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June 14, 2018 |
Revisions to the FFIEC BSA/AML Manual to Include the New CDD Regulation

On May 11, 2018, the federal bank regulators and the Financial Crimes Enforcement Network (“FinCEN”) published two new chapters of the Federal Financial Institution Examination Council Bank Secrecy Act/Anti-Money Laundering Examination Manual (“BSA/AML Manual”) to reflect changes made by FinCEN to the CDD regulation.[1]  One of the chapters replaces the current chapter “Customer Due Diligence – Overview and Examination Procedures” (“CDD Chapter”), and the other chapter is entirely new and contains an overview of and examination procedures for “Beneficial Ownership for Legal Entity Customers” to reflect the beneficial ownership requirements of the CDD regulation (“Beneficial Ownership Chapter”).[2] The new CDD Chapter builds upon the previous chapter, adds the requirements of the CDD regulation, and otherwise updates the chapter, which had not been revised since 2007.  The Beneficial Ownership Chapter largely repeats what is in the CDD Rule.  Both new chapters reference the regulatory guidance and clarifications from the Frequently Asked Questions issued by FinCEN on April 3, 2018 (the “FAQs”).[3]   Other Refinements to the CDD Regulation May Impact the BSA/AML Manual Implementation of the CDD regulation is a dynamic process and may require further refinement of these chapters as FinCEN issues further guidance.  For instance, in response to concerns of the banking industry, on May 16, 2018, FinCEN issued an administrative ruling imposing a 90-day moratorium on the requirement to recertify CDD information when certificates of deposit (“CDs”) are rolled over or loans renewed (if the CDs or loans were opened before May 11, 2018).  FinCEN will have further discussions with the banking industry and will make a decision whether to make this temporary exception permanent within this 90-day period (before August 9, 2018).[4] In his May 16, 2018, testimony at a House Financial Services Committee hearing on “Implementation of FinCEN’s Customer Due Diligence Rule,” FinCEN Director Kenneth Blanco suggested that FinCEN may be receptive to refinements as compliance experience is gained with the regulation.  Director Blanco also indicated that there will be a period of adjustment for compliance with the regulation and that FinCEN and the regulators will not engage in “gotcha” enforcement, but are seeking “good faith compliance.” Highlights from the New Chapters Periodic Reviews:  The BSA/AML Manual no longer expressly requires periodic CDD reviews, but suggests that regulators may still expect periodic reviews for higher risk customers.  The language in the previous CDD Chapter requiring periodic CDD refresh reviews has been eliminated.[5]Consistent with FAQ 14, the new CDD Chapter states that updating CDD information will be event driven and provides a list of possible event triggers, such as red flags identified through suspicious activity monitoring or receipt of a criminal subpoena.  Nevertheless, the CDD Chapter does not completely eliminate the expectation of periodic reviews for higher risk clients, stating:  “Information provided by higher profile customers and their transactions should be reviewed . . . more frequently throughout the term of the relationship with the bank.”Although this appears to be a relaxation of the expectation to conduct periodic reviews, we expect many banks will not change their current practices.  For a number of years, in addition to event driven reviews, many banks have conducted periodic CDD reviews at risk based intervals because they have understood periodic reviews to be a regulatory expectation. Lower Beneficial Ownership Thresholds:  Somewhat surprisingly, there is no expression in the new chapters that consideration should be given to obtaining beneficial ownership at a lower threshold than 25% for certain high risk business lines or customer types.  The new Beneficial Ownership Chapter simply repeats the regulatory requirement stating that:  “The beneficial ownership rule requires banks to collect beneficial ownership information at the 25 percent ownership threshold regardless of the customer’s risk profile.”  The FAQs (FAQ 6 and 7) refer to the fact that a financial institution may “choose” to apply a lower threshold and “there may be circumstances where a financial institution may determine a lower threshold may be warranted.”  We understand that specifying an expectation that there should be lower beneficial thresholds for certain higher risk customers was an issue that was debated among FinCEN and the bank regulators.For a number of years, many banks have obtained beneficial ownership at lower than 25% thresholds for high risk business lines and customers (e.g., private banking for non-resident aliens).  Banks that have previously applied a lower threshold, however, should carefully evaluate any decision to raise thresholds to the 25% level in the regulation.  If a bank currently applies a lower threshold, raising the threshold may attract regulatory scrutiny about whether the move was justified from a risk standpoint.  Moreover, a risk-based program should address not only regulatory risk, but also money laundering risk.  Therefore, banks should consider reviewing beneficial ownership at lower thresholds for certain customers and business lines and when a legal entity customer has an unusually complex or opaque ownership structure for the type of customer regardless of the business line or risk rating of the customer. New Accounts:  The new chapters do not discuss one of the most controversial and challenging requirements of the CDD rule, the requirement to verify CDD information when a customer previously subject to CDD opens a new account, including when CDs are rolled over or loans renewed.  This most likely may be because application of the requirement to CD rollovers and loan renewals is still under consideration by FinCEN, as discussed above. Enhanced Due Diligence:  The requirement to maintain enhanced due diligence (“EDD”) policies, procedures, and processes for higher risk customers remains with no new suggested categories of customers that should be subject to EDD. Risk Rating:  The new CDD Chapter seems to articulate an expectation to risk rate customers:  “The bank should have an understanding of the money laundering and terrorist financing risk of its customers, referred to in the rule as the customer risk profile.  This concept is also commonly referred to as the customer risk rating.”  The CDD Chapter, therefore, could be read as expressing for banks an expectation that goes beyond FinCEN’s expectation for all covered financial institutions in FAQ 35, which states that a customer profile “may, but need not, include a system of risk ratings or categories of customers.”  It appears that banks that do not currently risk rate customers should consider doing so.  Since the CDD section was first drafted in 2006 and amended in 2007, customer risk rating based on an established method with weighted risk factors has become a best and almost universal practice for banks to facilitate the AML risk assessment, CDD/EDD, and the identification of suspicious activity. Enterprise-Wide CDD:  The new CDD Chapter recognizes the CDD approach of many complex organizations that have CDD requirements and functions that cross financial institution legal entities and the general enterprise-wide approach to BSA/AML long referenced in the BSA/AML Manual.  See BSA/AML Manual, BSA/AML Compliance Program Structures Overview, at p. 155.  The CDD Chapter states that a bank “may choose to implement CDD policies, procedures and processes on an enterprise-wide basis to the extent permitted by law sharing across business lines, legal entities, and with affiliate support units.” Conclusion Despite the CDD regulation, at its core CDD compliance is still risk based and regulatory risk remains a concern.  Every bank must carefully and continually review its CDD program against the regulatory requirements and expectations articulated in the BSA/AML Manual, as well as recent regulatory enforcement actions, the institution’s past examination and independent and compliance testing issues, and best practices of peer institutions.  This review will help anticipate whether there are aspects of its CDD/EDD program that could be subject to criticism in the examination process.  As the U.S. Court of Appeals for the Ninth Circuit recently recognized, detailed manuals issued by agencies with enforcement authority like the BSA/AML Manual “can put regulated banks on notice of expected conduct.”  California Pacific Bank v. Federal Deposit Insurance Corporation, 885 F.3d 560, 572 (9th Cir. 2018).  The BSA/AML Manual is an important and welcome roadmap although not always as up to date, clear or detailed as banks would like it to be. These were the first revisions to the BSA/AML Manual since 2014.  We understand that additional revisions to other chapters are under consideration.    [1]   May 11, 2018 also was the compliance date for the CDD regulations.  The Notice of Final Rulemaking for the CDD regulation, which was published on May 11, 2016, provided a two-year implementation period.  81 Fed. Reg. 29,398 (May 11, 2016).  https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf. For banks, the new regulation is set forth in the BSA regulations at 31 C.F.R. § 1010.230 (beneficial ownership requirements) and 31 C.F.R. § 1020.210(a)(5).    [2]   The new chapters can be found at: https://www.ffiec.gov/press/pdf/Customer%20Due%20Diligence%20-%20Overview%20and%20Exam%20Procedures-FINAL.pdfw  (CDD Chapter) and https://www.ffiec.gov/press/pdf/Beneficial%20Ownership%20Requirements%20for %20Legal%20Entity%20CustomersOverview-FINAL.pdf (Beneficial Ownership Chapter).    [3]   Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, FIN-2018-G001.  https://www.fincen.gov/resources/statutes-regulations/guidance/frequently-asked-questions-regarding-customer-due-0.  On April 23, 2018, Gibson Dunn published a client alert on these FAQs.  FinCEN Issues FAQs on Customer Due Diligence Regulation.  https://www.gibsondunn.com/fincen-issues-faqs-on-customer-due-diligence-regulation/. FinCEN also issued FAQs on the regulation on September 29, 2017. https://www.fincen.gov/sites/default/files/2016-09/FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf.    [4]   Beneficial Ownership Requirements for Legal Entity Customers of Certain Financial Products and Services with Automatic Rollovers or Renewals, FIN-2018-R002.  https://www.fincen.gov/sites/default/files/2018-05/FinCEN%20Ruling%20CD%20and%20Loan%20Rollover%20Relief_FINAL%20508-revised.pdf    [5]   The BSA/AML Manual previously stated at p. 57:  “CDD processes should include periodic risk-based monitoring of the customer relationship to determine if there are substantive changes to the original CDD information. . . .” Gibson Dunn’s lawyers  are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions practice group, or the authors: Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Linda Noonan – Washington, D.C. (+1 202-887-3595, lnoonan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 11, 2018 |
Supreme Court Rejects Tolling Of Statute Of Limitations For Successive Class Actions

Click for PDF China Agritech Inc. v. Resh, No. 17-432 Decided June 11, 2018 Today, the Supreme Court held that the filing of a class action does not toll the statute of limitations for putative class members to file their own class actions. That means that if class certification is denied, putative class members cannot file successive class actions after the statute of limitations has expired. Background: Stockholders filed two timely class actions against China Agritech, Inc. alleging that the company violated the Securities Exchange Act of 1934.  After class certification was denied in both actions, stockholders filed a third class action, well outside the two-year limitations period.  They argued that their claims were timely because the limitations period was tolled while the earlier class actions were pending. Issue: Whether previously absent class members may bring a class action outside the applicable limitations period on the theory that the pendency of a previous class action (in which the court ultimately denied class certification) tolled the statute of limitations during the pendency of earlier class actions. Court’s Holding: No. Previously absent class members may not bring successive (also called “stacked”) class actions outside the limitations period. “The ‘efficiency and economy of litigation’ that support tolling individual claims, . . . do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification.” Justice Ginsburg, writing for the Court Gibson Dunn filed amicus briefs arguing against tolling for successive class actions for the Chamber of Commerce, Retail Litigation Center, and the American Tort Reform Association What It Means: The Court declined to extend the equitable tolling rule established in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), which permits putative class members to wait for a decision on class certification before filing an individual claim or intervening in the original lawsuit.  The Court held that the American Pipe rule does not toll the statute of limitations for putative class members to file class actions, so all class claims must be filed within the limitations period. The ruling ensures that when class certification is denied, a new plaintiff cannot revive otherwise expired claims by filing the case as a class action.  The Court explained that the decision about whether to certify a class should be made at the outset of the case for all would-be class representatives, and class members should not be able to extend the statute of limitations indefinitely by filing successive class actions each time class certification is denied. The Court made clear that its ruling applies regardless of the reason the court denied class certification in the first case. The Court stated that its ruling is not likely to lead to a dramatic increase in the number of protective class actions filed during the limitations period.  The majority of courts of appeals had already adopted the same rule, and those courts did not experience an increase in protective class action filings. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com Related Practice: Class Actions Theodore J. Boutrous, Jr. +1 213.229.7804 tboutrous@gibsondunn.com Christopher Chorba +1 213.229.7396 cchorba@gibsondunn.com Theane Evangelis +1 213.229.7726 tevangelis@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 5, 2018 |
The International Comparative Legal Guide: Anti-Money Laundering 2018

New York partner Joel Cohen and Washington, D.C. partner Stephanie Brooker are contributing editors for the first edition of International Comparative Legal Guide to: Anti-Money Laundering 2018.   Mr. Cohen and Ms. Brooker are also the authors of “Anti-Money Laundering 2018 – Overview of Recent AML Gatekeeper International and U.S. Developments,” [PDF] Stephanie Brooker and Washington, D.C. of counsel Linda Noonan are the authors of “Anti-Money Laundering 2018 – USA.” [PDF] These were published in The ICLG to: Anti-Money Laundering on June 5, 2018.  

