct from “reduction to practice” and meant to answer whether the inventor could have obtained a patent.  According to the dissent, Dr. Barry’s method was ready to patent after the first two surgeries and follow-ups, if not after the first.  Dr. Barry charged his usual fee for the surgeries, and the patients were not told that the surgery was experimental.  The early surgeries worked, and no multiple surgery or follow up requirement or “purpose” was claimed. On April 29, 2019, Medtronic’s petition for panel rehearing and rehearing en banc was denied, leaving stand the panel majority decision that gives strong weight in determining Section 102 bars to the inventor’s subjective view of whether an invention works for its “intended purpose.” Mylan Pharms. Inc. v. Research Corp. Techs., Inc., Nos. 2017-2088, -2089, -2091 (Fed. Cir. Feb. 1, 2019):  Joined parties can appeal adverse IPR decision without initial petitioner. An initial Petitioner timely filed an IPR, but had not been threatened with infringement and thus lacked Article III standing to appeal.  Three days after the Board instituted the initial petition, three other companies filed for joinder under 35 U.S.C. § 315(c).  Each joining company had been sued for infringement more than a year earlier, and thus, absent joinder, their petitions were otherwise time barred.  After an adverse decision from the Board, the initial petitioner did not appeal, leaving only the joined parties to appeal.  The patentee objected that, absent the initial petitioner, the joined parties lacked standing and did not “fall within the zone of interests of 35 U.S.C. § 319”—i.e., absent the initial petitioner, their own petitions were allegedly time barred. The Federal Circuit (Lourie, Bryson, and Wallach, JJ.) disagreed.  As the panel explained, Section 315 allows entities to be joined “as a party” and Section 319 gives a “party” a right to appeal.  Thus, even absent the initial petitioner, the joined parties fell “within the zone of interests of § 319 and are not barred from appellate review.” Momenta Pharma v. Bristol-Myers Squibb Co., No. 2017-1694 (Fed. Cir. Feb. 7, 2019):  IPR petitioner lacked standing for appeal after it suspended plans for a competing product. Momenta petitioned for IPR of a patent covering the immunosuppressant Orencia.  At the time, Momenta was planning a biosimilar, which it had in clinical trials.  But by the time of appeal, Momenta had suspended its development plans after its competing product failed Phase 1 trials.  The Federal Circuit (Newman, Dyk, and Chen, JJ.) held that Momenta thus lacked the present “concrete and particularized” interest required for Article III standing.  The panel rejected the argument that the patent could impact future development, finding a generalized threat of harm fell short of an “impending” injury: “[T]he cessation of potential infringement means that Momenta no longer has the potential for injury, thereby mooting the inquiry.”  Taken with Mylan above, Momenta illustrates that, while statutory standing may be durable, constitutional standing for Article III courts must be preserved up to and through appeal. Upcoming Oral Argument Calendar For a list of upcoming arguments at the Federal Circuit, please click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert: Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com) Raymond A. LaMagna – Los Angeles (+1 213-229-7101, rlamagna@gibsondunn.com) Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups: Appellate and Constitutional Law Group: Allyson N. Ho – Dallas (+1 214-698-3233, aho@gibsondunn.com) Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) Intellectual Property Group: Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com) Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Mark Reiter – Dallas (+1 214-698-3100, mreiter@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 10, 2019 |
Iran Steps Back from Nuclear Deal as Trump Administration Increases Sanctions Pressure

Click for PDF May 8, 2019, was the one-year anniversary of the U.S. decision to withdraw from the 2015 Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (“JCPOA”), and it was eventful.  The day began with Iranian President Hassan Rouhani announcing that Iran would immediately suspend compliance with JCPOA limits on enriched uranium and heavy water, with further suspensions to occur in 60 days unless assurances are made that Iran will receive promised economic benefits in the oil and banking sectors.  Later that day, the Trump administration imposed new sanctions relating to the iron, steel, aluminum, and copper sectors of the Iranian economy.  These new sanctions are the latest in what the White House is calling the “most powerful maximum pressure campaign ever witnessed.”[1] The pressure campaign has indeed ramped up in the past month.  First, on April 8, the U.S. State Department designated the Islamic Revolutionary Guard Corps as a foreign terrorist organization—marking the first time an arm of a foreign government has received such a designation.  Next, on April 22, the Trump administration declined to renew sanctions waivers that allowed certain countries to import Iranian oil.  Then, on May 3, the administration declined to renew two sanctions waivers—one allowing Iran to store excess heavy water produced in the uranium enrichment process, and another allowing Iran to trade away its enriched uranium. The ramifications of these recent events are global in scale.  Iran will likely see its recession deepen, as new U.S. restrictions threaten two pillars of its export economy:  crude oil and industrial metals.  Given that Iran has been increasingly pushed into a corner, it is no surprise that the country has threatened to violate its JCPOA commitments in hopes of relief.  So far, the signatories still in the deal—China, France, Germany, Russia, and the United Kingdom—have not taken concrete action in response, but that may change if Iran follows through with its threats.  In the meantime, Iran’s main customers, which include China and India, will need to find alternative trade partners or else face consequences under U.S. sanctions laws.  These recent developments also complicate bilateral trade talks between the United States and China, which have stalled this week.  Finally, given that the Trump administration has not shied away from using economic sanctions as a political tool, we could see waivers of sanctions liability under Iran sanctions used as a bargaining chip. We discuss below these recent developments, in the order in which they occurred.  To understand the lead-up to these events, please see the many client alerts we have published on the constantly evolving state of Iran sanctions—the most recent being our 2018 Year-End Sanctions Update. Designation of the IRGC as an FTO  On April 8, the Treasury Department designated the Islamic Revolutionary Guard Corps (“IRGC”), an official part of Iran’s government, as a foreign terrorist organization (“FTO”).[2]  The IRGC has already been designated and blocked under various sanctions programs—including those relating to counterterrorism.  What is surprising here is that the FTO label has, until now, been exclusively used on non-state actors such as Al-Qaeda or the Islamic State of Iraq and Syria (“ISIS”). While the new legal ramifications are two-fold, we do not expect these changes to have a significant impact on U.S. and non-U.S. person decisionmaking as to whether to engage the IRGC and its many associated entities in business transactions.  First, due to the FTO designation, IRGC members can be excluded from entering the United States by virtue of their affiliation.[3]  Second, any person who knowingly provides material support or resources to the IRGC can be criminally prosecuted or subject to civil enforcement for doing so under separate FTO authorities.[4]  Prior to this new designation however and subject to both criminal and civil enforcement, no U.S. person or non-U.S. person whose transactions had a nexus to the United States could do business with the IRGC without OFAC authorization.  Moreover, non-U.S. persons were also already potential targets for designation themselves or of secondary sanctions for doing business with the IRGC and its associated entities.  Given these already existing sanctions, it is unclear whether the largely duplicative enforcement powers the administration has gained through the designation outweigh the concern expressed by some that the IRGC’s FTO designation will increase the risk to U.S. servicepersons by, among other things, shutting down communication channels that might be helpful in the United States’ fight against ISIS.[5]  It remains to be seen whether the EU decides to expand the reach of the EU Blocking Statute to counter the FTO designation. Non-Renewal of Iran Oil Waivers As part of its withdrawal from the JCPOA, the Trump administration re-imposed the possibility of secondary sanctions on importers of Iranian oil last November.  To cushion the blow, temporary waivers[6] of those sanctions were granted to eight jurisdictions:  China, India, South Korea, Japan, Italy, Greece, Taiwan, and Turkey.[7]  Our contemporary analyses of the temporary waivers, also known as Significant Reduction Exceptions (“SREs”), can be found here and here.  Those waivers expired on May 2, 2019. Ahead of the expiration date, on April 22, 2019, Secretary of State Michael Pompeo announced that no further SREs would be issued,[8] a surprising move in light of reports that some State officials had promised additional waivers.[9]   In his statement, Pompeo assured the public that global oil markets would continue to be well supplied in the absence of waivers, citing productive discussions with Saudi Arabia, the United Arab Emirates, and other major oil producers.[10] The expiration of the SREs has little effect on Taiwan, Italy, and Greece, which reportedly ceased importing oil from Iran long before Pompeo’s announcement.[11]  The other SRE recipients, on the other hand, continued to purchase Iranian oil in early 2019; in fact, China increased its purchases, cementing its status as Iran’s biggest customer.[12]  China’s foreign ministry representative spoke out against the non-renewal decision, expressing opposition to the Trump administration’s “unilateral sanctions” and urging it to avoid “wrong moves” relating to Iran oil controls.[13]  Turkey’s foreign minister made a similar statement, also characterizing the Iran oil sanctions as “unilateral.”[14] At this early stage, it is unclear what practical effects the expiration of the SREs will have.  For example, can the countries with expired SREs continue to take delivery of already-purchased Iranian oil, or use money already set aside to make additional purchases?  These questions were apparently posed to two senior Department of State officials, but the officials characterized them as “hypothetical” and thus refused to comment.[15]  Another question is whether drawing on Iranian oil from storage will trigger sanctions.  Indeed, China reportedly has 20 million barrels of oil (worth over $1 billion) currently in storage in the northeast port of Dalian.[16] As we have previously outlined, there are still narrow categories of authorized activities, such as those supported by:  (1) General License J-1, allowing non-U.S. persons to fly U.S.-origin civil aircraft into Iran; (2) General License D-1, authorizing U.S. persons to export certain hardware, software, and services incident to personal communications over the Internet; and (3) various humanitarian exceptions allowing the export of agricultural commodities, food, medicine, and medical devices to Iran.  The current SREs support and promote transactions in the third category because, under this regime, payments to Iran for its oil are held in escrow accounts that Iran can only use for the purchase of humanitarian (or otherwise non-sanctioned) goods.[17]  If the expiration of the SREs has the intended effect of depriving Iran of oil revenue, then the country may not have the funds to purchase non-sanctioned goods to the same extent that it has in the past. Non-Renewal of Two Waivers and Shortened Renewals of Five Waivers for Civilian Nuclear Activities On May 3, the State Department announced that five sanctions waivers relating to civilian nuclear projects in Iran would be renewed, but for 90 days rather than the usual 180 days and with an added caveat that any effort starting May 4 to expand the Bushehr nuclear power plant would be subject to sanctions.[18]  Two waivers, however, were not be renewed.  The first waiver allowed Iran to store excess heavy water outside of the country; its expiration will pressure Oman, where Iran’s heavy water is currently stored, to dispose of it.  The second waiver allowed Iran to trade its enriched uranium for natural uranium, which is explicitly authorized by the JCPOA; the end of this waiver will most impact Russia, who has been a key player in these trades. This mixture of renewals and non-renewals reflects the Trump administration’s attempt to apply pressure on Iran without upending the nuclear status quo.  U.S. National Security Adviser John Bolton has reportedly pushed to end the civilian-nuclear-activity waivers completely, while others in the State and Treasury Departments have apparently expressed concern that doing so would threaten non-proliferation efforts.[19]  In any event, the Trump administration’s decision here represents a continued chipping away at Iran’s benefits under the JCPOA. Iran’s Announced Partial Withdrawal from the JCPOA On May 8, while still expressing a commitment to the JCPOA, Iranian President Rouhani announced that Iran would immediately stop complying with the JCPOA’s limits placed on the domestic build-up of enriched uranium and heavy water.[20]  (Indeed, those limits became harder to adhere to once the Trump administration revoked waivers allowing Iran to store or sell off these materials.)  Further, he declared that Iran would suspend compliance with other parts of the JCPOA if its signatories—the United Kingdom, France, Germany, China, and Russia—do not deliver on the economic benefits promised under the JCPOA.  In particular, Rouhani stated he expected the sanctions relief for the oil and banking sectors agreed under the JCPOA to materialize, the two areas hit hardest by U.S. sanctions. For their part, the JCPOA signatories appear to be taking a wait-and-see approach.  In a joint statement, the United Kingdom, France, Germany, and the European Union strongly urged Iran to continue to fully comply with the JCPOA and assured them that legitimate trade with Iran remains a priority, citing the operationalization of “INSTEX”—the special purpose vehicle created in January 2019 to facilitate barter-based trade with Iran.[21]  In the same statement, the European nations also expressed “regret” that the United States had re-imposed sanctions following their withdrawal from the deal, and called for non-signatories to refrain from taking actions that undercut the JCPOA.[22] It would seem that the JCPOA signatories have treated Iran’s May 8 announcement as a statement of intent—as opposed to an immediate violation of the deal—and thus have refrained from retaliatory action.  We will, of course, monitor this situation closely as we approach the 60-day deadline imposed by Rouhani. New Sanctions on Iron, Steel, Aluminum, and Copper On May 8, hours after Iran’s announcement, President Trump signed an executive order authorizing new sanctions relating to the iron, steel, aluminum, and copper sectors of the Iranian economy.[23]  To summarize broadly, blocking sanctions can now be placed on any person who has (1) operated in those sectors; (2) knowingly engaged in a “significant” transaction in those sectors (covered transactions include, among other things, sales, transportation, and marketing); (3) materially supported a person blocked under these sanctions; or (4) been owned or controlled by, or has acted on behalf of, a person blocked under these sanctions.  The new industrial-metals sanctions build upon existing sanctions on “raw and semi-finished metals,” which include aluminum and steel.[24]  Per the May 8 executive order, there will be a wind-down period of 90 days for existing transactions that would violate the industrial-metals sanctions.  Any new business activity in the relevant sectors, however, is immediately sanctionable. Industrial metals account for approximately 10% of Iran’s export economy.  These sanctions will likely help deepen Iran’s economic recession; the country is currently struggling with skyrocketing inflation, rising unemployment, and a currency plummeting in value.  Given that the United States shows no signs of letting up its “maximum pressure campaign,” we are likely to see more sanctions on Iran and, at the same time, more pushback from Iran on its obligations under the JCPOA. [1]    The White House, Statement from President Donald J. Trump Regarding Imposing Sanctions with Respect to the Iron, Steel, Aluminum, and Copper Sectors of Iran (May 8, 2019), available at https://www.whitehouse.gov/briefings-statements/statement-president-donald-j-trump-regarding-imposing-sanctions-respect-iron-steel-aluminum-copper-sectors-iran/. [2]   Bill Chappell, U.S. Labels Iran’s Revolutionary Guard As A Foreign Terrorist Organization, NPR (Apr. 8, 2019), available at https://www.npr.org/2019/04/08/710987393/u-s-labels-irans-revolutionary-guard-as-a-foreign-terrorist-organization. [3]    See U.S. Dep’t of State, Fact Sheet, Terrorism Designation FAQs (Feb. 27, 2019), available at https://www.state.gov/r/pa/prs/ps/2018/02/278882.htm. [4]    See 18 U.S.C. §§  2339A, 2339B. [5]    Karen DeYoung, Defense, intelligence officials caution White House on terrorist designation for Iran’s Revolutionary Guard, The Washington Post (Feb. 8, 2017), available at https://www.washingtonpost.com/world/national-security/defense-intelligence-officials-caution-white-house-on-terrorist-designation-for-irans-revolutionary-guards/2017/02/08/228a6e4a-ee28-11e6-b4ff-ac2cf509efe5_story.html. [6]    For the statutory basis for those waivers, please see Section 1245(d)(4)(D) of the National Defense Authorization Act for Fiscal Year 2012 (NDAA, P.L. 112-81, signed on Dec. 31, 2011) (22 U.S.C. 8513a). [7]    Ian Talley & Courtney McBride, U.S. to Issue Eight Waivers for Oil Countries Under Iran Sanctions, Wall Street Journal (Nov. 2, 2018), available at https://www.wsj.com/articles/u-s-to-issue-eight-waivers-for-oil-countries-under-iran-sanctions-1541172994. [8]    Press Release, U.S. Dep’t of State, Decision on Imports of Iranian Oil (Apr. 22, 2019), available at https://www.state.gov/secretary/remarks/2019/04/291272.htm. [9]    Jessica Donati, U.S. to End Iran Oil Waivers to Drive Tehran’s Exports to Zero, Wall Street Journal (Apr. 22, 2019), available at https://www.wsj.com/articles/u-s-to-end-iran-oil-waivers-to-drive-tehrans-exports-to-zero-11555898664. [10]    Press Release, U.S. Dep’t of State, Decision on Imports of Iranian Oil (Apr. 22, 2019).  Given the likely effect that this recent announcement will have on oil prices, analysts predict that secondary sanctions relating to the import of Venezuelan oil will likely be delayed.  See, e.g., S&P Global Platts, End of Iran waivers likely to postpone Venezuela secondary oil sanctions: analysts (Apr. 22, 2019), available at https://www.spglobal.com/platts/en/market-insights/latest-news/oil/042219-end-of-iran-waivers-likely-to-postpone-venezuela-secondary-oil-sanctions-analysts. [11]    Edward Wong & Clifford Krauss, U.S. to Clamp Down on Iranian Oil Sales, Risking Rise in Gasoline Prices, N.Y. Times (Apr. 21, 2019), available at https://www.nytimes.com/2019/04/21/us/politics/us-iran-oil-sanctions.html. [12]    Id.; Jessica Donati, U.S. to End Iran Oil Waivers to Drive Tehran’s Exports to Zero, Wall Street Journal (Apr. 22, 2019). [13]    Associated Press, China tells US to avoid ‘wrong moves’ over Iran oil controls (Apr. 24, 2019), available at https://www.seattletimes.com/business/china-tells-us-to-avoid-wrong-moves-over-iran-oil-controls/. [14]    Rishi Iyengar, China buys a lot of Iranian oil, and it’s not happy at all with US sanctions, CNN (Apr. 23, 2019), available at https://www.cnn.com/2019/04/22/energy/china-iran-oil-us-sanctions/index.html. [15]    Matthew Lee, U.S. Says No More Sanctions Waivers for Importing Iranian Oil, Real Clear Politics (Apr. 23, 2019), available here. [16]    Chen Aizhu & Florence Tan, Boxed in: $1 billion of Iranian crude sits at China’s Dalian port, Reuters (Apr. 30, 2019), available at https://www.reuters.com/article/us-china-iran-oil-sanctions/boxed-in-1-billion-of-iranian-crude-sits-at-chinas-dalian-port-idUSKCN1S60HS. [17]    Humeyra Pamuk & Timothy Gardner, U.S. renews Iran sanctions, grants oil waivers to China, seven others, Reuters (Nov. 5, 2018), available here. [18]    U.S. Dep’t of State, Fact Sheet, Advancing the Maximum Pressure Campaign by Restricting Iran’s Nuclear Activities (May 3, 2019), available at https://www.state.gov/r/pa/prs/ps/2019/05/291483.htm. [19]    Nicole Gaouette & Jennifer Hansler, US extends nuclear waivers for Iran, but with limits (May 3, 2019), available at https://www.cnn.com/2019/05/03/politics/us-iran-nuclear-waivers/index.html. [20]    BBC News, Iran nuclear deal: Trump raises pressure with sanctions on metals (May 8, 2019), available at https://www.bbc.com/news/world-middle-east-48204646; EU urges Iran to back down from nuclear escalation (May 8, 2019), available at https://euobserver.com/foreign/144864 [21]    European Union, Joint statement by High Representative of the European Union and the Foreign Ministers of France, Germany and the United Kingdom on the JCPoA (May 9, 2019), available at https://eeas.europa.eu/headquarters/headquarters-homepage/62093/joint-statement-high-representative-european-union-and-foreign-ministers-france-germany-and_en. [22]    Id. [23]    Executive Order Imposing Sanctions with Respect to the Iron, Steel, Aluminum, and Copper Sectors of Iran of May 8, 2019, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/iran_eo_metals.pdf. [24]    U.S. Dep’t of Treasury, Frequently Asked Questions Regarding Executive Order (E.O.) Imposing Sanctions with Respect to the Iron, Steel, Aluminum, and Copper Sectors of Iran of May 8, 2019, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx#eo_metals. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam M. Smith, Christopher Timura, Stephanie Connor, Richard Roeder and Audi Syarief. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade practice group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Steve Melrose – London (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 9, 2019 |
UK Nationalisation – Investment Treaties can offer opportunities to reorganise now to protect valuations

