Richard Manfredi, Author at Gibson Dunn

The challengers to the Rule have explained that if the court rules for them on the merits, then the remedy is for the court to vacate the Rule nationwide, in an order that is not limited to the parties in the case. A decision is expected by August 30.

This past Friday, July 19, global tax-consulting firm Ryan, LLC moved for summary judgment in its challenge to the Federal Trade Commission’s Non-Compete Rule in the U.S. District Court for the Northern District of Texas.[1] Gibson Dunn represents Ryan. A group of trade associations led by the United States Chamber of Commerce has likewise moved for summary judgment. Ryan and the trade associations previously won a preliminary injunction and stay of the Rule’s effective date (see Gibson Dunn’s July 5 client alert), which was limited to the parties to the case.[2]

Ryan’s primary argument—which the Court already found was likely to succeed—is that the FTC lacks statutory authority to promulgate the Non-Compete Rule. Ryan also argues that a grant of rulemaking authority to define “unfair methods of competition” would constitute an unconstitutional delegation of legislative power; that the rule is unlawfully retroactive; and that the FTC Commissioners are unconstitutionally insulated from the President’s control. Ryan further contends that the Non-Compete Rule is arbitrary and capricious in violation of the Administrative Procedure Act, because the FTC failed to justify the nearly universal breadth of its ban, overstated the Rule’s purported benefits, and understated its costs.

Ryan has asked the Court to vacate the Non-Compete Rule, with nationwide effect. As Ryan explained in its motion, under applicable Fifth Circuit precedent, if the Court rules for Ryan on the merits, then under the Administrative Procedure Act it is required to vacate the Rule in an order that is not limited to the parties to the case.

The Court has stated that it will rule on the summary judgment motions by August 30, shortly before the Rule is set to take effect on September 4. Briefing on Ryan’s and the trade associations’ motions, as well as the FTC’s expected cross-motion for summary judgment, is scheduled to be completed on August 16.

[1] Ryan’s brief in support of its motion is available here.

[2] Further analysis of the FTC’s Non-Compete Rule is available here.

Eugene Scalia, Allyson N. Ho, Amir C. Tayrani, Andrew Kilberg, Elizabeth A. Kiernan, Aaron Hauptman, and Josh Zuckerman represent Ryan, LLC and prepared this update.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any leader or member of the firm’s Administrative Law & Regulatory, Labor & Employment, or Antitrust & Competition practice groups:

Administrative Law and Regulatory:
Allyson N. Ho – Dallas (+1 214.698.3233, aho@gibsondunn.com)
Eugene Scalia – Washington, D.C. (+1 202.955.8673, escalia@gibsondunn.com)
Amir C. Tayrani – Washington, D.C. (+1 202.887.3692, atayrani@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, hwalker@gibsondunn.com)

Labor and Employment:
Andrew G.I. Kilberg – Washington, D.C. (+1 202.887.3759, akilberg@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214.698.3203, knelson@gibsondunn.com)
Jason C. Schwartz – Washington, D.C. (+1 202.955.8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Los Angeles (+1 213.229.7107, ksmith@gibsondunn.com)

Antitrust and Competition:
Rachel S. Brass – San Francisco (+1 415.393.8293, rbrass@gibsondunn.com)
Svetlana S. Gans – Washington, D.C. (+1 202.955.8657, sgans@gibsondunn.com)
Cynthia Richman – Washington, D.C. (+1 202.955.8234, crichman@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202.955.8678, sweissman@gibsondunn.com)

Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.

Gibson Dunn’s Workplace DEI Task Force aims to help our clients develop creative, practical, and lawful approaches to accomplish their DEI objectives following the Supreme Court’s decision in SFFA v. Harvard. Prior issues of our DEI Task Force Update can be found in our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update (listed below).

Key Developments

Following his recent attacks on Tractor Supply, social media personality Robby Starbuck launched another campaign on July 9, this time against John Deere. In a series of posts on X, Starbuck criticized John Deere for its DEI policies, workplace affinity groups, sponsorship of Pride events, and affiliation with shareholder Bill Gates. In dozens of tweets and social media posts, Starbuck characterized John Deere’s policies as “woke,” “creepy,” “communist”-like, and “crazy,” and called upon his followers to complain to John Deere’s customer service office and directly to its CEO. On July 16, apparently in response to Starbuck’s campaign, John Deere announced that it will no longer participate in or support “social or cultural awareness parades, festivals, or events,” that it will audit training materials “to ensure the absence of socially-motivated messages,” that it will “reaffirm” that the “existence of diversity quotas and pronoun identification have never been and are not company policy,” and that its Business Resource Groups will focus exclusively on things like professional development, networking, and mentoring. However, John Deere said that it would “continue to track and advance the diversity of our organization.” Starbuck immediately claimed victory, but called John Deere’s commitments “half measures,” saying that customers “want to hear that DEI policies are entirely gone.” Starbuck has said that he is planning to “expose” another company soon and that he will be targeting companies that rely on politically conservative consumers.

On June 24, 2024 and July 10, 2024, the Equal Protection Project (EPP) filed complaints with the U.S. Department of Education’s Office for Civil Rights (OCR) against Ithaca College and Rochester Institute of Technology. The EPP alleges that two of Ithaca College’s scholarship programs discriminate based on race and skin color in violation of Title VI because they are offered only to students of color. The EPP also alleges that Rochester Institute of Technology’s “Women in STEM” scholarship, which is offered exclusively to female, female-identifying, or non-binary students, discriminates based on sex and gender identity in violation of Title IX. OCR is evaluating both of EPP’s complaints.

On July 10, a three-judge panel for the Seventh Circuit affirmed summary judgment for Honeywell in Charles Vavra v. Honeywell International, Inc., No. 23-2823 (7th Cir.). Vavra argued that Honeywell violated Title VII and Illinois law by retaliating against him for refusing to watch a training video he claimed discriminated against white people. The district court granted summary judgment on Vavra’s claims last August after finding that he failed to show either that he was terminated due to bias or that the training itself was racist. Vavra appealed, and argued before the Seventh Circuit that the video crossed a line when it stated that workers carry unconscious biases. In an opinion written by Judge Kirsch, the court reasoned that Vavra could not have reasonably believed that the training video was discriminatory because he never watched it, and Vavra had failed to prove retaliatory motive..

On July 10, EEOC Vice Chair Jocelyn Samuels told attendees of an agency webinar that the Supreme Court’s recent decision in Muldrow v. City of St. Louis should have “no impact” on “lawful and appropriate” DEI work. While some have speculated that Muldrow will result in more challenges to company DEI programs, Vice Chair Samuels maintained that most company DEI efforts will remain unaffected by the decision. “The vast majority of the kinds of DEIA initiatives that employers are undertaking are what I call race-neutral,” she said, noting such programs “are carried out in ways that benefit everyone in the workplace.” EEOC Commissioner Kalpana Kotagal, who also spoke during the webinar, supported Samuels’ position, stating that “[a]s the case law is starting to really demonstrate, there are so many ways to lawfully implement DEIA initiatives that shouldn’t be difficult to defend and support.” Kotagal discussed examples of policies that she said remain lawful, such as targeted outreach to increase the diversity of applicant pools, voluntary employee affinity groups, and mentorship and training opportunities open to all applicants. “In general,” she said, “these kinds of programs are not going to be problematic because there’s no need to tie them to a protected class.”

Media Coverage and Commentary:

Below is a selection of recent media coverage and commentary on these issues:

Wall Street Journal, “How Tractor Supply Decided to End DEI, and Fast” (June 30): The Journal’s Sarah Nassauer reports on Tractor Supply’s June 27 decision to end its DEI programming and climate change goals, in response to a public pressure campaign launched on June 6 by “former Hollywood director turned conservative activist” Robby Starbuck. Using publicly available statements and videos, including a video of Tractor Supply Chief Executive Hal Lawton talking about the importance of company diversity and inclusion, Starbuck called upon customers to boycott the company. The “effectiveness of Starbuck’s campaign,” writes Nassauer, seems like a sign of “how the tide has turned” against corporate DEI programming. Nassauer suggests that companies like Tractor Supply, whose customers skew more male, rural and conservative, are increasingly seeing DEI initiatives as presenting “too much of a risk.” But companies’ reactions to the current DEI backlash have varied. As David Glasgow, executive director of the Meltzer Center for Diversity, Inclusion and Belonging, told Nassauer, companies favored by “liberal consumers” are largely maintaining their DEI commitments. Tractor Supply’s decision, says Glasgow, represents “an illustration of the two Americas.”
Reuters, “Fearless Fund: Diversity funds and Black founders feel chill” (July 2): Reuters’ Krystal Hu reports that the Eleventh Circuit’s June 3 decision enjoining Fearless Fund’s Strivers Grant Contest, which provides financial support to Black female entrepreneurs, is having “a chilling effect across the small industry of diversity-focused venture capital funds.” The court’s decision could affect some $200 billion committed to similar funding initiatives nationwide, writes Hu. Recent data from Crunchbase indicates that venture funding of Black entrepreneurs, which “surged in 2021,” has since “plunged.” Hu notes that several of Fearless Fund’s financing partners have withdrawn, citing the court’s decision. But Hu says that the minority venture capital community is not backing down. “People have the right to fund marginalized communities if and when racial disparities exist, and that is something needs to be protected,” Arian Simone, CEO of Fearless Fund, told Hu. Shila Nieves Burney, a general partner at Zane Venture Fund, another Atlanta-based fund, told Hu that she will continue to “back diverse teams” despite the Eleventh Circuit decision. But Burney expressed concern that the already limited funding provided to Black entrepreneurs is under threat: “If Fearless Fund is not able to raise their next fund, that creates a huge gap in the ecosystem. When there’s an attack on Black VCs, who’s going to fill that gap?”
Law360, “Armstrong Teasdale Resisted Diversity, Ex-DEI VP Says” (July 5): Law360’s Lauren Berg reports on a lawsuit filed June 30 in Missouri state court by Armstrong Teasdale LLP’s former vice president of diversity, equity and inclusion. Sonji R. Young, a Black woman hired in February 2021 to be the firm’s first DEI officer, claims that she experienced sex, age, race, color, and disability discrimination, as well as retaliation and defamation. Young alleges that firm officers, partners, and staff—most of whom are white—repeatedly obstructed her efforts to improve diversity and inclusion at the firm by refusing to train her on firm systems, denying her requests for additional staff and for funding of employee resource groups, undermining her efforts to recruit diverse talent, and otherwise withholding their support for DEI initiatives. Young also alleges that she was terminated in February 2023 after recommending certain DEI-related changes to the firm’s managing partner.
Washington Post, “Many universities are abandoning race-conscious scholarships worth millions” (July 9): The Post’s Danielle Douglas-Gabriel reports on the elimination of race-conscious scholarship criteria at dozens of colleges and universities. The Post has identified nearly 50 institutions that have “paused, ended or reconfigured hundreds of race-conscious scholarships worth . . . at least $45 million.” Most of these changes are occurring at public universities in states like Wisconsin, Ohio, and Missouri, where Republican legislators have passed laws banning race-conscious financial aid. Because far more colleges and universities rely on financial aid to improve student body diversity, as opposed to race-conscious admissions policies, Douglas-Gabriel reports that higher education experts are worried that this shift will have “a more profound impact on diversity in higher education” than the SFFA affirmative action decision itself. Faced with legislative mandates, institutions in these states are now shifting scholarship eligibility criteria away from race and toward alternatives like household income, zip code, or first generation-student status. But even these alternatives, if too close a proxy for race, “could run afoul of the law,” New York University School of Law professor Kenji Yoshino told the Post. Douglas-Gabriel notes that many donors are unhappy with these changes, including Mary Willis and Cynthia Willis-Esqueda, sisters who helped create a scholarship for Black, Hispanic, and Native students in honor of their father, a former professor at the University of Missouri at Kansas City. Willis and Willis-Esqueda are considering legal action of their own, expressing anger “that anybody would dare to say that we can’t decide where our little bit of inheritance goes.”

Case Updates:

Below is a list of updates in new and pending cases:

1. Contracting claims under Section 1981, the U.S. Constitution, and other statutes:

Do No Harm v. Pfizer, Inc., 646 F. Supp. 3d 490 (S.D.N.Y. 2022); No. 23-15 (2d Cir. 2024): On September 15, 2022, conservative medical advocacy organization Do No Harm filed suit against Pfizer, alleging that Pfizer discriminated against white and Asian students by excluding them from its Breakthrough Fellowship Program which provides college seniors with summer internships, two years of employment post-graduation, mentoring, and a two-year scholarship for a full-time master’s program. To be eligible, applicants must “[m]eet the program’s goals of increasing the pipeline for Black/African American, Latino/Hispanic and Native Americans.” Do No Harm requested a temporary restraining order and preliminary and permanent injunctions against the program’s eligibility criteria. In December 2022, the district court denied Do No Harm’s motion for a preliminary injunction and dismissed the case for lack of subject matter jurisdiction, finding that Do No Harm lacked Article III standing because it did not identify at least one member by name. Do No Harm appealed to the Second Circuit, which on March 6, 2024 affirmed the district court’s dismissal, holding that an organization must name at least one affected member to establish Article III standing under the “clear language” of Supreme Court precedent. (We previously covered this decision here.) Do No Harm petitioned for rehearing en banc.
- Latest update: On July 1, Pfizer filed its opposition to Do No Harm’s petition for rehearing en banc, arguing that the case does not conflict with Supreme Court or Second Circuit authority, create a conflict among the circuits, or present “a question of exceptional importance.”
Do No Harm v. Gianforte., No. 6:24-cv-00024-BMM-KLD (D. Mont. 2024): On March 12, 2024, Do No Harm filed a complaint on behalf of “Member A,” a white female dermatologist in Montana, alleging that a Montana law violates the Equal Protection Clause by requiring the governor to “take positive action to attain gender balance and proportional representation of minorities resident in Montana to the greatest extent possible” when making appointments to the state’s twelve-member Medical Board. Do No Harm alleges that since the ten already-filled seats are currently held by six women and four men, Montana law requires that the remaining two seats be filled by men, which would preclude Member A from holding the seat. On June 7, Governor Gianforte moved to dismiss for lack of jurisdiction.
- Latest update: On June 28, 2024, Do No Harm filed its opposition, arguing that its individual members have standing because the Supreme Court treats any statute that denies equal treatment as causing an injury in fact, regardless of whether a candidate has actually applied for a position. Further, Do No Harm argued that Governor Gianforte’s promise to interpret the Montana statute without discriminating does not fix the constitutional problem, because the plain text of the law “authorizes or encourages unconstitutional consideration of race and gender.”
Do No Harm v. National Association of Emergency Medical Technicians, No. 3:24-cv-11-CWR-LGI (S.D. Miss. 2024): On January 10, 2024, Do No Harm challenged the diversity scholarship program operated by the National Association of Emergency Medical Technicians (NAEMT), an advocacy group representing paramedics, EMTs, and other emergency professionals. NAEMT awards up to four $1,250 scholarships annually to students of color hoping to become EMTs or paramedics. Do No Harm requested a temporary restraining order, preliminary injunction, and permanent injunction against the program. On January 23, 2024, the court denied Do No Harm’s motion for a TRO, and NAEMT moved to dismiss Do No Harm’s amended complaint on March 18.
- Latest update: On June 6, 2024, Do No Harm filed a notice of supplemental authority, drawing the court’s attention to the Eleventh Circuit’s decision in Fearless Fund, which it argued supports the claim that Do No Harm has associational standing because its members are able and ready to apply for a scholarship. On June 25, the defendant submitted a response, arguing that Fearless Fund does not help establish injury in fact because there “was never any racial requirement” for applicants to the NAEMT scholarship, whereas Fearless Fund involved a diversity program that explicitly barred everyone but black females from applying.
Suhr v. Dietrich, No. 2:23-cv-01697-SCD (E.D. Wis. 2023): On December 19, 2023, a dues-paying member of the Wisconsin State Bar filed a complaint against the Bar over its “Diversity Clerkship Program,” a summer hiring program for first-year law students. The program’s application requirements had previously stated that eligibility was based on membership in a minority group. After the Supreme Court’s decision in SFFA, the eligibility requirements were changed to include students with “backgrounds that have been historically excluded from the legal field.” The plaintiff claims that the Bar’s program is unconstitutional even with the new race-neutral language, because, in practice, the selection process is still based on the applicant’s race or gender. The plaintiff also alleges that the Bar’s diversity program constitutes compelled speech and association in violation of the First Amendment. After reaching a partial settlement agreement with the Bar to remove the eligibility requirements concerning historically excluded backgrounds, the plaintiff filed an amended complaint, challenging three mentorship and leadership programs that allegedly discriminate based on race, which are funded by mandatory dues paid to the Bar. On May 31, the Bar moved to dismiss the amended complaint for failure to state a claim.
- Latest update: On June 28, 2024, the plaintiff opposed the Bar’s motion to dismiss, arguing that the Bar’s dues-funded programs are not “germane to the constitutional purpose” of a bar association, thereby violating the First Amendment. The plaintiff also argued that his claims are not time-barred because they accrue every day that the diversity program continues.

2. Employment discrimination and related claims:

Beneker v. CBS Studios, No. 2:24-cv-01659-JFW-SSC (C.D. Cal. 2024): On February 29, 2024, a straight, white, male writer sued CBS, alleging that the network’s de facto hiring policy discriminated against him on the bases of sex, race, and sexual orientation in violation of Section 1981 and Title VII. CBS declined to hire the plaintiff as a staff writer multiple times, but did hire several black writers, female writers, and a lesbian writer. The plaintiff requested a permanent injunction against the de facto policy, a staff writer position, and damages. On May 23, 2024, CBS Studios and parent company Paramount Global moved to dismiss.
- Latest update: On June 24, 2024, the defendants filed a second motion to dismiss in light of the plaintiff’s voluntary dismissal of his Title VII claims and Section 1981 claims with respect to only the white female/lesbian writers. The defendants reaffirmed their theory that the First Amendment is a “complete bar” to the plaintiff’s remaining claims because CBS is an “expressive enterprise” and has the right to “select which writers are best suited” to convey its message. In the alternative, the defendants argued that two of the Section 1981 claims are time barred, in part because courts should not view discrete hiring decisions as creating “continuing violations” of Section 1981.
Sobol v. DeJoy, No. 1:22-cv-00170-MWJS-RT (D. Haw. 2022): On April 15, 2022, a white man sued the United States Postal Service (USPS) for selecting a Black woman for a managerial role instead of him, alleging retaliation, hostile work environment, constructive discharge, and discrimination in violation of Title VII and the ADEA. On March 18, 2024, USPS moved for summary judgment.
- Latest update: On July 9, 2024, the court granted USPS’s motion for summary judgment, finding that the plaintiff lacked sufficient evidence that the adverse employment action was discriminatory. The court also held that, even if the plaintiff could establish a prima facie case of discrimination, the USPS had asserted a legitimate, nondiscriminatory reason for its hiring decision.