June 7, 2018 |
Jane Love Recognized by LMG Americas Women in Business

New York partner Jane Love was recognized as Best in Patent at the seventh annual Euromoney Legal Media Group Women in Business Law Awards. The awards recognize “the individuals, team and firms setting a new standard in progressive work practices and leading the way in their field.” The awards were held on June 7, 2018.  

June 4, 2018 |
Supreme Court Holds That The Colorado Civil Rights Commission Violated Cake Baker’s Religious Freedom Rights

Click for PDF Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission, No. 16-111 Decided June 4, 2018 The Supreme Court held 7-2 that the Colorado Civil Rights Commission violated the Free Exercise Clause when it rejected a baker’s religious justification for refusing to create a wedding cake for a same-sex couple. Background: Jack Phillips, a Christian baker, refused to create a wedding cake for a same-sex couple.  The couple then filed a discrimination complaint with the Colorado Civil Rights Commission.  After investigating, the Commission concluded that Phillips had violated the Colorado Anti-Discrimination Act and rejected his argument that providing the cake would violate his First Amendment rights to free speech and free exercise of religion.  The Commission held formal public hearings about the case, during which some commissioners disparaged Phillips’ religious beliefs and suggested they were insincere. Issue: Whether the Commission’s decision violated the Free Speech Clause or Free Exercise Clause of the First Amendment. Court’s Holding: Yes.  The Commission violated the Free Exercise Clause because it did not give “neutral and respectful consideration” to the sincere religious beliefs that motivated Phillips’ objection. What It Means: The Court resolved the case on narrow grounds, focusing on the Commission’s animus toward Phillips’ religious beliefs and avoiding broader questions regarding the scope of religious exemptions to facially neutral laws of general applicability. The Court articulated principles that should guide the resolution of similar cases in the future, recognizing that “religious and philosophical objections to gay marriage are protected views and in some instances protected forms of expression,” yet cautioning that “such objections do not allow business owners and other actors in the economy and in society to deny protected persons equal access to goods and services.”  The Court emphasized that “gay persons and gay couples cannot be treated as social outcasts or as inferior in dignity and worth.” State agencies, courts, and other tribunals responsible for enforcing anti-discrimination statutes must consider sincere religious beliefs in a tolerant, neutral, and respectful way, consistent with “the religious neutrality that the Constitution requires.” Any future decision in favor of a business owner who refuses goods or services to a same-sex couple based on sincere religious beliefs must be “sufficiently constrained” to avoid imposing a “serious stigma on gay persons.” “[T]hese disputes must be resolved with tolerance, without undue disrespect to sincere religious beliefs, and without subjecting gay persons to indignities when they seek goods and services in an open market.” Justice Kennedy, writing for the majority Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 4, 2018 |
Gibson Dunn Adds Appellate Partner Allyson Ho to Dallas Office

Gibson, Dunn & Crutcher LLP is pleased to announce that Allyson N. Ho has joined the firm in Dallas as a partner.  Formerly a partner with Morgan, Lewis & Bockius, she will continue her appellate practice at Gibson Dunn. “We are delighted to have Allyson as our partner,” said Ken Doran, Chairman and Managing Partner of Gibson Dunn.  “We have one of the top appellate practices in the country.  Allyson is a nationally renowned appellate advocate.  She will add depth and versatility to our exceptional appellate bench, both in Texas and nationwide.  Moreover, she is a wonderful person and will be a fabulous culture fit.” “Allyson is a splendid addition to our Dallas office,” said Rob Walters, Partner in Charge of the Dallas office.  “We have known Allyson for years, and we can attest to her superb advocacy and professionalism.  With her successful track record before the U.S. Supreme Court and other tribunals, we know she’ll quickly step in to handle the high-stakes appellate cases that our clients entrust to us.  Allyson is the perfect lawyer to lead this essential practice.” “Gibson Dunn has long been the home of the most distinguished appellate practice in the nation,” said Ho.  “I am thrilled to join the firm and to continue my appellate practice with the finest lawyers in Texas and across the country.” About Allyson Ho Ho has presented over 50 oral arguments in federal and state appellate courts nationwide – including more arguments and wins in business cases before the U.S. Supreme Court than any Texas lawyer.  She has also appeared and prevailed in every federal court of appeals in the country, as well as in various state appellate courts nationwide.  In addition, Ho advises clients in high-stakes matters before government officials and agencies, including the U.S. Senate, the Texas Attorney General’s Office and other Texas state agencies. She joins the firm from Morgan Lewis where she served as co-chair of its appellate practice group.  During her career, she served as Special Assistant to President George W. Bush from 2005 to 2006, and as Counselor to the Attorney General in the U.S. Department of Justice from 2004 to 2005.  She is among the top ranked appellate lawyers in Texas in Chambers USA from 2015 to 2018. Ho received her law degree in 2000 from Chicago Law School, with high honors and as member of the Law Review and Order of the Coif.  She served as a clerk for U.S. Supreme Court Justice Sandra Day O’Connor and Judge Jacques L. Wiener, Jr. of the U.S. Court of Appeals for the Fifth Circuit.

June 1, 2018 |
Supreme Court Round-Up (June 1, 2018)

As the Supreme Court continues its 2017 Term, Gibson Dunn’s Supreme Court Round-Up is summarizing the issues presented in the cases on the Court’s docket and the opinions in the cases the Court has already decided.  The Court has finished hearing arguments this Term, and we are awaiting decisions in 29 cases.  Gibson Dunn presented 3 oral arguments this Term, in addition to being involved in 11 cases as counsel for amici curiae.  Additionally, to date, the Court has granted certiorari in 18 cases for the 2018 Term, and Gibson Dunn is counsel for the petitioner in one of those cases. Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions.  The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions.  The Round-Up provides a concise, substantive analysis of the Court’s actions.  Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next.  The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions. To view the Round-Up, click here. Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 21 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the class action, intellectual property, separation of powers, and First Amendment fields. Moreover, while the grant rate for certiorari petitions is below 1%, Gibson Dunn’s certiorari petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 23 certiorari petitions since 2006. *   *   *  * Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group. Theodore B. Olson (+1 202.955.8500, tolson@gibsondunn.com) Amir C. Tayrani (+1 202.887.3692, atayrani@gibsondunn.com) Brandon L. Boxler (+1 202.955.8575, bboxler@gibsondunn.com) Rajiv Mohan (+1 202.955.8507, rmohan@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 31, 2018 |
California Supreme Court Spring 2018 Round-Up

Click for PDF Spearheaded by Daniel M. Kolkey, a former Associate Justice on the California Court of Appeal, Third Appellate District, and former Counsel to the Governor of California, Gibson Dunn’s California Appellate Practice Group has prepared the attached California Supreme Court Spring 2018 Round-Up, which previews upcoming cases and summarizes select opinions issued by the Court.  This edition includes opinions handed down from September 2017 through April 2018, organized by subject.  Each entry contains a description of the case, as well as a substantive analysis of the Court’s decision.  The Round-Up provides a resource for busy practitioners seeking an in-depth, timely, and objective report on the California Supreme Court’s actions. To view the Round-Up, click here. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court, or in state or federal appellate courts in California.  Please feel free to contact the following lawyers in California, or any member of the Appellate and Constitutional Law Practice Group. Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Daniel M. Kolkey – San Francisco (+1 415-393-8420, dkolkey@gibsondunn.com) Julian W. Poon – Los Angeles (+1 213-229-7758, jpoon@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kirsten Galler – Los Angeles (+1 213-229-7681, kgaller@gibsondunn.com) Jennafer M. Tryck – Orange County (+1 949-451-4089, jtryck@gibsondunn.com) Michael Holecek – Los Angeles (+1 213-229-7018, mholecek@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 31, 2018 |
President Trump Issues Additional Sanctions Further Targeting PdVSA and the Government of Venezuela