Click for PDF The political instabilities caused by Brexit raise the possibility that a General Election may be held in the UK sooner than the scheduled 5 May 2022.  Given current political turbulence, the prospect of Labour winning any such snap election can no longer be dismissed.  If this happens, a future Labour government led by Jeremy Corbyn and John McDonnell is expected to consider nationalising a range of assets, including utilities (such as water, rail and energy), the Royal Mail and possibly even certain private finance initiative (PFI) companies.  Nationalising profitable UK companies on this scale  has not happened since the post-WWII 1945 Labour government. How might nationalisation happen? There is not yet much detail on how any nationalisation programme would be carried out.  Industry-specific regulations and arrangements mean that the process will probably differ depending on the sector.  Some businesses – e.g. rail, certain PFI contracts – are run under  time-limited franchises and a Labour government might simply allow these contracts to run their course before bringing them back under government control.  However, other utilities are run under perpetual licences (e.g. regional water franchises in England and Wales were sold, not leased).  Here, the Government would need to impose a compulsory takeover, possibly issuing Government bonds to shareholders in exchange for their shares in the company owning the asset. Valuations It will not be possible to prevent the expropriation of these assets if it is approved by the UK Parliament.  However, a key question will be how the owners of such nationalised assets will be compensated.  Valuing shares is typically complex (especially with unlisted SPV ownership structures).  Labour has suggested valuations would be made on a case by case basis, with a role for Parliament in the process.  There is a concern, however, that Labour may seek to save money by refusing to pay full market value for the expropriated assets, or that the use of Government bonds as consideration may mean that payment is deferred over extremely long periods (some of the stock issued as consideration for the post-WWII nationalisations was not redeemable for 40 years). Valuations that are seen as unfair will inevitably trigger compensation claims by investors.  There are a number of routes to possible claims, such as under the Human Rights Act 1998 and/or the European Convention on Human Rights.  However, investment treaties may offer some investors a better chance of reclaiming the full value of their expropriated investments.  The standard of compensation under most investment treaties is fair market value.  In order to take advantage of an investment treaty, an investor will need to have in place a corporate structure which includes an entity located in a jurisdiction that is party to an investment treaty with the UK to pursue a treaty claim. What is an investment treaty? An investment treaty is an agreement between states that helps facilitate private foreign direct investment by nationals and companies of one state into the other.  Most investment treaties are bilateral (known as “bilateral investment treaties” or “BITs”), but the UK is also a party to the Energy Charter Treaty, which is a multilateral investment treaty with 51 signatories.  The purpose of an investment treaty is to stimulate foreign investment by reducing political risk.  Amongst other things, it is intended to protect an international investor if an asset it owns in the other state is subsequently nationalised without adequate compensation.  Investment treaties generally provide that the overseas investor will receive fair and equitable treatment and that the compensation for any nationalisation will be appropriate and adequate.  There are currently more than 3,200 BITs in force worldwide. The definition of what constitutes an investment is usually quite broad including, for example, security interests, rights under a contract and rights derived from shares of a company. Importantly, most investment treaties provide investors with a right to commence arbitration proceedings and seek compensation if the state has breached its obligations under the treaty (e.g. for failing to provide adequate compensation for a nationalisation).  This means a UK investment treaty could offer an avenue of protection for an overseas investor of a nationalised UK asset.  A list of countries with a UK BIT is here. How to benefit from a UK investment treaty? Some investors in UK assets that may be the subject of nationalisations are considering restructuring their UK investments to take advantage of investment treaties to which the UK is a party.  In some circumstances, this can be achieved by simply including a holding company in the corporate chain which is located in a jurisdiction that has an investment treaty with the UK.  So long as the restructuring is completed before a dispute regarding nationalisation arises, it will be effective.  Therefore, investors who hold UK assets that potentially may be the subject of nationalisation should consider restructuring now. The UK has investment treaties in force with over 100 jurisdictions but not all of them will be suitable for a restructuring.  Investors will want to analyse not only the substance of the UK investment treaty to which the host country is a signatory (some are more rudimentary than others) but also other risk factors.   In particular, investors will want to check the tax treatment of a particular investment vehicle, including making sure that the new company is not obliged under local rules to withhold tax on any interest or dividends.  Equally, some jurisdictions may be considered unattractive because of geopolitical uncertainties or because their courts and professionals have limited business experience.  The costs and governance associated with any possible restructuring would also need to be carefully considered, especially if the restructuring involves a jurisdiction where the new entity will be required to establish a more substantive business presence.  Given all these risks, there are probably only a very small set of  jurisdictions where investors might consider incorporating an entity within their deal structures. Each investment treaty is different and the possible structure will depend on the exact terms of the relevant treaty.  However, in general terms, the restructuring would usually involve the insertion of a new entity incorporated at the top of the corporate structure that holds the UK assets (but below any fund) via a share-for-share exchange with the existing holding entity. Conclusion If a future Labour government seeks to nationalise private assets it is inevitable that claims will be made, particularly regarding the amount of compensation paid to owners.  Although it is not yet clear how a Labour government would assess compensation levels, investors may wish to consider structuring their investments so that they will have the option of using a UK investment treaty for any valuation disputes. This client alert was prepared by London partners Charlie Geffen, Nicholas Aleksander and Jeffrey Sullivan, of counsel Anne MacPherson and associate Tamas Lorinczy. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please feel free to contact the Gibson Dunn lawyer with whom you usually work or any of the following lawyers: Jeffrey Sullivan – International Arbitration jeffrey.sullivan@gibsondunn.com Tel: 020 7071 4231 Sandy Bhogal – Tax SBhogal@gibsondunn.com Tel: 020 7071 4266 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Tamas Lorinczy – Corporate tlorinczy@gibsondunn.com Tel: 020 7071 4218 © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 9, 2019 |
Chapter 35: USA

New York partner Joel Cohen and Washington, D.C. of counsel Linda Noonan are the authors of “Chapter 35: USA” [PDF] published in The International Comparative Legal Guide to: Anti-Money Laundering 2019, 2nd Edition.