3. Challenges to agency rules, laws and regulatory decisions:

Do No Harm v. Lee, No. 3:23-cv-01175-WLC (M.D. Tenn. 2023): On November 8, 2023, Do No Harm sued Tennessee Governor Bill Lee under the Equal Protection Clause of the Fourteenth Amendment, seeking to enjoin a 1988 Tennessee law requiring the governor to “strive to ensure” that at least one board member of the six-member Tennessee Board of Podiatric Medical Examiners is a racial minority. On February 2, 2024, Governor Lee moved to dismiss the complaint for lack of standing. On February 16, Do No Harm opposed, contending that it satisfied standing requirements despite relying only on anonymous members. On March 1, 2024, the Governor replied in support of his motion.
- Latest update: On June 28, 2024, Do No Harm filed a notice of supplemental authority, drawing the court’s attention to the Eleventh Circuit’s decision in the Fearless Fund case and the proceedings in American Alliance for Equal Rights v. Ivey, No. 2:24-cv-00104-RAH-JTA (M.D. Ala. 2024)—in both cases, the courts found that plaintiffs had satisfied the standing requirements even when they were suing on behalf of individual anonymous members. Do No Harm argued that these cases support its claim that its members individually have standing, even if they remain anonymous.
American Alliance for Equal Rights v. Ivey, No. 2:24-cv-00104-RAH-JTA (M.D. Ala. 2024): On February 13, 2024, AAER filed a complaint against Alabama Governor Kay Ivey, challenging a state law that requires the governor to ensure there are no fewer than two individuals “of a minority race” on the Alabama Real Estate Appraisers Board. The Board has nine seats, including one for a member of the public with no real estate background, which has been unfilled for years. Because there was only one minority member among the Board at the time of filing, AAER asserts that state law requires that the open seat go to a minority. AAER states that one of its members applied for this final seat, but was denied purely on the basis of race, in violation of the Equal Protection Clause of the Fourteenth Amendment. On March 29, 2024, Governor Ivey answered the complaint, admitting that the Board quota is unconstitutional and will not be enforced. On May 7, 2024, the court granted a motion to intervene by the Alabama Association of Real Estate Brokers (AAREB), a trade association and civil rights organization for Black real estate professionals. On May 14, 2024, AAREB answered the complaint, seeking a declaration that the challenged law is valid and enforceable. On May 20, 2024, AAER moved for judgment on the pleadings. On June 10, Governor Ivey responded in support of AAER’s motion for judgment on the pleadings, but Intervenor AAREB opposed the motion.
- Latest update: On June 26, 2024, AAER filed a reply brief in support of its motion for judgment on the pleadings, arguing that any “contested material factual allegations” related to standing were decided before AAREB intervened in the litigation, and that no other disputes remain outstanding.
Lynn v. Goff, No. 1:24-cv-00211-CL (D. Or. 2024): On February 1, 2024, a white public school teacher filed a complaint against the Interim Executive Director of the Oregon Teacher Standards and Practices Commission, alleging that a state program reimbursing “diverse” teachers for the cost of obtaining or renewing their teaching licenses violated the Equal Protection Clause of the Fourteenth Amendment. In its answer, Oregon denied that it engaged in discriminatory treatment on the basis of skin color alone.
- Latest update: On June 28, 2024, the parties filed a notice of joint advanced dispute resolution after Oregon issued a temporary rule to end the reimbursement program. The plaintiff agreed to voluntarily dismiss the case once the state issues a permanent rule.

4. Board of Director or Stockholder Actions:

Ardalan v. Wells Fargo, No. 3:22-cv-03811 (N.D. Cal. 2022): On June 28, 2022, a putative class of Wells Fargo stockholders brought a class action against the bank related to an internal policy requiring that half of the candidates interviewed for positions that paid more than $100,000 per year be from an underrepresented group. The plaintiffs alleged that the bank conducted sham job interviews to create the appearance of compliance with this policy and that this was part of a fraudulent scheme to suggest to shareholders and the market that Wells Fargo was dedicated to DEI principles.
- Latest update: On June 4, 2024, the plaintiffs moved to certify a class of all people and entities who had purchased Wells Fargo stock during the period when the bank allegedly engaged in sham job interviews. The plaintiffs also sought to remove the stay on discovery in order to prove that there are issues of law and fact common to the putative class. On June 25, 2024, the defendants opposed class certification, arguing that plaintiffs had not proved that they affirmatively met the requirements due to the stay. On July 7, the court granted the parties’ motion to continue certain deadlines and set a telephonic case management conference for August 1, 2024.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Blaine Evanson, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Zoë Klein, Mollie Reiss, Jenna Voronov, Alana Bevan, Marquan Robertson, Elizabeth Penava, Skylar Drefcinski, Mary Lindsay Krebs, David Offit, Lauren Meyer, Kameron Mitchell, Maura Carey, and Jayee Malwankar.

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

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group
Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group
Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group
New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer
Washington, D.C. (+1 202-955-8503, zswilliams@gibsondunn.com)

Molly T. Senger – Partner, Labor & Employment Group
Washington, D.C. (+1 202-955-8571, msenger@gibsondunn.com)

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, bevanson@gibsondunn.com)

This update provides key takeaways on the new draft guidance and Diversity Action Plan requirements, including when the new requirements will go into effect, the types of clinical studies that require submission of a Diversity Action Plan, whether FDA intends to issue waivers for the requirements, and the consequences of failure to submit a Diversity Action Plan.

On June 26, 2024, FDA released its long-awaited draft guidance on Diversity Action Plans to increase enrollment of underrepresented populations in clinical trials of drugs and devices.[1] The highly anticipated guidance comes months after FDA’s statutory deadline for issuance of the guidance in December 2023.[2] The draft guidance reflects new congressional mandates and replaces FDA’s 2022 draft guidance on diversity plans.[3] The statutory requirement for drug and device sponsors to submit Diversity Action Plans will go into effect 180 days after FDA publishes a final guidance.[4] Failure to comply with Diversity Action Plan submission requirements is a prohibited act under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and could result in civil or criminal penalties.[5]

In April 2022, FDA released draft guidance recommending that sponsors of drugs and devices develop and submit Diversity Plans for clinical trials. In December 2022, Congress passed the Food and Drug Omnibus Reform Act (FDORA), which amended the FD&C Act to require the submission of Diversity Action Plans for certain drugs and devices.[6] This provision goes into effect 180 days after the publication of final guidance.[7]

FDA has described Diversity Action Plans as strategies for the enrollment and retention of clinically relevant study populations.[8] The new draft guidance describes the format and content of Diversity Action Plans, including the timing and process for submitting and receiving feedback on such plans. The guidance also outlines the criteria and process for FDA evaluation of requests for waivers of Diversity Action Plan requirements. Finally, the guidance provides recommendations for sponsors that publicly post information about their Diversity Action Plans.

Interested parties may submit comments on the draft guidance by September 26, 2024.[9] FDA is required to issue final guidance not later than June 2025 (9 months after the comment period closes on the draft guidance).[10] Sponsors of clinical trials for drugs and devices should monitor developments in this area, and work to ensure their clinical trial submissions meet these new standards.

When do the new Diversity Action Plan requirements go into effect?

The new Diversity Action Plan requirements will take effect 180 days after publication of final guidance and will apply to clinical trials for which enrollment begins after that date. However, because sponsors plan clinical trials in advance of enrollment, FDA provides in the new draft guidance three circumstances in which the agency does not expect submission of a Diversity Action Plan:

Clinical studies of drugs with protocols submitted within 180 days after publication of the final guidance, when enrollment is scheduled to begin 180 days after publication;
Clinical studies of devices received by FDA in investigational device exemption (IDE) applications within 180 days after publication of the final guidance; or
Clinical studies of devices that do not require submission of an IDE that are approved by an institutional review board or independent ethics committee within 180 days after publication of the final guidance.[11]

In these circumstances, there will continue to be a legal requirement to submit a Diversity Action Plan but, as indicated in the new draft guidance, FDA does not intend to take action to enforce that requirement.

What categories of study subjects must be included in a Diversity Action Plan?

Diversity Action Plans are not required to include any particular demographics. Under Sections 505(z) and 520(g)(9) of the FD&C Act, sponsors must submit Diversity Action Plans that include goals for clinical study enrollment. FDA encourages sponsors to list enrollment goals for race, ethnicity, sex, and age group in Diversity Action Plans. If goals for race, ethnicity, sex, and age group are listed in a Plan, Section 3602 of FDORA requires that each of those goals be disaggregated.

FDORA also requires that FDA issue guidance on the inclusion in Diversity Action Plans of certain categories of study subjects (i.e., age group, sex, race, and ethnicity) and provides that FDA “may include” guidance on other characteristics of study subjects (e.g., geographic location, socioeconomic status).[12] In the new draft guidance, FDA encourages sponsors to consider additional factors when developing enrollment goals, including geographic location, gender identity, sexual orientation, socioeconomic status, physical and mental disabilities, pregnancy, lactation, and comorbidity.

What types of clinical studies require submission of a Diversity Action Plan?

For drugs (including biologics regulated as drugs), sponsors conducting a Phase III study, or another pivotal study, must submit a Diversity Action Plan to FDA by the time they submit their study protocol.

For devices, sponsors must submit a Diversity Action Plan for any clinical study of a device:

in an application for an investigational device exemption (IDE); or
if an IDE is not required, in any premarket notification under Section 510(k) of the FD&C Act, request for de novo classification under Section 513(f)(2), or application for premarket approval under Section 515.[13]

Notwithstanding this statutory requirement, FDA explains in the new draft guidance that, because Diversity Action Plans may not be meaningful for certain device studies, the agency does not intend to receive or review Diversity Action Plans for device studies that are not designed to collect definitive evidence of the safety and effectiveness of a device for a specified use.[14]

In addition, although not a requirement, FDA strongly recommends that sponsors develop and implement a comprehensive diversity strategy across their entire clinical development program, including early studies, when possible.[15]

What information must be included in Diversity Action Plans?

Under Section 505(z) and 520(g)(9) of the FD&C Act, sponsors must include the following criteria in Diversity Action Plans:

Goals for enrollment, disaggregated by age group, sex, race, and ethnicity;
A rationale for enrollment goals; and
An explanation of how the sponsor intends to meet such goals

In the new draft guidance, FDA states that, to meet the statutory requirement for inclusion of a rationale for enrollment goals, a sponsor’s rationale must include sufficient information and analysis to explain how the sponsor determined its enrollment goals and provides detailed recommendations on information the rationale should include.[16] On measures to meet enrollment goals, FDA recommends that Diversity Action Plans include enrollment, retention, and monitoring strategies.[17] A Diversity Action Plan may be modified either at the sponsor’s request or based on FDA feedback.[18]

As required under FDORA, Diversity Action Plans must include a sponsor’s goals for enrollment, its rationale for such goals, and an explanation of how the sponsor intends to meet such goals.[19] FDORA directs FDA to issue updated guidance for sponsors on the form, manner, and content of Diversity Action Plans. Of note, sponsors are required to submit Diversity Action Plans in the “form and manner” specified by FDA in guidance. As such, though FDA guidance is typically nonbinding, once final, provisions in FDA guidance pertaining to the form and manner (i.e., process) of submission for Diversity Action Plans will have binding effect on drug and device sponsors.[20] Any FDA recommendations as to the content of Diversity Action Plans will not be binding.

Will FDA issue waivers for the Diversity Action Plan requirements?

The new draft guidance includes information on waivers for the Diversity Action Plan requirement, including eligibility criteria and FDA’s process of review. FDORA authorizes FDA to waive the submission and content requirements for Diversity Action Plans, if FDA determines:

A waiver is necessary based on what is known or can be determined about the prevalence or incidence of the disease or condition for which the product is under investigation (including in terms of the patient population that may use the product);
Conducting a clinical investigation in accordance with a Diversity Action Plan would otherwise be impracticable; or
A waiver is necessary to protect public health during a public health emergency.[21]

However, FDA notes that, given the importance of increasing enrollment of historically underrepresented populations in clinical research, full or partial waivers will be granted only in “rare instances.”[22] For example, FDA states that it generally does not intend to waive the Diversity Action Plan requirement even if the disease or condition being studied is “relatively homogenous with respect to race, ethnicity, sex, or age group.”[23] Because FDA is required to respond to a waiver request within 60 days of receipt, sponsors should submit waiver requests as early as feasible, and no later than 60 days before the Diversity Action Plan is required for submission.[24]

What are the consequences for failure to submit a Diversity Action Plan?

As discussed above, under sections 505(z) and 520(g)(9) of the Federal Food, Drug, and Cosmetic Act, submission of a Diversity Action Plan is required for certain clinical studies for drugs and devices. A Diversity Action Plan must include the sponsor’s goals for enrollment, rationale for such goals, and an explanation of how the sponsor intends to meet such goals. The Plan must be submitted in the form and manner specified by FDA in guidance, not later than, for drugs, the date on which the sponsor submits the protocol to FDA for a Phase III or other pivotal study, and for devices, in an investigational device exemption or, if an investigational device exemption is not required, in any premarket notification under section 510(k), request for classification under section 513(f)(2), or application for premarket approval under section 515. Any modifications to the Plan must be in the form or manner specified by FDA in guidance.

Failure to comply with these Diversity Action Plan statutory requirements constitute a prohibited act under the FFDCA. For drugs, it is a prohibited act under Section 301(d) of the FFDCA to introduce or deliver for introduction, or cause the introduction or delivery for introduction, into interstate commerce any drug in violation of Section 505, including Section 505(z). For devices, it is a prohibited act under 301(q)(1) to fail or refuse to comply with any requirement prescribed under Section 520(g), or to fail or refuse to furnish any notification or other material or information required by or under 520(g).

FDA’s new draft guidance does not discuss consequences for failure to comply with the new Diversity Action Plan statutory requirements. The absence of information in the draft guidance on enforcement mechanisms for failure to comply with the Diversity Action Plan requirements signals that, at this time, FDA is looking to encourage compliance on the part of drug and device sponsors, as opposed to appearing enforcement focused. This approach may change in the final guidance, given strong stakeholder interest in this issue.

Notably, there is no requirement that a sponsor meet the goals outlined in a Diversity Action Plan. FDA notes in the new draft guidance that if such goals are not being met or not expected to be met at the conclusion of a trial, sponsors should include as part of applicable periodic reporting requirements (e.g., investigational new drug application (IND) or IDE annual reports) an explanation for that outcome and mitigation strategies.[25]

[1] FDA, Diversity Action Plans to Improve Enrollment of Participants from Underrepresented Populations in Clinical Studies: Draft Guidance for Industry (June 2024) (hereinafter referred to as “Guidance”).

[2] See Section 3602(b) of the Food and Drug Omnibus Reform Act of 2022 (FDORA), passed as part of the Consolidated Appropriations Act, 2023, Pub. L. No. 117-328, 136 Stat. 4459 (2023).

[3] FDA, Diversity Plans to Improve Enrollment of Participants From Underrepresented Racial and Ethnic Populations in Clinical Trials; Draft Guidance for Industry; Availability (April 2022).

[4] See Section 3602(c) of FDORA. This submission requirement applies only with respect to clinical studies for which enrollment begins after 180 days after the publication of final guidance.

[5] See Sections 505(z)(3), 520(g)(9) of the Federal Food, Drug, and Cosmetic Act; see also Sections 301(d), (q)(1), 303 of the FD&C Act.

[6] See Section 3601 of FDORA.

[7] See Section 3602(c) of FDORA. This submission requirement applies only with respect to clinical studies for which enrollment begins after 180 days after the publication of final guidance.

[8] FDA Notice of Availability: Draft Guidance on Diversity Action Plans, 89 Fed. Reg. 54010 (June 28, 2024).

[9] 89 Fed. Reg. 54010, 54011 (June 28, 2024).

[10] See Section 3602(b)(2) of FDORA.

[11] Guidance at 2.

[12] See Section 3602(a) of FDORA.

[13] Sponsors of devices being studied as described in section 21 CFR 812.2(c) are not required to submit Diversity Action Plans. See 520(g)(9)(A)(ii).

[14] Guidance at 6-7.

[15] Guidance at 7.

[16] Guidance at 22-23.

[17] Guidance at 23.

[18] Guidance at 18.

[19] See Sections 505(z)(2), 520(g)(9)(B).

[20] 89 Fed. Reg. 54010 (June 28, 2024).

[21] See Sections 505(z)(4), 520(g)(9)(C).

[22] Guidance at 20.

[23] Guidance at 20.

[24] Guidance at 20.

[25] Guidance at 19.

The following Gibson Dunn lawyers assisted in preparing this update: Katlin McKelvie and Carlo Felizardo.

Gustav W. Eyler – Washington, D.C. (+1 202.955.8610, geyler@gibsondunn.com)
Katlin McKelvie – Washington, D.C. (+1 202.955.8526, kmckelvie@gibsondunn.com)
John D. W. Partridge – Denver (+1 303.298.5931, jpartridge@gibsondunn.com)
Jonathan M. Phillips – Washington, D.C. (+1 202.887.3546, jphillips@gibsondunn.com)
Carlo Felizardo – Washington, D.C. (+1 202.955.8278, cfelizardo@gibsondunn.com)

Ramirez v. Charter Communications, Inc., S273802 – Decided July 15, 2024

The California Supreme Court held today that an arbitration agreement may be unconscionable if it requires a party resisting arbitration to pay the other party’s attorney’s fees, requires arbitration of claims commonly brought by employees but not those commonly brought by employers, or unreasonably shortens a statute of limitations. Yet even if an agreement contains unconscionable provisions, a court must analyze whether they may be severed and the rest of the agreement enforced.

“[T]he decision whether to sever unconscionable provisions and enforce the balance is a qualitative one, based on the totality of the circumstances. The court cannot refuse to enforce an agreement simply by finding that two or more collateral provisions are unconscionable as written and eschewing any further inquiry.”

Justice Corrigan, writing for the Court

Background:

Angelica Ramirez, a former employee of Charter Communications, filed a lawsuit alleging discrimination, harassment, retaliation, and wrongful discharge under California’s Fair Employment and Housing Act. Charter sought to compel arbitration under the arbitration agreement Ramirez signed as a condition of her employment. The trial court found the arbitration agreement procedurally and substantively unconscionable, determined that severance of those provisions was improper, and denied the motion to compel arbitration. The Court of Appeal affirmed.

The California Supreme Court granted review to determine whether various provisions of the arbitration agreement were in fact unconscionable and, if so, whether they could be severed from the agreement.

Issues:

Is an arbitration agreement unconscionable when it lacks mutuality in terms of the claims subject to and excluded from arbitration, shortens the period for filing claims, truncates discovery, or requires a party resisting arbitration to pay the other side’s attorney’s fees?
Is severance improper when an arbitration agreement contains more than one unconscionable provision?

Court’s Holdings:

While the lack of mutuality, shortening of the period for filing claims, and requirement that a party resisting arbitration pay the other side’s attorney’s fees may be unconscionable, a provision limiting discovery is not unconscionable when an arbitrator can order additional discovery.
No. Even if an arbitration agreement contains more than one unconscionable provision, courts must conduct a qualitative analysis to determine, under the totality of the circumstances, whether the unconscionable provisions may be severed from the agreement.

What It Means:

The Court clarified that, when analyzing whether a provision limiting discovery renders an arbitration agreement unconscionable, courts must focus on circumstances known at the time the agreement was made and should not consider post-contract formation circumstances.
When drafting arbitration agreements, employers should ensure mutuality in terms to prevent a finding of unconscionability. An agreement may not, for example, compel arbitration of claims more likely to be brought by an employee but exclude arbitration of claims likely to be brought by an employer.
There is no bright line rule prohibiting severance when an arbitration agreement contains more than one unconscionable provision. Regardless of how many unconscionable provisions an agreement contains, courts must conduct a qualitative analysis to determine whether the agreement’s unconscionability can be cured by severing the unconscionable provisions.
The Court concluded that enforcing the rules of unconscionability does not violate the Federal Arbitration Act.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court. Please feel free to contact the following practice group leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Michael J. Holecek +1 213.229.7018 mholecek@gibsondunn.com

Related Practice: Labor and Employment

Jason C. Schwartz
+1 202.955.8242
jschwartz@gibsondunn.com

Katherine V.A. Smith
+1 213.229.7107
ksmith@gibsondunn.com

Jesse A. Cripps
+1 213.229.7792
jcripps@gibsondunn.com

Related Practice: Litigation

Theodore J. Boutrous, Jr.
+1 213.229.7804
tboutrous@gibsondunn.com

Theane Evangelis
+1 213.229.7726
tevangelis@gibsondunn.com

This alert was prepared by Michael Holecek, Ryan Azad, and Thomas Cochrane.