Click for PDF On May 21, 2018, in response to the reelection of Venezuelan President Nicolás Maduro, President Donald J. Trump imposed additional sanctions against the Government of Venezuela.[1]  The new sanctions prohibit U.S. persons from engaging in certain dealings in debt owed to the Government of Venezuela and equity of Venezuelan state-owned entities.  In this regard, these sanctions build upon prior Venezuela-related sanctions to further restrict financing available to the current Venezuelan government. In a statement released with the executive order, President Trump noted that the sanctions are designed to prevent the Maduro regime from selling off valuable state-owned assets in “fire sales,” which deprive the Venezuelan people of “assets the country will need to rebuild its economy.”[2]  In many senses this executive order represents a protective measure.  Furthermore, selling and collateralizing debt owed to and equity held by the Venezuelan government sidesteps other U.S. sanctions to provide alternative means of financing state-owned enterprises, such as Petroleos de Venezuela, S.A. (“PdVSA”), which fund support for the Maduro regime.[3]  The new sanctions are meant to close off this potential funding stream without incurring the collateral costs associated with adding PdVSA to the Specially Designated Nationals (“SDN”) list. Notably, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”)—which is also immersed in the tasks of issuing guidance related to new Russia and Iranian sanctions—has not provided any general licenses, interpretive guidance, or additional statements regarding this executive order or the sanctions it imposes. OVERVIEW OF NEW SANCTIONS The executive order specifically prohibits the following transactions in debt owed to and equity held by the Government of Venezuela.  As in earlier executive orders, the “Government of Venezuela” includes not only its political subdivisions, agencies, and instrumentalities but also the Central Bank of Venezuela, PdVSA, and any entity that is at least 50 percent owned or controlled by these targeted entities (including, for example, PdVSA subsidiaries and majority-owned joint ventures).[4] (1) Transactions involving the purchase of any debt owed to the Government of Venezuela, including accounts receivable.[5] The executive order prohibits U.S. persons from engaging in transactions involving the purchase of debts owed to the Government of Venezuela.  For example, pursuant to this prohibition, a U.S. person may not purchase from PdVSA a debt it is owed by a non-sanctioned customer.  Importantly, this provision prohibits not only U.S. persons from buying debts owed to the Venezuelan government but also broadly prohibits U.S. persons from engaging in any transactions related to the purchase of such debts.  For example, a U.S. bank may not provide financing for one entity to purchase the debt that another entity owes the Government of Venezuela. As in other Venezuela-related sanctions, debt subject to this prohibition includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper.[6]  Although accounts receivable are expressly included as debt in this provision, their inclusion here does not represent an expansion of OFAC’s interpretation of debt.  Rather, OFAC has generally considered trade debt, including accounts receivable, to be debt subject to prior Venezuela-related sanctions and other similar sanctions.[7]  The explicit inclusion of accounts receivable in these provisions highlights the type of transaction that the sanctions are primarily aimed at stopping and for which compliance professionals should screen. (2) Transactions involving any debt owed to the Government of Venezuela that is pledged as collateral after the effective date of this order, including accounts receivable.[8] The executive order also prohibits U.S. persons from dealing in debt owed to the Government of Venezuela that is pledged as collateral after May 21, 2018.  OFAC has not provided any interpretative guidance regarding what constitutes “collateral” for the purposes of this provision, but it likely refers to debt, as defined above, which is offered as security for a loan made to the Government of Venezuela.  This provision only covers debt pledged as collateral after May 21, 2018.  It does not prohibit U.S. persons from dealing in the transfer of debt owed to the Government of Venezuela that was pledged as collateral on or before May 21, 2018.  However, OFAC has also not provided additional information regarding when it will consider a debt to be “pledged” for the purposes of determining when such debt is covered by this provision.  It is likely that debt is pledged upon the execution of the agreement offering the debt as collateral. This provision directly curtails the ability of the Venezuelan Government to use accounts receivable financing to support its continued operation.  For example, a U.S. person would likely be prohibited from participating in transactions between a PdVSA customer and a PdVSA creditor where the customer paid its outstanding debt to the creditor, in lieu of payment by PdVSA. While similar in some respects to prior sanctions targeting debt transactions, these new prohibitions include several notable differences.  First, the provisions restrict transactions involving debt owed to the Government of Venezuela, rather than debt owed by the Government of Venezuela to its creditors.[9]  Second, there is no exception for dealings in short-term debt.  Where prior Venezuela sanctions permitted transactions in debt with payment terms less than 30 or 90 days (depending upon the debtor), debts with payment terms of any length are covered by this executive order.[10]  Finally, these prohibitions are not limited to “new debt” issued after a specified date.[11]  Instead, all debts owing to the Government of Venezuela, regardless of when they were issued, are covered.  The novelty of these features poses additional compliance challenges for U.S. businesses and financial institutions. (3) Transactions involving the sale, transfer, assignment, or pledging as collateral by the Government of Venezuela of any equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest.[12] Pursuant to this provision, U.S. persons are broadly prohibited from engaging in transactions in which the Government of Venezuela is selling, transferring, assigning, or collateralizing equity interests in Venezuelan state-owned entities.  As in prior sanctions, “equity” includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.[13]  In that regard, this prohibition prevents the Maduro government from selling shares in state-owned entities to finance their continued operation. Unlike certain prior provisions restricting equity transactions involving the Venezuelan government, this provision is not limited based on the date the relevant equity was issued.[14]  Instead, all equity interests in any entity majority-owned by the Venezuelan government are subject to this prohibition, regardless of when the equity was issued.  Relatedly, where other prior sanctions prohibited U.S. persons from participating in the purchase of equity from the Venezuelan government, this provision now prohibits U.S. persons from participating in a broader range of transactions involving such equity.[15] Importantly, this prohibition covers transactions involving Venezuelan government sale, transfer, assignment, or collateralization of equity interests in CITGO.  When sanctions on Venezuelan government debt or equity were imposed in August 2017, OFAC issued a general license effectively carving out CITGO, PdVSA’s U.S. subsidiary, from those restrictions.[16]  OFAC has offered no such authorization here.  Consequently, in the absence of a license from OFAC, U.S. persons are prohibited from dealing in CITGO shares offered for sale, transfer, assignment, or collateral by the Government of Venezuela, including PdVSA. EUROPEAN UNION RESPONSE On May 29, 2018, the EU Foreign Ministers noted that the EU will “act swiftly, according to established procedures, with the aim of imposing additional targeted and reversible restrictive measures, that do not harm the Venezuelan population, whose plight the EU wishes to alleviate,” without yet detailing the exact scope of the additional EU sanctions.[17]  So far, the EU with Regulation (EU) 2017/2063 has already legislated an arms embargo and the prohibition on equipment, which might be used for internal repression, targeting also respective auxiliary services, as well as an asset freeze and prohibitions that no funds or economic resources shall be made available to or for the benefit of certain persons.[18]  From the EU statements, it can be inferred that as a minimum it is to be expected that the list of persons subject to the asset freeze will be expanded. IMPLICATIONS The new sanctions targeting the Government of Venezuela may have significant effects for U.S. and non-U.S. companies.  First, the novel features of the debt-related provisions, including restrictions on debt owed to rather than by PdVSA, may require firms to reconfigure their compliance strategies.  For example, the purpose of covered transactions or the parties’ relationship to the Government of Venezuela may not be readily apparent to financial institutions, who may, as a result, wish to supplement transaction screening with compliance certifications from their customers.  Foreign financial institutions must be wary as well.  If a foreign bank obscures the purpose of a transaction in order for a U.S. bank to accept the transaction, the foreign bank could be held liable for “causing” a violation of U.S. sanctions.[19] Furthermore, these additional sanctions, coupled with the prominence of state-owned enterprises in the Venezuelan economy, will further discourage U.S. companies from engaging in business in Venezuela.  Companies that do or have done business in Venezuela already face significant challenges securing payment from state-owned entities, such as PdVSA.  Not only does PdVSA lack the funding to pay outstanding debts but prior sanctions and OFAC-issued interpretative guidance have limited the ability of all parties to rely on debt financing.[20]  Cutting off PdVSA’s ability to use the sale of state-owned equities and accounts receivable financing to raise funds will make it more challenging to set acceptable payment terms for ongoing work in Venezuela.  When no viable payment options remain, U.S. businesses will likely stop doing business with companies like PdVSA.  In this way, the U.S. Venezuela-related sanctions may ultimately incur the same collateral costs that would have come from blacklisting PdVSA, even though these measures were intended to avoid this outcome. Despite having this potential unintended consequence, the escalating sanctions targeting Venezuela have not yet had their intended effect on the Maduro regime.  Although the Trump administration and the EU called for “free and fair” elections and the disbanding of the Venezuelan Constituent Assembly when announcing new sanctions last year, the Constituent Assembly certified the reelection of President Maduro in an election the Trump administration characterized as “neither free nor fair.”[21]  It is unclear whether the addition of these new prohibitions will be sufficient to achieve the desired outcome in Venezuela.    [1]   E.O. 13835 (May 21, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_eo_13835.pdf.    [2]   Statement from President Donald J. Trump on the Maduro Regime in Venezuela (May 21, 2018), available at https://www.whitehouse.gov/briefings-statements/statement-president-donald-j-trump-maduro-regime-venezuela/.    [3]   OFAC FAQs at Question 512, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.    [4]   E.O 13835 § 2(d).    [5]   E.O 13835 § 1(a)(i).    [6]   OFAC FAQs at Question 511, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.    [7]   Id. at Question 419, indicating that payment terms for goods provided and services rendered are debt subject to applicable sanctions.    [8]   E.O 13835 § 1(a)(ii).    [9]   Cf. Directive 2 (as amended on Sept. 29, 2017) under Executive Order 13662, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive2_20170929.pdf. [10]   E.O. 13808 (Aug. 24, 2017) (“EO”), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/13808.pdf. [11]   Cf. E.O. 13808 § 1(a)(i)-(ii). [12]   E.O 13835 § 1(a)(iii). [13]   OFAC FAQs at Question 511, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela. [14]   Cf. E.O. 13808 § 1(a)(ii). [15]   Cf. E.O. 13808 § 1(b). [16]   General License 2, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl2.pdf. [17]   Venezuela: Council adopts conclusions, available at http://www.consilium.europa.eu/en/press/press-releases/2018/05/28/venezuela-council-adopts-conclusions/. [18]   Regulation (EU) 2017/2063, available at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32017R2063&from=EN. [19]   E.O 13835 § 2(a); see e.g., OFAC (July 20, 2017), available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170727_transtel.pdf, [20]   Clifford Krauss, ConocoPhillips Wins $2 Billion Ruling over Venezuelan Seizure, (Apr. 25, 2018) NY Times, available at https://www.nytimes.com/2018/04/25/business/energy-environment/conocophillips-venezuela-ruling.html. [21]   Statement by the Press Secretary on New Financial Sanctions on Venezuela (Aug. 25, 2017), available at https://www.whitehouse.gov/briefings-statements/statement-press-secretary-new-financial-sanctions-venezuela/; Declaration by the High Representative on behalf of the EU on the presidential and regional elections in Venezuela available at http://www.consilium.europa.eu/en/press/press-releases/2018/05/22/declaration-by-the-high-representative-on-behalf-of-the-eu-on-the-presidential-and-regional-elections-in-venezuela/. The following Gibson Dunn lawyers assisted in preparing this client update: R.L. Pratt, Judith Alison Lee, Adam Smith, Stephanie Connor and Richard Roeder. 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 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) 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) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart – Washington, D.C. (+1 202-887-3706, whart@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) 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) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 30, 2018 |
Recent Developments Related to Regulation and Litigation Involving the Education Sector (May 2018)