May 6, 2019 |
OFAC Releases Detailed Guidance on Sanctions Compliance Best Practices

Click for PDF On May 2, 2019, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) released extensive new guidance regarding what constitutes an effective sanctions compliance program. The document, titled “A Framework for OFAC Compliance Commitments,” is significant in that it represents the most detailed statement to date of OFAC’s views on the best practices that companies should follow to ensure compliance with U.S. sanctions laws and regulations. As described by OFAC, the document is meant to serve as a roadmap for how to prevent sanctions violations from occurring in the first place and, when violations do occur, to provide greater transparency with respect to how OFAC will assess the adequacy of a company’s existing compliance program in determining what penalty to impose. As we described in our 2018 Year-End Sanctions Update, this guidance reflects OFAC’s increasingly aggressive approach to enforcement.  In December 2018, Treasury Under Secretary Sigal Mandelker announced that OFAC intended to outline the hallmarks of an effective sanctions compliance program and described those elements in broad strokes.  The May 2 guidance expands upon those elements and will serve as a key benchmark for the evaluation of sanctions compliance programs going forward. Notably, the OFAC compliance guidance was published on the heels of another compliance-related pronouncement from the U.S. Department of Justice (“DOJ”), as described here.  Taken together, the DOJ and OFAC guidance supports our oft-given warnings against a siloed approach to compliance for multinational companies.  To date, many organizations that developed anti-corruption compliance programs in line with the extensive criteria set forth by the DOJ and the Securities and Exchange Commission (“SEC”) have not benefitted from the same kind of prescriptive guidance with respect to sanctions risks. Five Components of an Effective Sanctions Compliance Program Consistent with longstanding policy, OFAC in its newly published compliance framework continues to take the view that there is no such thing as a “one-size-fits-all” sanctions compliance program, and that a company should generally take a risk-based approach tailored to that company’s particular profile.  Where OFAC breaks new ground is in publishing a detailed framework that—while recognizing that there will be some variability from one organization to the next in terms of the particulars—sets out what OFAC views as the five essential components of any strong sanctions compliance program.  In order, those components are: Management commitment; Risk assessment; Internal controls; Testing and auditing; and Training. In addition to the similarities to the DOJ compliance focus areas, the five OFAC elements loosely correspond to the elements of compliance as articulated by the Financial Crimes Enforcement Network (“FinCEN”) with respect to financial institutions.  Broadly speaking, the new OFAC framework corresponds with the lifecycle of a compliance program—starting with a deep commitment on the part of senior management to creating a culture of compliance backed by sufficient resources.  OFAC then advises that companies conduct a thorough assessment of, among other things, their customers, supply chain, intermediaries, counterparties, products, services and geographic locations to identify potential sources of sanctions-related risk.  To prevent those risks from materializing, OFAC makes clear that it expects companies to develop appropriate internal controls, including policies and procedures designed to detect and report upward potential sanctions violations.  Such policies and procedures should also be regularly tested and updated to address any weaknesses that may be identified.  At the same time, to ensure the program is properly implemented, relevant employees should receive training on the company’s sanctions compliance policies and procedures at regular intervals of no more than a year. Within each of the five components of an effective sanctions compliance program, OFAC also provides concrete examples of best practices that companies are expected to follow.  For example, when conducting a risk assessment, companies are advised to develop an onboarding process for new customers and accounts that includes a sanctions risk rating based on both know-your-customer information provided by the potential counterparty and independent research conducted by the company. Consistent with OFAC’s existing Economic Sanctions and Enforcement Guidelines, when apparent violations do occur, the nature and extent of a company’s compliance program will continue to be a potential aggravating or mitigating factor for purposes of determining what penalty to impose.  With the publication of the new OFAC compliance framework, companies subject to U.S. jurisdiction now have the benefit of a more granular understanding of what policies and procedures will lead OFAC to conclude that their sanctions compliance program is adequate or deficient. Moreover, in recent settlement agreements OFAC has often required companies to certify on an annual basis that they have implemented and maintained an extensive set of sanctions compliance commitments.  Now that OFAC has clearly staked out what it views as the essential components of an effective sanctions compliance program, we assess that such periodic certifications are likely to become a regular feature of OFAC settlements going forward. Ten Common Pitfalls of Sanctions Compliance Programs In addition to spotlighting what it views as the components of an effective sanctions compliance program, OFAC also identifies in an appendix to its new framework common areas where sanctions compliance programs fall short.  Derived from recent OFAC enforcement actions, this section of the framework is designed to alert U.S. and non-U.S. companies to common pitfalls that could cause a company to incur U.S. sanctions liability. OFAC identifies a total of ten common causes of U.S. sanctions violations, including: Lack of a formal OFAC sanctions compliance program; Misinterpreting, or failing to understand the applicability of, OFAC’s regulations; Facilitating transactions by non-U.S. persons; Exporting or re-exporting U.S.-origin goods, technology or services to OFAC-sanctioned persons or countries; Utilizing the U.S. financial system, or processing payments to or through U.S. financial institutions, for commercial transactions involving OFAC-sanctioned persons or countries; Sanctions screening software or filter faults; Improper due diligence on customers and clients; De-centralized compliance functions and inconsistent application of a sanctions compliance program; Utilizing non-standard payment or commercial practices; and Individual liability. These root causes of sanctions violations are best viewed as traps for the unwary.  While many of the above potential causes of U.S. sanctions violations—each discussed at greater length in the framework—will be familiar to sophisticated parties and their counsel, the document nevertheless serves as a useful refresher of the various ways in which companies commonly run afoul of OFAC regulations and may be especially useful for employee training purposes. Recommendations Now that OFAC has finally provided a detailed statement of what it views as sanctions compliance best practices, companies engaging in activities with a U.S. nexus should take this opportunity to carefully review the strengths and weaknesses of their existing sanctions compliance programs.  In particular, companies should use the OFAC framework as a baseline, carefully assess whether their own compliance program contains all of the basic components that OFAC has indicated that it expects to be present, and update their compliance program accordingly.  By taking these simple steps, compliance-minded companies may reduce their risk of incurring U.S. sanctions liability and may also reduce their potential exposure if, despite their best efforts, a violation somehow occurs. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam M. Smith, M. Kendall Day, Stephanie L. Connor and Scott R. Toussaint. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade and Anti-Money Laundering Practice Groups: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Henry C. Phillips – Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt – Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com) Scott R. Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Steve Melrose – London (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 3, 2019 |
Updated DOJ Criminal Division Guidance on the “Evaluation of Corporate Compliance Programs”

Click for PDF On April 30, 2019, the U.S. Department of Justice (“DOJ”), Criminal Division, released updated guidance to DOJ prosecutors on how to assess corporate compliance programs when conducting an investigation, in making charging decisions, and in negotiating resolutions.  The pronouncement, “Evaluation of Corporate Compliance Programs,” updates earlier guidance that DOJ’s Fraud Section issued in February 2017 (covered in our 2017 Mid-Year FCPA Update).  This guidance emphasizes DOJ’s laser focus on compliance programs, requiring companies under investigation to carefully evaluate, test, and likely upgrade their programs well before the investigation is over. The updated Evaluation document has been restructured around the three “fundamental questions” from the Justice Manual that DOJ prosecutors should assess: Is the corporation’s compliance program well designed? Is the program being applied earnestly and in good faith?  In other words, is the program being implemented effectively? Does the corporation’s compliance program work in practice? Under these three categories, the updated Evaluation groups 12 topics and sample questions that DOJ considers relevant in evaluating a corporate compliance program.  Much like the earlier Evaluation articulation, these topics relate to common elements of effective compliance programs, including policies and procedures, training, reporting mechanisms and investigations, third-party due diligence, tone at the top, compliance independence and resources, incentives and disciplinary measures, and periodic testing and review.  Several of these core standards can be found in other compliance program guidance materials, such as the Resource Guide to the U.S. Foreign Corrupt Practices Act and, very recently, the “Framework for OFAC Compliance Commitments” issued by OFAC on May 2, 2019, pursuant to the Agency’s promise to provide more guidance on its expectations for sanctions compliance programs. The following chart captures how the 12 compliance topics in the updated Evaluation are grouped under DOJ’s three core questions. Core Questions Compliance Topic (Core Focus) Is the Program Well Designed? Risk Assessment  DOJ will assess whether the program is appropriately tailored to the company’s business model and the particularized risks that accompany it, considering factors like the company’s locations, industry sectors, and interactions with government officials. Policies and Procedures DOJ will assess whether the company has established appropriate policies and procedures, the processes for doing so and disseminating them to the workforce, and the guidance and training provided to “key gatekeepers in the control processes.” Training and Communications DOJ will assess the compliance training provided to directors, officers, employees, and third parties, as well as efforts to communicate to the workforce about the company’s response to misconduct, and the availability of resources to provide compliance guidance to employees. Confidential Reporting Structure and Investigation Process DOJ will assess the company’s reporting channels and investigative mechanism. Third-Party Management DOJ will examine whether the company’s third-party due diligence process is risk-based and includes controls and monitoring related to the qualifications and work of its third parties. Mergers and Acquisitions DOJ will examine the company’s M&A pre-acquisition due diligence and post-acquisition integration processes. Is the Program Implemented Effectively? Commitment by Senior and Middle Management DOJ will evaluate the commitment by company leadership to a culture of compliance, including management’s messaging and promotion of compliance and the board’s role in overseeing compliance.  The OFAC Compliance Framework similarly emphasizes the importance of management’s commitment to, and support of, a company’s compliance program. Compliance Autonomy and Resources DOJ will assess whether the compliance function has sufficient seniority, resources, and autonomy commensurate with the company’s size and risk profile.  Notably, DOJ will ask whether the company outsourced all or parts of its compliance function to an external firm or consultant.  If so, DOJ will probe the level of access that the external firm or consultant has to company information. Incentives and Disciplinary Measures DOJ will assess whether the company has clear disciplinary procedures that are enforced consistently, as well as whether and how the company incentivizes ethical behavior. Does the Program Work in Practice? Continuous Improvement, Periodic Testing, and Review DOJ will consider how the company has reviewed and evaluated its compliance program to ensure it is current, including changes made to the program in light of lessons learned.  DOJ also will assess the internal audit function and how the company measures its culture of compliance.  Effective training also is called out specifically in the OFAC Compliance Framework. Investigation of Misconduct DOJ will assess the effectiveness and resources of the company’s investigative function.  Notably, this is the second instance in the updated Evaluation calling for DOJ to assess a company’s investigative function. Analysis and Remediation of Any Underlying Misconduct DOJ will consider whether the company conducts root-cause analyses of misconduct and takes timely and appropriate remedial action against violators.  Under the heading “Accountability,” the updated Evaluation includes a question about whether disciplinary actions for failures in supervision have been considered by the company. KEY TAKEAWAYS The updated Evaluation covers many of the same topics as the prior version, yet the addition of certain questions signals added emphasis or expectations compared to the prior guidance.  Although non-exhaustive, the following list outlines key takeaways from the updated Evaluation that companies should consider in building, maintaining, and enhancing their compliance programs. Starting with a Risk Assessment and Building on “Lessons Learned”:  The updated Evaluation calls for tailoring a company’s compliance program based on its risk assessment, and ensuring that the criteria for the risk assessment are “periodically updated.”  Commentators suggest risk assessments annually or every two years.  DOJ does not prescribe the timing of risk assessments.  Going forward, “‘revisions to corporate compliance programs [should be made] in light of lessons learned.’”  This means that a company’s risk assessment should be an ongoing and iterative process, and that a company should reexamine and revise its compliance program from time to time based on the risk assessment results.  Reexamining and revising the compliance program is necessary to address DOJ’s particular emphasis on making enhancements in response to specific instances of misconduct.  When companies conduct internal investigations, especially where there is a prospect of a government-facing inquiry, they should give serious consideration to taking prompt remedial steps to address the components highlighted by the updated Evaluation document.  This will better position companies to advocate that they have effectively and timely remediated root-cause issues and should receive remediation credit. Importance of Compliance Personnel:  In evaluating whether a company has sufficient staffing for compliance personnel, the updated Evaluation presents a number of related queries, such as where within the company the compliance function is housed (but without dictating a particular reporting structure) and how the compliance function compares with other functions within the company in terms of stature, compensation, rank/title, reporting lines, resources, and access to key decision-makers. Responsibility for Third Parties:  The updated Evaluation indicates an increased focus on a company’s oversight of third parties, which historically have factored into the vast majority of Foreign Corrupt Practices Act enforcement actions.  Among other things, DOJ will consider whether a company has “appropriate business rationale[s]” for the use of third parties and whether it has considered “the compensation and incentive structures” for third parties against the compliance risks posed.  In addition, in assessing a company’s remediation of misconduct involving suppliers, DOJ will consider the company’s process for supplier selection.  Termination of a supplier or business partner upon a company’s finding of misconduct, and steps to ensure that such third parties cannot be re-engaged without appropriate authorization, is a sign of a mature compliance program expected by DOJ. Cascading Tone from the Top:  The updated Evaluation emphasizes “culture of compliance.”  Crucially, messaging at the “top” alone will not equate to an adequate tone of compliance.  Rather, DOJ will focus on how the compliance tone cascades downward in the organization and to counterparties.  DOJ will examine not only the standards set by the board of directors and senior executives, but also the tone and actions of middle management to reinforce those standards.  The focus on the cultural leadership by mid-level management has been a constant theme from DOJ for more than a decade.  In addition, in assessing a company’s remediation, DOJ will consider whether managers were held accountable for misconduct that occurred under their supervision and whether the company considered disciplinary actions for failures in supervision. Like its predecessor, the updated Evaluation guidance is an important resource for companies both for reactively defending their compliance programs in the context of a DOJ investigation and for proactively benchmarking or enhancing their programs.  Clearly, this refined prism will provide the template for DOJ Filip Factor presentations. The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, Richard Grime, Patrick Stokes, Christopher Sullivan, Oleh Vretsona, Abbey Bush, and Alexander Moss. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues.  We have more than 110 attorneys with FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices.  Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com) David Debold (+1 202-955-8551, ddebold@gibsondunn.com) Michael S. Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stephanie Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) M. Kendall Day (+1 202-955-8220, kday@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com) Christopher W.H. Sullivan (+1 202-887-3625, csullivan@gibsondunn.com) Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com) Courtney M. Brown (+1 202-955-8685, cmbrown@gibsondunn.com) Jason H. 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Alfaro (+55 (11) 3521-7160, lalfaro@gibsondunn.com) Fernando Almeida (+55 (11) 3521-7095, falmeida@gibsondunn.com) Singapore Grace Chow (+65 6507.3632, gchow@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 1, 2019 |
Gibson Dunn Named Best Regulatory Law Firm of the Year by GamblingCompliance