With several landmark decisions this Term, the U.S. Supreme Court accelerated a substantial transformation of the law governing actions by regulatory agencies. The Court overruled Chevron, sharply limiting judicial deference to agencies’ statutory interpretation. It gave regulated entities more time to challenge agency rules in court. It stayed enforcement of a major EPA rule concerning ozone pollution. And it determined that the Constitution requires agencies to bring at least many civil penalty actions in federal court, not in agency administrative tribunals. The webcast takes stock of what these major cases mean for regulatory agencies going forward, particularly against the backdrop of other significant Supreme Court administrative law decisions in recent years.

PANELISTS:

Stuart F. Delery is a partner in Gibson, Dunn & Crutcher’s Washington, D.C. office, where he is a member of the firm’s Litigation Department and Co-Chair of the Administrative Law and Regulatory Practice Group and the Crisis Management Practice Group. Stuart is an experienced appellate and district court litigator who brings 30 years of experience at the highest levels of government and the private sector to help clients navigate major matters that present complex legal and reputational risks, particularly matters involving difficult statutory, regulatory and constitutional issues. His practice focuses on representing corporations and individuals in high-stake litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement.

Prior to re-joining the firm, Stuart served as White House Counsel for President Biden from 2022-2023. As Counsel to the President, he advised the President on the full range of constitutional, statutory, and regulatory legal issues, including on questions of presidential authority, domestic policy, and national security and foreign affairs. He managed responses to high-profile congressional and other investigations, and he assisted the President in nominating and confirming federal judges. Stuart also served as Deputy Counsel to the President from 2021-2022. Previously, Stuart served as the Acting Associate Attorney General of the United States, the third-ranking position at the Department of Justice, and the Senate-confirmed Assistant Attorney General for the Civil Division. Stuart is admitted to practice law in the District of Columbia.

Matt Gregory is a partner in the Washington D.C. office of Gibson, Dunn & Crutcher. He practices in the firm’s Litigation Department and Appellate and Constitutional Law and Administrative Law Practice Groups. Matt has been recognized in the 2023 and 2024 editions of Best Lawyers: Ones to Watch® in America for both Administrative / Regulatory Law and Appellate Practice, and is a member of the Edward Coke Appellate Inn of Court. Matt represents corporate clients in a wide range of appellate, administrative law, and litigation matters. Prior to joining Gibson Dunn, Matt clerked for Justice Anthony M. Kennedy of the U.S. Supreme Court and Judge Raymond M. Kethledge of the U.S. Court of Appeals for the Sixth Circuit. Matt is admitted to practice law in Virginia and the District of Columbia.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General Category.

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.

From the Derivatives Practice Group: This week, President Biden announced his intent to nominate Julie Brinn Siegel to be a Commissioner of the CFTC. Siegel is the Senior Coordinator for Management at the Office of Management and Budget.

New Developments

President Biden Announced Intent to Nominate Julie Brinn Siegel as a Commissioner of the CFTC. On July 11, President Biden announced his intent to nominate Julie Brinn Siegel to be a Commissioner of the CFTC. Siegel currently serves as the federal government’s deputy chief operating officer as Senior Coordinator for Management at the Office of Management and Budget (OMB). Prior to that, Siegel served as Secretary of the Treasury Janet Yellen’s Deputy Chief of Staff and served as Senior Counsel and Policy Advisor to U.S. Senator Elizabeth Warren (D-MA). Last month, President Biden nominated CFTC Commissioner Johnson to be Assistant Secretary for Financial Institutions at the Department of Treasury and nominated CFTC Commissioner Christy Goldsmith Romero to be Chair and Member of the Federal Deposit Insurance Corporation (FDIC) which, if confirmed by the Senate, would leave open two Democratic Commissioner seats at the CFTC. Siegel, if nominated and confirmed by the Senate, would take the seat of Commissioner Goldsmith Romero. [NEW]
First Interagency Fraud Disruption Conference Focuses on Combatting Crypto Schemes Commonly Known as “Pig Butchering.” On July 11, the CFTC and the DOJ’s Computer Crime and Intellectual Property Section’s National Cryptocurrency Enforcement Team (“NCET”) convened the first Fraud Disruption Conference to work on efforts to combat a type of fraud commonly known as “pig butchering”. It is estimated that Americans are scammed out of billions per year, making this a top law enforcement priority. The working group addressed strategies to prevent victimization; using technology to disrupt the fraud; and collaboration on enforcement efforts. Several agencies also collaborated on an anti-victimization messaging campaign to warn Americans to remain vigilant against emerging fraud threats. [NEW]
Supreme Court Overrules Chevron, Sharply Limiting Judicial Deference To Agencies’ Statutory Interpretation. On June 28, the Supreme Court overruled Chevron v. Natural Resources Defense Council, a landmark decision that had required courts to defer to agencies’, including the CFTC’s, reasonable interpretations of ambiguous statutory terms. For a more detailed analysis of the ruling please refer to Gibson Dunn’s client alert, available here.
CFTC Announces Supervisory Stress Test Results. On July 1, the CFTC issued Supervisory Stress Test of Derivatives Clearing Organizations: Reverse Stress Test Analysis and Results, a report detailing the results of its fourth Supervisory Stress Test (“SST”) of derivatives clearing organization (“DCO”) resources. Among other findings, the 2024 report concluded the DCOs studied hold sufficient financial resources to withstand many extreme and often implausible price shocks. The purpose of the analysis was twofold: (1) to identify hypothetical combinations of extreme market shocks, concurrent with varying numbers of clearing member (“CM”) defaults, that would exhaust prefunded resources (DCO committed capital, and default fund), and unfunded resources available to the DCOs (this represents the reverse stress test component), and (2) to analyze the impacts of DCO use of mutualized resources on non-defaulted CMs.
CFTC Staff Issues a No-Action Letter Regarding Certain Reporting Requirements for Swaps Transitioning from CDOR to CORRA. On June 27, the CFTC Division of Market Oversight (“DMO”) and Division of Data (“DOD”) issued a staff no-action letter regarding certain Part 43 and Part 45 swap reporting obligations for swaps transitioning under the ISDA LIBOR fallback provisions from referencing the Canadian Dollar Offered Rate (“CDOR”), to referencing the risk-free Canadian Overnight Repo Rate Average (“CORRA”) following the cessation of CDOR after June 28, 2024. The letter states DMO and DOD will not recommend the CFTC take enforcement action against an entity for failure to timely report under Part 45 the change in a swap’s floating rate. This letter covers those floating rate changes that are made under the ISDA LIBOR fallback provisions from CDOR to CORRA, but only in the event the entity uses its best efforts to report the change by the applicable deadline in Part 45 and in no case reports the required information later than five business days from, but excluding, July 2, 2024. The letter also states DMO and DOD will not recommend the CFTC take enforcement action against an entity for failure to report under Part 43 the change in the floating rate for a swap modified after execution to incorporate the ISDA LIBOR fallback provisions to transition from referencing CDOR to referencing CORRA.
CFTC Extends Public Comment Period for Proposed Amendments to Event Contracts Rules. On June 27, the CFTC announced it is extending the deadline for public comment on a proposal to amend its event contract rules. The extended comment period will close on August 8, 2024. The CFTC is providing an extension to allow interested persons additional time to analyze the proposal and prepare their comments. The proposal would amend CFTC Regulation 40.11 to further specify types of event contracts that fall within the scope of Commodity Exchange Act (“CEA”) Section 5c(c)(5)(C) and are contrary to the public interest, such that they may not be listed for trading or accepted for clearing on or through a CFTC-registered entity.

New Developments Outside the U.S.

ESAs Consult on Guidelines under the Markets in Crypto-Assets Regulation. On July 12, the European Supervisory Authorities (“ESAs”) published a consultation paper on Guidelines under Markets in Crypto-assets Regulation (“MiCA”), establishing templates for explanations and legal opinions regarding the classification of crypto-assets along with a standardized test to foster a common approach to classification. [NEW]
ESAs Report on the Use of Behavioral Insights in Supervisory and Policy Work. On July 11, the ESAs published a joint report following their workshop on the use of behavioral insights by supervisory authorities in their day-to-day oversight and policy work. The report provides a high-level overview of the main topics discussed during the workshop held in February 2024 for national supervisors and other competent authorities, where participants explored the added value of behavioral insights in their work by exchanging their experiences and discussing the challenges they face. [NEW]
ESMA Publishes the 2024 ESEF Reporting Manual. On July 11, ESMA published the update of its Reporting Manual on the European Single Electronic Format (“ESEF”) supporting a harmonized approach for the preparation of annual financial reports. ESMA has also updated the Annex II of the Regulatory Technical Standards (“RTS”) on ESEF. [NEW]
ESMA Publishes Statement on Use of Collateral by NFCs Acting as Clearing Members. On July 10, ESMA issued a public statement on deprioritizing supervisory actions linked to the eligibility of uncollateralized public guarantees, public bank guarantees, and commercial bank guarantees for Non-Financial Counterparties (“NFCs”) acting as clearing members, pending the entry into force of EMIR 3.
ESMA Launches New Consultations. On July 10, ESMA published a new package of public consultations with the objective of increasing transparency and system resilience in financial markets, reducing reporting burden and promoting convergence in the supervisory approach. [NEW]
ESMA Consults on Rules to Recalibrate and Further Clarify the Framework. On July 9, ESMA launched new consultations on different aspects of the Central Securities Depositories Regulation (“CSDR”) Refit. The proposed rules relate to the information to be provided by European CSDs to their national competent authorities (“NCA”s) for the review and evaluation, the information to be notified to ESMA by third-country CSDs, and the scope of settlement discipline. [NEW]
ESMA Consults on Liquidity Management Tools for Funds. On July 8, ESMA announced it is seeking input on draft guidelines and technical standards under the revised Alternative Investment Fund Managers Directive (“AIFMD”) and the Undertakings for Collective Investment in Transferable Securities (“UCITS”) Directive. Both Directives aim to mitigate potential financial stability risks and promote harmonization of liquidity risk management in the investment funds sector. [NEW]
ESMA Consults on Reporting Requirements and Governance Expectations for Some Supervised Entities. On July 8, ESMA launched two consultations on proposed guidance for some of its supervised entities. The consultations are aimed at the following entities supervised by ESMA: Benchmark Administrators, Credit Rating Agencies, and Market Transparency Infrastructures. The Consultation Paper sets out the information ESMA expects to receive and a timeline for supervised entities to provide the required information. The objective of the Draft Guidelines is to ensure consistency in cross-sectoral reporting. [NEW]
ESMA Puts Forward Measures to Support Corporate Sustainability Reporting. On July 5, ESMA published a Final Report on the Guidelines on Enforcement of Sustainability Information (“GLESI”) and a Public Statement on the first application of the European Sustainability Reporting Standards (“ESRS”). ESMA reports that these documents will support the consistent application and supervision of sustainability reporting requirements.
ESMA Releases New MiCA Rules To Increase Transparency for Retail Investors. On July 4, ESMA published the second Final Report under the Markets in Crypto-Assets Regulation (MiCA) covering eight draft technical standards that aim to provide more transparency for retail investors, clarity for providers on the technical aspects of disclosure and record-keeping requirements, and data standards to facilitate supervision by National Competent Authorities (“NCAs”). The report covers public disclosures, as well as descriptions on how issuers should disclose price-sensitive information to the public to prevent market abuses, such as insider dealing.
ESMA Reappoints Three Members to its Management Board. On July 4, ESMA announced that it has reappointed three current members to its Management Board. The appointments took place at the Board of Supervisors meeting on July 3. The Management Board, chaired by Verena Ross, Chair of ESMA, is responsible for ensuring that the Authority carries out its mission and performs the tasks assigned to it under its founding Regulation.
EBA and ESMA Publish Guidelines on Suitability of Management Body Members and Shareholders for Entities Under MiCA. On June 27, EBA and ESMA published joint guidelines on the suitability of members of the management body, and on the assessment of shareholders and members with qualifying holdings for issuers of asset reference tokens (“ARTs”) and crypto-asset service providers (“CASPs”), under the MiCA. The first set of guidelines covers the presence of suitable management bodies within issuers of ARTs and CASPs. The second set of guidelines concerns the assessment of the suitability of shareholders or members with direct or indirect qualifying holdings in a supervised entity.

New Industry-Led Developments

Trade Associations Submit Letter on EMIR IM Model Validation. On July 8, ISDA, the Alternative Investment Management Association (“AIMA”), the European Fund and Asset Management Association (“EFAMA”) and the Securities Industry and Financial Markets Association’s asset management group (“SIFMA AMG”) submitted a letter to the ESAs and the European Commission on initial margin (“IM”) model approval requirements set out in the European Market Infrastructure Regulation (“EMIR 3.0”). The letter highlights challenges posed by the three-month period granted to the European Banking Authority and NCAs to validate changes to an IM model and describes how the ISDA Standard Initial Margin Model (“ISDA SIMM”) schedule can be amended to address these issues. [NEW]
ISDA Proceeds with Development of an Industry Notices Hub. On July 1, ISDA announced it will proceed with the development of an industry-wide notices hub, following strong support from buy- and sell-side institutions globally. The new online platform will allow instantaneous delivery and receipt of critical termination-related notices and help to ensure address details for physical delivery are up to date, reducing the risk of uncertainty and potential losses for senders and recipients of these notices.
ISDA Publishes Framework to Prepare for Close Out of Derivatives Contracts. On June 27, ISDA published the ISDA Close-out Framework that market participants can use to help prepare for potential terminations of collateralized derivatives contracts. ISDA stated that the launch of the ISDA Close-out Framework is in response to the March 2023 failure of Signature Bank and SVB in the US, which, according to ISDA, highlighted the complexities of potentially terminating over-the-counter derivatives trading relationships following various post-crisis regulatory reforms. Specifically, the reforms require that in-scope entities post margin for non-cleared derivatives transactions, while various jurisdictions have introduced mandatory stays on termination rights and remedies as part of bank resolution regimes. ISDA stated that the ISDA Close-out Framework is intended to be used as a preparatory resource to help firms coordinate internal business functions and stakeholders and internal and external legal, operational, risk management, infrastructure and other relevant service providers to ensure they are adequately prepared for any potential future stress events.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

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

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus – New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt , Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki , New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

This edition of Gibson Dunn’s Federal Circuit Update for June 2024 summarizes the current status of a couple petitions pending before the Supreme Court and recent Federal Circuit decisions concerning damages, trade secret misappropriation, patent eligibility under 35 U.S.C. § 101, and induced infringement.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

There was a new potentially impactful petition filed before the Supreme Court in June 2024:

United Therapeutics Corp. v. Liquidia Technologies, Inc. (US No. 23-1298): “1. Whether the IPR statute and SAS require the Federal Circuit to review de novo, or only for an abuse of discretion, the PTO’s reliance on new grounds and new printed publications—not raised in the initial petition—when deciding to cancel patent claims. 2. Whether, if § 312 is deemed ambiguous, the Court should overrule Chevron.” The respondent waived its right to respond, the Court requested a response, which is due August 12, 2024.

We also provide an update below of the petitions pending before the Supreme Court that were summarized in our May 2024 update:

In Chestek PLLC v. Vidal (US No. 23-1217), the response brief is due August 14, 2024. Five amicus curiae briefs have been filed. In Cellect LLC v. Vidal (US No. 23-1231), the response brief is due August 21, 2024, and seven amicus curiae briefs have been filed.

Upcoming Oral Argument Calendar

The list of upcoming arguments at the Federal Circuit is available on the court’s website.

Key Case Summaries (June 2024)

EcoFactor, Inc. v. Google LLC, No. 23-1101 (Fed. Cir. June 3, 2024): EcoFactor sued Google alleging infringement of patents directed to smart thermostats in computer-networked heating and cooling systems, which adjusts the user’s thermostat settings to reduce strain on the electricity grid during periods of high demand. Following a jury trial, the jury found infringement and awarded damages to EcoFactor. Google moved for a new trial on damages, which the district court denied.

The majority (Reyna, J., joined by Lourie, J.) affirmed. The majority reasoned that EcoFactor’s damages expert based his royalty rate on comparable license agreements and the testimony of EcoFactor’s CEO, and thus, the royalty rate was sufficiently reliable. The majority therefore concluded that the district court did not abuse its discretion in denying the motion for a new trial.

Judge Prost dissented-in-part. Judge Prost reasoned that the royalty rate from EcoFactor’s damages expert “rests on EcoFactor’s self-serving, unilateral recitals of its beliefs in the license agreements,” which were “directly refuted” by two of the license agreements and “have no other support . . . to back them up.” Judge Prost concluded that the “law does not allow damages to be so easily manufactured.” Judge Prost then noted that the royalty rate suffered from another problem in that it included the value of non-asserted patents, which EcoFactor’s damages expert did not properly apportion. Judge Prost therefore determined that the analysis performed by EcoFactor’s damages expert was unreliable, and the district court abused its discretion by not granting a new trial on damages.

Insulet Corp. v. EOFlow, Co. Ltd., No. 24-1137 (Fed. Cir. June 17, 2024): Insulet and EOFlow manufacture insulin pump patches. Starting in the early 2000s, Insulet developed the wearable insulin pump OmniPod® followed by next generation products in 2007 and 2012. EOFlow began developing its own product in 2011, the EOPatch®, followed by its next generation product in 2017. Around that time, four former Insulet employees were hired by EOFlow, and allegedly passed confidential information to EOFlow. Insulet sued EOFlow for misappropriation of trade secrets. Insulet moved for a preliminary injunction, arguing it was likely to be irreparably harmed by the misappropriation, particularly in light of news that Medtronic would imminently acquire EOFlow, which would provide a source of capital for EOFlow and increase competition with Insulet. The district court granted the preliminary injunction.

The Federal Circuit (Lourie, J., joined by Prost and Stark, JJ.) reversed. Under the Defend Trade Secrets Act (“DTSA”), the statute of limitations to bring a trade secret misappropriation claim is three years. 18 U.S.C. § 1836(d). EOFlow had raised a statute of limitations challenge; however, the district court expressed no opinion on the matter. The Federal Circuit held that it was an abuse of discretion to ignore this argument, which was a material factor in evaluating a likelihood of success on the merits. The Court further held that, even if the statute of limitations argument had been addressed, Insulet had not established a likelihood of success on the merits because it had not alleged a trade secret with particularity, as required by the DTSA. Specifically, Insulet “advanced a hazy grouping of information that the court did not probe with particularity to determine what, if anything, was deserving of trade secret protection.” Instead, the district court should have determined what “specific information” was alleged to be the trade secret, such as “particular design drawings and specifications for each physical component and subassembly.” The Court also determined that the district court failed to assess whether the information was generally known or reasonably ascertainable through proper means, such as reverse engineering, particularly in light of tear-down videos and Insulet’s own publications that were available on the internet. And finally, the Court determined that the district court failed to consider the disclosures in Insulet’s own patents related to the OmniPod. If certain components of the OmniPod were known to the public through patent disclosures, then those components would unlikely merit trade secret protection.

Beteiro, LLC v. DraftKings Inc., No. 22-2275 (Fed. Cir. June 21, 2024): Beteiro owns four patents directed to methods that enable users to participate in online gambling using a user communication device by first determining whether the user is physically located in a state that allows gambling by using the GPS on the mobile device. DraftKings filed a motion to dismiss under Rule 12(b)(6) on the grounds that the patents were directed to patent-ineligible subject matter under 35 U.S.C. § 101, and the district court granted the motion.