Click for PDF This is the latest update of significant developments relating to regulatory, administrative, and legal actions involving schools.  This quarter saw the reinstatement of the Accrediting Council for Independent Colleges and Schools (ACICS), as well as three for-profit law schools turning the tables on their schools’ accreditor, the American Bar Association.  There were also significant developments on the political and regulatory fronts, not to mention a shifting landscape in federal enforcement.  Let’s jump into it. A.   ACICS Ruling and Reinstatement On March 23, 2018, a federal district court ordered the Department of Education (ED) to reconsider its decision terminating recognition of ACICS.  ACICS had submitted a petition for continued recognition to ED in January 2016.  In December 2016, President Obama’s ED Secretary terminated ACICS’s recognition, and ACICS challenged the decision in court.  In an April 29, 2017 filing, the Trump Administration supported the previous Administration’s termination decision. However, on March 23, the United States District Court for the District of Columbia found that ED failed to consider supplemental responses and additional evidence ACICS provided to ED in May 2016 at ED’s request.  The court held that in doing so, ED violated the Higher Education Act and its implementing regulations’ requirement that the ED Secretary consider all available relevant information, as well as the Administrative Procedure Act’s requirement that an agency must examine all relevant data.  ACICS v. DeVos, No. 16-2448 (RBW), 2018 WL 1461958, at *13, 17 (D.D.C. Mar. 23, 2018).  The court concluded that ED acted arbitrarily and capriciously by failing to consider this information.  Id. at *17. On remand, ED must reconsider the recognition petition ACICS submitted in January 2016 and must consider in the first instance the supplemental materials ACICS submitted in May 2016.  In the interim, Secretary DeVos restored ACICS’s status as a federally recognized accrediting agency effective December 12, 2016.  ACICS may file a written submission explaining the relevance of the May 2016 materials and include additional relevant evidence.  Secretary DeVos ordered that any written submission and exhibits should be filed with ED no later than May 30, 2018.  Because the court did not reach the merits of ACICS’s case, it is hard to know how ACICS will fare under this new review.  But it is fair to say that just the opportunity for a new review shows a seismic shift in the landscape from one Administration to the next. B.    Change in Enforcement Focus, Per the New York Times Two recent New York Times articles further highlight the differences in approach between the current and previous Administrations when it comes to enforcement relating to the sector.  In an article dated May 9, 2018, the Times reports that Mick Mulvaney, the interim director of the Consumer Financial Protection Bureau (CFPB), will move the agency’s student loan division into its consumer information unit.  A CFPB spokesman described the change as a “very modest organizational chart change,” but some officials believe it may dampen the agency’s zeal for an enforcement case it has been pursuing against the nation’s largest student loan collector, Navient.  Further signaling its desire to move away from examining student-lending issues, the CFPB also removed the topic “student loan servicing” from its bi-annual long-term regulatory agenda. In the second article dated May 13, 2018, the Times reports that a unit within ED that was tasked with investigating for-profit colleges, which previously included a dozen or so lawyers and investigators at the end of the Obama Administration, is now made up of three employees.  Its mandate has also shrunk.  Whereas the unit used to investigate such issues as advertising, recruitment practices, and job placement claims, the three-person team now focuses on processing student loan forgiveness applications and smaller compliance cases. C.    Litigation Outside of the political arena, there was activity this past quarter in both federal and state courts. 1.    InfiLaw Scores a Win in Florida and Sets Its Sights on the ABA InfiLaw was involved in a variety of litigation this past quarter, fighting back a False Claims Act case and filing multiple suits against the American Bar Association. First, on April 23, 2018, the United States District Court for the Middle District of Florida dismissed for a second time a False Claims Act lawsuit filed against InfiLaw Corp. and its now-closed law school, Charlotte School of Law.  U.S. ex rel. Bernier v. Infilaw Corp., No. 6:16-cv-970-Orl-37TBS, 2018 WL 1905342, at *8 (M.D. Fla. Apr. 23, 2018).  A former law professor turned qui tam relator, Barbara Bernier, “adopted the kitchen-sink approach” to pleading after the United States declined to intervene, according to the court.  She alleged the school had made improper “incentive payments to recruitment staff,” “admitted academically unqualified students,” “altered students grades,” “juked its employment stats” and “failed to implement a written plan to combat misuse of copyrighted works,” among other allegations.  Id. at *6, *8. The court held that the majority of these claims had been “publicly disclosed” online and elsewhere and therefore the relator could not proceed because she was not an “original source” of the allegations—i.e., she didn’t voluntary disclose this information to the Government before the public disclosures or demonstrate knowledge that materially adds to the public disclosures.  Id. at *7-8.  On the remaining claims, the court held that the relator had not provided sufficient specificity; she provided “just vague allegations that these incidents occurred and Defendants were responsible.”  Id. at *8. However, the court did give the relator leave to amend, and she filed an amended complaint on May 7, 2018.  We would not be surprised to see InfiLaw move to dismiss the complaint again. Second, Charlotte School of Law and its two sister schools, Florida Coastal School of Law and Arizona Summit Law School, turned to offense and filed three separate suits against their accreditor, the American Bar Association, alleging that the ABA’s findings of noncompliance with its accreditation standards “were arbitrary, capricious, unreasonable, [and] an abuse of discretion.”  In the accompanying press release for the Florida Coastal lawsuit, the school highlighted its diverse student body, and the president of Florida Coastal lamented that “[t]he ABA’s decisions in regard to accreditation seem to be calculated efforts to win political points, without regard for due process, or how students will be adversely affected.”  The ABA is yet to respond to these complaints. 2.    Two Lawsuits Relating to For-Profit Schools Two additional lawsuits were unsealed or filed this past quarter relating to for-profit schools.  First, in the United States District Court for the District of Utah, an ex-employee of lead generator EduTrek filed a lawsuit under the False Claims Act against his former employer and a host of schools.  At its core, the lawsuit alleges that EduTrek and its clients violated ED’s incentive compensation ban.  The United States declined to intervene on February 16, 2018. Second, two former students filed a purported class action lawsuit against Capella University in the United States District Court for the District of Minnesota, alleging the school “misled prospective and current students … about the time to completion and cost of their mostly student-loan financed doctoral degrees.”  Compl. ¶ 2, Wright v. Capella Education Co., No. 18-cv-1062 (D. Min. April 20, 2018).  The school has until July 9, 2018 to respond to the allegations. 3.    Don’t Forget About the Non-Profit Schools As has been the case for a while, and particularly this past quarter, there were a number of prominent investigations opened and lawsuits filed against traditional non-profit schools.  The Department of Justice (DOJ) garnered national news coverage of its decision to investigate at least seven elite colleges—Amherst College, Grinnell College, Middlebury College, Pomona College, Wellesley College, Wesleyan University, and Williams College—for possible antitrust issues.  The investigation reportedly seems to center on whether the schools improperly shared information among them to enforce the terms of their early-admissions programs. There was also a notable False Claims Act settlement with the University of North Texas.  According to DOJ’s press release, the school “agreed to pay the United States $13,073,000.00 to settle claims that it inaccurately measured, tracked and paid researchers for effort spent on certain NIH-sponsored research grants.” On top of those announcements, DOJ also announced on March 2, 2018 that it had indicted six former employees of the Chicago campus of the Center for Employment Training, a non-profit school, for an alleged “scheme[] to enroll fake students in classes as part of a conspiracy to swindle federal financial aid programs out of millions of dollars.” Twelve graduates of the landscape architecture program at Colorado State University have also sued their alma mater, alleging that the university should refund their tuition because the school failed to secure proper accreditation for the master’s degree program. Finally, Howard University confirmed on March 29, 2018 that the school had conducted an internal investigation and discovered that several employees of the university’s financial aid department awarded themselves grants, even though they had tuition remission, and thus received more money than “the total cost of attendance.” As we have been saying for some time, traditional schools are just as susceptible to the claims that have been made, particularly by the prior Administration, against the for-profit education sector.  We are continuing to see that proven true. 4.    Federal Actions Against Individuals The past quarter also saw two notable developments in cases brought by the federal government against individuals involved in the sector.  First, on April 16, 2018, DOJ announced that the owner of “a privately owned, non-accredited school” called Atius Technology Institute, which specialized “in information technology courses, pleaded guilty … to bribing a public official at the U.S. Department of Veterans Affairs (VA) in exchange for the public official’s facilitation of over $2 million in payments that were supposed to be dedicated to providing vocational training for military veterans with service-connected disabilities.” Second, the case brought by the Securities and Exchange Commission against two executives of ITT Educational Services, Inc., appears headed to trial.  On March 23, 2018, the United States District Court for the Southern District of Indiana largely denied the dueling summary judgment motions filed by the executives and the SEC.  The court set trial for July 9, 2018. 5.    State Level Litigation and Disputes On the state level, there continue to be battles about the proper scope of state authority.  On March 12, 2018, Secretary DeVos set forth the Trump Administration’s stance in an interpretive guidance, stating that the federal government has the exclusive power to regulate and oversee federal student loan servicers, and therefore any state regulations on the topic are preempted. Meanwhile, in Massachusetts, a superior court judge rejected a motion to dismiss filed by the Pennsylvania Higher Education Assistance Agency (PHEAA), one of the nation’s largest student loan servicers, in a case brought by the Massachusetts Attorney General, on the grounds that PHEAA is not protected by sovereign immunity, even though formed under the Commonwealth of Pennsylvania.  In that same case, DOJ had filed a statement of interest arguing that the Massachusetts Attorney General is precluded from suing PHEAA on preemption grounds.  Although this argument was not addressed in the court’s decision, the court stated during oral argument on the motion:  “[T]he preemption issue is not going to make the whole case go away.”  This stands seemingly in contrast to the guidance from Secretary DeVos. In California, Corinthian College students have seemingly taken the baton previously held by state attorneys general and filed a class action lawsuit for declaratory and injunctive relief against Secretary DeVos and ED.  The students filed suit in the Northern District of California in December 2017 and filed a first amended complaint on March 17, 2018.  The students allege that after Corinthian closed, ED promised the students complete loan forgiveness but then in December 2017 announced a plan to award only partial relief of student loan debt to borrowers using a formula based on students’ earnings.  The students argue that ED’s use of an earnings formula is “arbitrary and capricious” rulemaking that violates the Administrative Procedure Act.  On May 25, 2018, a magistrate judge issued a preliminary injunction, blocking enforcement of ED’s partial loan relief program, finding that by using records from the Social Security Administration to obtain students’ earnings, ED violated the federal Privacy Act.  A hearing to consider next steps, including the process for loan forgiveness, is scheduled for June 4. Finally, Ashford University and its holding company, Bridgepoint Education, scored a victory in Iowa.  The state’s approval agency had attempted to strike Ashford’s eligibility to receive post-9/11 GI Bill benefits after Ashford closed its physical location in Iowa.  Ashford sued to block the loss of eligibility, and the state court dismissed Ashford’s suit.  However, on April 26, 2018, the Iowa Supreme Court vacated the lower court’s decision, holding that the lower court judge should have disclosed that she has family ties to the state office of the attorney general.  Ashford can now resume its legal challenge to Iowa’s attempt to withdraw Ashford’s GI Bill eligibility. D.    Regulatory Activity There has been a lot of activity on the regulatory front.  On May 9, 2018, ED published its Spring 2018 Agency Rule List, including the following in its list of topics in the “Prerule” and “Proposed Rule” stages:  state authorization of distance education providers, accreditation, borrower defense, gainful employment, and eligibility of faith-based entities and activities. Rules related to state authorization that had been published in December 2016 were scheduled to go into effect on July 1, 2018, but ED has published a notice of proposed rulemaking that proposes a two-year delay in the effective date.  The public has 15 days to comment on the proposed delay.  The regulations would have required institutions that offer distance education to students in states where the institution is not physically located to either meet those states’ requirements for offering postsecondary education or to participate in a state authorization reciprocity agreement, and then document that there is a state process for review and action on student complaints. ED previously sent two other Obama-era consumer protection regulations to negotiated rulemaking sessions.  After three months of negotiations, the sessions regarding borrower defense to repayment concluded in February without consensus.  Sticking points included which evidentiary standard should be used and whether to include or how long a statute of limitations should be.  The sessions regarding gainful employment similarly ended without consensus in April after four days of negotiations.  Since no consensus was reached in either session, ED can draft its own language, presumably keeping in mind the information gathered during the negotiated rulemaking sessions.  ED will need to publish a Notice of Proposed Rulemaking for each rule, which will be followed by a period of public comment.  Final regulations will be published by November 1, 2018, to take effect on July 1, 2019. E.    Corporate Activity Finally, there were some notable developments in the trend of schools seeking nonprofit status, as well as a noteworthy sale.  First, the Higher Learning Commission approved Purdue University’s acquisition of Kaplan University.  This was the final hurdle for the deal.  Second, Grand Canyon University also received good news from the Higher Learning Commission.  The accreditor approved its request to revert back to nonprofit status.  Third, Ashford University announced it is joining the trend, too, and is seeking to become a nonprofit.  It is expected to seek approval from its accreditor, the WASC Senior College and University Commission.  Finally, Laureate Education Inc. announced a deal to sell the University of St. Augustine for Health Sciences to a private equity firm, Altas Partners, for $400 million. *    *    * As always, we will continue to monitor all of these developments, and you can look forward to updates in our next report.     Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following: Los Angeles Timothy Hatch (+1 213-229-7368, thatch@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Julian W. Poon (+1 213-229-7758, jpoon@gibsondunn.com) Eric D. Vandevelde (+1 213-229-7186, evandevelde@gibsondunn.com) James Zelenay (+1 213-229-7449, jzelenay@gibsondunn.com) Jeremy S. Smith (+1 213-229-7973, jssmith@gibsondunn.com) Denver Jeremy S. Ochsenbein (+1 303-298-5773, jochsenbein@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Washington, D.C. Douglas Cox (+1 202-887-3531, dcox@gibsondunn.com) Michael Bopp (+1 202-955-8256, mbopp@gibsondunn.com) Jason J. Mendro (+1 202-887-3726, jmendro@gibsondunn.com) Amir C. Tayrani (+1 202-887-3692, atayrani@gibsondunn.com) Lucas C. Townsend (+1 202-887-3731, ltownsend@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 30, 2018 |
Update on Proposed Changes to the CFIUS Review Process