GamblingCompliance named Gibson Dunn “Best Regulatory Lawyer/Law Firm of the Year (North America)” at its 2019 GamblingCompliance Global Regulatory Awards.  The award recognized the firm’s “exceptional legal service and guidance to clients within the sector.” The results were announced at its annual dinner on May 1, 2019. Gibson Dunn’s Betting and Gaming Practice is one of the most preeminent betting and gaming legal practices worldwide, representing the most prestigious and influential clients in the industry across Europe, Asia and the Americas. We believe that the Gibson Dunn global betting and gaming practice provides our clients with a unique offering – no other global law firm can offer an award-winning regulatory and compliance capability alongside a market-leading transactional practice in the betting and gaming sector in the United Kingdom, the United States, Europe and the Asia-Pacific Region.

May 1, 2019 |
President Trump Ramps Up Cuba Sanctions Changes — Allows Litigation Against Non-U.S. Companies Conducting Business in Cuba

Click for PDF Frustrated by Cuba’s continued support of the Maduro regime in Venezuela, the Trump administration announced on April 17, 2019 that it will permit U.S. individuals and companies to initiate litigation against foreign individuals and companies that have past or present business in Cuba involving property that the Cuban government confiscated in 1959.  The administration made its announcement in a speech delivered by the president’s national security advisor John R. Bolton, who framed the administration’s decision in characteristically colorful rhetoric:  “The ‘troika of tyranny’—Cuba, Venezuela, and Nicaragua —is beginning to crumble…The United States looks forward to watching each corner of this sordid triangle of terror fall.”[1]  The same day, the Trump administration also announced several other significant changes to U.S. policy toward Cuba, including blocking “U-turn” financial transactions to cut off Cuba’s access to dollar-denominated transactions, limiting nonfamily travel to the island, imposing caps on the value of personal remittances, and enforcing visa restrictions regarding alien traffickers of property confiscated by Cuba. I.   Title III of LIBERTAD to Become Effective on May 2, 2019      On April 17, 2019, President Trump lifted long-standing limitations on American citizens seeking to sue over property confiscated by the Cuban regime after the revolution led by Fidel Castro six decades ago. Title III of the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996,[2] commonly known as the Helms-Burton Act, authorizes current U.S. citizens and companies whose property was confiscated by the Cuban government on or after January 1, 1959 to bring suit for monetary damages against individuals or entities that “traffic” in that property.  The policy rationale for this private right of action was to provide recourse for individuals whose property was seized by the Castro regime.  As part of the statutory scheme, Congress provided that the President may suspend this private right of action for up to six months at a time, renewable indefinitely.  In the past, Presidents of both parties have consistently suspended that statutory provision in full every six months.  That will change tomorrow, May 2, 2019, when the suspension will be effectively lifted. A.   Background The Trump administration has been moving towards this development for some time.  In November 2018, Bolton stated that the suspension of Title III’s private cause of action would be given a “very serious review.”  The administration’s subsequent renewals of the suspension were increasingly limited in scope and duration.  When the suspension expired in early January 2019, it was renewed for 45 days (far short of the usual six months).[3]  In March 2019, the U.S. State Department announced that it intended to allow U.S. citizens and companies to bring suit in U.S. federal court against entities and sub-entities on the Cuba Restricted List,[4] a U.S. State Department compilation of Cuban entities that the U.S. Government considers to be “under the control of, or act for or on behalf of, the Cuban military, intelligence, or security services personnel.”  The remainder of the suspension was extended another 30 days on March 4, 2019, and then another two weeks on April 3, 2019.[5]  Finally, on April 17, 2019, Secretary of State Michael Pompeo announced that the Title III suspension would not extend past today’s expiration date.[6] B.   Analysis What the suspension of Title III means in practice depends upon the interpretation of a number of key terms.  The term “property” under LIBERTAD is all-encompassing:  it applies to any present, future, or contingent interest in real, personal, or mixed property.  Any “person” that “traffics” in such property is liable to the U.S. citizen whose property was confiscated. LIBERTAD defines “person” as a natural person or entity, including an agency or instrumentality of a foreign state.  The term “traffics” is defined as any person who knowingly and intentionally: (1) sells, transfers, distributes, dispenses, brokers, manages, or otherwise disposes of confiscated property, or purchases, leases, receives, possesses, obtains control of, manages, uses, or otherwise acquires or holds an interest in confiscated property, (2) engages in a commercial activity using or otherwise benefiting from confiscated property, or (3) causes, directs, participates in, or profits from, trafficking [] by another person, or otherwise engages in trafficking [] through another person . . . .[7] On its face, the covered activity here is exceptionally broad.  It is broad enough to capture both direct commercial transactions involving confiscated property and also companies doing business with other companies engaged in such transactions.  Indeed, the “trafficking” definition theoretically captures actors only tangentially tied to the confiscated property.  For example, if the seller of confiscated property uses the proceeds from the sale to then purchase goods unrelated to that property, it would appear that the provider of those goods could be considered a “trafficker.” LIBERTAD exempts certain activities from its trafficking definition.  Specifically, trafficking does not include the delivery of international telecommunications services to Cuba, transactions incident to lawful travel to Cuba, or transactions by a person who is a citizen or resident of Cuba and who is not an official of the Cuban Government or the ruling political party in Cuba. However, these exemptions may only apply to a limited number of the many Title III claims that can reasonably be expected to be filed.  The U.S. Foreign Claims Settlement Commission (“FCSC”) has certified more than 6,000 claims relating to property confiscated by the Cuban government.[8]  Taking into account both certified and uncertified claims, one senior official at the State Department recently estimated that the total potential Title III claims could number as high as 200,000.[9] Companies found liable under Title III may face significant financial consequences.  The statutory scheme allows plaintiffs to choose from multiple methods of calculating damages, including by calculating the current value of the confiscated property or its value when confiscated plus interest.[10]  Plaintiffs can also recover interest, court costs, and attorney fees.  In addition, plaintiffs may recover treble damages for claims certified by the FCSC.  Treble damages are also available if plaintiffs provide advance notice of their claims to prospective defendants and such defendants engage in “trafficking” more than 30 days after such notice has been provided. There are a number of obstacles that Title III plaintiffs face regarding both a finding of liability and recovery on a judgment.  On liability, plaintiffs may file suit at any time during the trafficking of their confiscated property and up to two years after the trafficking has ceased to occur.  This two-year statute of limitations puts pressure on plaintiffs to identify and act on their potential claims quickly.  Moreover, obtaining personal jurisdiction, serving process, and conducting discovery are much more difficult when foreign defendants are involved.  Finally, there are aspects of Title III that may be challenged on colorable constitutional grounds, including the vagueness of the definition of “trafficking,” the extraterritorial and retroactive aspects of the remedy, and the potentially arbitrary and punitive nature of the measure of damages.  The prospects for such challenges will vary depending on the particular facts and circumstances of each case. On recovery, plaintiffs may face a situation where the non-U.S. defendant does not have any property in the United States.  Enforcing a Title III judgment in a foreign jurisdiction may be difficult, particularly where the jurisdiction has a blocking or anti-enforcement statute.  For example, in the European Union, Council Regulation (EC) No. 2271/96 (the “EU Blocking Statute”) provides that any “judgment of a court or tribunal . . . [or] of an administrative authority . . . giving effect, directly or indirectly, to the [Helms-Burton Act] or to actions based thereon or resulting there from, shall [not] be recognized or be enforceable in any manner.”  Indeed, this particular regulation also provides for the “clawback” of any damages that were awarded in a Title III action. II.   Other Announced Changes to Cuba Policy Alongside its decision to allow Title III claims to proceed, Bolton and Secretary of State Mike Pompeo made a number of other announcements that will have a significant impact on those engaged in Cuba-related business and travel.  These include Bolton’s announcement that the United States would once again prohibit U.S. banks from processing so-called “U-Turn” financial transactions.  President Obama had issued a general license permitting these transactions—which involve Cuban interests and originate from, and terminate, outside of the United States—as part of a broader set of sanctions relief issued in advance of his historic visit to Cuba in 2016.  These “U-Turn” transactions enabled Cuban entities doing business with non-U.S. firms to access U.S. correspondent and intermediate banks and therefore to participate in U.S. dollar-denominated global trade.  Upon the revocation of this license, U.S. banks will again be prohibited from facilitating Cuba-related transactions in this regard, and Cuban entities and companies engaged in business there will again be effectively cut off from the U.S. financial system. As previously noted, the administration announced that it planned to impose new restrictions on nonfamily travel to Cuba.  The administration has not yet detailed restrictions on this type of travel, which Bolton described as “veiled tourism.”  However, there are up to a dozen categories of travel that could soon be prohibited without a specific license.  Bolton also announced the U.S. government would reimpose a cap on the amount of remittances that can be sent to Cuba at $1,000 per person per quarter. Finally, Pompeo announced that the administration would begin to enforce restrictions on the issuance of U.S. visas to aliens involved in trafficked property.[11]  Specifically, Title IV of LIBERTAD requires the Secretary of State to deny visas to, and the Attorney General to exclude from the United States, any alien who (1) has confiscated, or has directors or overseen the confiscation of, property a claim to which is owned by a U.S. national, (2) traffics in such property, (3) is a corporate officer, principal, or shareholder with a controlling interest in an entity that has been involved in the confiscation or trafficking of such property, or (4) is a spouse, minor child, or agent of any of the above.[12] III.   Counter-Suits in EU and Canadian Courts The Trump administration’s decision to end the litigation limitations under the Helms-Burton Act may cause a large number of cases to be filed in other jurisdictions and the World Trade Organization to counteract the administration’s move.  On the same day that the Trump administration announced its decision to allow Title III of LIBERTAD to go into effect, Federica Mogerhini, the High Representative of the EU for Foreign Affairs and Security Policy European Union, and Cecilia Malmström, the EU Trade Commission Representative, issued a joint statement that “[t]he EU will consider all options at its disposal to protect its legitimate interests, including in relation to WTO rights and through the use of the EU Blocking Statute.”[13]   As previously mentioned, the EU Blocking Statute prohibits the enforcement of U.S. courts’ judgements relating to LIBERTAD within the EU, and allows EU companies sued in the U.S. to recover any damages through legal proceedings against U.S. claimants in EU courts.  The two EU representatives also joined a statement with Canada’s Minister of Foreign Affairs Chrystia Freeland noting that EU and Canadian law are aligned on these points.[14]  In both statements, the EU and Canadian representatives also threatened to sue the United States at the World Trade Organization in response. IV.   Preparing for the Flood Any company that is now trading or has traded with Cuba during the last two years, or which benefits from trade with other parties who trade with Cuba, is now a potential target for Title III claims.  Given the breadth of covered activity under Title III and the theoretical prospect of steep payouts, companies should take an expansive approach in assessing their own liability risk.  To better understand this risk, companies should inventory the types of direct and indirect commercial activities they engage in which involve Cuba, and ascertain the ownership histories of any property at issue to determine if it was confiscated by the Cuban government.  Companies should also scrutinize the origins of their proceeds, to determine if they stem from confiscated property or traffickers of such property.  Self-assessment will also serve to mitigate reputational risk:  a company sued under Title III may risk relationships with banks, customers, and other business partners who do not want to inadvertently “benefit” from proceeds of confiscated property. We recommend that companies seek advice of counsel to assess the degree of exposure under Title III, identify available legal defenses, and develop strategies for minimizing risk.  To the extent such potential claims are identified, counsel can assist in mapping out potential litigation strategies and monitoring the filing of legal actions in jurisdictions where a court is more likely to find personal jurisdiction over a foreign company defendant in a Title III action. [1]   NPR, Bolton Announces New Crackdown on Cuba, Nicaragua, and Venezuela, Apr. 17, 2019, available at https://www.pbs.org/newshour/politics/watch-live-bolton-to-address-trump-administrations-cuba-policy-shift.  Mr. Bolton’s speech marked the 58th anniversary of the Bay of Pigs invasion, the failed 1961 attempt to overthrow Fidel Castro, Cuba’s then communist leader. [2]   Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996, P.L. 104-114, 110 Stat. 785 (1996) (codified at 22 U.S.C. §§ 6021–91) (hereinafter “LIBERTAD”). [3]   U.S. Dep’t of State, Media Note, Secretary’s Determination of 45-Day-Suspension Under Title III of LIBERTAD Act (Jan. 16, 2019), available at https://www.state.gov/r/pa/prs/ps/2019/01/288482.htm. [4]   Most transactions between the United States, or persons subject to U.S. jurisdiction, and Cuba are prohibited.  Under the Obama administration, OFAC relaxed many of its sanctions on Cuba, including certain restrictions on travel and related services.  Soon after assuming office, President Trump reimposed several of the Obama administration’s changes to United States sanctions policy.  Most notably, the Trump administration’s new Cuba policy aimed to keep the Grupo de Administración Empresarial (“GAESA”), a conglomerate run by the Cuban military, from benefiting from the opening in U.S.-Cuba relations.  On November 9, 2017, the U.S. Department of State published the “Cuba Restricted List,” consisting of Cuban entities that the U.S. Government considers to be “under the control of, or act for or on behalf of, the Cuban military, intelligence, or security services personnel.”  The U.S. sanctions on Cuba were also revised to prohibit U.S. persons and entities from engaging in direct financial transactions with entities listed on the Cuba Restricted List.  Since its publication, the State Department has issued periodic updates to the list, including three updates on November 15, 2018, March 9, 2019, and on April 24, 2019.  See 83 FR 57523 (Nov. 15, 2018); 84 FR 8939 (Mar. 9, 2019); 84 FR 17228 (Apr. 24, 2019). [5]   U.S. Dep’t of State, Media Note, Secretary Enacts 30-Day Suspension of Title III (LIBERTAD Act) With an Exception (Mar. 4, 2019), available at https://www.state.gov/r/pa/prs/ps/2019/03/289864.htm;  U.S. Dep’t of State, Media Note, Secretary Pompeo Extends For Two Weeks Title III Suspension with an Exception (LIBERTAD Act) (Apr. 3, 2019), available at https://www.state.gov/r/pa/prs/ps/2019/04/290882.htm. [6]   The White House, Fact Sheets, President Donald J. Trump is Taking a Stand For Democracy and Human Rights in the Western Hemisphere (Apr. 17, 2019), available at https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-taking-stand-democracy-human-rights-western-hemisphere/. [7]   See LIBERTAD, § 4(13). [8]   A database containing decisions rendered by the FCSC on these claims is available at https://www.justice.gov/fcsc/claims-against-cuba. [9]   U.S. Dep’t of State, Special Briefing, Senior State Department Official on Title III of the LIBERTAD Act (Mar. 4, 2019), available at https://www.state.gov/r/pa/prs/ps/2019/03/289871.htm; Reuters, U.S. considering allowing lawsuits over Cuba-confiscated properties (Jan. 16, 2019), available at https://uk.reuters.com/article/uk-usa-cuba/us-considering-allowing-lawsuits-over-cuba-confiscated-properties-idUKKCN1PA308. [10]   See LIBERTAD, § 302(a). [11]   A similar pledge was made in a press document issued by the White House.  See The White House, Fact Sheets, President Donald J. Trump is Taking a Stand For Democracy and Human Rights in the Western Hemisphere (Apr. 17, 2019), available at https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-taking-stand-democracy-human-rights-western-hemisphere/. [12]   See LIBERTAD, § 401(a). [13]   Joint Statement by Federica Mogherini and Cecilia Malmström on the decision of the United States to further activate Title III of the Helms Burton (Libertad) Act (Apr. 17, 2019), available at https://eeas.europa.eu/headquarters/headquarters-homepage/61183/joint-statement-federica-mogherini-and-cecilia-malmstr%C3%B6m-decision-united-states-further_en. [14]   Joint Statement by Federica Mogherini, Chrystia Freeland and Cecilia Malmström on the decision of the United States to further activate Title III of the Helms Burton (Libertad) Act (Apr. 17, 2019), available at https://eeas.europa.eu/headquarters/headquarters-homepage/61181/joint-statement-federica-mogherini-chrystia-freeland-and-cecilia-malmstr%C3%B6m-decision-united_en. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam M. Smith, Thomas G. Hungar, Christopher T. Timura, Stephanie L. Connor, R.L. Pratt and Audi K. Syarief. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade and Appellate and Constitutional Law Practice Groups: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com) Thomas G. Hungar – Washington, D.C. (+1 202-887-3784, thungar@gibsondunn.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair – Washington, D.C. 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Toussaint – Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Steve Melrose – London (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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