The Federal Circuit (Stark, J., joined by Dyk and Prost, JJ.) affirmed. At step one, the Court stated that the claims are directed to the abstract idea of “exchanging information concerning a bet and allowing or disallowing the bet based on where the user is located.” In doing so, the Court specifically found that Beteiro’s patent claims “exhibit several features that are well-settled indicators of abstractness,” such as detecting information, generating and sending notifications, receiving messages (bets), determining legality (GPS location), and processing information (allowing/disallowing bets). The Court also determined that the claims were drafted in a result-oriented, functional manner, using language that described the desired outcomes without explaining how to achieve them. The Court further determined that the claims did not recite any improvement in the way computers operate, and thus, the claims were directed to an abstract idea. As to step two, the Court determined that the use of GPS on a mobile phone was conventional, contrary to Beteiro’s contentions.

Amarin Pharma, Inc. v. Hikma Pharmaceuticals USA Inc., No. 23-1169 (Fed. Cir. June 25, 2024): Amarin sells icosapent ethyl (an omega-3 fatty acid commonly found in fish oils) under the brand name Vascepa® for the treatment of patients with high triglyceride levels. In 2012, Amarin received FDA approval for treatment of severe hypertriglyceridemia, a condition where a patient’s blood triglyceride is at least 500 mg/dL (“the SH indication”), and later in 2019, for treatment to reduce cardiovascular risk in patients having blood triglyceride levels of at least 150 mg/dL (“the CV indication”). Hikma submitted an Abbreviated New Drug Application (“ANDA”) for approval of its generic icosapent ethyl in 2016 when Vascepa® was only approved for the SH indication, and in 2019, opted to carve out the additional CV indication by seeking FDA approval only for uses not covered by Amarin’s newly listed CV indication patents. However, around the same time, Hikma also removed the CV limitation of use from its product label, which had originally been included when it initially filed its ANDA. Hikma then issued several press releases advertising its product as a generic version of Vascepa®, referencing Vascepa®’s $1.1 billion in sales, which included sales for all uses of Vascepa® including the CV indication that made up 75% of the sales.

Amarin sued Hikma for inducing infringement of two of its patents directed to uses of icosapent ethyl based on (1) Hikma’s public statements in press releases and on its website, and (2) the product label for its generic icosapent ethyl product. Hikma moved to dismiss under Rule 12(b)(6), and the district court granted the motion. The district court found that the removal of the CV limitation of use from the product label would not be understood by physicians as suggesting that Hikma’s product had been approved for the CV indication. The district court also found that while Hikma’s press releases and website were relevant to an intent to induce, it did not rise to the level of encouraging, recommending, or promoting Hikma’s generic for the CV indication.

The Federal Circuit (Lourie, J., joined by Moore, C.J., and Albright, J. (sitting by designation)) reversed, holding that the district court had to examine the label and public statements in its totality to determine what they “would communicate to physicians and the marketplace.” In so holding, the Court noted that while the underlying case was a traditional Hatch-Waxman case, the issue on appeal was nothing more than “a run-of-the-mill induced infringement case.” The Court concluded that while the label alone would not recommend, encourage, or promote infringement, a physician would read Hikma’s press releases as an instruction or encouragement to prescribe Hikma’s product for any FDA-approved use, which included the CV indication that Hikma carved out from its ANDA. The Court concluded that these allegations, taken together, plausibly stated a claim for induced infringement.

The following Gibson Dunn lawyers assisted in preparing this update: Blaine Evanson, Audrey Yang, Al Suarez, Evan Kratzer, and Julia Tabat.

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, any leader or member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups, or the following authors:

Blaine H. Evanson – Orange County (+1 949.451.3805, bevanson@gibsondunn.com)
Audrey Yang – Dallas (+1 214.698.3215, ayang@gibsondunn.com)

Appellate and Constitutional Law:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202.955.8547, tdupree@gibsondunn.com)
Allyson N. Ho – Dallas (+1 214.698.3233, aho@gibsondunn.com)
Julian W. Poon – Los Angeles (+ 213.229.7758, jpoon@gibsondunn.com)

Intellectual Property:
Kate Dominguez – New York (+1 212.351.2338, kdominguez@gibsondunn.com)
Y. Ernest Hsin – San Francisco (+1 415.393.8224, ehsin@gibsondunn.com)
Josh Krevitt – New York (+1 212.351.4000, jkrevitt@gibsondunn.com)
Jane M. Love, Ph.D. – New York (+1 212.351.3922, jlove@gibsondunn.com)

A proposed rule from the Committee on Foreign Investment in the United States would substantially expand the scope of covered real estate transactions subject to national security review during a time of growing concern around foreign acquisitions of U.S. land.

Over the past year, national security risks associated with foreign acquisitions of certain real estate, including agricultural land, have been an issue of growing concern. This increasing national security concern has manifested in several key developments: (i) a rise in efforts by state and local governments to implement their own real-estate focused national security reviews, which we described in a previous client alert, (ii) a notable and recent presidential block of a major real estate transaction,[1] and (iii) bipartisan federal legislative support for stronger restrictions on acquisitions of U.S. land by foreign adversaries.[2]

Most recently, on July 8, 2024, the Committee on Foreign Investment in the United States (“CFIUS”) issued a Notice of Proposed Rulemaking (“NPRM” or the “proposed rule”) to expand its jurisdiction to review and potentially block certain real estate transactions involving foreign persons. The scope of the update is noteworthy. The proposed rule would add nearly 60 locations to CFIUS’s existing list of military installations whose proximity to a potential real estate purchase could create CFIUS jurisdiction, bringing the total list to over 250 installations—and representing a roughly 30% increase in a single update.[3]

This alert provides: (i) a brief refresher on CFIUS’s jurisdiction over real estate transactions, (ii) a summary of the proposed rule, (iii) a discussion of historical trends and projections regarding CFIUS’s review of real estate transactions, and (iv) key takeaways for dealmakers.

I. Refresher on CFIUS’s Jurisdiction Over Real Estate Transactions.

The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) provided CFIUS with expanded jurisdiction over (among other things) certain real estate transactions. Using that new jurisdiction, CFIUS drafted rules for “certain transactions by foreign persons involving real estate in the United States” (the “real estate rules”), which became effective in February 2020. The real estate rules provided the process for CFIUS to review acquisitions involving a foreign person purchasing, leasing, or gaining certain other land rights in property close to military installations and other sensitive areas. Specifically, the real estate rules set out four categories of locations that could subject a real estate transaction to CFIUS’s jurisdiction and listed each of these sets of locations in an Appendix to the rules (“Appendix A”).

Part 1 of Appendix A provides locations for which a property may be subject to review based on being in “close proximity” to (i.e., within one mile of) a listed military installation.
Part 2 of Appendix A provides locations for which a property may be subject to review based on being within the “extended range” (i.e., between one and one hundred miles from) a listed military installation.
Part 3 of Appendix A lists missile launch ranges (i.e., geographic areas) for which a property being in the extended area of that range may subject it to CFIUS review.
Part 4 of Appendix A lists offshore training areas where a property being in the extended range of that area may subject it to CFIUS review.

Congress’s policy rationale for providing CFIUS with authority over real estate transactions was—and remains—driven by intelligence collection risks. As CFIUS’s press release for the NPRM noted, FIRRMA allows CFIUS to review transactions that could “reasonably provide the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility, or property; or could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance.”

There are limited exceptions to CFIUS jurisdiction over “covered real estate”; most notably, if such real estate falls within an “urbanized area” or “urban cluster.” Yet, there is a meaningful limitation to this exception, as it does not apply where such real estate is (1) located within, or will function as part of, a covered port or (2) is within “close proximity” to certain military installations or other sensitive government sites.

II. Updates to CFIUS’s List of Sensitive U.S. Military Installations.

The proposed rule seeks to expand the list of covered military installations, the second such expansion of covered real estate installations since the real estate rules were promulgated under FIRRMA. The real estate rules themselves note that the Department of Defense (“DoD”) will continue “on an ongoing basis” to assess and update Appendix A.[4]

A noteworthy transaction served as the precursor to the first update to Appendix A. In January 2023, CFIUS determined that it did not have jurisdiction to review an acquisition of land by Chinese food manufacturer Fufeng Group Ltd. That land was near Grand Forks Air Force Base, which was not among the military installations listed in Appendix A. Ostensibly in response to public outcry around CFIUS’s determination that it lacked jurisdiction over this acquisition, in August 2023, DoD issued a final rule adding eight military installations to Appendix A, including Grand Forks Air Force Base.

This NPRM, coming nearly a year after the prior Appendix A expansion, would add a substantially increased number of military installations, with 59 proposed additions. The proposed rule is not immediately effective. CFIUS provided for a 30-day public comment period, following which CFIUS is expected to promptly publish a final rule. Once implemented, and assuming no changes are made to the proposed list of new military installations, the NPRM will bring the total number of military installations listed in Part 1 of Appendix A to 162 and Part 2 to 65, while making the following updates:

Expand CFIUS’s jurisdiction over real estate transactions to include 40 new military installations in Part 1 of the list (“close proximity,” i.e., within a one-mile radius);
Expand CFIUS’s jurisdiction over real estate transactions to include 19 new military installations in Part 2 of the list (“extended range,” i.e., within a 100-mile radius);
Move eight military installations from part 1 to part 2;
Remove one installation from part 1 and two installations from part 2;
Revise the definition of the term “military installation,” including to expand the definition of an installation to encompass “Army depots, arsenals, and military terminals,” “Marine Corps installations, logistic battalions and support facilities,” and Space Force bases, and expand other parts of the definition to encompass each of the Armed Forces; and
Update the names of 14 installations and the location of seven others.

III. Trends and Projections for CFIUS Review of Real Estate Transactions.

Since the CFIUS real estate rules became effective in 2020, there have been very few reviews of “covered real estate transactions.” CFIUS’s annual report to Congress for 2021 provided data showing that zero of the 272 notices and only one of the 164 short-form declarations filed with the Committee were for a covered real estate transaction. In 2022, only one of the 286 notices and five of the 154 short-form declarations were for covered real estate transactions.

There are likely several reasons why there have been so few covered real estate CFIUS filings in the past years. One possible reason is that many transactions that involved covered real estate also implicate a U.S. target’s broader assets and operations, governance rights, or access to technical information or personal data, resulting in CFIUS jurisdiction based on its authority to review “control” transactions and “non-controlling” covered investments.

Another reason is that, following FIRRMA, some transactions require mandatory filings with CFIUS, but covered real estate transactions are subject only to voluntary filings. In fact, a covered real estate transaction for which the parties did not file a voluntary CFIUS notice was the subject of a recent presidential order. In May 2024, following a CFIUS-initiated review that identified a risk to national security arising from the potential for foreign surveillance and intelligence collection activities, President Biden issued a presidential decision requiring Chinese cryptocurrency mining company MineOne to divest an acquisition of Wyoming real estate located in “close proximity” to a U.S. Air Force base with strategic missile silos.[5]

We do not expect the overall number of real estate reviews to rise substantially because of the additions in the NPRM, but we do expect CFIUS to closely scrutinize the more limited universe of transactions that implicate covered real estate—whether or not those transactions result in voluntary filings with the Committee—and to take bold action with respect to those transactions when warranted.

CFIUS is likely to consider possibilities to further expand or enhance its jurisdiction over real estate transactions owing, in part, to bipartisan support from U.S. legislators. As is often the case for national security initiatives, there exists bipartisan federal legislative support for tougher scrutiny on foreign acquisitions of U.S. land. In response to the NPRM, Chairman of the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party John Moolenaar (R-MI) made a statement in support of the proposed rule calling for even tougher measures to restrict “foreign adversaries” from purchasing land that would “leave our military facilities susceptible to surveillance.” U.S. Senator Sherrod Brown (D-OH) also issued a statement in support, noting the importance of protecting agricultural land near military bases. As the presidential election draws near, lawmakers on both sides of the aisle are likely to maintain focus on national security issues. This continued support paves the way for CFIUS to continue updating its rulemaking around real estate, echoed in Assistant Secretary of the Treasury for Investment Security Paul Rosen’s comments in the NPRM press release that CFIUS “will remain responsive to the evolving nature of the risks we face to ensure we are protecting our military installations and related defense assets.”

IV. Key Takeaways and Next Steps for Dealmakers.

The proposed rule is likely to be finalized and implemented by fall of this year. Considering this timeline, transaction parties should act now to update their approach to potentially implicated transactions. We recommend taking note of the following:

CFIUS will continue its efforts to identify and review non-notified real estate transactions. Especially given the intense scrutiny of foreign investments in U.S. real estate by U.S. federal, state, and local government authorities, as well as certain segments of the private sector and U.S. media, CFIUS will continue its efforts to identify and review covered real estate transactions. Some reviews could result in CFIUS identifying a threat to national security posed by a prior investment and the need for mitigation measures up to and including divestment.

The expanded list of installations should inform current deal diligence. Because transactions under consideration or negotiation today may not sign until after a final rule is published later this year, transaction parties should immediately begin considering the NPRM when conducting due diligence of real estate investments and acquisitions. Moreover, for transactions subject to CFIUS’s “control” or “covered investment” jurisdiction, the NPRM provides important insight into the locations that CFIUS considers most sensitive and likely to raise national security considerations.

Foreign parties can still acquire rights in covered real estate. Although the proposed rule does not distinguish between investors of different jurisdictions,[6] CFIUS will continue to evaluate transactions using a case-by-case, transaction-specific approach that accounts for the risk profile of the investors. CFIUS filings for covered real estate transactions remain voluntary, and foreign investors will continue to be able to receive CFIUS approvals for these transactions. Of note, the blocked acquisition we discussed in this alert involved a Chinese-backed acquirer and indications that the real estate could be used for surveillance. Not every covered real estate transaction poses a risk to U.S. national security and, even when CFIUS does identify a threat, in many cases the threat can be mitigated through manageable conditions on the foreign investor’s physical access to, and use of, the land. Moreover, the “urbanized area” and “urban cluster” exceptions discussed above continue to apply.

In addition to conducting CFIUS-focused risk analysis, transaction parties must consider state and local foreign investment reviews—at least for now. Currently, approximately twenty states have implemented some form of restriction on foreign investment in real estate, and over a dozen states are currently considering bills that would establish similar restrictions.[7] As described in a previous client alert, these state-level restrictions may not ultimately survive legal challenges on the grounds of the U.S. Constitution’s “supremacy clause” —the legal argument being that Congress has already reserved the power to regulate foreign investment in real estate with FIRRMA. However, until successfully challenged, these state and local rules also merit consideration for parties undergoing real estate transactions near U.S. military installations.

[1] See Order of May 13, 2024, Regarding the Acquisition of Certain Real Property of Cheyenne Leads by MineOne Cloud Computing Investment I L.P., 89 Fed. Reg. 43,301 (May 16, 2024).

[2] See, e.g., Protecting America’s Agricultural Land from Foreign Harm Act of 2023, S. 926, 118th Cong. (2023); Countering Communist China Act, H.R. 7476, 118th Cong. (2024).

[3] Note that the proposed rule would not amend the lists of three missile launch areas and twenty-three offshore training “geographic areas” also enumerated in the CFIUS rules, and discussed herein in Section I.

[4] “The Department of Defense will continue on an ongoing basis to assess its military installations and the geographic scope set under the rule to ensure appropriate application in light of national security considerations.” Provisions Pertaining to Certain Transactions by Foreign Persons Involving Real Estate in the United States, 85 Fed. Reg. 3,158, 3,160 (Jan. 17, 2020)

[5] Order of May 13, 2024, Regarding the Acquisition of Certain Real Property of Cheyenne Leads by MineOne Cloud Computing Investment I L.P., 89 Fed. Reg at 43,301

[6] Note that CFIUS’s real estate rules do provide for certain “excepted investors” from the United Kingdom, Canada, Australia, and New Zealand.

[7] See Micah Brown & Nick Spellman, “Statutes Regulating Ownership of Agricultural Land,” The Nat’l Agric. L. Center, https://nationalaglawcenter.org/state-compilations/aglandownership (last updated Nov. 30, 2023); April J. Anderson et al., Cong. Rsch. Serv., LSB11013, State Regulation of Foreign Ownership of U.S. Land: January to June 2023 (2023).

The following Gibson Dunn lawyers prepared this update: Michelle Weinbaum, Chris Mullen, Mason Gauch, Stephenie Gosnell Handler, and David Wolber.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. For additional information about how we may assist you, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm’s International Trade practice group:

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, rkirk@gibsondunn.com)
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, asmith@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, shandler@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, ctimura@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202.887.3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213.229.7269, nhanna@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202.955.8685, cmbrown@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202.887.3509, ssewall@gibsondunn.com)
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, mweinbaum@gibsondunn.com)
Mason Gauch – Houston (+1 346.718.6723, mgauch@gibsondunn.com)
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, cmullen@gibsondunn.com)
Sarah L. Pongrace – New York (+1 212.351.3972, spongrace@gibsondunn.com)
Anna Searcey – Washington, D.C. (+1 202.887.3655, asearcey@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, stoussaint@gibsondunn.com)
Claire Yi – New York (+1 212.351.2603, cyi@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, szhang@gibsondunn.com)

Asia:
Kelly Austin – Hong Kong/Denver (+1 303.298.5980, kaustin@gibsondunn.com)
David A. Wolber – Hong Kong (+852 2214 3764, dwolber@gibsondunn.com)
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing (+86 10 6502 8534, qyue@gibsondunn.com)
Dharak Bhavsar – Hong Kong (+852 2214 3755, dbhavsar@gibsondunn.com)
Felicia Chen – Hong Kong (+852 2214 3728, fchen@gibsondunn.com)
Arnold Pun – Hong Kong (+852 2214 3838, apun@gibsondunn.com)

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Patrick Doris – London (+44 207 071 4276, pdoris@gibsondunn.com)
Michelle M. Kirschner – London (+44 20 7071 4212, mkirschner@gibsondunn.com)
Penny Madden KC – London (+44 20 7071 4226, pmadden@gibsondunn.com)
Irene Polieri – London (+44 20 7071 4199, ipolieri@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Nikita Malevanny – Munich (+49 89 189 33 224, nmalevanny@gibsondunn.com)
Melina Kronester – Munich (+49 89 189 33 225, mkronester@gibsondunn.com)
Vanessa Ludwig – Frankfurt (+49 69 247 411 531, vludwig@gibsondunn.com)

Gibson, Dunn & Crutcher LLP announces release of Edition 14 of Lexology In-Depth: International Investigations.

Gibson, Dunn & Crutcher LLP is pleased to announce with Lexology the release of International Investigations. Gibson Dunn partner Stephanie L. Brooker was the Contributing Editor of the publication, which explores the scope of corporate and individual liability and the regulatory and criminal investigations process in the United States and abroad. The Treatise is FREE for a limited time to access HERE.

Ms. Brooker, partners M. Kendall Day and David C. Ware, of counsel Bryan H. Parr, and associate Jack Strachan jointly authored the United States chapter.

You can view this informative and comprehensive treatise via the links below:

CLICK HERE to view Lexology In-Depth: International Investigations

CLICK HERE to view the United States chapter

The following Gibson Dunn lawyers contributed to this publication: Stephanie L. Brooker, M. Kendall Day, David C. Ware, Bryan H. Parr, Jack Strachan.

Gibson Dunn has deep experience with investigations, corporate compliance, and white collar defense.