Click for PDF After six months of wrangling over the fate of a proposal to modernize the process by which the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) reviews foreign investment in the United States, the U.S. Congress appears primed to streamline and modernize the CFIUS review process.  Last week, committees in the Senate and the House of Representatives approved mark-ups of the proposed legislation, which will most likely be included in the National Defense Authorization Act of Fiscal Year 2019.  As it currently stands, the proposed legislation would alter the CFIUS review process in many critical respects. Background CFIUS is an inter-agency committee authorized to review the national security implications of transactions that could result in control of a U.S. business by a foreign person (“covered transactions”), and to block transactions or impose measures to mitigate any threats to U.S. national security.[1]  Established in 1975 and last reformed in 2007, observers have pointed to an antiquated regulatory framework that hinders the Committee’s ability to review the particular national security implications posed by an increasing number of Chinese investments targeting sensitive technologies in the United States. As we wrote in November 2017, the proposed Foreign Investment Risk Review Modernization Act (“FIRRMA”) sought to expand the scope of transactions subject to CFIUS review and reform the process by which that review takes place.[2]  Despite initial bipartisan congressional support and endorsement by the Trump administration, FIRRMA encountered a fair amount of criticism from U.S. industry groups.  As originally drafted, FIRRMA would have broadened the scope of transactions subject to CFIUS review to include—among other things—outbound investments in which a U.S. company would contribute intellectual property or other support, such as joint ventures or licensing agreements, which are not currently subject to CFIUS jurisdiction.  After months of intense lobbying, those provisions have been replaced by a proposal to update U.S. export controls to regulate “emerging” and “foundational” technologies.  The amended version of FIRRMA also provides for short-form “light” filings, tightens the timeframe for CFIUS reviews, exempts acquirers from U.S. allies, expands the definition of “passive” investments excluded from CFIUS review, and codifies the Committee’s review of real estate transactions involving sensitive government sites as well as those connected to air, land, and sea ports. Regulating Outbound Technology Transfers Through the Export Control Process One of the most controversial provisions of the original FIRRMA legislation was the inclusion of outbound investments—such as joint ventures or licensing agreements—in the list of covered transactions subject to CFIUS review.[3]  As originally drafted, FIRRMA would have subjected to CFIUS review any contribution (other than through an ordinary customer relationship) by a U.S. critical technology company of both intellectual property and associated support to a foreign person through any type of arrangement.  Such structures are common vehicles for foreign investment, and do not trigger CFIUS jurisdiction under current regulations because they do not involve the acquisition of a U.S. business.  As detailed below, the Senate ultimately retreated from this approach, opting instead to deal with such transactions through a new and enhanced set of export controls. The Senate’s amended version of FIRRMA would require the President to establish, in coordination with the Secretaries of Commerce, Defense, Energy, and State, a “regular, ongoing interagency process to identify emerging and foundational technologies” that are essential to national security but not subject to CFIUS review.[4]  The Senate draft directs the Secretary of Commerce to establish controls on the export, re-export, or in-country transfer of such technology, such as requiring a license or other authorization.[5]  Notably, the legislation would require a license before any covered technology is transferred to a country subject to an arms embargo, which would include technology transfers to China.  If a license application is submitted on behalf of a joint venture, the Commerce Department may require the disclosure of any foreign person with significant ownership interests in the foreign entity participating in the transaction. The House version of the proposed CFIUS legislation also includes robust export control measures in lieu of an effort to regulate outbound investments through CFIUS.  As a result, the CFIUS reform legislation may provide an end-run around attempts to reform and modernize U.S. export controls, an effort that has languished on the legislative docket for decades. Mandatory “Light” Filings and a Streamlined Review Process  Under current practice, most CFIUS reviews commence when the parties to a transaction submit a joint voluntary notice, a lengthy filing that must include detailed information about the transaction, the acquiring and target entities, the nature of the target entity’s products, and the acquiring entity’s plans to alter or change the target’s business moving forward.[6]  In practice, parties are expected to submit a “draft” notice to CFIUS prior to the commencement of the official 30-day review period, which provides the Committee and the parties with an opportunity to identify and resolve concerns before the official clock starts ticking.  In recent years, this informal review process has added a degree of unpredictability in terms of timing, as the “pre-filing” phase can consume several weeks. The current CFIUS review process includes a 30-day initial review of a notified transaction, potentially followed by a 45-day investigation period, for a possible total of 75 days.  In certain circumstances, CFIUS may also refer a transaction to the President for decision, which must be made within 15 days.[7]  As the volume of transactions before the Committee has increased, it has become more common for CFIUS to ask parties to refile notices at the end of the official 75-day review period, thereby restarting the clock.  This has added a significant degree of uncertainty to the CFIUS review, compelling some parties to abandon deals or not to file at all. The Senate’s amended version of FIRRMA would alter this process in several key respects: Mandatory “Light” Filings.  In lieu of the lengthy voluntary notice required in the current CFIUS review process, FIRRMA would authorize parties to submit short form “declarations”—not to exceed 5 pages in length—at least 45 days prior to the completion of a transaction.  Declarations would be mandatory in certain circumstances, such as when a foreign government holds a “substantial” interest in the foreign acquirer, or in other circumstances prescribed by the Committee.[8] Exemptions.  The proposed Senate bill would also allow the Committee to exempt transactions involving companies from U.S. allies, as well as those which have developed a parallel process to review the national security implications of foreign investment.  Notably, parallel measures to review foreign investment have been proposed in a number of other countries.  In August 2017, citing similar concerns with China’s technological investments, the European Union called for more rigorous screening of foreign acquisitions involving European companies, and Germany increased the authority of its Ministry for Economic Affairs and Energy (“BMWi”) to review foreign investments.  And in October 2017, the United Kingdom published several legislative proposals that would increase its ability to review and intervene in transactions that raise national security considerations or involve national infrastructure. Timeframe.  FIRRMA would also require the Committee to respond to a declaration within a tighter time period.  The Senate draft says that the Committee shall take action within 30 days of receiving a declaration,[9] whereas the House draft cuts that response time down to 15 days.[10]  FIRRMA would provide for a longer initial review period, extending it from 30 to 45 days and authorizing CFIUS to extend the 45-day investigation phase by 30 days “in extraordinary circumstances.”[11]  In the House draft, the extension period for extraordinary circumstances is only 15 days.[12] Filing Fees.  The original FIRRMA bill included a provision requiring filing fees not to exceed the lesser of 1% of the value of the transaction or $300,000.[13] The Senate draft still provides for filing fees, but it is less specific as to the amount, instructing the Committee to consider the value of the transaction, the effect of the fee on small business concerns, the effect on foreign investment, and the expenses of the Committee in setting the fee.[14]  The Senate draft also instructs the Committee to periodically reconsider the amount of the fee.  In contrast, the House draft eliminates the proposed filing fees entirely. Judicial Review.  The original November 2017 version of FIRRMA would have exempted the actions and findings of the Committee from judicial review, limiting parties’ ability to challenge CFIUS decisions.  The amended Senate version of the bill provides that parties may challenge CFIUS actions before the U.S. Court of Appeals for D.C. Circuit.[15]  The Senate draft also establishes procedures for the review of privileged or classified information via ex parte and in camera reviews.[16] The Space Between “Control” and “Passive” Investments The Senate draft would expand the definition of a covered transaction to include not only a transaction through which a foreign company could obtain “control” of a U.S. company, but also any “other investment (other than passive investment) by a foreign person in any United States critical technology company or United States critical infrastructure company that is unaffiliated with the foreign person.”[17]  Notably, current CFIUS regulations exclude transactions that result in a foreign person holding 10 percent or less of the outstanding voting interest in a U.S. business if the transaction is “solely for the purpose of a passive investment,” i.e., “if the person holding or acquiring such interests does not plan or intend to exercise control, does not possess or develop any purpose other than passive investment, and does not take any action inconsistent with holding or acquiring such interests solely for the purpose of passive investment.”[18]  FIRRMA sought to clarify this provision by codifying a stricter definition of the term passive investment, not dependent upon the percent of ownership interest.  If enacted, this change will significantly increase the types of transactions that are subject to CFIUS scrutiny. The amended version of the Senate bill effectively expands the definition in several key ways.  For example, the original FIRRMA stated that in order for an investment by a foreign person in a U.S. business to be considered passive, the foreign person could not have access to any non-public technical information or nontechnical information that was not available to all investors.[19]  The amended Senate draft adds a materiality requirement and eliminates the provision on nontechnical information entirely.  In the new version, the information afforded must be technical, material, and nonpublic in order for the investment to be deemed non-passive.[20] The draft Senate legislation also specifically indicates that financial information does not qualify as material nonpublic technical information.[21] The passivity definition is of critical importance for private equity funds, and the amended Senate version of the bill accommodates such funds by excluding them from regulations that would allow CFIUS to create a test for passivity based on the size of the investment.  The Senate draft also clarifies that an indirect investment by a foreign person through an investment fund that affords the foreign person membership as a limited partner on an advisory board or committee shall be considered a passive investment so long as the advisory board or committee does not have the power to approve, disapprove, or otherwise control investment decisions of the fund.[22] Real Estate Transactions As drafted late last year, FIRRMA sought to broaden the scope of transactions subject to CFIUS review to include the purchase or lease by a foreign person of real estate that is in close proximity to a U.S. military installation or other sensitive U.S. government facility or property.  This would effectively codify the Committee’s standard practice of examining the proximity of a physical property to any sensitive military or U.S. government facilities.  The amended version of the Senate draft retains this provision, and includes properties connected to air, land or sea ports.[23]  However, the Senate draft exempts the purchase of any ‘single housing unit’ as well as real estate in ‘urbanized areas’ as defined by the U.S. Census Bureau.[24] Amendments A to ZTE By the end of the Senate Banking mark-up on May 22, 2018, the Senate’s draft legislation had been subject to 50 different amendments, ranging from pedestrian changes in title to substantive alterations in the original language.  There was also a last-ditch attempt by Senator Van Hollen (D-MD) to push back on the Trump administration’s recent effort to weaken penalties imposed on the Chinese telecom giant ZTE Corporation (“ZTE”) for violations of U.S. sanctions and export controls.  Notably, the amended legislation was approved by the Senate Committee on Banking, Housing, and Urban Affairs with the ZTE amendment by a unanimous vote.  Some observers noted that the Senate’s attempt to push back on the President’s interference in the ZTE case could provide the administration with certain diplomatic cover in advance of further trade talks with the Chinese.    [1]   CFIUS operates pursuant to section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (FINSA) (section 721) and as implemented by Executive Order 11858, as amended, and regulations at 31 C.F.R. Part 800.    [2]   Press Release, U.S. Senator John Cornyn, Cornyn, Feinstein, Burr Introduce Bill to Strengthen the CFIUS Review Process, Safeguard National Security (Nov. 8, 2017), available at https://www.cornyn.senate.gov/content/news/cornyn-feinstein-burr-introduce-bill-strengthen-cfius-review-process-safeguard-national.    [3]   FIRRMA Section 3(a)(5)(B)(v).  The House draft includes only joint ventures that could result in the foreign control of a U.S. business in the list of covered transactions.  Amendment to H.R. 5841 Section 201(3)(B)(i).    [4]   Amendment to S. 2098 Section 25(a).    [5]   Amendment to S. 2098 Section 25(b).    [6]   31 C.F.R. §§ 800.401(a)-(b), 800.402(c).    [7]   31 C.F.R. § 800.506.    [8]   The requirements for what can trigger a mandatory declaration (the acquisition of a substantial interest in a U.S. business by a foreign person in which a foreign government has a substantial interest) are the same in both the House and Senate drafts.  The definition of substantial interest is also the same.  The original Senate version of FIRRMA mandated declarations for transactions involving the acquisition of a voting interest of at least 25% in a U.S. business by a foreign person in which a foreign government owns, directly or indirectly, at least a 25% voting interest.  See FIRRMA Section 5(v)(II)(aa).  Recent iterations of the bill replaced this 25% threshold with the phrase “substantial interest,” to be defined by subsequent regulation, with the caveat that an interest that is a passive investment or that is less than a 10% voting interest shall not be considered a substantial interest.  Amendment to S. 2098 Section 6(v)(IV)(bb)(AA)-(CC).  The House bill largely parallels the Senate bill on the use of voluntary and mandatory declarations.  One linguistic change is that the Senate bill directs that the Committee “shall” prescribe regulations establishing requirements for declarations whereas the House bill says that the Committee “may” prescribe regulations for voluntary and mandatory declarations.  Amendment to H.R. 5841 Section 302(a)(v)(II)(aa).    [9]   Amendment to S. 2098 Section 6(v)(III)(bb). [10]   Amendment to H.R. 5841 Section 302(a)(v)(IV)(bb). [11]   Amendment to S. 2098 Section 9. [12]   Amendment to H.R. 5841 Section 303. [13]   FIRRMA Section 19. [14]   Amendment to S. 2098 Section 22. [15]   Amendment to S. 2098 Section 15. [16]   These provisions clarify parties’ rights in the wake of the D.C. Circuit’s 2014 decision in Ralls Corp. v. Committee on Foreign Investment in the United States.  After CFIUS and President Obama ordered the Chinese-owned Ralls Corporation to divest a wind-farm project in close proximity to a Department of Defense facility, the D.C. Circuit held that the Committee had violated Ralls’ due process rights by failing, prior to the order to divest, to provide Ralls with access to the unclassified information that the government had relied on, and to give Ralls the opportunity to rebut that unclassified information. [17]   Amendment to S. 2098 Section 3(a)(5)(B)(iii). [18]   31 C.F.R. §§ 800.302(b), 800.223. [19]   FIRRMA Section 3(a)(5)(D)(i). [20]   Amendment to S. 2098 Section 3(a)(5)(D)(i). [21]   Amendment to S. 2098 Section 3(a)(5)(D)(ii). [22]   Amendment to S. 2098 Section 3(a)(5)(D)(iv). [23]   Amendment to S. 2098 Section 3(a)(5)(B)(ii). [24]   Amendment to S. 2098 Section 3(a)(5)(C)(i). The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Jose Fernandez and Stephanie Connor. 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 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) 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) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart – Washington, D.C. (+1 202-887-3706, whart@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) 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) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 30, 2018 |
Federal Circuit Update (May 2018)