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

April 25, 2019 |
Webcast: Getting Ready for the Next Cycle: Prepackaged and Prenegotiated Chapter 11 Reorganization Strategies

Join a panel of seasoned Gibson Dunn partners for a discussion focusing on prepackaged and prenegotiated Chapter 11 reorganization cases. The webinar will discuss the complex issues that debtors and creditors face in negotiating prepacks and prenegotiated restructuring plans. Our panelists will discuss benefits and risks for both debtors and creditors of prepackaged and prenegotiated plans to accomplish a Chapter 11 reorganization. This webinar is the second in a series of upcoming webinars on Getting Ready for the Next Cycle. Our Getting Ready for the Next Cycle webinars will cover, among other topics: (a) prepackaged and pre-negotiated bankruptcies; (b) buying and selling financially distressed companies/assets; (c) DIP financing; (d) rights offerings and other methods for financing an exit from Chapter 11; (e) fiduciary duties for boards of financially distressed companies; and (f) European and Asian financings and workouts. Our next webinar in this series is scheduled for May 9, 2019; registration details will be available later this month. View Slides (PDF) PANELISTS: Michael A. Rosenthal is a partner in the New York office of Gibson, Dunn & Crutcher and Co-Chair of Gibson Dunn’s Business Restructuring and Reorganization Practice Group.  Mr. Rosenthal has extensive experience in reorganizing distressed businesses and related corporate reorganization and debt restructuring matters.  He has represented complex, financially distressed companies, both in out-of-court restructurings and in pre-packaged, pre-negotiated and freefall chapter 11 cases, acquirors of distressed assets and investors in distressed businesses.  During the recent financial and credit crisis, Mr. Rosenthal has been active in representing and providing advice to entities regarding their rights and exposure related to difficulties in the financial services sector, including issues related to loan restructurings, spin-offs, derivative products, securitizations and customer account issues.  In addition to debtors, acquirors and investors, Mr. Rosenthal has represented creditors’ committees, secured and unsecured creditors, bondholders and trustees.  He also has substantial experience in advising private equity firms and others on distressed and fulcrum security investing strategies. Oscar Garza is a partner in Gibson, Dunn & Crutcher’s Orange County and Los Angeles offices, joined the firm in 1990.  He is a member of the Business Restructuring and Reorganization Practice Group (and was a former co-chair of the restructuring group), Transnational Litigation and Latin America Practice Groups. Mr. Garza’s restructuring practice involves representing debtors, creditors’ committees, and secured creditors in chapter 11 cases, advising buyers and sellers of the assets of financially distressed companies, and representing Bankruptcy Trustees in complex cases. Mr. Garza’s transnational litigation practice is currently focused on leading and coordinating the defense against recognition and enforcement of foreign judgments with significant emphasis in defending actions in Latin America.  He is also advising on litigation strategy for multinational corporations involved in litigation within Latin America. MCLE INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

April 30, 2019 |
California Consumer Privacy Act Update — California State Committees Vote on Amendments