About the Authors:

Stephanie Brooker, a partner in the Washington, D.C. office of Gibson Dunn, is Co-Chair of the firm’s Global White Collar Defense and Investigations, Anti-Money Laundering, and Financial Institutions Practice Groups. Stephanie served as a prosecutor at DOJ, including serving as Chief of the Asset Forfeiture and Money Laundering Section, investigating a broad range of white-collar and other federal criminal matters, and trying 32 criminal trials. She also served as the Director of the Enforcement Division and Chief of Staff at FinCEN, the lead U.S. anti-money laundering regulator and enforcement agency. Stephanie has been consistently recognized by Chambers USA for enforcement defense and BSA/AML compliance as an “excellent attorney,” who clients rely on for “important and complex” matters, and for providing “excellent service and terrific lawyering.” She has also been named a National Law Journal White Collar Trailblazer and a Global Investigations Review Top 100 Women in Investigations.

Kendall Day is a nationally recognized white-collar partner in the Washington, D.C. office of Gibson Dunn, where he is Co-Chair of Gibson Dunn’s Global Fintech and Digital Assets Practice Group, Co-Chair of the firm’s Financial Institutions Practice Group, co-leads the firm’s Anti-Money Laundering practice, and is a member of the White Collar Defense and Investigations and Crisis Management Practice Groups. Kendall is recognized as a leading White Collar Attorney in the District of Columbia by Chambers USA – America’s Leading Business Lawyers. Most recently, Kendall was recognized in Best Lawyers 2024 for white-collar criminal defense. Prior to joining Gibson Dunn, Kendall had a distinguished 15-year career as a white-collar prosecutor with DOJ, rising to the highest career position in DOJ’s Criminal Division as an Acting Deputy Assistant Attorney General (“DAAG”). As a DAAG, Kendall had responsibility for approximately 200 prosecutors and other professionals. Kendall also previously served as Chief and Principal Deputy Chief of the Money Laundering and Asset Recovery Section. In these various leadership positions, from 2013 until 2018, Kendall supervised investigations and prosecutions of many of the country’s most significant and high-profile cases involving allegations of corporate and financial misconduct. He also exercised nationwide supervisory authority over DOJ’s money laundering program, particularly any BSA and money-laundering charges, DPAs and non-prosecution agreements involving financial institutions.

David C. Ware is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He is a member of the firm’s Securities Enforcement, Securities Litigation, Accounting Firm Advisory and Defense, and White Collar Defense and Investigations Practice Groups. David’s practice focuses on government investigations and enforcement actions, internal investigations, and litigation in the areas of auditing and accounting, securities fraud, and related aspects of federal regulatory and criminal law. He also counsels clients concerning compliance with SEC and PCAOB rules and standards. Prior to joining Gibson Dunn, Mr. Ware spent nearly six years at the PCAOB’s Division of Enforcement and Investigations, rising to the position of Associate Director. While at the PCAOB, David was responsible for numerous complex and high-profile investigations, including acting as the lead attorney in some of the PCAOB’s most significant enforcement actions.

Bryan H. Parr is of counsel in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the White Collar Defense and Investigations, Anti-Corruption & FCPA, and Litigation Practice Groups. His practice focuses on white-collar defense and regulatory compliance matters around the world. Bryan has extensive expertise in government and corporate investigations, including those involving the Foreign Corrupt Practices Act (FCPA) and anticorruption. He has defended a range of companies and individuals in U.S. Department of Justice (DOJ), SEC, and CFTC enforcement actions, as well as in litigation in federal courts and in commercial arbitrations. In his FCPA practice, Bryan regularly guides companies on creating and implementing effective compliance programs, successfully navigating compliance monitorships, and conducting appropriate M&A-related FCPA diligence and integration. He is recognized as a leading corporate crime and investigations lawyer by Chambers & Partners Latin America for his significant activity and experience in the region. He is proficient in Portuguese, French, and Spanish, and works professionally in all three languages.

Jack Strachan is an associate in the Washington, D.C. office of Gibson, Dunn & Crutcher. He is a member of the firm’s Corporate Department. Jack earned his law degree from the University of Michigan Law School, as well as a B.A. in Economics and Philosophy from the University of Michigan.

Contact Information:

For assistance navigating these issues, please contact the Gibson Dunn lawyer with whom you usually work, the leaders or members of the firm’s White Collar Defense and Investigations 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)
David C. Ware – Washington, D.C. (+1 202.887.3652, dware@gibsondunn.com)
Bryan H. Parr – Washington, D.C. (+1 202.777.9560, bparr@gibsondunn.com)
Jack Strachan – Washington, D.C. (+1 202.777.9445, jstrachan@gibsondunn.com)

The Corporate Sustainability Due Diligence Directive (CSDDD), one of the most debated pieces of European legislation of recent times, establishes far-reaching mandatory human rights and environmental obligations on companies of a certain size operating in the European Union—obligations that extend to their subsidiaries and even to their suppliers. In our two-episode podcast The ESG Digest: Insights into the European Corporate Sustainability Due Diligence Directive, Gibson Dunn lawyers and clients discuss the impact and implications of the new directive.

In our second episode, Gibson Dunn partner Markus Rieder (Munich) and Juergen Gleichauf, chief compliance officer and chief human rights officer at Mercedes-Benz, discuss the challenges for companies in meeting the mandatory human rights and environmental obligations established by the Corporate Sustainability Due Diligence Directive (CSDDD). These include transitioning from national laws to the newly established European directive, and managing risks and setting up remediation measures in a complex supply chain. Juergen also shares examples of how companies can effectively implement a human rights-led corporate strategy.

Previous Episode

HOSTS:

Markus Rieder is a partner in the Munich office of Gibson, Dunn & Crutcher and co-chair of the firm’s Transnational Litigation practice. He is also a member of the firm’s Class Actions, Securities Litigation and International Arbitration Groups. Markus focuses his practice on complex commercial litigation, both domestic and cross-border, and national and international arbitration, as well as on compliance and white collar defense. He has substantial experience in the automotive, industrial and manufacturing sectors. He also advises related to the increased risks of ESG litigation, encompassing a variety of issues including climate and environmental protection matters, human rights and the new German Supply Chain Due Dilligence Act, and represents clients in major cutting-edge issues such as climate protection lawsuits.

City of Grants Pass v. Johnson, No. 23-175 – Decided June 28, 2024

Today, the Supreme Court held 6–3 that the constitutional prohibition on “cruel and unusual punishments” does not forbid low-level fines and jail terms for camping on public property.

“At bottom, the question this case presents is whether the Eighth Amendment grants federal judges primary responsibility for assessing th[e] causes [of homelessness] and devising those responses. It does not.”

Justice Gorsuch, writing for the Court

Background:

The Eighth Amendment provides that “cruel and unusual punishments” shall not be “inflicted.” In Martin v. Boise, 920 F.3d 584 (9th Cir. 2019), the Ninth Circuit held that it would be cruel and unusual to impose any punishment, no matter how small, for sleeping on public property if a person has “no access to alternative shelter.” Id. at 615. Punishing a person for such “‘an involuntary act or condition,’” the Ninth Circuit reasoned, would be tantamount to punishing the “status” of homelessness. Id. at 616-617.

Shortly after Martin, plaintiffs sued Grants Pass, a small city in Oregon. The plaintiffs claimed that Grants Pass’s prohibitions against camping on public property violate the Cruel and Unusual Punishments Clause because the number of homeless people in the jurisdiction exceeds the number of shelter beds. Applying Martin,the district court certified a class of “involuntarily homeless” people in Grants Pass and granted the plaintiffs summary judgment. After the Ninth Circuit affirmed, Grants Pass’s petition for rehearing en banc was denied by a 14-to-13 margin, with the dissenters joining five opinions criticizing Martin and its extension in this case. The Supreme Court then granted a cert petition to decide whether the Ninth Circuit has correctly interpreted the Eighth Amendment.

Issue:

Does the enforcement of generally applicable laws regulating camping on public property constitute “cruel and unusual punishment” prohibited by the Eighth Amendment?

Court’s Holding:

Low-level fines and jail terms are not cruel and unusual punishments for public camping, even as applied to someone who is involuntarily homeless.

What It Means:

The Supreme Court began with a discussion of the practical implications of the Ninth Circuit’s Martin rule. Although the Court recognized that “the Ninth Circuit’s intervention in Martin was well-intended,” the Court emphasized that many cities use public-camping ordinances “as one important tool among others to encourage individuals experiencing homelessness to accept services and to help ensure safe and accessible sidewalks and public spaces.” The Court noted evidence that acceptance of service decreased under Martin—for example, shelter utilization had dropped by 40% in Grants Pass since the classwide injunction.
The Supreme Court held that low-level fines and jail terms are ordinary punishments that are neither cruel nor unusual under the Eighth Amendment. The Court also rejected the plaintiffs’ reliance on Robinson v. California, 370 U.S. 660 (1962), which held that the Eighth Amendment prohibited the government from making the “status” of being an addict a crime, regardless of the punishment. As the Court explained, public camping, even when purportedly compelled by one’s circumstances, is conduct rather than status under Robinson and therefore subject to the standard Eighth Amendment analysis.
The Supreme Court also reasoned that the Eighth Amendment should not be distorted to address questions that other constitutional provisions and common-law doctrines address. For example, the Court identified the Due Process Clause as the traditional basis for constitutional arguments about criminal responsibility and the defense of “necessity” as the traditional state-law doctrine potentially available to those jailed or fined for doing something (like public camping) that they had no choice but to do. The Eighth Amendment, the Court explained, simply does not provide any guideposts to decide when cities can regulate public camping.
The Court highlighted the broad coalition of hundreds of amici that supported review of Grants Pass’s case. As the Court observed, almost half the States, California Governor Newsom, San Francisco Mayor London Breed, and the cities of Anchorage, Honolulu, Los Angeles, Phoenix, Portland, and Seattle, among many others, criticized the Ninth Circuit for tying governments’ hands in responding to the urgent homelessness crisis. The Court’s decision returns the “full panoply of tools in the policy toolbox” to “the people and their elected representatives.”

Gibson Dunn represented the City of Grants Pass as Petitioner.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the U.S. Supreme Court. Please feel free to contact the following practice group leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Litigation

Theodore J. Boutrous, Jr.
+1 213.229.7804
tboutrous@gibsondunn.com

Theane Evangelis
+1 213.229.7726
tevangelis@gibsondunn.com

Related Practice: Real Estate

Eric M. Feuerstein
+1 212.351.2323
efeuerstein@gibsondunn.com

Jesse Sharf
+1 310.552.8512
jsharf@gibsondunn.com

Related Practice: Land Use and Development

Mary G. Murphy
+1 415.393.8257
mgmurphy@gibsondunn.com

Benjamin Saltsman
+1 213.229.7480
bsaltsman@gibsondunn.com

This alert was prepared by associates Patrick Fuster, Daniel Adler, Lefteri Christos, and Karl Kaellenius.

Loper Bright Enterprises v. Raimondo, No. 22-451
Relentless, Inc. v. Department of Commerce, No. 22-1219 – Decided June 28, 2024

Today, the Supreme Court overruled Chevron v. Natural Resources Defense Council, a landmark decision that had required courts to defer to agencies’ reasonable interpretations of ambiguous statutory terms.

“Chevron is overruled. Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the APA requires.”

Chief Justice Roberts, writing for the Court

Background:

The Supreme Court’s decision in Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), instructed courts to apply a two-step framework when reviewing administrative agencies’ interpretations of statutes that they administer. At step one, courts determined whether the statute had an unambiguous meaning using the traditional tools of statutory construction. If not, then courts proceeded to step two, at which they deferred to the agency’s interpretation as long as it was reasonable. This meant that an agency’s reading of the law could control even if it was not the view that a court would otherwise adopt using its independent judgment (and even if the agency’s view had changed over time).

Loper Bright Enterprises and Relentless, Inc. are small businesses engaged in herring fishing off the Atlantic coast. They brought two lawsuits challenging a rule promulgated by the Department of Commerce that required them to pay for government-approved fishing monitors, which can reduce fishers’ returns by up to 20%. The challengers argued that this rule was unauthorized by the governing statute, which did not expressly say who should pay for these monitors. The district courts in both cases granted summary judgment to the Department, and the D.C. Circuit and First Circuit affirmed. Applying Chevron, these courts both held that the agency had reasonably interpreted the statute.

Issue:

Whether the Court should overrule or clarify the Chevron doctrine.

Court’s Holding:

Chevron is overruled. Judicial deference to administrative agencies’ statutory interpretation is contrary to the Administrative Procedure Act (“APA”) and traditional principles of judicial review. Judges must independently interpret statutes without deference to an agency’s reading of the law.

What It Means:

Overruling Chevron will make it more difficult for government agencies to win cases turning on statutory-interpretation questions. Today’s decision continues a trend of Supreme Court decisions reining in administrative agency action, including recent cases curbing the Securities and Exchange Commission’s power to bring enforcement actions in administrative tribunals rather than federal courts (SEC v. Jarkesy) and granting a stay of the Environmental Protection Agency’s “Good Neighbor” emissions-regulation plan for failing to comply with the APA’s requirement of reasoned decisionmaking (Ohio v. EPA). Altogether, this case law signals the Justices’ skepticism of expansive claims of regulatory power by federal agencies, and today’s action is a major resetting of the balance of power between courts and agencies, as well as between agencies and challengers of agency action.
Notably, the Court rested its decision on the plain language of the APA, which provides that a court reviewing agency action “shall decide all relevant questions of law” and “interpret constitutional and statutory provisions.” 5 U.S.C. § 706. Justice Thomas wrote a separate concurrence to explain his view that Chevron also violates the Constitution’s separation of powers by abdicating judges’ duty to exercise independent judgment and impermissibly conferring that judicial power on the Executive Branch.
The effects of Chevron’s demise will likely be most dramatic in the lower federal courts, some of which have continued to apply Chevron in recent years even as the Supreme Court has rarely invoked the doctrine over the past decade. Today’s decision instructs these circuit and district judges to change their practices and abandon deference. Instead, they “must exercise their independent judgment in deciding whether an agency has acted within its statutory authority.”
Going forward, agencies’ interpretation of statutes will still be entitled to a lesser degree of “respect” under Skidmore v. Swift & Co., insofar as the agencies’ views are persuasive. This may depend on factors such as whether the agency adopted the interpretation close in time to the statute’s enactment and how consistently the agency has adhered to that interpretation since.
Today’s decision does not necessarily unsettle prior cases relying on Chevron to interpret statutes. The Court stated that a prior case’s reliance on Chevron to conclude that an agency’s action was lawful is not, standing alone, justification to overrule it.
Even after today’s decision, agencies will likely continue to issue regulations largely as before the overruling of Chevron, particularly in certain areas, though the scope of such regulations may change. For example, taxpayers will continue to seek rules regarding how to report routine business transactions and will want to participate in the rulemaking process through the notice and comment procedure. While today’s decision will have a significant impact on the litigation landscape regarding such tax and other regulations, many of those regulations faced strong judicial headwinds when challenged even under Chevron.

Gibson Dunn represented the Chamber of Commerce of the United States of America as Amicus Supporting Petitioners in Loper Bright.

The Court’s opinion is available here.

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Administrative Law and Regulatory Practice

Eugene Scalia +1 202.955.8210 escalia@gibsondunn.com	Helgi C. Walker +1 202.887.3599 hwalker@gibsondunn.com	Stuart F. Delery +1 202.955.8515 sdelery@gibsondunn.com
Russell Balikian +1 202.955.8535 rbalikian@gibsondunn.com

This alert was prepared by associates Max E. Schulman and Nicholas B. Venable.

From the Derivatives Practice Group: The CFTC had an active week with various approvals and no-action relief.

New Developments

CFTC Staff Issues a No-Action Letter Regarding Certain Reporting Requirements for Swaps Transitioning from CDOR to CORRA. On June 27, the CFTC Division of Market Oversight (“DMO”) and Division of Data (“DOD”) issued a staff no-action letter regarding certain Part 43 and Part 45 swap reporting obligations for swaps transitioning under the ISDA LIBOR fallback provisions from referencing the Canadian Dollar Offered Rate (“CDOR”), to referencing the risk-free Canadian Overnight Repo Rate Average (“CORRA”) following the cessation of CDOR after June 28, 2024. The letter states DMO and DOD will not recommend the CFTC take enforcement action against an entity for failure to timely report under Part 45 the change in a swap’s floating rate. This letter covers those floating rate changes that are made under the ISDA LIBOR fallback provisions from CDOR to CORRA, but only in the event the entity uses its best efforts to report the change by the applicable deadline in Part 45 and in no case reports the required information later than five business days from, but excluding, July 2, 2024. The letter also states DMO and DOD will not recommend the CFTC take enforcement action against an entity for failure to report under Part 43 the change in the floating rate for a swap modified after execution to incorporate the ISDA LIBOR fallback provisions to transition from referencing CDOR to referencing CORRA. [NEW]
CFTC Extends Public Comment Period for Proposed Amendments to Event Contracts Rules. On June 27, the CFTC announced it is extending the deadline for public comment on a proposal to amend its event contract rules. The extended comment period will close on August 8, 2024. The CFTC is providing an extension to allow interested persons additional time to analyze the proposal and prepare their comments. The proposal would amend CFTC Regulation 40.11 to further specify types of event contracts that fall within the scope of Commodity Exchange Act (“CEA”) Section 5c(c)(5)(C) and are contrary to the public interest, such that they may not be listed for trading or accepted for clearing on or through a CFTC-registered entity. [NEW]
CFTC Grants ForecastEx, LLC DCO Registration and DCM Designation. On June 25, the CFTC announced that it has issued ForecastEx, LLC an Order of Registration as a derivatives clearing organization (“DCO”) and an Order of Designation as a designated contract market (“DCM”) under the CEA. DCO registration was granted under Section 5b of the CEA. DCM designation was granted under Section 5a of the CEA. ForecastEx is a limited liability company registered in Delaware and headquartered in Chicago, Illinois. [NEW]
CFTC Approves Final Capital Comparability Determinations for Certain Non-U.S. Nonbank Swap Dealers. On June 25, the CFTC announced it has approved four comparability determinations and related comparability orders granting conditional substituted compliance in connection with the CFTC’s capital and financial reporting requirements to certain CFTC-registered nonbank swap dealers organized and domiciled in Japan, Mexico, the European Union (France and Germany), or the United Kingdom. Pursuant to the orders, non-U.S. nonbank swap dealers subject to prudential regulation by the Financial Services Agency of Japan, the National Banking and Securities Commission of Mexico and the Mexican Central Bank, the European Central Bank, or the United Kingdom Prudential Regulation Authority may satisfy certain CEA capital and financial reporting requirements by being subject to, and complying with, comparable capital and financial reporting requirements under the respective foreign jurisdiction’s laws and regulations, subject to specified conditions. [NEW]
U.S. Department of Treasury Releases Joint Policy Statement and Principles on Voluntary Carbon Markets. On May 28, the Biden-Harris Administration released a Joint Statement of Policy and new Principles for Responsible Participation in Voluntary Carbon Markets (the “Joint Statement”) announcing the U.S. government’s approach to further developing high-integrity voluntary carbon markets (“VCMs”). The Joint Statement announces seven principles, which are not exhaustive, that seek to codify and strengthen concepts and practices already developed market participants, governments and international bodies. The primary aim of these principles is to inform and support the continuing development of VCMs. On June 17, Gibson Dunn published an alert discussing the principles and key takeaways.

New Developments Outside the U.S.