Click for PDF This May 2018 edition of Gibson Dunn’s Federal Circuit Update discusses the proposed elimination of the broadest reasonable interpretation standard during post-issuance proceedings before the PTAB, provides a summary of the pending WesternGeco case before the Supreme Court regarding extraterritorial damages, and briefly summarizes the differences between precedential and non-precedential opinions. This Update also provides a summary of the pending en banc case involving the PTO’s ability to recover attorneys’ fees.  Also included are summaries of recent decisions regarding the burden in venue disputes, the pleading standard for patent infringement following the abrogation of Form 18, and whether equitable estoppel applies after substantial claim amendments. Federal Circuit News On May 8, 2018, the PTO announced proposed rulemaking that would change its prior policy of using the broadest reasonable interpretation (BRI) standard for construing unexpired and proposed amended patent claims in post-issuance proceedings before the PTAB.  Instead, the PTAB would use the Phillips standard applied in district courts and ITC proceedings.  The Notice of Proposed Rulemaking states:  “The Office’s goal is to implement a fair and balanced approach, providing greater predictability and certainty in the patent system.” Judges Prost, Moore, O’Malley and Reyna, who dissented from the denial of the petition for rehearing en banc in In re Cuozzo Speed Technologies, and Judge Newman, who dissented in the panel opinion and from the denial of the petition for rehearing en banc, have historically supported the use of the Phillips standard in post-issuance proceedings.  The notice of proposed rulemaking is available here. On April 26, 2018, the PTO also released guidance on the impact of SAS Institute Inc. v. Iancu, where the Supreme Court mandated that “the Board [] address every claim the petition has challenged.  138 S. Ct. 1348, 1354, 1358 (2018).  In light of this decision, the PTO announced that the Board will now “institute as to all claims or none” and, in addition, if the Board institutes, it “will institute on all challenges raised in the petition.”  Furthermore, “[t]he final written decision will address, to the extent claims are still pending at the time of decision, all patent claims challenged by the petitioner and all new claims added through the amendment process.”  For pending trials that had only been partially instituted, the panels may “issue an order supplementing the institution decision to institute on all challenges raised in the petition” and “may take further action to manage the trial proceeding, including, for example, permitting additional time, briefing, discovery, and/or oral argument, depending on various circumstances and the stage of the proceeding” and even, in some cases, extend the statutory 12-month deadline.  The PTO’s guidance is available here. Supreme Court.  The Supreme Court has decided two cases from the Federal Circuit this Term (Oil States v. Greene’s Energy and SAS v. Iancu); we are awaiting the Court’s decision on a third case: Case Status Issue WesternGeco LLC (Schlumberger) v. ION Geophysical Corp., No. 16-1011 Argued on Apr. 16, 2018 Recoverability of lost profits for foreign use in cases where patent infringement is proven under 35 U.S.C. § 271(f) Upcoming En Banc Federal Circuit Cases NantKwest, Inc. v. Matal, No. 16-1794 (Fed. Cir.):  Whether the PTO can recover attorneys’ fees in litigation under 35 U.S.C. § 145. After the PTAB affirmed the examiner’s rejection of NantKwest’s patent application, NantKwest appealed to the district court.  The PTO prevailed on the merits of the appeal and moved to recover both attorneys’ fees and expert fees.  Section 145 provides that “[a]ll the expenses of the proceedings shall be paid by the applicant.”  Applying this provision, the district court granted the PTO’s request for expert fees, but rejected the PTO’s request for attorneys’ fees.  A panel of the Federal Circuit reversed the district court’s holding as to attorneys’ fees, holding that the “[a]ll expenses of the proceedings” provision under § 145 authorizes an award of attorneys’ fees.  (Decision available here.) The Federal Circuit sua sponte ordered that the panel decision be vacated and that the case be reheard en banc.  Seven amicus briefs were filed, five in support of NantKwest (the International Trademark Association, the Intellectual Property Owners Association, the Intellectual Property Law Association of Chicago, the Association of Amicus Counsel, and the American Bar Association) and two in support of neither party (Federal Circuit Bar Association and American Intellectual Property Law Association).  Oral argument was held on March 8, 2018.  (Audio recording is available here.) Question presented: Did the panel in NantKwest, Inc. v. Matal, 860 F.3d 1352 (Fed. Cir. 2017) correctly determine that 35 U.S.C. § 145’s “[a]ll the expenses of the proceedings” provision authorizes an award of the United States Patent and Trademark Office’s attorneys’ fees? Federal Circuit Practice Update Precedential vs. Non-Precedential Opinions. Internal Operating Procedure (“IOP”) No. 10 governs the use of precedential opinions vs. non-precedential opinions and Rule 36 affirmances.  IOP No. 10 provides that “the purpose of a precedential disposition is to inform the bar and interested persons other than the parties.”  IOP No. 10 at ¶ 2.  Precedential opinions should not be used merely to explain the reasons for the disposition to the parties; that can be conveyed through the use of a non-precedential opinion.  Id. The IOP identifies fourteen situations in which a precedential opinion is appropriate.  See id. at ¶ 4.  Reasons include:  resolution of an issue of first impression; the criticism, clarification, alteration, or modification of an existing rule of law; an actual or apparent conflict in or with past holdings of the court or other courts that is created, resolved or continued; the correction of procedural errors; or the case has been returned by the Supreme Court for disposition, requiring more than mere ministerial obedience to directions of the Supreme Court.  Id. The decision to make an opinion non-precedential is generally governed by a majority vote of the panel.  But, if the decision includes a dissenting opinion, the judge authoring the dissenting opinion may elect to have the entire opinion issue as precedential, regardless of the preferences of the majority judges.  Id. at ¶ 6.  All three judges must agree to use a Rule 36 judgment in order to do so.  Id. Key Case Summaries (April – May 2018) In re ZTE (USA) Inc., No. 18-113 (Fed. Cir. May 14, 2018) (Motion Panel Order):  Burden of persuasion for venue for foreign defendants. American GNC filed a complaint against ZTE in the Eastern District of Texas, and ZTE moved to dismiss for improper venue under 28 U.S.C. § 1406.  While that motion was pending, ZTE moved to transfer to the Northern District of Texas or the Northern District of California under 28 U.S.C. § 1404(a).  The first magistrate judge denied ZTE’s motion to transfer.  A second magistrate judge denied ZTE’s motion to dismiss for improper venue after finding that ZTE failed to show it did not have a regular and established place of business in the Eastern District of Texas.  The magistrate judge noted the lack of uniformity among courts in who bears the burden of proof with respect to venue but determined that, under Fifth Circuit law, the burden lies with the objecting defendant.  Over ZTE’s objections regarding the burden of proof, the district court denied ZTE’s motion to dismiss. ZTE petitioned for a writ of mandamus, which the Federal Circuit granted.  The Court first determined that Federal Circuit—not regional circuit—law governs the placement of the burden of persuasion on the propriety of venue under § 1400(b).  It then held as a matter of Federal Circuit law that, upon motion by the Defendant challenging venue in a patent case, the Plaintiff bears the burden of establishing proper venue and that this holding  “best aligns with the weight of historical authority among the circuits and best furthers public policy.”  The Court remanded to the district court to consider whether venue was proper in light of its holding that the plaintiff, American GNC, bears the burden. Disc Disease Solutions Inc. v. VGH Solutions, Inc., No. 2017-1483 (Fed. Cir. May 1, 2018):  Pleading standard for patent infringement following the abrogation of Form 18. In December 2015, certain amendments to the Federal Rules of Civil Procedure took effect.  Among them was the abrogation of Rule 84 (stating that the “Forms in the Appendix suffice under these rules”) and Form 18 (a form adequate to plead a direct patent infringement claim).  Absent Form 18, complaints now must meet the Iqbal/Twombly standard for pleading to survive a 12(b)(6) motion. Disc Disease filed its complaint the day before the 2015 amendments became effective.  The district court determined that Iqbal/Twombly—not Form 18—applied to Disc Disease’s complaint and dismissed the complaint for failure to state a claim.  The district court later denied reconsideration because it did not view the 2015 amendments to be an intervening change in the law. The Federal Circuit reversed.  The Federal Circuit did not address whether Form 18 or Iqbal/Twombly governed because, it held, the district court erred in dismissing Disc Disease’s complaint even under Iqbal/Twombly‘s pleading standard.  The Court noted that the case “involves simple technology” with only four independent claims in the asserted patents.  Disc Disease’s complaint “specifically identified the three accused products—by name and by attaching photos of the product packaging as exhibits—and alleged that the accused products meet each and every element of at least one claim” of the asserted patents.  This was sufficient to state a claim for patent infringement in these circumstances. John Bean Technologies Corp. v. Morris & Associates, Inc., No. 17-1502 (Fed. Cir. Apr. 19, 2018):  Equitable estoppel when claims are substantively amended or added following ex parte reexamination. John Bean (and its predecessor) and Morris are competitors in the poultry chiller market.  After the patent-in-suit issued to John Bean, Morris sent John Bean’s counsel a demand letter on June 27, 2002, informing him that John Bean had been contacting Morris’s customers and asserting that Morris’s equipment infringes the recently issued patent.  The letter demanded that John Bean stop telling Morris’s customers that Morris’s products infringe John Bean’s patent and advised John Bean that the patent was invalid over a specific prior art reference.  John Bean did not respond, and Morris continued to develop and sell its product. Eleven years later, on December 18, 2013, John Bean filed a request for ex parte reexamination of the patent-in-suit.  During reexamination, John Bean amended the two original claims and added six additional claims in response to a rejection by the PTO.  Shortly after the reexamination certificate issued, John Bean filed a complaint in the U.S. District Court for the Eastern District of Arkansas against Morris for patent infringement.  The district court granted summary judgment in favor of Morris that John Bean’s infringement action was barred by equitable estoppel given John Bean’s silence after the demand letter. The Federal Circuit (Reyna, J.) reversed, holding that the district court abused its discretion in applying equitable estoppel to bar John Bean’s infringement action without considering how the ex parte reexamination affected the patent claims.  The Court explained that the amendments made during reexamination in this case were both substantial and substantive, including by adding new limitations.  As a result, the asserted claims did not exist at the time of Morris’s demand letter.  But the Court recognized that there may be other cases where the asserted claims may be considered identical for the purposes of infringement and also for applying equitable estoppel.  The Court also acknowledged that Morris may have recourse under the affirmative defenses of absolute and intervening rights. 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) Blair A. Silver – Washington, D.C. (+1 202-955-8690, bsilver@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: Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com) Caitlin J. Halligan – New York (+1 212-351-4000, challigan@gibsondunn.com) Nicole A. Saharsky – Washington, D.C. (+1 202-887-3669, nsaharsky@gibsondunn.com) Intellectual Property Group: Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com) Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com)Mark Reiter – Dallas (+1 214-698-3100, mreiter@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 29, 2018 |
Gibson Dunn Named Winner in Three Categories for D.C. Litigation Department of the Year

Click for PDF National Law Journal’s 2018 D.C. Litigation Department of the Year contest recognized Gibson Dunn as co-winner in the General Litigation [PDF] and Labor & Employment [PDF] categories and the winner in the Products Liability/Mass Torts [PDF] category.  Gibson Dunn was the only firm to win in three categories.  Profiles ran in the magazine’s June issue and noted the firm’s “winning streak in 2017 was marked by cases that may prove instructive for future litigation.”

May 24, 2018 |
Dodd Frank 2.0: Reforming U.S. HVCRE Capital Treatment

Click for PDF On Tuesday, May 22, 2018, the U.S. House of Representatives passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (Reform Bill), which had already passed the Senate on a bipartisan basis.  President Trump signed the Reform Bill into law today.  Among the Reform Bill’s more important provisions is a section reforming the current capital treatment of so-called High Volatility Commercial Real Estate (HVCRE) loans.  The Reform Bill, in provisions that are now effective, overrides certain highly conservative provisions in both the federal banking agencies’ (Banking Agencies) Basel III capital rule and their interpretations of it. HVCRE Capital Treatment Under the Basel III Capital Rule and the Banking Agencies’ Interpretations Current HVCRE treatment is a purely American phenomenon; it was not included in the international Basel III framework.  A form of capital “gold plating,” it imposes a 50% heightened capital treatment on certain commercial real estate loans that are characterized as HVCRE loans. The current Basel III capital rule defines an HVCRE loan as follows: A credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property, unless the facility finances: One- to four-family residential properties; Certain community development properties The purchase or development of agricultural land, provided that the valuation of the agricultural land is based on its value for agricultural purposes and the valuation does not take into consideration any potential use of the land for non-agricultural commercial development or residential development; or Commercial real estate projects in which: The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio under Banking Agency standards – e.g., 80% for a commercial construction loan; The borrower has contributed capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development expenses out-of-pocket) of at least 15% of the real estate’s appraised ”as completed” value; and The borrower contributed the amount of capital required  before the bank advances funds under the credit facility, and the capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project.[1] Under the current Basel III capital rule, the life of a project concludes only when the credit facility is converted to permanent financing or is sold or paid in full.[2] The current Basel III capital rule has raised many interpretative questions; however, many of the important ones have not been answered by the Banking Agencies, and others have been answered in a non-intuitive, unduly conservative manner.  In particular, the Banking Agencies interpreted the requirement relating to internally generated capital as foreclosing distributions of such capital even if the amount of capital in the project exceeds 15% of “as completed” value post-distribution.[3]  The Banking Agencies also have not permitted appreciated land value to be taken into account for purposes of the borrower’s capital contribution. The Reform Bill’s Principal Provisions The Reform Bill overrides the current Basel III capital rule.[4]  Specifically, it states that the Banking Agencies may impose a heightened capital charge on an HVCRE loan (as currently defined) only if the loan is also an HVCRE ADC loan.  Such a loan is defined as: A credit facility secured by land or improved real property that, prior to being reclassified by the depository institution as a non-HVCRE ADC loan— (A) primarily finances, has financed, or refinances the acquisition, development, or construction of real property; (B) has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and (C) is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility. Thus the loan must not only finance or refinance the acquisition, development, or construction of real property, it must “primarily” do so, must have a development purpose, and must be dependent on future income, sales proceeds or refinancing – not current income.  The “HVCRE ADC” loan definition also corrects some of the unduly conservative regulatory interpretations described above.  It permits appreciated land value, as determined by a qualifying appraisal, to be taken into account for purposes of the 15% test, and it permits capital to be withdrawn as long as the 15% test continues to be met. In addition, the Reform Bill overrides the current Basel III capital rule by stating that HVCRE status may end prior to the replacement of the ADC loan with permanent financing, upon: the substantial completion of the development or construction of the real property being financed by the credit facility; and cash flow being generated by the real property being sufficient to support the debt service and expenses of the real property, in accordance with the bank’s applicable loan underwriting criteria for permanent financings.[5] Additional exemptions from HVCRE treatment apply to loans for: the acquisition or refinance of existing income-producing real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the institution’s applicable loan underwriting criteria for permanent financings; and improvements to existing income-producing improved real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the institution’s applicable loan underwriting criteria for permanent financings. Finally, loans made prior to January 1, 2015 may not be classified as HVCRE loans. Conclusion The Reform Bill’s HVCRE ADC provisions are a welcome development.  They do not answer every question relating to HVCRE treatment, but they do purge regulatory interpretations that led to heightened capital treatment for many ADC loans in the absence of persuasive risk justifications.  It is to be hoped that the Banking Agencies further the legislation’s intent of aligning gold plated capital treatment more closely to risk when interpreting the new law.    [1]   See, e.g., 12 C.F.R. § 3.2.    [2]   Id.    [3]   See Interagency HVCRE FAQ Response 15.  It remains unclear how this interpretation squares with the text of the HVCRE regulation itself.    [4]   The original version of the Senate bill, which was passed first, did not include this provision.  Senator Tom Cotton, R-Ark, proposed the relevant amendment while the Senate was considering the bill.    [5]   The Reform Bill retains the current exemptions for loans financing one- to four-family residential properties, certain community development properties, and the purchase or development of agricultural land. The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long and James Springer. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions or Real Estate practice groups, or any of the following: Financial Institutions Group: Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) James O. Springer – Washington, D.C. (+1 202-887-3516, jspringer@gibsondunn.com) Real Estate and Finance Groups: Jesse Sharf – Los Angeles (+1 310-552-8512, jsharf@gibsondunn.com) Eric M. Feuerstein – New York (+1 212-351-2323, efeuerstein@gibsondunn.com) Erin Rothfuss – San Francisco (+1 415-393-8218, erothfuss@gibsondunn.com) Aaron Beim – New York (+1 212-351-2451, abeim@gibsondunn.com) Linda L. Curtis – Los Angeles (+1 213-229-7582, lcurtis@gibsondunn.com) Drew C. Flowers – Los Angeles (+1 213-229-7885, dflowers@gibsondunn.com) Noam I. Haberman – New York (+1 212-351-2318, nhaberman@gibsondunn.com) Victoria Shusterman – New York (+1 212-351-5386, vshusterman@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 21, 2018 |
The EU Responds to the U.S. Withdrawal from the Iran Deal