Click for PDF In the last two weeks, California legislative committees voted on several amendments to the California Consumer Privacy Act (CCPA), which is due to go into effect January 1, 2020.  While each proposal requires additional approvals, including full Assembly and Senate votes, the committees’ determinations provide an important development in the ongoing roll-out of the CCPA, what it will ultimately require, and how to address compliance. The California Assembly’s Privacy and Consumer Protection Committee approved amendments that included narrowing the scope of personal information, and effectively exempting employee-related information from coverage under the Act.  In addition, the Senate Appropriations Committee unanimously approved S.B. 561 yesterday,[1] which would expand the private right of action against entities that violate the CCPA, and is supported by Attorney General Xavier Becerra.[2]  These amendments, and any other legislative amendments or clarifications, will be further supplemented by the Attorney General Office’s promulgation of regulations, still anticipated to be issued for public comment by Fall 2019. The following is a summary of each of the amendments voted on in the past week, and a chart exhibiting the key changes to the existing language of the CCPA.  As always, we will continue to monitor these important updates. Senate The Senate Judiciary Committee and the Senate Appropriations Committee both voted this month to augment the private right of action for violations of the CCPA with S.B. 561.  Under the current version of the CCPA, consumers only have a private right of action for certain unauthorized disclosures of their data. S.B. 561 would permit a private right of action for any violation of the CCPA, broadly expanding the potential exposure businesses may face.  The bill further removes the 30-day cure period for violations before claims can be brought by the Attorney General.  Finally, the amendment removes the provision permitting businesses and third parties to seek guidance directly from the Attorney General, replacing it with a statement that the Attorney General may publish materials to provide general guidance on compliance. Assembly Several bills in the Assembly also continued to gain traction with a positive vote from the California Assembly’s Privacy and Consumer Protection Committee: A.B. 25 redefines “consumer” to exclude employees, contractors, agents, and job applicants, so long as their personal information is only collected and used by the business in that context; A.B. 873 modifies the definition of “personal information” to narrow its scope—including by removing information relating to a household, and information “capable of being associated with” a consumer—and also redefines “deidentified” data; A.B. 1564 would require businesses to make available to consumers a toll-free telephone number or an email address for submitting requests, and require businesses with websites to make those website addresses available to consumers to submit requests for information; A.B. 846 would modify the way businesses can offer financial incentive plans to consumers in exchange for their data; A.B. 1146 would exempt vehicle and ownership data collected by automotive dealers and shared with the manufacturers of the vehicle sold if the vehicle information is shared pursuant to, or in anticipation of, a vehicle repair relating to a warranty or recall; and A.B. 981 would exempt certain insurance institutions subject to the Insurance Information and Privacy Protection Act (IIPPA) from the CCPA, and would incorporate certain disclosure and other privacy requirements into the IIPPA to be in line with the CCPA. Notably, a proposal to revoke and revamp the CCPA, A.B. 1760—which would have required obtaining opt-in consent from consumers before sharing (not just selling) personal information, and would have generally broadened consumers’ rights under the Act—was taken off hearing, and will not move forward, at least at this time. Potential Impact of the Amendments on Businesses Arguably the most important changes to the CCPA for businesses interacting with California consumers are the proposed amendments set out in S.B. 561; expanding the private right of action to any violations of the Act has the potential to significantly increase the number of suits brought by individuals, including data privacy class actions, and magnify the resulting financial impact of the Act businesses interacting with state residents.  As before, in anticipation of this potential amendment, it is important for businesses to work now to analyze steps necessary to ensure compliance with the various provisions likely to go into effect, including as discussed in our previous client alerts (California Consumer Privacy Act of 2018 (July 2018) and New California Security of Connected Devices Law and CCPA Amendments (October 2018)).  In general, businesses should ensure that they understand the type, nature, and scope of consumer data they have collected, including where it is stored; create the processes to comply with the disclosure and other, technically difficult rights (including a Do Not Sell opt-out link on their website, and a request verification and disclosure process); revise service provider agreements for compliance; and review their privacy policies, both internal and public, to ensure that they are properly disclosing how personal data is collected, used, and potentially shared with third parties. Certain of the proposed Assembly bill amendments, on the other hand, may serve to narrow the impact on businesses, particularly related to the scope of personal information at issue.  The modifications in A.B. 25, clarifying that the CCPA is not intended to cover employees’ data, could minimize the impact on companies that generally do not collect California residents’ personal information other than as a result of being an employer of Californians, and also minimize logistical issues that would otherwise arise if businesses have to allow employees to exercise the rights afforded by the Act.  Rather, it would shift the impact of the CCPA primarily to those businesses that rely on collecting data as a part of their business model. The scope of personal information would be further narrowed if A.B. 873 passes, as it may eliminate some of the broader reaching—and more confusing—applications of CCPA, to household data and data that is “capable of being associated with” a consumer.  The remaining language focuses on information that is linked directly, or indirectly to a particular consumer.  This will also clarify some concern expressed at multiple public forums on the CCPA, regarding how verifications for data requests should work when the individual is requesting household data. A.B. 873 also redefines “deidentified,” and while several of the same guardrails would exist, the new definition would specifically require (1) contractual prohibitions on recipients of data to not reidentify such deidentified personal information, and (2) a public commitment to not reidentify the data, which may require certain internal and third party contract provision revisions, and suggested modifications to the language in consumer-facing privacy policies.  As a result, it may be important for businesses to re-evaluate their contracts with suppliers, distributors, and contractors to ensure compliance for any use of deidentified data. Logistically, A.B. 1564 would offer businesses some relief from providing a toll-free telephone number for requests related to the Act, offering instead an option of an email address or a telephone number, and a website address for consumers to access.  While many businesses may have already included an email address for compliance with related laws, instituting a telephone number for such requests may impose additional logistical issues for businesses under the current text of the law. Finally, for entities offering customer loyalty programs, the new provisions of A.B. 846—replacing the financial incentive provisions—will require particular attention, if passed.  Primarily, businesses will need to ensure the offerings and their value must be “reasonably” related to the value of the data collected, though there may be latitude on what incentives are possible. Comparison of Proposed Language to Original The following chart provides a comparison of what would be key changes to the language of the CCPA as a result of the more broadly applicable amendments currently moving through the California legislature.  The language crossed out in the Original Language column indicates what has been deleted from the current language of the Act, while the bolded language in the Proposed Amendment column shows what language has been added.  That column contains what would be the final text if these amendments are adopted.  We will continue to monitor the progress of these amendments, and will provide updates, accordingly.[3] Concept Original Language Proposed Amendment Introducing Private Right of Action for Any Violation of the Act (S.B. 561) (a) (1) Any consumer whose nonencrypted or nonredacted personal information, . . .  is subject to an unauthorized access . . . may institute a civil action for any of the following . . . (a) (1) Any consumer whose rights under this title are violated, or whose  nonencrypted or nonredacted personal information . . . is subject to an unauthorized access . . . may institute a civil action for any of the following Excluding Employees from the Definition of Consumer (A.B. 25) (g) “Consumer” means a natural person who is a California resident . . . (g) (1) “Consumer” means a natural person who is a California resident . . . (g) (2) “Consumer” does not include a natural person whose personal information has been collected by a business in the course of a person acting as a job applicant to, an employee of, a contractor of, an agent on behalf of the business, to the extent the person’s personal information is collected and used solely  within the context of the person’s role as a job applicant to, an employee of, a contractor of, or an agent on behalf of the business. Redefining Deidentified (A.B. 873) “Deidentified” means information that cannot reasonably identify, relate to, describe, be capable of being associated with, or be linked, directly or indirectly, to a particular consumer, provided that a business that uses deidentified information: (1)  Has implemented technical safeguards that prohibit reidentification of the consumer to whom the information may pertain. (2)  Has implemented business processes that specifically prohibit reidentification of the information. (3)  Has implemented business processes to prevent inadvertent release of deidentified information. (4)  Makes no attempt to reidentify the information. “Deidentified” means information that does not reasonably identify or link, directly or indirectly, to a particular consumer, provided that the business makes no attempt to reidentify the information, and takes reasonable technical and administrative measures designed to: (1)  Ensure that the data is deidentified. (2)  Publicly commit to maintain and use the data in a deidentified form. (3)  Contractually prohibit recipients of the data from trying to reidentify the data. Excluding Household and Information “capable of being associated with” from the Definition of “Personal Information” (A.B. 873) “Personal information” means information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household. Personal information includes, but is not limited to, the following if it identifies, relates to, describes, is capable of being associated with, or could be reasonably linked, directly or indirectly, with a particular consumer or household. “Personal information” means information that identifies, relates to, describes, or could reasonably be linked, directly or indirectly, with a particular consumer. Personal information may include, but is not limited to, the following if it identifies, relates to, describes, or could be reasonably linked, directly or indirectly, with a particular consumer. Prescribing Methods of Contacting Businesses (A.B. 1564) (1) Make available to consumers two or more designated methods for submitting requests for information required to be disclosed pursuant to Sections 1798.110 and 1798.115, including, at a minimum, a toll-free telephone number, and if the business maintains an Internet Web site, a Web site address. (1) (A) Make available to consumers a toll-free telephone number or an email address for submitting requests for information required to be disclosed pursuant to Sections 1798.110 and 1798.115. (B)  If the business maintains an internet website, make the internet website available to consumers to submit requests for information required to be disclosed pursuant to Sections 1798.110 and 1798.115. Clarifying Non-discrimination Provision re Financial Incentives: Removing in Favor of Customer Loyalty Programs (A.B. 846)   (a)  (1)  A business shall not discriminate against a consumer because the consumer exercised any of the consumer’s rights under this title, including, but not limited to, by: … (B)  Charging different prices or rates for goods or services, including through the use of discounts or other benefits or imposing penalties. (C)  Providing a different level or quality of goods or services to the consumer. (2) Nothing in this subdivision prohibits a business from charging a consumer a different price or rate, or from providing a different level or quality of goods or services to the consumer, if that difference is reasonably related to the value provided to the consumer by the consumer’s data. (b) (1) A business may offer financial incentives, including payments to consumers as compensation, for the collection of personal information, the sale of personal information, or the deletion of personal information. A business may also offer a different price, rate, level, or quality of goods or services to the consumer if that price or difference is directly related to the value provided to the consumer by the consumer’s data. (2) A business that offers any financial incentives pursuant to subdivision (a), shall notify consumers of the financial incentives pursuant to Section 1798.135. (3) A business may enter a consumer into a financial incentive program only if the consumer gives the business prior opt-in consent pursuant to Section 1798.135 which clearly describes the material terms of the financial incentive program, and which may be revoked by the consumer at any time. (4) A business shall not use financial incentive practices that are unjust, unreasonable, coercive, or usurious in nature. (a)  (1)  A business shall not discriminate against a consumer because the consumer exercised any of the consumer’s rights under this title, including, but not limited to, by: … (B)  Charging higher prices or rates for goods or services, including through the use of discounts or other benefits or imposing penalties. (C)  Providing a lower level or quality of goods or services to the consumer. (2) Nothing in this subdivision prohibits a business from offering a different price, rate, level, or quality of goods or services to a consumer, including offering its goods or services for no fee, if any of the following are true: (A)  The offering is in connection with a consumer’s voluntary participation in a loyalty, rewards, premium features, discount, or club card program. (B)  That difference is reasonably related to the value provided by the consumer’s data. (C)  The offering is for a specific good or service whose functionality is reasonably related to the collection, use, or sale of the consumer’s data. (b)  As used in this section, “loyalty, rewards, premium features, discount, or club card program” includes an offering to one or more consumers of lower prices or rates for goods or services or a higher level or quality of goods or services, including through the use of discounts or other benefits, or a program through which consumers earn points, rewards, credits, incentives, gift cards, or certificates, coupons, or access to sales or discounts on a priority or exclusive basis.    [1]   Although approved unanimously, S.B. 561 was placed on Suspense File, where the committee sends bills with an annual cost of more than $150,000, to be considered following budget discussions.  The bill will not move forward until the Appropriations Committee releases it for a vote.    [2]   The Senate Judiciary Committee had previously approved the bill 6-2 on April 9, 2019.    [3]   Please note that the following chart does not include language modifications to the IIPPA (A.B. 981) or proposed amendments exempting information shared between automotive dealers and vehicle manufacturers (A.B. 1146), as they are of more limited application than the more general provisions that were included. If you have questions about those particular provisions, please reach out to discuss with us and we would be happy to provide further guidance. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Privacy, Cybersecurity and Consumer Protection practice group, or the authors: H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com) Maya Ziv – Palo Alto (+1 650-849-5336, mziv@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection Group: United States Alexander H. Southwell – Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall – Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Richard H. Cunningham – Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com) H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Shaalu Mehra – Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) Europe Ahmed Baladi – Co-Chair, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com) James A. Cox – London (+44 (0)207071 4250, jacox@gibsondunn.com) Patrick Doris – London (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Jean-Philippe Robé – Paris (+33 (0)1 56 43 13 00, jrobe@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Nicolas Autet – Paris (+33 (0)1 56 43 13 00, nautet@gibsondunn.com) Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com) Sarah Wazen – London (+44 (0)20 7071 4203, swazen@gibsondunn.com) Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com) Asia Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com) Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 29, 2019 |
Investments in MENA-Based Assets: Please proceed to the Exit in an orderly fashion

Click for PDF Following the influx of capital into the MENA region in the last two decades, private equity (PE) firms and institutional investors who acquired businesses during that period, and who generally hold on to such assets for a period of 3-7 years, are now seeking to divest these assets and provide returns to their investors. Whilst more developed regions have a strong track record of successful exits, exits from investments in MENA based assets are traditionally more difficult to realise. This article sets out a number of methods to streamline exit processes and potentially increase returns. TURNKEY TRANSACTION The timeframe for the execution phase of a non-complex PE sale transaction (i.e. the period between entering negotiations on a term sheet and closing the deal) is often significantly longer in MENA than it is in developed markets. Even with the best of intentions, it is not uncommon for simple dispositions in the MENA region to drag on for nine to 12 months and regularly it takes much longer. To help shorten this timeframe, private equity and corporate sellers alike should pre-empt issues and attempt to provide the purchaser with a potential “turnkey transaction”. Pre-sale diligence and clean-up The first step in offering a turnkey solution is ensuring that the target group undergoes an extensive vendor due diligence review prior to taking it to market. From a legal perspective, this review should usually include (as a minimum): (i) ensuring that each member of the target group has the requisite licences to operate in its jurisdiction of operation; (ii) simplifying the corporate structure of the target group to make the disposition smooth and marketable; (iii) renewing commercial contracts with key customers and suppliers; (iv) ascertaining (and minimising) which counterparties of the target group’s commercial and financial arrangements will be required to consent to the transaction; and (v) setting up and maintaining a well organised virtual data room. Identifying and resolving issues prior to entering into a formal sales process ensures time is not wasted trying to solve them contractually later in the process. Preparation of a vendor due diligence report also means bidders do not have to carry out due diligence cold. Undertaking these steps prior to going to market will streamline the process to signing, reduce the number of conditions precedent and specific indemnities requested by potential purchasers (which will leave the seller in a stronger negotiating position) and limit the time from signing to completion. Taken together, this should result in significant cost savings. Additionally, a well organised and structured corporate group, with a limited number of identified issues, will be a more attractive proposition for purchasers and could lead to higher asset valuations. W&I insurance A pre-negotiated warranty and indemnity insurance policy is now commonly offered by private equity sellers in developed markets and is emerging as a tool in the MENA market. Whilst its prominence in the region is growing, it is still somewhat of an unknown option for many market participants. To give this issue context, generally speaking, PE sellers will not give warranties or indemnities except as to title and any SPV seller will immediately distribute the proceeds to investors. As a result, the purchaser will have limited recourse for any claims under the SPA. Comprehensive W&I insurance can help to bridge this gap, giving purchasers the security they need and allowing the seller to determine its internal rate of return on the transaction on completion and to distribute the proceeds to its investors without delay. With a stapled W&I policy in place, negotiations of the SPA warranty package are also often more efficient, although W&I insurance providers will be reluctant to insure a one-sided suite of warranties based on limited due diligence. Stapled financing Another option to facilitate a smooth exit is for the seller to arrange stapled financing. Essentially, stapled financing is a financing package pre-arranged by the seller and its advisors prior to going to market, which is then offered to potential purchasers. This form of financing offers both sellers and purchasers a number of advantages. Although in more developed jurisdictions the debt markets are relatively competitive and acquisition financing is more easily attainable, in MENA obtaining acquisition finance has, historically, often been somewhat challenging. Stapled finance packages offer potential purchasers easier access to debt they may otherwise have found very difficult to raise, especially in a truncated timeframe. Importantly, stapled financing also provides an indication of the expected sale price as it demonstrates the debt multiple the business can sustain. In an auction process (further discussed below), offering stapled financing means there could be an increase in the number of fully funded bidders, which should increase competition and potentially lead to a higher sale price. In a transaction with a split signing and completion, offering stapled financing also provides increased deal certainty to the seller by reducing the risk of the successful purchaser being unable to fund the transaction at completion. For purchasers, stapled financing can help streamline the process of securing acquisition financing.  Even if a successful purchaser decides not to move ahead with the stapled terms as offered, from the outset of the transaction they should have a well negotiated facilities agreement and term sheet which they can build on and potentially use to negotiate better terms. This should save the potential purchaser a considerable amount of time and effort and reduce their legal fees. SECONDARY BUYOUTS In the first half of 2018, secondary buyouts (i.e. a disposition of an asset by a financial sponsor or PE firm to a different financial sponsor or PE firm) accounted for over 40% of all dispositions by PE firms in the US. The proliferation of secondary buyouts has been a growing trend in developed markets since 2010, but it is fair to say that this has not yet extended to the Middle East. Indeed secondary buyouts are relatively rare. There are two primary reasons for this: (1) there are fewer players in the market; and (2) there is possible mistrust between competitors. Potential purchasers fear that the seller will have extracted most of the value from the asset prior to the sale and sellers fear that the purchaser may be able to re-sell the asset within a short timeframe for a significantly higher price. Although there is nothing you can do to increase the number of players in the MENA PE market, there are several methods that sellers can employ to alleviate both their own trust concerns and those of a potential PE purchaser. The first is the inclusion of “anti-embarrassment” provisions in the share purchase agreement. Anti-embarrassment provisions require the purchase price of the secondary buyout to be recalculated and to be subject to an upwards adjustment if the purchaser sells on the asset at a higher price within a certain period (normally 1-2 years) following completion of the original transaction. Although anti-embarrassment provisions are less common than they used to be in more developed markets, as asset prices are generally quite stable, market participants have strong relationships and short hold periods are relatively uncommon, this could be a useful tool in MENA where the market is more volatile. To assuage the concerns of potential purchasers that the value of the asset has been maximised and there is no further ‘upside’ available, sellers could also consider rolling-over a small stake in the business (e.g. 10 to 20%), showing faith in the future of the business and aligning themselves with the buyer. If rolling-over a stake in the asset, it will be necessary, however, to ensure that this is permitted under the relevant fund documentation of the seller and to include appropriate minority protections (i.e. tag rights) under a shareholders’ agreement or similar arrangement. It is also important for a seller who is rolling-over to trust the buyer and understand the only realistic option for selling the rolled-over stake will be to exit on the buyer’s terms. RUNNING AN EFFECTIVE AUCTION PROCESS Studies have shown that where there is competition for a business the best way to maximise a financial investor’s return on any investment can be to run the exit process as an auction, rather than as a bilateral sale process. The benefits of this are clear: more potential purchasers come to market, which leads to increased competition, which should lead to a higher sale price. However, while a failed bilateral sale is a private matter, an unsuccessful auction process may become widely known in the market, which could result in other potential purchasers becoming wary of the asset. To try to prevent this from happening, sellers should ensure they run their auction process efficiently and with appropriate ‘gates’ at different stages of the process (such as letters of intent or non-binding indicative bids). This also allows for a pre-emptive bid to emerge should that be available. During the preparation stage of the auction process, the seller or its investment banking team on the transaction should consider the bidder universe, identify those bidders (both financial and strategic) that might be key players in an auction, and be comfortable that those invited to participate will participate meaningfully in the process. Usually they will circulate a teaser containing a limited amount of financial and other information on the business before bidders formally enter the auction process. If there are insufficient meaningful bidders to create competitive tension, the seller will lose its leverage in the process and the advantage of running an auction process is gone. Throughout the auction sale, in order to ensure the potential purchasers maintain discipline, and provided there is competitive tension it is vital to stick to the timeline and process set out in the process letter and remove those parties from the process who fail to do so. The non-disclosure agreement (NDA) will be the first legal document prospective bidders will see in an auction so it is likely to set the stage for the whole process. To help limit legal costs, the NDA should contain market standard terms that will not need to be heavily negotiated (when sending this document to prospective bidders, it is useful to inform them as such). Before moving on to the initial bidding stage of the process, the seller should instruct its legal advisors to prepare a well advanced, reasonably commercial template share purchase agreement (and shareholders’ agreement if rolling-over a stake in the business). This will help to prevent the legal costs of the transaction from spiralling and portray to potential bidders that the seller is a professional outfit who is looking to run an efficient, fair process and enter into a market standard transaction. Few things frustrate a bidder (and their legal advisers) as much as an unreasonably one-sided first draft SPA. When reviewing initial bids, the seller and the financial advisers should be careful to balance the desire to keep as many potential bidders in the process as possible with the need to ensure only qualified (by reference to the criteria set out in the process letter) and serious bidders move to the next stage of the process, when the potential bidders will receive access to the data room. It is not uncommon for companies to enter auctions primarily in order to gain confidential information on a competitor. Moreover, if the process is competitive, the seller should restrict the number of questions that bidders can submit to the management team (based on their due diligence findings) to ensure only those which are material need to be answered. Often bidders submit an excessive list of questions many of which are unnecessary and answering them can become a drain on management and lead to the incurrence of excessive legal fees. The inclusion of a vendor due diligence report in the data room should also help to limit the number of questions bidders and their advisers feel the need to ask. In the final stage of the auction process, the seller should seek to limit the exclusivity period provided to any final bidder and move to signing as soon as practicable (ideally within 24/48 hours). A shorter timeframe will add pressure on the purchaser to finalise the deal and will also leave open the option of returning to one of other bidders as a ‘white knight’ if the deal with the final bidder falls through. CONCLUSION In a market where successful sales by PE firms and financial institutions are difficult to come by, it would be prudent for sellers to consider implementing some (if not all) of the steps outlined above to streamline the transaction process, increase competition and maximise the consideration received in an exit situation. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update.  Gibson Dunn has been advising leading Middle Eastern institutions, companies, financial sponsors, sovereign wealth funds and merchant families on their global and regional transactions and disputes for more than 35 years.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors in the firm’s Dubai office, with any questions, thoughts or comments arising from this update. Fraser Dawson  (+971 (0)4 318 4619, fdawson@gibsondunn.com) Ciarán Deeny (+971 (0)4 318 4622, cdeeny@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 29, 2019 |
S.D.N.Y. Decision May Have Significant Impact on Bankruptcy Code “Safe Harbor” for Securities Transactions