EBA and ESMA Publish Guidelines on Suitability of Management Body Members and Shareholders for Entities Under MiCA. On June 27, EBA and ESMA published joint guidelines on the suitability of members of the management body, and on the assessment of shareholders and members with qualifying holdings for issuers of asset reference tokens (“ARTs”) and crypto-asset service providers (“CASPs”), under the Markets in Crypto Assets regulation (“MiCA”). The first set of guidelines covers the presence of suitable management bodies within issuers of ARTs and CASPs. The second set of guidelines concerns the assessment of the suitability of shareholders or members with direct or indirect qualifying holdings in a supervised entity. [NEW]
ESAs Propose Improvements to the Sustainable Finance Disclosure Regulation. On June 18, the EBA, the European Insurance and Occupational Pensions Authority (“EIOPA”), and ESMA (the three European Supervisory Authorities , i.e., “ESAs”) published a Joint Opinion on the assessment of the Sustainable Finance Disclosure Regulation (“SFDR”). In the joint opinion, the ESAs call for a coherent sustainable finance framework that caters for both the green transition and enhanced consumer protection, considering the lessons learned from the functioning of the SFDR.
ESMA Publishes 2023 Annual Report. On June 14, ESMA announced that it has published its Annual Report for 2023. ESMA stated that the report sets out the key achievements in the first year of implementing ESMA’s new 5-year strategy, delivering on the mission of enhancing investor protection and promoting stable and orderly financial markets in the European Union (EU). According to the report, ESMA’s key accomplishments during 2023 include enhancing supervisory convergence through peer reviews on the supervision of central counterparties (CCPs) and central securities depositories (CSDs), identifying areas for improvement and issuing recommendations to ensure consistent supervision across the EU, and monitoring retail investment markets and reporting on the costs and performance of retail investment products, highlighting cost reductions and variations across products and member states, and recommending that investors carefully evaluate costs and diversify investments. [NEW]

New Industry-Led Developments

ISDA Publishes Framework to Prepare for Close Out of Derivatives Contracts. On June 27, ISDA published the ISDA Close-out Framework that market participants can use to help prepare for potential terminations of collateralized derivatives contracts. ISDA stated that the Llaunch of the ISDA Close-out Framework is in response to the March 2023 failure of Signature Bank and SVB in the US, which, according to ISDA, highlighted the complexities of potentially terminating over-the-counter derivatives trading relationships following various post-crisis regulatory reforms. Specifically, the reforms require that in-scope entities are now required to post margin for non-cleared derivatives transactions, while various jurisdictions have introduced mandatory stays on termination rights and remedies as part of bank resolution regimes. ISDA stated that Tthe ISDA Close-out Framework is intended to be used as a preparatory resource to help firms coordinate internal business functions and stakeholders and internal and external legal, operational, risk management, infrastructure and other relevant service providers to ensure they are adequately prepared for any potential future stress events. [NEW]
ISDA Responds to CCIL on Proposal for USD/INR FX Options. On June 21, ISDA submitted a response to a consultation paper from the Clearing Corporation of India Limited (“CCIL”) on a proposal to introduce an electronic trading platform and clearing and settlement services for USD/INR FX options of up to one year maturity initially. The response sets out the features of the trading platform, the risk management framework and a questionnaire on the parameters of the product. ISDA’s response focuses mainly on the risk management framework aspect, including the margin models and default management framework. It asks for more clarity and transparency on the choice of margin models and encourages the implementation of scheduled variation margin calls and stress-based anti-procyclicality measures. [NEW]
ISDA Responds to FSB Consultation on Liquidity Preparedness for Margin and Collateral Calls. On June 18, ISDA submitted a response to the Financial Stability Board’s (FSB) consultation on liquidity preparedness for margin and collateral calls. The response notes that the recommendations are generally sensible and seek to incorporate a proportionate and risk-based approach. It also highlights a number of considerations relevant to the non-bank financial intermediation (NBFI) sector’s liquidity preparedness for margin and collateral calls.
ISDA Responds to FCA Consultation on Sustainability Disclosure Requirements. On June 14, ISDA responded to the UK Financial Conduct Authority’s (FCA) consultation on sustainability disclosure requirements for portfolio management. ISDA stated that it supports the FCA taking a proportionate approach to the use of derivatives in sustainable investing. ISDA believes that it is important that recommendations on the treatment of derivatives, expected to be proposed by the European Union’s Platform on Sustainable Finance (PSF) by the end of 2024, are implemented consistently by the relevant authorities, including those in the UK. In the response, ISDA highlights several issues related to derivatives and makes recommendations.
ISDA Responds to FCA and BoE on UK EMIR Refit. On June 12, ISDA submitted a response to the joint Bank of England and UK Financial Conduct Authority (FCA) consultation on part two of the UK European Market Infrastructure Regulation (UK EMIR) Refit reporting Q&A and proposed updates to validation rules. In the response, ISDA highlights several topics, including the reporting of equity resets, commodity basis swaps and excess collateral under UK EMIR.
VERMEG Integrates Common Domain Model into COLLINE Collateral Management System. On June 10, ISDA announced that VERMEG, a technology provider for the banking and insurance sector, has integrated the Common Domain Model (CDM) into its COLLINE collateral management system to support the consumption of digitized regulatory initial margin (IM) credit support annexes (CSAs). ISDA stated that VERMEG is the first entity to integrate the CDM to improve the efficiency of collateral processes, with several other firms currently in testing.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

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

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

Adam Lapidus – New York (212.351.3869, alapidus@gibsondunn.com )

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

William R. Hallatt , Hong Kong (+852 2214 3836, whallatt@gibsondunn.com )

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki , New York (212.351.4028, mtakagaki@gibsondunn.com )

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

Fischer v. United States, No. 23-5572 – Decided June 28, 2024

Today, the Supreme Court held 6-3 that Section 1512(c) of the Sarbanes-Oxley Act—which prohibits obstructing official proceedings—is limited to acts that impair the availability or integrity of evidence in an official proceeding.

“Although the Government’s all-encompassing interpretation may be literally permissible, it defies the most plausible understanding of why (c)(1) and (c)(2) are conjoined, and it renders an unnerving amount of statutory text mere surplusage.”

Chief Justice Roberts, writing for the Court

Background:

Section 1512(c) of the Sarbanes Oxley Act provides criminal penalties for anyone who corruptly:

(1) alters, destroys, mutilates, or conceals a record, document, or other object, or attempts to do so, with the intent to impair the object’s integrity or availability for use in an official proceeding; or

(2) otherwise obstructs, influences, or impedes any official proceeding, or attempts to do so.

On January 6, 2021, Joseph W. Fischer allegedly forced his way into the Capitol and assaulted members of the Capitol Police. Fischer was arrested and charged with violating Section 1512(c) by obstructing an official proceeding. Fischer moved to dismiss, arguing that the statute prohibits only acts that impair the integrity or availability of evidence in an official congressional proceeding. The district court agreed and dismissed the count. The D.C. Circuit reversed, holding that Section 1512(c)(2) is a catchall provision that reaches beyond the specific examples in subsection (c)(1). Judge Katsas dissented, construing Section 1512(c)(2) as limited to acts that affect the integrity or availability of evidence in an official proceeding.

Issue:

Is 18 U.S.C. § 1512(c)(2) limited to actions pertaining to evidence for official proceedings?

Court’s Holding:

Yes. Section 1512(c)(2) requires the Government to establish that a defendant impaired or attempted to impair the availability or integrity of evidence intended for use in an official proceeding.

What It Means:

The Court’s decision means that the Government cannot use Section 1512(c)(2) to prosecute obstructive conduct that is unrelated to evidence intended for use in an official proceeding. To reach this conclusion, the Court relied on canons of construction that limit generalized statutory terms and phrases—“otherwise” clauses in particular—by reference to more specific neighboring or preceding terms and phrases.
The Court emphasized that Section 1512(c)(2) still has teeth. For example, the Court noted that it is possible to violate Section 1512(c)(2) by creating false evidence, impairing witness testimony, or tampering with intangible information.
Justice Jackson voted with the majority and wrote a concurrence to emphasize that the Court’s holding “follows from” the statute’s “legislative purpose.” Justice Barrett, joined by Justice Sotomayor and Justice Kagan, dissented and would have adopted a broader construction of Section 1512(c)(2) that covered Fischer’s alleged conduct even though it was not related to evidence tampering.
Today’s decision is the latest example of the Court narrowly construing broad criminal law provisions to avoid sweeping in conduct addressed by other statutes. Earlier this week, in Snyder v. United States, the Court narrowly construed the federal bribery statute to exclude after-the-fact gratuities that may be regulated by state law. And in 2015, in Yates v. United States, the Supreme Court construed Sarbanes-Oxley’s criminal spoliation provision, 18 U.S.C. § 1519, to limit the broad phrase “a tangible object” to one used to record or preserve information.

The Court’s opinion is available here.

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: White Collar Defense and Investigations

Stephanie Brooker +1 202.887.3502 sbrooker@gibsondunn.com	Winston Y. Chan +1 415.393.8362 wchan@gibsondunn.com	Nicola T. Hanna +1 213.229.7269 nhanna@gibsondunn.com
F. Joseph Warin +1 202.887.3609 fwarin@gibsondunn.com

Related Practice: Public Policy

Michael D. Bopp
+1 202.955.8256
mbopp@gibsondunn.com

Mylan L. Denerstein
+1 212.351.3850
mdenerstein@gibsondunn.com

This alert was prepared by associates Tessa Gellerson and Salah Hawkins.

The groups are seeking a total reversal of the EPA’s decision to grant Louisiana primacy over Class VI wells.

On June 12, 2024, three environmental activist groups—the Deep South Center for Environmental Justice, Healthy Gulf, and the Alliance for Affordable Energy—challenged the United States Environmental Protection Agency’s (the “EPA”) final rule granting Louisiana primary enforcement authority (also known as “primacy”) over Class VI injection wells.[1] The groups filed a petition for review in the United States Court of Appeals for the Fifth Circuit, claiming that the EPA’s final primacy rule was improper and violated the Safe Drinking Water Act (the “SDWA”) and other federal statutes on a number of grounds. The groups are seeking a total reversal of the EPA’s decision to grant Louisiana primacy over Class VI wells, and if the challenge is successful, Louisiana may be forced to resubmit portions of its Class VI primacy application, potentially stranding pending Class VI well permit applications that were transferred to the Louisiana Department of Energy and Natural Resources (the “LDENR”) for review or shifting those applications back to the EPA to undergo its lengthy review process.

Louisiana’s Path to Class VI Primacy

On September 17, 2021, Louisiana submitted an application to the EPA to expand Louisiana’s primacy over underground injection wells to include Class VI injection wells under the state’s existing Underground Injection Control (the “UIC”) program under the SDWA.[2] To gain primacy for a Class VI injection well, a state must demonstrate that it (1) has jurisdiction over underground injection, (2) has implemented UIC laws and regulations that are at least as stringent as the applicable EPA requirements, and (3) has the necessary expertise and administrative, civil, and criminal enforcement mechanisms to enforce its UIC program.[3]

After a year-long review process that included the consideration of over 40,000 public comments, the EPA determined that Louisiana’s Class VI UIC program met all federal requirements, concluding that Louisiana had demonstrated that it has the requisite jurisdiction, stringent UIC provisions, enforcement procedures, and expertise in place to oversee a UIC program.[4] Consequently, on December 28, 2023, the EPA signed a final rule granting primacy over Class VI wells to Louisiana, which became effective on February 5, 2024.[5] We have previously covered Louisiana’s primacy application in greater detail here.

Activist Groups Argue the EPA Violated the Safe Drinking Water Act and the Administrative Procedures Act.

The three activist groups, aided by their counsel at Earthjustice, challenged the EPA’s decision to grant Louisiana primacy over Class VI wells by arguing that the EPA’s decision violated both the SDWA and the Administrative Procedure Act (the “APA”). Two of these claims are described below:

Louisiana’s Waiver of Liability after Site Closure

The activist groups’ primary challenge to Louisiana’s grant of primacy centers on a liability waiver provision in Louisiana’s Class VI regulations governing post-injection site care and closure requirements. These groups argue in their challenge that, even though Louisiana’s post-injection site care and closure regulations appear to meet or exceed the analogous regulations issued by the EPA, these regulations are effectively nullified by a liability release that is given to (1) Class VI storage site operators, (2) the emitters that generated the CO2 that was injected at the applicable site, (3) the owners of the CO2 stored at the applicable site, and (4) other parties.[6] Louisiana’s liability release states:

Upon the issuance of the certificate of completion of injection operations, the storage operator, all generators of any injected carbon dioxide, all owners of carbon dioxide stored in the storage facility, and all owners otherwise having any interest in the storage facility shall be released from any and all future duties or obligations under this Chapter and any and all liability associated with or related to that storage facility which arises after the issuance of the certificate of completion of injection operations.[7]

The activist groups argue that Louisiana’s release of site operators and others from “future duties or obligations” and all liabilities related to the Class VI injection site arising after the site closure certificate is issued by the LDENR means that site operators are released from the state’s post-injection site care and closure requirements and will have no liability if they do not meet such requirements. In addition, the groups point out that under Louisiana’s UIC regulations, upon the state’s issuance of a site closure certificate, the ownership of Class VI wells eventually automatically transfers to the state, but the related liabilities do not. This, they claim, may orphan the responsibility and liability associated with post-injection site care and closure requirements.[8] Consequently, the activist groups argue, “Louisiana’s liability waiver renders the state’s program less stringent [than the EPA’s program] on its face” because the EPA’s Class VI regulations do not include similar liability waiver provisions.[9] Thus, the groups claim in their challenge that Louisiana’s primacy application did not satisfy the necessary requirements and the EPA did not have the authority to grant primacy based on the application.

The EPA appears to have already addressed the arguments made by the activist groups. In its final rule granting Louisiana primacy, the EPA stated that “[t]he EPA disagrees that long term liability provisions are always incompatible with the SDWA and the EPA’s UIC regulatory requirements”.[10] The EPA also pointed out that in its Class VI Rule of 2010 “the EPA did not conclude that states that authorize liability transfer after site closure cannot receive UIC Class VI primacy” and a state may receive primacy if “such state liability transfer provisions [are] appropriately crafted so that the state’s Class VI program meets UIC regulatory requirements”, concluding that Louisiana’s provisions were appropriately crafted and met all federal requirements. [11]

North Dakota and Wyoming, the two other states to have been granted Class VI primacy from the EPA, provide for a possible liability transfer to the state after a Class VI well is closed, after 10 years and 20 years, respectively.[12] Additionally, several other states that are in the process of applying for Class VI primacy have adopted similar liability transfer provisions regarding Class VI wells. Of all these states’ liability transfer provisions, Louisiana’s are the strictest, with a 50-year minimum wait before liability transfer can occur.[13]

Alleged Lack of Expertise at the LDNER

The activist groups further claim that the EPA’s decision to grant Class VI primacy to Louisiana was “arbitrary and capricious” and thus in violation of the APA because, the groups allege, Louisiana failed to demonstrate that the LDENR has the proper staff and expertise necessary to implement its UIC Program.[14] The SWDA and the EPA’s guidelines for making primacy determinations require applicant states to provide a description of the state agency staff that will carry out the UIC program and to demonstrate the technical expertise required to evaluate Class VI projects.

The groups argue that Louisiana “conceded” that the LDENR does not have the requisite expertise because the LDENR plans to utilize third-party contractors to review Class VI well permit applications for factors like site characterization, modeling, risk, and environmental justice analysis.[15] They note that, while the “EPA allows use of contractor support” and states may demonstrate in their primacy applications that “they have in-house staff or access to contractor support” for all requisite areas of expertise,[16] Louisiana’s primacy application did not identify specific contractors or provide details regarding LDENR’s access to contractors. They further argue that access to contractors could prove to be difficult in the future due to either a limited number of contractors or to conflicts of interest.[17] As a result, the groups conclude that the EPA does not have support for the assertion that the LDENR has access to the required expertise, either through in-house staff or through third party contractors.

The activist groups further claim that Louisiana lacks the requisite expertise “in light of the state’s past failures regulating less complicated wells” [18], alleging that performance audits on the state’s oil and gas wells from 2014 through 2020 show a failure to monitor and enforce violations.[19] The groups also allege two instances in which a Class II and Class III well, respectively, caused water contamination in the state, even though Louisiana has primacy over Class II and III wells.[20] The groups claim that, given the state’s alleged lack of expertise and oversight, the EPA failed to reasonably explain why it granted Louisiana Class VI primacy, making the decision to do so arbitrary and capricious.[21]

In its published final rule, the EPA responded to public comments that had expressed similar concerns that Louisiana lacked the requisite staff and expertise to be granted Class VI primacy. The EPA concluded that the LDENR did have the requisite staff and technical expertise to oversee all aspects of its UIC program in accordance with federal standards.[22] The EPA also stated that the previous environmental incidents either were unrelated to UIC program implementation or they did not involve LDENR and thus could not have any bearing on LDENR’s expertise.[23]

Other Claims and Future Developments

The activist groups also challenged Louisiana’s primacy on other grounds, including that (1) the EPA’s adoption of Louisiana’s liability waiver violated federal law by releasing Class VI project participants from liability under the Clean Water Act, CERCLA, and RCRA,[24] and (2) the EPA violated the APA by failing to evaluate certain differences between the EPA’s regulations and Louisiana’s regulations to determine if Louisiana’s regulations are less stringent.[25]

It is not clear if the challenges raised by the activist groups will be successful. The EPA’s responses to public comments appear to show that it was aware of, and not concerned by, these challenges when it issued its final rule granting Louisiana primacy over Class VI wells. While these challenges might delay the development of the carbon capture industry in the United States if successful, the interest in carbon capture projects (and the tax credits that these projects generate) will likely lead to market solutions for any delays that result. Gibson Dunn will continue to monitor this case and other potential challenges to carbon capture projects throughout the United States.

[1] Class VI wells are used by the carbon capture and sequestration industry to permanently sequester captured carbon in underground geological formations.

[2] https://www.epa.gov/uic/primary-enforcement-authority-underground-injection-control-program-0.

[3] 89 Fed. Reg. 703, 704 (Jan. 5, 2024); 40 CFR parts 124, 144, 145, and 146.

[4] 89 Fed. Reg. at 706-10.

[5] 89 Fed. Reg. at 703.

[6] Petitioners’ Brief at 11.

[7] La. Rev. Stat. Section 30:1109(A)(3).

[8] Petitioners’ Brief at 12.

[9] Petitioners’ Brief at 17.

[10] 89 Fed. Reg. at 707.

[11] Id. At 706-07.

[12] N.D. Cent. Code Section 38-22-17; W.S. Section 35-11-319.

[13] La. Rev. Stat. Section 30:1109(A)(1).

[14] Petitioners’ Brief at 1; 49.

[15] Petitioners’ Brief at 46.

[16] Petitioners’ Brief at 46-47.

[17] Petitioners’ Brief at 47.

[18] Petitioners’ Brief at 1.

[19] Petitioners’ Brief at 47-48.

[20] Petitioners’ Brief at 48.

[21] Petitioners’ Brief at 49.

[22] 89 Fed. Reg. at 706-07.

[23] 89 Fed. Reg. at 708-09.

[24] Petitioners’ Brief at 13.

[25] Petitioners’ Brief at 16.