Click for PDF We recently assessed President Trump’s decision to abandon the 2015 Iran nuclear deal, known as the Joint Comprehensive Plan of Action (“JCPOA”), and to re-impose lifted sanctions on Iran, including secondary sanctions that threaten to limit non-U.S. entities’ access to the U.S. market if they transact with certain Iranian entities. On May 17, 2018, Jean-Claude Juncker, President of the European Commission, stated that the European Union (EU) would “stick to the [JCPOA]” and seek to protect “European businesses, especially small and medium-sized enterprises.”[1] The next day, the European Commission announced it would prohibit compliance with the re-imposed U.S. sanctions.[2] The Commission will accomplish this by revising an existing EU blocking statute,[3] so that EU nationals and other persons within the EU, as well as companies incorporated within the EU, such as subsidiaries of U.S. companies, will be prohibited from complying with the revived U.S. sanctions.[4] This decision thrusts companies that do business in both the United States and EU into significant legal uncertainty. The European Commission also announced a number of other measures designed to facilitate continued trade with Iran. For example, the Commission has “[l]aunched the formal process to remove obstacles for the European Investment Bank to decide under the EU budget guarantee to finance activities” in Iran.[5] As “confidence building measures,” the Commission will “continue and strengthen the ongoing sectoral cooperation with, and assistance to, Iran, including in the energy sector and with regard to small and medium-sized companies.”[6] The Commission has also said it would encourage member states “to explore the possibility of allowing one-off bank transfers to the Central Bank of Iran” to allow Iranian authorities to receive oil-related revenues.[7] Implementation Timeline The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced the re-imposed sanctions will be subject to 90- and 180-day wind-down periods that will expire on August 6 and November 4, 2018, respectively.[8] The European Commission aims to have the amended blocking statute take effect before the first expiration on August 6, 2018.[9] Once amended, the blocking statute will automatically take effect after two months, unless either the European Parliament or Council object, but it could take effect sooner if both institutions indicate approval before the objection periods ends.[10] Legal Risks A tangle of U.S. laws, including the Iran and Libya Sanctions Act of 1996 (“ISA”)[11] and Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”),[12] provide sanctions that apply extraterritorially to prohibit non-U.S. entities from transacting with various Iranian entities. Companies that engage in such transactions may face severe consequences, including large financial penalties and a complete ban from the U.S. banking system.[13] Needless to say, such a ban may pose an existential threat to non-U.S. entities with significant U.S. business. The practical effect of the EU blocking statute, however, remains uncertain. That regulation prohibits entities and persons from complying with U.S. sanctions and foreign court requests that stem from U.S. laws specified in the blocking statute’s annex.[14] The annex currently includes the following laws: a)      Cuban Liberty and Democratic Solidarity Act of 1996; b)      Iran and Libyan Sanctions Act of 1996; c)      Code of Federal Regulations, Ch. V, Part 515 (Cuban Assets Controls Regulations), subparts B, E, and G. The blocking statute’s impact remains uncertain for a variety of reasons. First, EU member states must give effect to the statute by passing domestic implementing laws. The United Kingdom passed such a law, which created a criminal offence for compliance with the stated U.S. laws. The U.K. law does not provide for a prison sentence as punishment,[15] but it does provide for a potentially unlimited fine.[16] Other member states also created criminal offences, including Ireland, the Netherlands, and Sweden. Other states, including Germany, Italy and Spain, created administrative penalties for non-compliance. Meanwhile some member states, including France, Belgium and Luxembourg, never implemented the blocking statute. It is unclear whether they would do so now, although they have a duty under EU law to implement the blocking statute. Second, the European Commission has not yet released the amended statute: its scope remains to be seen. Finally, the extent to which member states will prosecute violations of the blocking statute remains unclear. It has largely been viewed as a political symbol, rather than an effective legal tool. No company has ever been convicted of breaching the blocking statute,[17] and only Austria has ever pressed charges.[18] Indeed, European Commission Vice President Valdis Dombrovskis recognized the blocking statute “could be of limited effectiveness” given the centrality of the U.S. banking system.[19] Considering the current political situation, which substantially differs from the situation when the EU blocking statute was first introduced in 1996, the enforcement appetite, however, might increase. Possible Options for Affected Companies The U.S. sanctions and impending EU blocking statute confront companies with a multi-jurisdictional Scylla and Charybdis. Entities have three basic options. First, they could attempt to comply with both U.S. and EU law while maintaining business in Iran. Some companies, such as French oil conglomerate Total, have indicated they will seek special licenses from the United States to allow their business in Iran to continue.[20] Given that the purpose of the U.S. sanctions is to isolate Iran economically, such efforts seem unlikely to succeed. Second, companies could comply with U.S. sanctions while exiting Iranian business and thereby potentially violating the EU blocking statute. While special attention has to be paid to criminal prosecution in, inter alia, Ireland, and high fines in the United Kingdom,[21] most member states impose maximum fines well under $1 million.[22] The United States, meanwhile, may impose multi-billion dollar fines[23] and ban companies from the U.S. banking system. Given the profound threat of such penalties, a number of non-U.S. companies have already announced plans to end business in Iran.[24] Third, companies could comply with the blocking statute, maintain business with Iranian entities, and violate the U.S. sanctions. But given the existential threat that a ban from the U.S. financial system would pose to many large companies, this route appears least tenable. Whether this route merits pursuit will largely depend on the support the EU commits to providing to small and medium-sized enterprises that become a target of U.S. sanctions. Conclusion The European Commission’s announcement that it will amend the blocking statute further increases the uncertainty companies face in navigating U.S. sanctions on Iran, and may expose them to significant liability. Russia’s recently proposed law to impose fines and possibly imprisonment for complying with U.S. sanctions against Russia only adds to the uncertainty.[25] The scope and practical effect of the EU blocking statute remain to be seen, but Gibson Dunn will continue to closely monitor the situation. 1 Speech, European Commission, Press conference remarks by Jean-Claude Juncker (May 17, 2018), http://europa.eu/rapid/press-release_SPEECH-18-3851_en.htm. 2 Press Release, European Commission, European Commission acts to protect the interests of EU companies investing in Iran as part of the EU’s continued commitment to the Joint Comprehensive Plan of Action (May 18, 2018), http://europa.eu/rapid/press-release_IP-18-3861_en.htm. 3 Council Regulation (EC) No. 2271/1996 (OJ L 309, 29.11.1996, p. 1-6). 4 Id.; see also Press Release, supra note 2. 5 Press Release, supra note 2. 6 Id. 7 Id. 8 U.S. Dep’t of Treasury, Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018 National Security Presidential Memorandum Relating to the Joint Comprehensive Plan of Action (JCPOA) (May 8, 2018), https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf, (hereinafter “OFAC FAQ”). 9 Press release, supra note 2. 10 Id. 11 Pub. L. No. 104-172 (codified as amended in scattered sections of 50 U.S.C.). 12 Pub. L. No. 111-195 (codified as amended in scattered sections of 22 and 50 U.S.C.). 13 CISADA § 102. 14 Council Regulation (EC) No. 2271/1996, art. 5. 15 Extraterritorial US Legislation (Sanctions against Cuba, Iran, Libya) (Protection of Trading Interests) Order, S.I. 1996/3171. The U.K. law’s omission of a custodial sentence makes it an outlier in U.K. financial crime laws. 16 Id. 17 See, e.g., In 1990s Redux, EU to Consider Blocking U.S. Sanctions Over Iran, N.Y. Times (May 9, 2018), https://www.nytimes.com/reuters/2018/05/09/business/09reuters-iran-nuclear-eu-business.html. 18 See Austria charges bank after Cuban accounts cancelled, Reuters (Apr. 27, 2007), http://www.reuters.com/article/2007/04/27/austria-bawag-idUSL2711446820070427. 19 Huw Jones, EU says block on U.S. sanctions on Iran of limited use for EU banks, Reuters (May 17, 2018), https://www.reuters.com/article/us-iran-nuclear-eu-banks/eu-says-block-on-u-s-sanctions-on-iran-of-limited-use-for-eu-banks-idUSKCN1II17K; 20 Steven Mufson, French oil giant Total seeks Iran sanctions waiver from Trump for $2 billion project, Washington Post (May 16, 2018), https://www.washingtonpost.com/business/economy/french-oil-giant-total-seeks-iran-sanctions-waiver-from-trump-for-2-billion-project/2018/05/16/dfc709cc-5926-11e8-b656-a5f8c2a9295d_story.html. 21 See Extraterritorial US Legislation (Sanctions against Cuba, Iran, Libya) (Protection of Trading Interests) Order, S.I. 1996/3171 (articulating no maximum penalty); Lag om EG:s förordning om skydd mot extraterritoriell lagstiftning som antas av ett tredje land (Svensk författningssamling [SFS] 1997:825) (Swed.) (same). 22 For example, the Netherlands imposes a maximum fine of one million guilders, which is about $560,000. See Uitvoering van verordening (EG) nr. 2271/96 van de Raad van de Europese Unie van 22 november 1996, https://www.parlementairemonitor.nl/9353000/1/j9vvij5epmj1ey0/vi3ah5gewv8e. 23 For example, it levied a $9 billion fine against BNP Paribas for violating sanctions against Iran, Cuba and Sudan. Maia De La Baume & Anca Gurzu, Europe not backing down on Iran, Politico (May 17, 2018), https://www.politico.com/story/2018/05/17/europe-iran-trump-595120. 24 EU moves to block US sanctions on Iran, Al Jazeera (May 17, 2018), https://www.aljazeera.com/news/2018/05/eu-moves-block-sanctions-iran-180517134848253.html. 25 Maya Lester, Draft Russian Bill criminalises compliance with Western sanctions, European Sanctions Blog (May 16, 2018), https://europeansanctions.com/2018/05/16/draft-russian-bill-criminalises-compliance-with-western-sanctions/. The proposed Russian law targets U.S. sanctions against Russia, not Iran, but if Russia chooses to maintain business with Iran, then it’s possible that compliance with the re-imposed U.S. sanctions against Iran could trigger the Russian law where that compliance implicates business in Russia. See id. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Patrick Doris, Mark Handley, Richard Roeder, Adam Smith, and Chris Timura. 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 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) 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) Helen L. Galloway – Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart – Washington, D.C. (+1 202-887-3706, whart@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) 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) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com) Richard W. Roeder – Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 21, 2018 |
Supreme Court Upholds Agreements To Individually Arbitrate Employment-Related Disputes