Click for PDF On April 23, 2019, in In re Tribune Co. Fraudulent Conveyance Litigation, 2019 WL 1771786 (S.D.N.Y. Apr. 23, 2019) (“Tribune”), Judge Denise Cote of the District Court for the Southern District of New York held that the Bankruptcy Code “safe harbor” provision in 11 U.S.C. § 546(e) prevents a plaintiff from clawing back payments that Tribune Company (“Tribune”) made to public shareholders in 2007 as part of a go-private transaction.[1]  Section 546(e) bars a trustee from asserting a claim for constructive fraudulent transfer to avoid (or undo) a “settlement payment” (i.e., a payment for securities) made by or to certain protected entities (“Covered Entities”), including a “financial institution.”[2] The decision is important because it is one of the first, if not the first, to specially address footnote 2 in Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), which opinion was viewed as severely limiting the scope of the safe harbor. I.  Supreme Court Decision in Merit Management On February 27, 2018, the Supreme Court in Merit Management held that the safe harbor does not protect a transfer that merely passed through a Covered Entity, where neither the transferor nor the transferee is itself a Covered Entity.[3]  By way of footnote 2, the Supreme Court expressly avoided addressing whether, because the Bankruptcy Code defines a “financial institution” to include the “customer” of a “financial institution” under certain circumstances,[4] the safe harbor protects a transfer made by or to a party that constitutes a protected “customer” but is not otherwise a Covered Entity.[5]  That was the issue decided in Tribune. II.  Background in Tribune In 2007, Tribune, a public company, consummated a tender offer and then went private through a merger six months later.  In the tender offer, Tribune borrowed funds and transmitted the cash required to repurchase approximately 50% of its outstanding shares to Computershare Trust Company, N.A. (“CTC”), which acted as “Depository.”  CTC, on Tribune’s behalf, then accepted and held tendered shares and paid out $34 per share to tendering shareholders.  In the merger, CTC acted as an “Exchange Agent” and performed essentially the same function. One year after the merger, on December 8, 2008, Tribune and various subsidiaries commenced chapter 11 bankruptcy cases.  A litigation trust was established pursuant to Tribune’s chapter 11 plan, and the trustee (“Trustee”) pursued a claim to recover the tender offer and merger payments from Tribune’s former shareholders, alleging that the payments constituted an actual fraudulent transfer under 11 U.S.C. § 548(a)(1)(A).[6]  The Trustee did not bring a claim for constructive fraudulent transfer because he acknowledged that, based on controlling Second Circuit law at the time, the safe harbor barred the claim because the payments went through CTC.[7]  After the Supreme Court rejected that theory in Merit Management, the Trustee filed a motion for leave to amend his complaint to add a claim for constructive fraudulent transfer. III.  District Court Held That Section 546(e) Protects Tribune’s Shareholder Payments Because They Were Made By a “Financial Institution” (i.e., Tribune) Judge Cote denied the Trustee’s motion for leave to amend on grounds including futility, holding that the safe harbor still bars the Trustee’s proposed claim, notwithstanding Merit Management, because Tribune constituted a “financial institution.”  That conclusion rested on four premises: (1) it was “undisputed” that CTC is a “financial institution” because it is a “bank” and “trust company”; (2) Tribune was CTC’s “customer” based on the “ordinary meaning” of that term because “Tribune engaged the CTC’s services as depositary in exchange for a fee” and “was a ‘purchaser’ of CTC’s ‘services’”; (3) CTC acted as Tribune’s “agent,” based on the “well-settled meaning of th[at] common-law term[],” because “CTC was entrusted with billions of dollars of Tribune cash and was tasked with making payments on Tribune’s behalf to Shareholders upon the tender of their stock certificates to CTC,” which “is a paradigmatic principal-agent relationship”; and (4) “CTC acted ‘in connection with a securities contract,’” which is broadly defined to include any agreement to repurchase securities, as Tribune had done.[8] The Trustee argued that “reading the definition of ‘financial institution’ to cover an entity like Tribune would run counter to the spirit of the Supreme Court’s decision in Merit Management, which rejected the idea that a bank or trust company acting as a ‘mere conduit’ can be sufficient ground to invoke the safe harbor provision.”[9]  Rejecting that argument, Judge Cote noted that “the Supreme Court specifically declined to address the scope of the definition of ‘financial institution,’” and, ultimately, “[t]he text of Section 101(22)(A) compels the conclusion that Tribune itself was a ‘financial institution.’”[10] IV.  Takeaways from Tribune The customer-as-financial-institution argument accepted in Tribune offers a potential defense to a claim for constructive fraudulent transfer, which is most important in situations where neither the transferor nor the transferee is otherwise a Covered Entity.  It remains to be seen whether other courts will follow Tribune,[11] and, if so, whether its holding will be extended beyond large public securities transactions (as in Tribune) to small public or private transactions where a bank facilitates a payment for securities (as in Merit Management).  In any event, Tribune signals a potential step toward regaining some of the safe harbor’s protective ground that appeared lost in Merit Management.    [1]   Gibson, Dunn & Crutcher LLP represents certain shareholders and directors in this litigation.    [2]   11 U.S.C. § 546(e).    [3]   138 S. Ct. 883.  The decision is discussed in greater detail in our previous client alert.  See Garza, Oscar, Rosenthal, Michael & Levin, Douglas, Supreme Court Settles Circuit Split Concerning Bankruptcy Code “Safe Harbor” (Mar. 5, 2018).    [4]   See 11 U.S.C. § 101(22)(A) (“The term ‘financial institution’ means . . . a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity and, when any such Federal reserve bank, receiver, liquidating agent, conservator or entity is acting as agent or custodian for a customer . . . in connection with a securities contract . . . such customer[.]”) (emphasis added).    [5]   See 138 S. Ct. at 890 n.2 (“The parties here do not contend that either the debtor or petitioner in this case qualified as a ‘financial institution’ by virtue of its status as a ‘customer’ under § 101(22)(A). . . .  We therefore do not address what impact, if any, § 101(22)(A) would have in the application of the § 546(e) safe harbor.”).    [6]   The actual fraudulent transfer claim was dismissed on January 6, 2017.  See In re Tribune Fraudulent Conveyance Litig., 2017 WL 82391 (S.D.N.Y. Jan. 6, 2017).    [7]   Tribune, at *2 (“The law in the Second Circuit at that time was that section 546(e) applied to any transaction involving one of the financial entities listed in that section, ‘even as a conduit.’”) (quoting In re Quebecor World (USA) Inc., 719 F.3d 94, 100 (2d Cir. 2013)).    [8]   Id. at *9-11.    [9]   Id. at *12.    [10]   Id.   [11]   Tribune is also subject to appeal. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or any of the following: Oscar Garza – Orange County, CA (+1 949-451-3849, ogarza@gibsondunn.com) Douglas G. Levin – Orange County, CA (+1 949-451-4196, dlevin@gibsondunn.com) Matthew G. Bouslog – Orange County, CA (+1 949-451-4030, mbouslog@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: David M. Feldman – New York (+1 212-351-2366, dfeldman@gibsondunn.com) Robert A. Klyman – Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Jeffrey C. Krause – Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 25, 2019 |
Colorado Passes Sweeping New Law to Alter the State’s Oil and Gas Regulatory Framework