The following Gibson Dunn attorneys prepared this update: Michael P. Darden, Rahul D. Vashi, Zain Hassan, Mariana Lozano, and Graham Valenta.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Oil and Gas, Tax, or Environmental Litigation and Mass Tort practice groups, or the authors:

Oil and Gas:
Michael P. Darden – Houston (+1 346.718.6789, mpdarden@gibsondunn.com)
Rahul D. Vashi – Houston (+1 346.718.6659, rvashi@gibsondunn.com)
Graham Valenta – Houston (+1 346.718.6646, gvalenta@gibsondunn.com)
Zain Hassan – Houston (+1 346.718.6640, zhassan@gibsondunn.com)
Mariana Lozano – Houston (+1 346.718.6711, mlozano@gibsondunn.com)

Tax:
Michael Q. Cannon – Dallas (+1 214.698.3232, mcannon@gibsondunn.com)
Matt Donnelly – Washington, D.C. (+1 202.887.3567, mjdonnelly@gibsondunn.com)
Josiah Bethards – Dallas (+1 214.698.3354, jbethards@gibsondunn.com)

Environmental Litigation and Mass Tort:
Stacie B. Fletcher – Washington, D.C. (+1 202.887.3627, sfletcher@gibsondunn.com)
David Fotouhi – Washington, D.C. (+1 202.955.8502, dfotouhi@gibsondunn.com)
Rachel Levick – Washington, D.C. (+1 202.887.3574, rlevick@gibsondunn.com)

Securities & Exchange Commission v. Jarkesy, No. 22-859 – Decided June 27, 2024

Today, the Supreme Court held 6-3 that the Seventh Amendment to the United States Constitution requires the SEC to sue in federal court, not in the agency’s in-house court, when the SEC seeks civil penalties for fraud.

“[T]he Government has created claims whose causes of action are modeled on common law fraud and that provide a type of remedy available only in law courts. This is a common law suit in all but name. And such suits typically must be adjudicated in Article III courts.”

Chief Justice Roberts, writing for the Court

Background:

In 2013, the SEC brought administrative enforcement proceedings against George Jarkesy and his investment advisor for securities fraud. After an SEC in-house administrative law judge found that Jarkesy committed securities fraud, the SEC ordered Jarkesy to pay hundreds of thousands of dollars in civil penalties and disgorgement.

A divided panel of the Fifth Circuit held unconstitutional parts of the SEC’s in-house adjudication process for three independent reasons: (1) The Seventh Amendment right to a jury trial barred the SEC’s use of administrative proceedings to impose civil penalties; (2) Congress unconstitutionally vested the SEC with the unfettered discretion to decide whether to enforce securities laws in an agency adjudication or in federal court; and (3) Congress unconstitutionally insulated SEC administrative law judges from removal by allowing their firing only upon a finding of “good cause” by the Merit Systems Protection Board, whose members themselves are subject to removal only in certain limited circumstances.

Issue:

Can the SEC require defendants in actions for civil penalties to defend themselves before the agency tribunal rather than before a jury in federal court?

Court’s Holding:

No. The Seventh Amendment entitles defendants to a jury trial in federal court for SEC fraud actions seeking civil penalties.

What It Means:

Today’s decision will have a significant impact on the forum in which the SEC can enforce the statutes it administers—in the agency’s in-house administrative court, or in federal court before an Article III judge and a jury. The Court explained that “if a suit is in the nature of an action at common law, then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory.” The Court also emphasized that the form of relief the SEC sought in this case—civil penalties—was “all but dispositive” on the issue of whether the Seventh Amendment applied because civil penalties are “a type of remedy at common law that could only be enforced in courts of law.” Thus, going forward, if the SEC seeks civil penalties on a claim that resembles a traditional common-law action, the SEC very likely must proceed only in federal court, not in the administrative court.
The decision will also likely impact how the SEC settles enforcement actions with unregistered parties, including public companies and individual executives, at least for violations that resemble traditional common-law actions. The imposition of penalties in such settlements will likely require a federal court judgment, which in turn will subject settlements to potential scrutiny by a district court prior to endorsement of the judgment.
In the near term, the decision may have little impact on SEC enforcement because the agency hasn’t pursued contested actions seeking penalties in its administrative forum. But long term, requiring the SEC to bring enforcement actions in federal court will afford defendants access to independent judges and juries, the rules of evidence and civil procedure, and other procedural protections.
The Court’s decision could have broader implications for other agencies and other theories of liability. Many agencies have in-house courts that adjudicate alleged violations of the statutes they implement. If an agency seeks monetary penalties on a ground that resembles a traditional action at common law—such as a fraud or negligence claim—the Seventh Amendment presumptively requires the agency to proceed in federal court. The “public rights” exception to this principle will be construed more narrowly than suggested by some prior Court decisions. Defendants facing agency enforcement actions therefore should carefully consider the nature of the agency’s claims and requested penalties and assert their constitutional rights to a jury trial. Similarly, parties to agency investigations should consider asserting those constitutional rights in the event the agency signals it intends to take enforcement action.
Because the Seventh Amendment question resolved the case, the Court declined to reach the other constitutional questions that the petitioner presented. Thus, the Court has yet to decide whether Congress unconstitutionally delegated to the SEC the power to choose the forum in which to proceed or unconstitutionally insulated the administrative law judge from removal.

The Court’s opinion is available here.

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Securities Enforcement

Mark K. Schonfeld
+1 212.351.2433
mschonfeld@gibsondunn.com

David Woodcock
+1 214.698.3211
dwoodcock@gibsondunn.com

Related Practice: Administrative Law and Regulatory Practice

Eugene Scalia +1 202.955.8210 escalia@gibsondunn.com	Helgi C. Walker +1 202.887.3599 hwalker@gibsondunn.com	Stuart F. Delery +1 202.955.8515 sdelery@gibsondunn.com
Akiva Shapiro +1 212.351.3830 ashapiro@gibsondunn.com	Russell Balikian +1 202.955.8535 rbalikian@gibsondunn.com

Related Practice: Securities Litigation

Reed Brodsky +1 212.351.5334 rbrodsky@gibsondunn.com	Monica K. Loseman +1 303.298.5784 mloseman@gibsondunn.com	Brian M. Lutz +1 415.393.8379 blutz@gibsondunn.com
Craig Varnen +1 213.229.7922 cvarnen@gibsondunn.com	Mary Beth Maloney +1 212.351.2315 mmaloney@gibsondunn.com

This alert was prepared by associates Elizabeth Kiernan and Jessica Lee.

Ohio v. EPA, Nos. 23A349, 23A350, 23A351, and 23A384 – Decided June 27, 2024

Today, in a case that further highlights the significance of the Court’s emergency docket for challenging agency rules, the Supreme Court (5-4) granted Ohio and several other applicants a stay that suspends the EPA’s “Good Neighbor” plan regulating some states’ emissions.

“Perhaps there is some explanation why the number and identity of participating States does not affect what measures maximize cost-effective downwind air-quality improvements. But if there is an explanation, it does not appear in the final rule. As a result, the applicants are likely to prevail on their argument….”

Justice Gorsuch, writing for the Court

Background:

The Clean Air Act directs each state to develop plans to implement air-quality standards. If a state’s plan fails to meet the relevant requirements, the EPA can reject that plan and impose a federal plan instead. One requirement in the Act is a “Good Neighbor” provision, which requires upwind states to reduce emissions to account for pollution exported to downwind states. In 2022, the EPA proposed to reject the plans of 23 upwind states whose emissions it said would have an effect on downwind states. The EPA proposed a single, coordinated federal plan for all 23 states. The EPA ultimately disapproved 21 states’ plans. Before the federal plan was final, several courts of appeals held that the EPA had likely violated the Act in disapproving certain states’ plans and granted stays of the disapprovals pending review. In June 2023, the EPA nonetheless finalized the proposed federal plan—the “Good Neighbor” plan. Since then, several other states have obtained stays of the EPA’s state-plan disapprovals. The Good Neighbor plan now applies to only 11 states, regulating far less emissions than the plan’s stated intent.

Ohio and several other states still subject to the federal plan, as well as several industry participants, challenged the plan in the D.C. Circuit and sought a stay pending that court’s review. After the D.C. Circuit declined to stay the federal plan, several of the states and industry participants applied to the Supreme Court for a stay, arguing that the Good Neighbor plan violates the Administrative Procedure Act because the EPA failed to consider how the federal plan would work if it applied to fewer than 23 states.

Issue:

Are applicants entitled to a stay of the Good Neighbor plan?

Court’s Holding:

Yes. The applicants are likely to succeed on the merits because the Good Neighbor plan does not comply with the APA’s requirement that the agency provide a reasoned explanation, and applicants have demonstrated that they face irreparable harm justifying a stay of the plan pending final judicial review.

What It Means:

The Court concluded that the applicants were likely to succeed on the merits. The Court emphasized that the “long-settled standards” of federal rulemaking require the agency to explain its response to all material comments raised during the notice and comment period. While the Court recognized that EPA was aware of the concern that the Good Neighbor plan might not apply to all 23 States, the Court faulted EPA for failing “to explain why it believed its rule would continue to offer cost-effective improvements in downwind air quality with only a subset of the States it originally intended to cover.”
Because the Court concluded that the “harms and equities” relevant to a stay of the enforcement of a federal regulation were “very weighty on both sides,” it held that the propriety of the stay turned on the likelihood of success on the merits. The Court did credit—and the dissent did not dispute—the applicants’ argument that the unrecoverable costs of compliance with the rule during the pendency of the litigation would constitute irreparable harm. This argument would likely extend more broadly to challenges of other agency actions.
Justice Barrett dissented, joined by Justices Sotomayor, Kagan, and Jackson. She did not object to the Court’s analysis of the equities but concluded that the States were unlikely to succeed on the merits. She closed by noting that the Court “should proceed all the more cautiously” when addressing emergency applications “with voluminous, technical records and thorny legal questions.”
The Court’s decision indicates a willingness to grant stays while an agency rule is being challenged in lower courts and even before any lower court has expressed its views on the merits of the rule. This further highlights the importance of the Court’s emergency docket, particularly for challenges to broad federal rules.
Notably, the Court defused criticism over the so-called “shadow docket” by holding oral argument, rather than deciding the stay merely on the briefs.

The Court’s opinion is available here.

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Environmental Litigation and Mass Tort

Stacie B. Fletcher
+1 202.887.3627
sfletcher@gibsondunn.com

Daniel W. Nelson
+1 202.887.3687
dnelson@gibsondunn.com

This alert was prepared by associates Zachary Tyree, Aly Cox, and Aaron Gyde.

Snyder v. United States, No. 23-108 – Decided June 26, 2024

Today, the Supreme Court held 6-3 that a federal bribery statute, 18 U.S.C. § 666(a)(1)(B), does not criminalize after-the-fact “gratuities” paid to state or local government officials in recognition for official acts, where there was no quid pro quo agreement to take those acts.

“The question in this case is whether [federal law] also makes it a crime for state and local officials to accept gratuities—for example, gift cards, lunches, plaques, books, framed photos, or the like—that may be given as a token of appreciation after the official act. The answer is no.”

Justice Kavanaugh, writing for the Court

Background:

Petitioner James Snyder is the former mayor of Portage, Indiana. While Snyder was mayor, Portage contracted with a local truck company to buy garbage trucks worth $1.125 million. Several months later, Snyder solicited and accepted $13,000 from the truck company’s owners, which Snyder contended he received for providing the company with consulting services. It is undisputed that Snyder did not engage in this solicitation until after the city awarded the garbage truck contracts.

Snyder was later indicted for violating 18 U.S.C. § 666, which prohibits state and local officials from “corruptly solicit[ing,] demand[ing,] . . . or accept[ing]” anything of value offered with the intent to “influence[] or reward[]” in connection with certain government business. Snyder moved to dismiss and, after the jury returned a guilty verdict, filed a post-trial motion for acquittal, arguing that Section 666 applies only to acts of quid pro quo bribery and does not criminalize “gratuities” paid in recognition of actions already taken. The district court denied both motions, and the Seventh Circuit affirmed.

Issue:

Does 18 U.S.C. § 666(a)(1)(B) criminalize gratuities, i.e., payments in recognition of actions a state or local official has already taken or committed to take, without any quid pro quo agreement to take those actions?

Court’s Holding:

No. Section 666 applies only to quid pro quoacts of bribery. State and local officials may not be found guilty under this statute unless the prosecution proves that they solicited, demanded, or accepted something of value in exchange for taking an official act.

What It Means:

This decision is the latest in a series of cases in which the Court has rejected novel and expansive readings of federal fraud statutes in state and local public corruption cases.
E.g., Ciminelli v. United States, 143 S.Ct. 1121 (2023); Kelly v. United States, 140 S. Ct. 1565 (2020).

Today’s holding clarifies that providing state and local officials with tokens of appreciation—for example, gift cards, meals, events, or as in this case, a $13,000 payment—does not subject those officials to federal prosecution. At the same time, the Court reiterated that today’s decision does not affect the ability of state and local governments to regulate gratuities: “state and local governments may and often do regulate gratuities to state and local officials.” So before providing state and local officials with gifts or other benefits that might be considered gratuities, you should consult applicable state and local law.
The Court’s holding also should lend confidence to those subject to other federal public corruption statutes that they will not face prosecution for payments that might be seen as after-the-fact “gratuities.” This is especially true for statutes like the Foreign Corrupt Practices Act (FCPA), which prohibits the offer, promise, or payment of anything of value to improperly influence foreign officials. The Court’s ruling today further solidifies the conclusion that the FCPA, which proscribes influencing but not rewarding, does not extend to gratuities.
Justice Gorsuch wrote separately to emphasize that today’s decision is driven by the rule of lenity, which requires construing ambiguous criminal statutes in favor of defendants. Justice Jackson, joined by Justices Sotomayor and Kagan, dissented, contending that the Court’s opinion “elevates nonexistent federalism concerns over the plain text of the statute.”

The Court’s opinion is available here.

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com
Jonathan C. Bond +1 202-887-3704 jbond@gibsondunn.com

Related Practice: White Collar Defense and Investigations

Stephanie Brooker +1 202.887.3502 sbrooker@gibsondunn.com	F. Joseph Warin +1 202.887.3609 fwarin@gibsondunn.com
Charles J. Stevens +1 415.393.8391 cstevens@gibsondunn.com	Nicola T. Hanna +1 213.229.7269 nhanna@gibsondunn.com

This alert was prepared by associate Cate McCaffrey and partner Jillian London.

This proposed legislation, if enacted, would constitute the most significant modification of PAGA since it was enacted two decades ago, and would provide employers with significant new options when facing claims brought under PAGA.

After months of negotiations, bills that would substantially reform the California Private Attorneys General Act (PAGA) were introduced in the California Assembly and Senate on June 21, 2024. This proposed legislation, if enacted, would constitute the most significant modification of PAGA since it was enacted two decades ago, and would provide employers with significant new options when facing claims brought under PAGA.

Among other things, the proposed reform would impose new limits on who can bring a PAGA action and the scope of Labor Code violations that a plaintiff can pursue, create caps on penalties for employers who can demonstrate reasonable compliance, reduce penalties for certain types of violations (such as technical defects in wage statements), and provide employers with greater opportunities to cure alleged violations. The law would also for the first time permit injunctive relief in PAGA actions and allocate a greater share of any civil penalties to employees. The bills state that these reforms would apply to PAGA actions brought on or after June 19, 2024, unless the plaintiff submitted a PAGA notice before June 19.

Given the nature of these reforms, and the prevalence of PAGA actions in recent years, we expect significant litigation over the meaning and application of these new provisions if the proposed reform is enacted. California employers should be prepared to leverage these changes in any new PAGA litigation.

I. Background of PAGA Reform

There is currently a ballot measure to repeal PAGA that is set to go to California voters in the November 2024 election. The ballot measure, if enacted, would eliminate private PAGA actions, and replace PAGA with a new law imposing increased penalties but with enforcement limited to state regulators.

Last week, following months of discussions between Governor Newsom, labor advocates, and business groups, Governor Newsom announced a deal on proposed PAGA amendments to “avert [the] contentious ballot measure.” On Friday, Assembly Bill 2288 and Senate Bill 92 were introduced, which memorialize the agreement to reform PAGA. If the legislation is signed into law by June 27, then the PAGA repeal ballot initiative will be withdrawn from the ballot.

II. Key Provisions of the Proposed PAGA Reform

A. Limitations on Standing

The proposed legislation would impose two substantive limitations on standing. First, it would require a plaintiff to have personally suffered each of the Labor Code violations they are seeking to pursue on a representative basis. This change is a response to the Court of Appeal’s decision in Huff v. Securitas Security USA Services, Inc., 23 Cal.App.5th 745 (2018), which has been interpreted to permit a PAGA plaintiff to recover PAGA penalties not only for alleged Labor Code violations that the plaintiff personally suffered, but also other alleged violations that only affected other employees. The proposed legislation makes clear that a plaintiff must prove that they personally suffered the same alleged Labor Code violations they seek to pursue on behalf of other employees. There is an exception to this new requirement for PAGA actions filed by employees represented by certain nonprofit legal aid organizations.

Second, the proposed legislation makes clear that the PAGA plaintiff must have personally suffered each alleged violation within one year of filing a PAGA notice with the Labor & Workforce Development Agency (LWDA). This change is a response to the Court of Appeal’s decision in Johnson v. Maxim Healthcare Services, Inc., 66 Cal.App.5th 924 (2021), which PAGA plaintiffs have used to argue that a PAGA action could be premised on a Labor Code violation regardless of when it occurred. The proposed legislation clarifies that a plaintiff seeking to file a PAGA action must have experienced a Labor Code violation during the one-year limitations period under Section 340 of the Code of Civil Procedure.

B. Courts May “Limit the Scope” of PAGA Claims Prior to Trial

The proposed legislation empowers trial courts to both limit evidence at trial and limit the scope of any PAGA claim to ensure that it can be effectively tried. This is effectively a codification of the California Supreme Court’s decision in Estrada v. Carpet Royalty Mills, Inc., 15 Cal.5th 582 (2024), which held that trial courts cannot strike an entire PAGA claim on manageability grounds, but can and should use their “numerous tools . . . to manage complex cases generally, and PAGA cases in particular.” Id. at 618 (emphasis added). More information about the Estrada decision is available here.

This particular provision will likely be a source of significant litigation, particularly given that the legislation does not describe how or when courts should “limit the scope” of a PAGA action.

C. Reductions in PAGA Penalties

1. Caps When Employer Takes “All Reasonable Steps to Comply”

The proposed legislation expands PAGA’s cure provisions and rewards employers who proactively take “all reasonable steps” to comply with the Labor Code.

First, if an employer cures an alleged violation and takes “all reasonable steps to be prospectively in compliance” either before or within 60 days of receiving a notice of a claimed PAGA violation, then the employer will not be liable for any penalty. The proposed legislation provides examples of “reasonable steps,” including: conducting periodic payroll audits, disseminating lawful written policies, providing trainings on Labor Code and Wage Order compliance, and taking corrective action with regard to supervisors. An employer’s attempts to take reasonable steps shall be evaluated by a “totality of the circumstances and take into consideration the size and resources available to the employer, and the nature, severity and duration of the alleged violation.”

Second, if an employer demonstrates that it “has taken all reasonable steps to be in compliance” with the law prior to receipt of a PAGA notice or a request for personnel records, but does not cure the alleged violation, then the available penalties are capped at 15% of the penalties sought.

Third, if an employer demonstrates that it “has taken all reasonable steps to prospectively be in compliance” with the law within 60 days of receiving a PAGA notice, but does not cure the alleged violations, then penalties would be capped at 30%.

Finally, penalties will be capped at $15 per employee per pay period if an employer cures the alleged violations but does not take “all reasonable steps to prospectively be in compliance” with the law.

These cure provisions, if enacted, will likely become a significant part of responding to PAGA actions given the potential for substantial reductions in PAGA penalties.

2. Reductions for Harmless Violations

Under the proposed legislation, penalties for technical wage statement violations would be capped at $25 per employee per pay period if an employee can easily determine the required information despite the alleged error. In addition, for isolated errors that occur for less than 30 days or four consecutive pay periods, the maximum penalty available is $50.