Click for PDF Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP v. Morris, No. 16-300; National Labor Relations Board v. Murphy Oil USA, No. 16-307 Decided May 21, 2018 Today, the Supreme Court held 5-4 that an employee’s agreement to arbitrate employment-related disputes with his employer through individual arbitration is enforceable under the Federal Arbitration Act. The Court rejected the argument that enforcing the arbitration agreement’s class action waiver would violate employees’ right to engage in collective action under the National Labor Relations Act. Background: The Federal Arbitration Act (FAA) provides that agreements to arbitrate transactions involving interstate commerce “shall be valid, irrevocable, and enforceable,” except “upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2.  In these consolidated cases, the employees agreed to arbitrate work-related disputes through individual arbitration, but later sued their employers in federal courts, arguing that the arbitration agreements were invalid because they violated employees’ right to engage in “concerted activities” under the National Labor Relations Act (NLRA).  29 U.S.C. § 157. Issue: Whether an agreement that requires an employer and an employee to resolve work-related disputes through individual arbitration, and waive class proceedings, is enforceable under the FAA, notwithstanding the employee’s NLRA right to engage in concerted activities.Court’s Holding: Yes.  Arbitration agreements requiring individual arbitration of employment disputes are enforceable notwithstanding the NLRA collective-action right. What It Means: The Supreme Court ruling confirms that courts will continue to enforce agreements between employers and employees to arbitrate their disputes on an individual basis, rather than in class action litigation. This case continues the Supreme Court’s trend of enforcing the FAA’s strong policy favoring arbitration. The Court held that under the FAA’s saving clause, litigants only can challenge an arbitration agreement on grounds that would apply to “any” contract—not on grounds specific to arbitration. The Court’s reasoning suggests that state laws restricting arbitration are not likely to withstand challenge under the FAA. Clients should consult a Gibson Dunn attorney regarding the nuances created by different jurisdictions. The Court determined that the NLRA’s “concerted activities” provision was intended to protect organizing and collective bargaining in the workplace, not the treatment of class actions or class arbitration. Interestingly, the Solicitor General said the arbitration agreements are enforceable, but the National Labor Relations Board (NLRB) said they are not enforceable – and both argued their positions before the Supreme Court. For this reason (and others), the Court declined to afford Chevron deference to the NLRB’s view. “It is this Court’s duty to interpret Congress’s statutes as a harmonious whole rather than at war with one another. And abiding that duty here leads to an unmistakable conclusion.” Justice Gorsuch, writing for the Court Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com   Gibson Dunn’s Labor and Employment lawyers are available to assist in addressing any questions you may have regarding arbitration programs. Please feel free to contact the following practice leaders or the attorneys with whom you work: Labor and Employment Practice Catherine A. Conway +1 213.229.7822 cconway@gibsondunn.com) Eugene Scalia +1 202.955.8206 escalia@gibsondunn.com Jason C. Schwartz +1 202.955.8242 jschwartz@gibsondunn.com   Related Practice: Class Actions Theodore J. Boutrous, Jr. +1 213.229.7804 tboutrous@gibsondunn.comm Christopher Chorba +1 213.229.7396 cchorba@gibsondunn.com Theane Evangelis +1 213.229.7726 tevangelis@gibsondunn.com   © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 17, 2018 |
Webcast: Supreme Court Strikes Down Federal Limits On Sports Gambling

“A more direct affront to state sovereignty is not easy to imagine.” — Justice Alito, writing for the majority On May 14, 2018, the United States Supreme Court held 7-2 striking down a federal law which prohibited States from authorizing sports betting. Gibson Dunn attorneys Theodore B. Olson and Matthew D. McGill led the successful team representing the Governor of New Jersey in this landmark case. In this webcast Mr. Olson and Mr. McGill will discuss the case, the oral argument, and the impacts of this Supreme Court decision. They will also be joined by Gibson Dunn partner Debra Wong Yang to discuss the regulatory and commercial opportunities following this decision. Murphy v. National Collegiate Athletic Association, No. 16-476 New Jersey Thoroughbred Horsemen’s Association, Inc. v. National Collegiate Athletic Association, No. 16-477 View Slides [PDF] PANELISTS Theodore B. Olson is a partner in the Washington, D.C. office of Gibson Dunn, a longtime member of the firm’s Executive Committee, and Founder of the firm’s Crisis Management, Sports Law, and Appellate and Constitutional Law practice groups. Selected by Time magazine in 2010 as one of the 100 most influential people in the world, Mr. Olson is one of the nation’s premier appellate and United States Supreme Court advocates. He has argued 63 cases in the Supreme Court and has prevailed in over 75% of those arguments. These cases include the two Bush v. Gore cases arising out of the 2000 presidential election; Citizens United v. Federal Election Commission; Hollingsworth v. Perry, the case upholding the overturning of California’s Proposition 8, banning same-sex marriages and Murphy v. NCAA, repealing PASPA. Mr. Olson’s practice is concentrated on appellate and constitutional law, federal legislation, media and commercial disputes, and assisting clients with strategies for the containment, management and resolution of major legal crises occurring at the federal/state, criminal/civil and domestic/international levels. He has handled cases at all levels of state and federal court systems throughout the United States. Matthew D. McGill is a partner in the Washington, D.C. office of Gibson Dunn.  He practices in the firm’s Litigation Department and its Appellate and Constitutional Law and Intellectual Property practice groups. Mr. McGill is a Chambers-ranked appellate litigator, and previously was named a national Rising Star by Law360, which identified him as one of ten appellate lawyers under 40 to watch. He has participated in 20 cases before the United States Supreme Court, prevailing in 15.  Spanning a wide range of substantive areas, those representations have included several high-profile triumphs over foreign and domestic sovereigns. Debra Wong Yang This webcast will be moderated by Debra Wong Yang, a partner in the Los Angeles office of Gibson Dunn. Drawing on her depth of experience and record of success, Ms. Yang focuses part of her practice on strategic counseling. She leads critical representations, both high-profile and highly confidential, involving a wide variety of industries, economic sectors, regulatory bodies, law enforcement agencies, global jurisdictions and all types of proceedings. She guides teams of attorneys and outside consultants in the development and implementation of strategies to achieve the most favorable outcomes, greatest protection of reputational interests and minimalizing of harm to the business assets. Ms. Yang also has a strong background in addressing and resolving problems across the white collar litigation spectrum, including through corporate and individual representations, internal investigations, crisis management and compliance. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. 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 18, 2018 |
Theodore Olson Named Litigator of the Week

The Am Law Litigation Daily named Washington, D.C. partner Theodore B. Olson as its Litigator of the Week [PDF] for convincing the U.S. Supreme Court to strike down federal limits on sports gambling. The profile was published on May 18, 2018.

May 16, 2018 |
The ‘MFW’ Framework Gains Traction Outside the Merger Context

Washington, D.C. partner Jason Mendro and associate Jeffrey Rosenberg are the authors of “The ‘MFW’ Framework Gains Traction Outside the Merger Context,” [PDF] published in the Delaware Business Court Insider on May 16, 2018.

May 17, 2018 |
Gibson Dunn Strengthens Private Equity and M&A Practices With Four Corporate Partners

Gibson, Dunn & Crutcher LLP is pleased to announce that George Stamas, Mark Director, Andrew Herman, and Alexander Fine have joined the firm as partners.  Stamas will work in the firm’s New York and Washington, D.C. offices, while Director, Herman and Fine will be based in the Washington, D.C. office and also will work regularly in the New York office.  They all join from Kirkland & Ellis, continuing their corporate, mergers and acquisitions and private equity practices. “We are delighted to add this distinguished team to the firm,” said Ken Doran, Chairman and Managing Partner of Gibson Dunn.  “George, Mark, Andrew and Alex are talented, highly regarded lawyers and energetic business developers.  They have strong contacts in the legal and business communities in D.C., New York and internationally.  Their addition will significantly strengthen our M&A, private equity and corporate practices not just on the East Coast but across the firm worldwide.” “Many of us here at Gibson Dunn have worked opposite of this group in a number of transactions, and we have the utmost respect for them,” said Stephen Glover, a partner in the Washington, D.C. office and Co-Chair of the M&A Practice Group.  “Our combined practice will create a D.C. corporate powerhouse that will firmly establish our position as a leader in high-end corporate and M&A.  In addition, their private equity and public company M&A experience will complement and expand our national and international practice.” “We are excited about the opportunity to join the firm,” said Stamas.  “We have long admired Gibson Dunn’s culture and collaborative approach to servicing clients.  We are committed to joining the team and further developing our practice together.  We wish the very best to our former colleagues, who we hold in high regard.” About George Stamas Stamas served as a senior partner in Kirkland & Ellis’ corporate practice group since 2002 and will continue to serve as a senior partner in Gibson Dunn’s New York and Washington, D.C. offices.  He focuses on public company and private equity M&A and corporate securities transactions.  He also counsels C-level executives and board of directors on corporate governance matters. Stamas has previously served as Vice Chair of the Board of Deutsche Banc Alex Brown, Inc.; as a founding board member of FTI Consulting (NYSE); as a venture partner of international venture capital firm New Enterprise Associates; and as a member of numerous public and private corporate boards. He is an executive board member of New York private equity firm MidOcean Partners.  He also is a board member of the Shakespeare Theatre Company and on the National Advisory Council of Youth Inc.  He is a co-founder of The Hellenic Initiative and a member of The Council on Foreign Relations. Stamas is also is a partner of Monumental Partners, which controls the Washington Capitals and Washington Wizards and is a partner of the Baltimore Orioles. He graduated in 1976 from the University of Maryland Law School, where he was a member of the International Law Review, and from 1977 to 1979, he served as special counsel to Stanley Sporkin in the Enforcement Division of the Securities and Exchange Commission. About Mark Director Director represents public companies and private equity sponsors and their portfolio companies in a broad range of transactions, including M&A, leveraged buyouts, spin-offs, minority investments and joint ventures.  He also advises boards of directors and corporate executives on corporate governance, public disclosure, securities reporting, and compliance and risk management matters. He is a member of the Society for Corporate Governance and the Board of Directors of Everybody Wins! DC, a children’s literacy organization.  He serves as Vice President and a member of the Board of Directors of Washington Hebrew Congregation. Director was a partner with Kirkland & Ellis since 2002.  Before that he served as Executive Vice President and General Counsel of publicly traded US Office Products Co. and of a private equity-owned telecommunications company.  He graduated cum laude in 1984 from Harvard Law School, where he was a member of the Journal on Legislation and worked with the Hon. Douglas H. Ginsburg (then a professor at Harvard) to co-author a casebook on the regulation of the electronic mass media. About Andrew Herman Herman’s practice focuses on advising private equity sponsors and their portfolio companies on leveraged buyouts, growth equity investments and other transactions.  He also advises public companies on M&A transactions, securities law compliance and corporate governance.  He is experienced in advising on the acquisition and sale of sports franchises. Herman joined Kirkland & Ellis in 2002 and became a partner in 2004.  He graduated in 1995 from Columbia University School of Law, where he was a Harlan Fiske Stone Scholar and the submissions editor of the Journal of Transactional Law.  He received a master’s degree with honors in accounting from the University of North Carolina, Chapel Hill in 1992.  Herman serves on the Board of Directors and chairs the Finance Committee at Adas Israel Congregation. About Alexander Fine Fine’s practice focuses on advising private equity sponsors and public companies on a wide range of transactional matters, including strategic M&A, leveraged buyouts, minority investments, and joint ventures.  He also advises clients on corporate governance and securities law matters. Fine was previously a partner with Kirkland & Ellis since 2010, and before that served as Executive Vice President and Corporate Counsel of Allied Capital Corporation. He graduated in 2000 from the University of Virginia School of Law where he was a member of the Order of the Coif and of the Editorial Board of the Virginia Law Review.