Click for PDF On April 16, 2019, the Governor of Colorado signed Senate Bill 19-181 (“SB-181”) into law, making sweeping changes to Colorado’s framework for oil and gas regulation.[1]  SB-181 marks the latest attempt to manage growing tensions between Colorado’s oil and gas operators, who have seen crude oil production quadruple since 2010,[2] and fast-growing population centers along the Front Range, which includes suburbs of Denver along the I-25 corridor.[3] SB-181 was enacted after last year’s unsuccessful ballot campaign for Proposition 112, which if approved by voters would have significantly curtailed oil and gas development in Colorado.  Proposition 112 was a ballot initiative that would have required new oil and gas development to be subject to a 2,500-foot setback from occupied buildings and “vulnerable” areas, broadly defined to include water bodies and public spaces.[4]  According to an impact assessment of Proposition 112 conducted by the Colorado Oil and Gas Conservation Commission (the “COGCC”), the state’s oil and gas regulatory arm, approximately 85% of the non-federal land in Colorado would have been unavailable for oil and gas production had Proposition 112 passed.[5]  The oil and gas industry raised a record-setting $38 million to help defeat the initiative, nearly doubling the previous fundraising record for a single group in a ballot initiative.[6]  Ultimately, Colorado voters rejected Proposition 112 by a 56.1% vote.[7]  At the same time, however, the 2018 election saw a so-called “blue wave” crash into Colorado, with Democrats taking control of the state Senate, expanding control of the state House, and sweeping every statewide election, including the races for governor, secretary of state, and attorney general.[8] In the shadow of Proposition 112’s defeat by Colorado voters, the state’s newly elected lawmakers and legislative leaders pushed for an overhaul of oil and gas regulation in Colorado, culminating in Governor Jared Polis’s signing of SB-181 last week.[9]  While SB-181 mandates a host of changes to oil and gas regulation in Colorado, three changes in particular may have a significant impact on future oil and gas development, each of which is discussed below.  First, SB-181 grants local governments new power to regulate oil and gas development, including enhanced authority over surface activities.  Second, SB-181 requires the COGCC to prioritize and emphasize the protection of public health, safety, and the environment in its regulations, which could lead to an adjustment of the balanced approach to regulation that the COGCC had been implementing over the past decade. Third, SB-181 alters Colorado’s mandatory pooling rules to make it more difficult to pool nonconsenting mineral interest owners into a drilling unit. Increased Local Control of Oil and Gas Sites Prior to the passage of SB-181, Colorado law explicitly limited the ability of local governments to regulate oil and gas development, and the Colorado Supreme Court had recognized the primacy of state regulation over oil and gas operations.[10] SB-181 grants local governments significant new power to regulate the surface impacts of oil and gas development.  Local governments that elect to regulate oil and gas operations can now control where oil and gas wells are located to minimize adverse impacts to public health, safety, and the environment.[11] The bill requires all operators to first file applications to approve well sites with local governments which opt into the local regulatory scheme and to include such applications with their drilling permit applications to the COGCC (or, if a local government opts out of the local regulatory scheme, to include proof that the local government does not regulate the siting of oil and gas wells).[12]  Both local governments and oil and gas operators may ask the COGCC to appoint a technical review board to assess a local government’s preliminary or final determination (or lack thereof) regarding an operator’s well locations, but, notably, local governments are not required to consider the findings of a technical review board in making their final determinations.[13]  Local governments can also inspect oil and gas facilities; impose fines for leaks, spills, and emissions; impose fees on operators to cover the costs of permitting, regulation, and inspection; and enforce operators’ compliance with local noise ordinances.[14] The authority granted to local governments by SB-181 could therefore significantly affect the balance in Colorado between statewide and local regulatory control of oil and gas operations.  At the other end of the spectrum is Texas, where a local government’s power to regulate oil and gas operations is expressly preempted by statute, except in limited circumstances.[15]  Colorado’s shift toward additional local control of oil and gas development may significantly increase local government oversight of oil and gas operators and may prompt some localities to explore ways to use their new authority to substantially limit, and perhaps effectively ban, drilling operations. Shifts in Regulatory Priority Prior to the passage of SB-181, the COGCC was tasked with ensuring that the efficient development of oil and gas resources in the state was balanced with other regulatory objectives.  Colorado’s Oil and Gas Conservation Act (the “Act”) required the COGCC to “foster the responsible, balanced development, production, and utilization” of oil and gas resources to achieve the “maximum efficient rate of production” and to prevent “waste” of oil and gas.[16]  The Act required that such development occur “in a manner consistent with protection of public health, safety, and welfare, including the protection of the environment and wildlife resources,” but the Act also prioritized the controlled development of oil and gas in Colorado so as to maximize production.[17]  Health and environmental impacts were an important consideration under existing legislation, but they were to be weighed against effective resource management. SB-181 alters the COGCC’s objectives, deemphasizing its role in promoting oil and gas development.  The bill amends the Act to state that the COGCC’s mission is to “regulate,” not “foster,” the efficient development of oil and gas “in a manner that protects public health, safety, and welfare, including the protection of the environment and wildlife resources.”[18]  While the COGCC may still pursue maximally efficient production, that goal is now “subject to” the protection of public health, safety, and the environment.[19]  Further, SB-181 alters the definition of “waste” to specifically exclude the nonproduction of oil and gas if such nonproduction is necessary to protect public health, safety, and the environment.[20] These shifts in regulatory priority could have a dramatic effect on the mission of the COGCC.  By making the development of oil and gas resources subject to the protection of public health, safety, and the environment, SB-181 potentially requires the COGCC to adjust its balanced approach to regulation, through which it currently considers the efficient extraction of oil and gas weighed against other objectives.  After SB-181, the COGCC may perceive its top priority to be the protection of public health, safety, and the environment.[21] Under SB-181, the COGCC must exercise its regulatory authority “in a reasonable manner to protect and minimize adverse impacts” to public health, safety, and the environment.[22]   Furthermore, the changes to the definition of “waste” suggest that the COGCC may consider requiring nonproduction in some circumstances to fulfill its new regulatory focus.[23] Changes in Mandatory Pooling Orders Prior to the adoption of SB-181, Colorado law allowed “any interested person” to file an application with the COGCC to pool oil and gas resources within a particular drilling unit.[24]  Colorado did not require a specific percentage of mineral interest owners to join in a pooling application; rather, any person with a mineral interest could seek a mandatory pooling order, including operators with lease or royalty interests. If the COGCC approved the interested person’s pooling application, mineral interest owners who did not consent to pooling were entitled to a 1/8th royalty from oil or gas production until cost recovery was achieved.[25]  In addition, prior law did not restrict the operator from using the surface land of such nonconsenting owners for oil and gas operations.[26] SB-181 makes it significantly more difficult for operators to obtain a mandatory pooling order and increases the burden on operators if a mandatory pooling order is granted.  Colorado now joins several other oil and gas producing states in requiring a minimum percentage of the mineral interest owners to join a pooling application, requiring the consent of owners of 45% of the relevant mineral interests.[27]  If a mandatory pooling order is granted, nonconsenting owners are entitled to a 13% royalty from gas wells and a 16% royalty from oil wells until cost recovery is achieved.[28] Finally, operators are specifically prohibited from using the surface land of a nonconsenting owner for oil and gas operations.[29]  Given the often bitter debates among mineral interest owners in or near large metropolitan areas in Colorado, under these changes operators could find mandatory pooling orders more difficult to obtain. Implementation Issues and Other Changes Implementation provisions in the initial drafts of SB-181 caused significant alarm in the oil and gas industry. Early drafts of the bill allowed the COGCC to refrain from issuing any new oil and gas permits until the COGCC promulgated and implemented every new or revised rule required by SB-181.[30]  Many in the oil and gas industry argued that this allowed the COGCC to establish a moratorium on drilling lasting for months.[31]  A later version of the bill removed COGCC’s ability to delay all new permits, however.  The final version of the bill signed by Governor Polis allows the COGCC to delay its final determination regarding a permit application only if the COGCC determines pursuant to “objective criteria” that the permit application requires additional analysis to ensure the protection of public health, safety, and the environment.[32]  The COGCC must make these criteria available for public comment within 30 days and, following the public comment period, the criteria will become effective.[33] SB-181 makes several other important changes to oil and gas regulation in Colorado.  The bill requires the COGCC to establish rules to minimize emissions of methane, volatile organic compounds, and nitrogen oxides and to consider adopting more stringent rules regarding emissions controls.[34] Previously, the COGCC had worked with state’s air quality regulator to establish emissions limits for the oil and gas industry.  SB-181 also mandates changes in the composition of the COGCC itself.  Prior to the bill’s passage, the COGCC consisted of nine members, three of whom were required to have substantial experience in the oil and gas industry.[35]  Under the new law, the number of COGCC members who must have significant industry experience is lowered from three to one.[36] In addition, no later than July 1, 2020, the COGCC will be restructured to consist of seven members, none of whom may have “an immediate conflict of interest or who may not be able to make balanced decisions about oil and gas regulation in Colorado.”[37]  Previously, all COGCC members on a part-time basis; now, five of the seven will serve on the Commission full time.[38] Conclusion SB-181 makes large-scale changes to the oil and gas regulatory landscape in Colorado.  The bill shifts the state’s regulatory priorities away from fostering the efficient, balanced development of oil and gas; provides local governments with new and significant regulatory powers; and makes mandatory pooling orders significantly more difficult to obtain.  As a consequence, the industry will be required to focus keenly on local politics in the areas in which they operate.  The debate is not over, however.  Ballot initiatives have already been proposed to repeal some or all of the new legislation, including some sponsored by resource-friendly local governments whose economies depend heavily on the oil and gas industry.  Operators will also be closely monitoring the promulgation of new and revised state-level regulations required by SB-181 in an effort to anticipate and address some of its potentially strict effects.  In the meantime, SB-181 provides oil and gas opponents significant new regulatory tools that could potentially slow oil and gas development in Colorado, especially near its major cities and suburban areas.    [1]   https://www.denverpost.com/2019/04/16/colorado-oil-gas-bill-signed-gov-jared-polis/    [2]   https://www.eia.gov/state/analysis.php?sid=CO#21    [3]   https://www.nytimes.com/2018/05/31/us/colorado-fracking-debates.html    [4]   https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/filings/2017-2018/97Final.pdf    [5]   https://cogcc.state.co.us/documents/library/Technical/Miscellaneous/COGCC_2018_Prop_112_Init_97_GIS_Assessment_20180702.pdf    [6]   https://www.cpr.org/news/story/record-breaking-political-spending-swamps-colorado    [7]   https://elections.denverpost.com/results/county-break-down/?Prop-112/7618    [8]   https://www.5280.com/2018/11/a-blue-wave-crashes-into-colorado-in-the-2018-midterms/    [9]   https://www.denverpost.com/2019/04/16/colorado-oil-gas-bill-signed-gov-jared-polis/ [10]   City of Longmont v. Colo. Oil & Gas Ass’n, 369 P.3d 573, 585 (Colo. 2016) (“The Oil and Gas Conservation Act and the Commission’s pervasive rules and regulations, which evince state control over numerous aspects of fracking, from the chemicals used to the location of waste pits, convince us that the state’s interest in the efficient and responsible development of oil and gas resources includes a strong interest in the uniform regulation of fracking.”). [11]   Senate Bill 19-181 §4. [12]   Senate Bill 19-181 §12. [13]   Senate Bill 19-181 §12. [14]   Senate Bill 19-181 §4. [15]   Tex. Nat. Res. Code Ann. § 81.0523 (“The authority of a municipality or other political subdivision to regulate an oil and gas operation is expressly preempted, except that a municipality may enact, amend, or enforce an ordinance or other measure that: (1) regulates only above-ground activity … (2) is commercially reasonable; (3) does not effectively prohibit an oil and gas operation … and (4) is not otherwise preempted by state or federal law.”). [16]   Colo. Rev. Stat. §34-60-102(1)(a)–(b) [17]   Id. (emphasis added); see also https://www.denverpost.com/2019/04/16/colorado-oil-gas-bill-signed-gov-jared-polis/ [18]   Senate Bill 19-181 §6. [19]   Id.; see also https://leg.colorado.gov/bills/sb19-181 [20]   Senate Bill 19-181 §6. [21]   See  https://coloradosun.com/2019/04/16/senate-bill-181-oil-gas-law-colorado-signed/; see also https://www.law360.com/publicpolicy/articles/1150786/colo-law-expanding-oil-gas-rules-gets-gov-s-signature [22]   Senate Bill 19-181 §18. [23]   Senate Bill 19-181 §6. [24]   Colo. Rev. Stat. §34-60-116(6) [25]   Colo. Rev. Stat. §34-60-116(7)(c) [26]   Senate Bill 19-181 adds this restriction. [27]   Senate Bill 19-181 §14. [28]   Id. [29]   Id. [30]   https://www.natlawreview.com/article/know-primer-colorado-s-senate-bill-181 [31]   Id. [32]   Senate Bill 19-181 §12. [33]   Senate Bill 19-181 §12. [34]   Senate Bill 19-181 §3. [35]   Colo. Rev. Stat. §34-60-104(2)(a)(I) [36]   Senate Bill 19-181 §8. [37]   Senate Bill 19-181 §9. [38]   Id. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Oil and Gas practice group, or the following authors: Beau Stark – Denver (+1 303-298-5922, bstark@gibsondunn.com) Fred Yarger – Denver (+1 303-298-5706, fyarger@gibsondunn.com) Graham Valenta – Houston (+1 346-718-6645, gvalenta@gibsondunn.com) Please also feel free to contact any of the following in the firm’s Oil and Gas group: Michael P. Darden – Houston (+1 346-718-6789, mpdarden@gibsondunn.com) Tull Florey – Houston (+1 346-718-6767, tflorey@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Shalla Prichard – Houston (+1 346-718-6644, sprichard@gibsondunn.com) Doug Rayburn – Dallas (+1 214-698-3442, drayburn@gibsondunn.com) Gerry Spedale – Houston (+1 346-718-6888, gspedale@gibsondunn.com) Justin T. Stolte -Houston (+1 346-718-6800, jstolte@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.