3. Limits on $200 Penalty for “Subsequent Violations”

PAGA currently allows for a default penalty of $200 per pay period for each “subsequent violation,” rather than the standard $100 penalty for “initial” violations. The proposed legislation limits this higher penalty by making it clear that it will be assessed only after any agency or court “has issued a finding or determination to the employer that its policy or practice giving rise to the violation was unlawful” within the five years preceding the alleged violation, or if the court finds the employer’s conduct was “malicious, fraudulent, or oppressive.”

4. Prohibition on Certain Derivative PAGA Penalties

Currently, PAGA plaintiffs often seek to recover penalties for alleged underpayment of wages and derivative penalties for alleged wage statement violations, failure to timely pay wages during employment, and failure to timely pay wages upon termination based on the same underlying underpayment. The proposed legislation would prohibit an employee from seeking derivative penalties for failure to timely pay wages claims unless the underpayment was willful or intentional, and, for wage statement claims, unless the violation was knowing or intentional.

D. Early Case Resolution Procedures

The proposed legislation also introduces new cure mechanisms for employers wanting early resolution. If an employer has less than 100 total employees during the PAGA period, then the employer can submit a confidential proposal to the LWDA to cure the alleged violations. The LWDA may then arrange a settlement conference with the plaintiff and employer in an attempt to reach an early resolution for the matter. If the LWDA determines that the employer’s proposal is not sufficient, or if the LWDA fails to act, then the employee may proceed to file a PAGA action in court.

For employers with more than 100 employees during the PAGA period, the bill allows the employer to file a request for a stay and an “early evaluation conference” with the court after a PAGA claim is filed, which requires the court stay all discovery and responsive pleading deadlines. Once the conference is set, the employer must submit (and serve plaintiff) a confidential statement to a “neutral evaluator”—which the legislation does not define—that details the allegations the employer disputes, which alleged violations it intends to cure, and the proposed plan to cure the alleged violations. The plaintiff must submit a response statement, including the factual basis for each alleged violation, the amount of penalties claimed for each violation, the total amount of attorney’s fees incurred as of the date of the submission, any settlement demand, and the basis for accepting or rejecting the employer’s cure proposal. If the conference is successful (i.e., the neutral and parties agree to a proposal and the alleged violations are cured), then it is treated as a confidential settlement of that claim. Notably, if the neutral or plaintiff does not agree that the employer has cured the alleged violations, then the employer may file a motion to request the court approve the cure and submit evidence showing correction of the alleged violations.

Unlike the other proposed amendments to PAGA, the early resolution provisions do not become operative until October 1, 2024. But like the other proposed amendments, the early resolution procedures would apply to PAGA actions brought on or after June 19, 2024 (unless the plaintiff submitted a PAGA notice before June 19).

E. Limitations of Potential Penalties for Employers Who Pay Weekly

Because PAGA penalties are based on the number of pay periods in which employees suffered a violation, employers with weekly payroll schedules are penalized twice as much as those employers with bi-weekly payroll schedules. The proposed legislation provides relief to these employers by reducing by 50% the penalties if an employee’s regular pay period is weekly rather than bi-weekly or semi-monthly.

F. Employee-Focused Reforms

Although most of the proposed reforms are designed to address concerns of employers over abuses of PAGA, the proposed legislation does have two changes designed to benefit employees. First, for the first time a PAGA plaintiff would be able to seek injunctive relief. Second, aggrieved employees will now receive a 35% share of any recovery (an increase from 25%).

III. Conclusion

The proposed reform of PAGA would create a new era in California employment litigation, as it would provide employers with significant additional tools to address and defend PAGA claims. Employers should begin preparing now to utilize these tools in future PAGA litigation and should carefully track how courts are applying and interpreting these amendments.

The following Gibson Dunn lawyers prepared this update: Jason Schwartz, Jesse Cripps, Bradley Hamburger, Michael Holecek, Megan Cooney, Amina Mousa, and Tim Kolesk.

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

Jesse A. Cripps – Los Angeles (+1 213.229.7792, jcripps@gibsondunn.com)
Bradley J. Hamburger – Los Angeles (+1 213.229.7658, bhamburger@gibsondunn.com)
Michael Holecek – Los Angeles (+1 213.229.7018, mholecek@gibsondunn.com)
Megan Cooney – Orange County (+1 949.451.4087, mcooney@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202.955.8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213.229.7107, ksmith@gibsondunn.com)

The proposed rule would significantly curtail U.S. investments in the People’s Republic of China, Hong Kong, and Macau used to advance the development and production of semiconductors and microelectronics, quantum information technologies, and artificial intelligence systems. Once finalized, this new regulatory framework will implement a notification regime for certain transactions while outright prohibiting others. Additionally, while transactions that occur prior to the effective date of the final rule are excepted, the U.S. Department of the Treasury reserves the right to request information about such transactions as needed. Comments on the proposed rule may be submitted until August 4, 2024.

This alert provides (1) background of the outbound investment rulemaking process; (2) a refresher on the contours of the proposed rule; (3) changes from the August 2023 ANPRM in the June 2024 NPRM; (4) next steps in the regulatory process; and (5) Gibson Dunn’s key takeaways for clients.

I. Background of the Outbound Investment Rule

On June 21, 2024, the U.S. Department of the Treasury (“Treasury”) advanced the Biden Administration’s national security objective of regulating certain outbound investment by issuing a Notice of Proposed Rulemaking (“NPRM”) pursuant to Executive Order (“EO”) 14105, which was issued by President Biden on August 9, 2023. The EO and the NPRM address national security risks posed by certain outbound investment activities involving “covered national security technologies and products” in “countries of concern,” namely the People’s Republic of China (“PRC”), Hong Kong, and Macau. The NPRM follows the Advance Notice of Proposed Rulemaking (“ANPRM”) that was issued concurrently with the EO and was the subject of a previous Gibson Dunn client alert. Note that the NPRM does not itself impose any new requirements, and its proposed requirements are subject to change when Treasury issues the final rule.

An outbound investment regime would become another powerful tool in the U.S. government’s efforts to counter the PRC’s technological and military surge and reflects the Biden Administration’s strategic priority of addressing the PRC as its “pacing challenge” in the global arena, particularly regarding critical technologies, as outlined in its 2022 National Security Strategy.

In line with the ANPRM, the NPRM proposes to prohibit some outbound investment transactions outright, and to require notifications for other investments. The categories of prohibited and notifiable investments address transactions with a “covered foreign person”—that is a person of a “country of concern” who engages in a “covered activity” related to the development or production of “covered national security technologies and products.” The NPRM also provides exceptions and exemptions for certain transactions, outlines the procedures and penalties for compliance and enforcement, and invites further public comments on specific issues. The decision to issue the ANPRM and NPRM—administrative steps not required under the International Emergency Economic Powers Act (“IEEPA”) under which EO 14105 was issued—indicates a concerted effort by Treasury to develop a rule informed by stakeholder input prior to issuing a final rule. The NPRM comment period ends on August 4, 2024, and Treasury is expected to issue a final rule thereafter.

Below, we provide a refresher on the basic contours of the rule, highlight changes introduced by the NPRM, and share key takeaways.

II. Refresher of Basic Contours of the Rule

A. To Whom Does the Rule Apply?

The NPRM adopts the definition of “U.S. person” set out in the EO, which includes “any United States citizen, lawful permanent resident, entity organized under the laws of the United States or any jurisdiction within the United States, including any foreign branches of any such entity, and any person in the United States.”

The proposed rule would also apply to any “controlled foreign entity,” defined as “any entity incorporated in, or otherwise organized under the laws of, a country other than the United States of which a U.S. person is a parent.” The term “parent” would include any person or entity who or which (1) directly or indirectly holds more than 50 percent of the outstanding voting interest or voting power of the board of an entity, (2) is the general partner, managing member, or equivalent of an entity, or (3) is the investment adviser to any entity that is a pooled investment fund. The proposed rule would require such U.S. parents to take “all reasonable steps to prohibit and prevent any transaction by its controlled foreign entity” that would be prohibited or notifiable under the proposed rule. The proposed rule provides a list of examples of “reasonable steps” U.S. parents should take to direct their controlled entities, such as using binding agreements, governance or shareholder rights, internal policies, procedures, or guidelines, periodic training and internal reporting requirements, effective internal controls, and testing and auditing functions.

In addition, the proposed rule would apply to U.S. personnel of foreign entities by prohibiting them from “knowingly directing” transactions that would be prohibited for a U.S. person to conduct itself. This is similar to the standard anti-“facilitation” provisions found in most U.S. sanctions regulations. The proposed rule would not restrict a U.S. person from working at any entity that receives investment, nor would it restrict a U.S. person from working at an entity making such an investment, as long as the U.S. person recuses themselves from the sensitive investment. Developing policies and procedures to ensure compliance with these requirements will be essential for U.S. and non-U.S. companies engaged in transactions that may involve the covered national security technologies and products.

B. What Types of Investments Would Be Restricted?

According to the proposed rule, a “covered transaction” is any transaction that a U.S. person knows (at the time of the transaction) involves a “covered foreign person.” Such transactions include the following:

Acquisition of an equity interest or contingent equity interest;
Certain debt financing that is convertible to an equity interest or that affords certain management or board rights to the lender;
The conversion of a contingent equity interest or equivalent;
A greenfield investment or other corporate expansion;
Entry into a joint venture; and
Acquisition of a limited partner or equivalent interest in a non-U.S. investment fund.

A “covered foreign person” is defined as a person of a “country of concern” that engages in a “covered activity”—and certain parents and majority-owned subsidiaries of such entities. The initial “countries of concern” under the proposed rule are the PRC, Hong Kong, and Macau.

A “covered activity” is any activity related to the development or production of specific “covered national security technologies and products” in three key industries: semiconductors and microelectronics; quantum information technologies, and artificial intelligence (“AI”) systems. As outlined in detail in the table below, certain “covered activities” will require notification to Treasury post-acquisition, while others will be prohibited outright.

Semiconductors and Microelectronics

Proposed Notifiable Transactions

Proposed Prohibited Transactions

Transactions involving “covered foreign persons” engaged in the following “covered activities”:

(1) Integrated Circuit Design: The design of integrated circuits for which transactions involving U.S. persons are not otherwise prohibited.

(2) Integrated Circuit Fabrication: The fabrication of integrated circuits for which transactions involving U.S. persons are not otherwise prohibited.

(3) Integrated Circuit Packaging: The packaging of integrated circuits for which transactions involving U.S. persons are not otherwise prohibited.

Transactions involving “covered foreign persons” engaged in the following “covered activities”:

(1) Technologies that Enable Advanced Integrated Circuits

Software for Electronic Design Automation: The development or production of electronic design automation software for integrated circuits or advanced packaging.
Integrated Circuit Manufacturing Equipment: The development or production of front-end semiconductor fabrication equipment designed for performing the volume fabrication of integrated circuits, including equipment used in the production stages from a blank wafer or substrate to a completed wafer or substrate (i.e., the integrated circuits are processed but they are still on the wafer or substrate).
Equipment for performing volume advanced packaging.
Extreme Ultraviolet Lithography Fabrication Equipment: Commodity, material, software, or technology designed exclusively for use in or with extreme ultraviolet lithography fabrication equipment.

(2) Advanced Circuit Design and Production

Advanced Integrated Circuit Design: The design of integrated circuits that exceed the thresholds in Export Control Classification Number (“ECCN”) 3A090.a, or integrated circuits designed for operation at or below 4.5 Kelvin.
Advanced Integrated Circuit Fabrication: The fabrication of integrated circuits meeting any of the following criteria:
- Logic integrated circuits using a non-planar transistor architecture or with a production technology node of 16/14 nanometers or less, including fully depleted silicon-on-insulator (FDSOI) integrated circuits;
- NOT-AND (NAND) memory integrated circuits with 128 layers or more;
- Dynamic random-access memory (DRAM) integrated circuits using a technology node of 18 nanometer half-pitch or less;
- Integrated circuits manufactured from a gallium-based compound semiconductor;
- Integrated circuits using graphene transistors or carbon nanotubes; or
- Integrated circuits designed for operation at or below 4.5 Kelvin.
Advanced Integrated Circuit Packaging: The packaging of integrated circuits using advanced packaging techniques.

(3) Supercomputers: The development, installation, sale, or production of any supercomputer enabled by advanced integrated circuits that can provide a theoretical compute capacity of 100 or more double-precision (64-bit) petaflops or 200 or more single-precision (32-bit) petaflops of processing power within a 41,600 cubic foot or smaller envelope.

Quantum Information Technologies

Proposed Notifiable Transactions

Proposed Prohibited Transactions

No transactions involving “covered foreign persons” and quantum information technologies are currently contemplated.

Transactions involving “covered foreign persons” engaged in the following “covered activities”:

(1) Quantum Computers and Components: The development of a quantum computer or the production of any of its critical components required to produce a quantum computer such as a dilution refrigerator or two-stage pulse tube cryocooler.

(2) Quantum Sensors: The development or production of any quantum sensing platform designed for, or which the relevant “covered foreign person” intends to be used for military, government intelligence, or mass-surveillance end uses.

(3) Quantum Networking and Quantum Communication Systems: The development or production of any quantum network or quantum communication system designed for, or which the relevant “covered foreign person” intends to be used for: (i) networking to scale up the capabilities of quantum computers, such as for the purposes of breaking or compromising encryption; (ii) secure communications, such as quantum key distribution; or (iii) any other application that has any military, government intelligence, or mass-surveillance end use.

AI Systems

Proposed Notifiable Transactions

Proposed Prohibited Transactions

Transactions involving “covered foreign persons” engaged in the following “covered activities”:

(1) The development of any AI system for which transactions involving U.S. persons are not otherwise prohibited that are:

Designed to be used for any government intelligence or mass-surveillance end use (e.g., through mining text, audio, or video; image recognition; location tracking; or surreptitious listening devices) or military end use (e.g., for weapons targeting, target identification, combat simulation, military vehicle or weapons control, military decision-making, weapons design, or combat system logistics and maintenance);
Intended by the “covered foreign person” to be used for cybersecurity applications, digital forensics tools, and penetration testing tools, or the control of robotic systems; or
Trained using a proposed threshold quantity of computing power based on computational operations. Treasury proposes a potential threshold ranging from greater than 10^23 to greater than 10^25 computational operations (e.g., integer or floating-point operations).

Transactions involving “covered foreign persons” engaged in the following “covered activities”:

(1) Certain AI System Development: The development of any AI system that is designed to be exclusively used for, or which the relevant “covered foreign person” intends to be used for, any:

Military end use (e.g., for weapons targeting, target identification, combat simulation, military vehicle or weapon control, military decision-making, weapons design, or combat system logistics and maintenance); or
Government intelligence or mass surveillance end use (e.g., through mining text, audio, or video; image recognition; location tracking; or surreptitious listening devices).

(2) Certain Training for AI Systems: The development of any AI system that is trained using a proposed threshold quantity of computing power based on computational operations with or without biological sequence data.

Treasury proposes a potential threshold ranging from greater than 10^24 to greater than 10^26 computational operations (e.g., integer or floating-point operations) without biological sequence data and a potential threshold of greater than 10^23 or 10^24 computational operations with biological sequence data.

In addition to the above, transactions involving “covered activities” (even if otherwise merely notifiable) will nevertheless be prohibited if the transaction involves an entity that:

Is included on the Entity List or Military End User List maintained by the U.S. Department of Commerce’s Bureau of Industry and Security;
Meets the definition of a “military intelligence end-user” in 15 C.F.R. § 744.22(f)(2);
Is included on the Specially Designated Nationals and Blocked Person (“SDN”) List maintained by Treasury’s Office of Foreign Assets Control (“OFAC”), or is owned 50 percent or more by one or more individuals or entities included on the SDN List;
Is included on the Treasury’s Non-SDN Chinese Military-Industrial Complex Companie (“NS-CMIC”) List; or
Is designated as a foreign terrorist organization by the Secretary of State under 8 U.S.C. 1189.

C. What Are the Requirements for Notifications?

A U.S. person subject to a notification requirement would have to submit a notification form to Treasury no later than 30 days after (1) a transaction is completed or (2) the U.S. person acquires knowledge (including information a U.S. person had or could have had through a reasonable and diligent inquiry) that the transaction constituted a “covered transaction.” The notification form would include details about the U.S. person, the covered transaction, relevant national security technologies and products, and the covered foreign person.

D. What Are the Exceptions and Exemptions?

Despite its sweeping coverage of many transactions involving the above-identified national security technologies and products, the proposed rule creates several notable exceptions and exclusions.

One prominent exclusion applies to citizens or permanent residents of a country of concern, such as the PRC, Hong Kong, or Macau, who are also either U.S. citizens or permanent residents of the United States. Such individuals are excluded from the definition of “covered foreign persons” and therefore do not on their own trigger the rule’s prohibitions or notification requirements.

Treasury has asked for comments on whether a similar exclusion should apply to U.S. entities that are currently covered under the definition of “person[s] of a country of concern,” such as U.S. subsidiaries of Chinese companies. This alteration to the definition would potentially allow U.S. persons to invest in such entities without being subject to the rule.

In addition to the exclusion for certain individuals, the proposed rule also lists several types of transactions that would be excepted from the rule’s scope, even if the transactions involve a covered foreign person. These include:

Publicly traded securities: An investment by a U.S. person in a publicly traded security (including on non-U.S. exchanges) or a security issued by an investment company, such as an index fund, mutual fund, or exchange-traded fund, unless the investment affords the U.S. person rights beyond standard minority shareholder protections;
Certain LP investments: A U.S. person’s investment made as a limited partner in a pooled investment fund, unless the investment affords the U.S. person rights beyond standard minority shareholder protections; noting, however, that Treasury proposes alternatives which would cap this exclusion to investments which do not exceed (i) $1,000,000, or (ii) 50% of the total assets under management of the fund;
Buyouts of country of concern ownership: A U.S. person’s full buyout of all country of concern ownership of an entity, such that the entity would not constitute a covered foreign person following the transaction;
Intracompany transactions: An intracompany transaction between a U.S. parent and a majority-controlled subsidiary to support ongoing operations or other non-covered activities;
Pre-EO 14105 binding commitments: A transaction fulfilling a binding, uncalled capital commitment entered into prior to August 9, 2023 (though Treasury reserves the right to request information about such transactions as needed);
Certain syndicated debt financings: Where the U.S. person, as a member of a lending syndicate, acquires a voting interest in a covered foreign person upon default and the U.S. person cannot initiate any action vis-à-vis the debtor and does not have a lead role in the syndicate; and
Third country measures: Certain transactions involving a person of a country or territory outside of the United States may be excepted transactions where the Secretary of the Treasury determines that the country or territory is addressing national security concerns posed by outbound investment and the transaction is of a type for which associated national security concerns are likely to be adequately addressed by the actions of that country or territory.

The proposed rule also provides a mechanism for U.S. persons to seek a “national interest” exemption determination for transactions that are in the national interest of the United States. The proposed rule does not specify the criteria or process for obtaining such an exemption, but states that Treasury will issue guidance on this matter in the future.

E. What Are the Penalties for Noncompliance?

The NPRM proposes penalties for violations of the outbound investment restrictions that relate to the nature and severity of the conduct. If a violation is not willful, meaning that the U.S. person did not act with knowledge or intent to violate the rule, the maximum civil penalty is the amount set by Section 206 of IEEPA, which is currently $368,136 per violation (an amount adjusted annually for inflation). If a violation is willful, meaning that the U.S. person acted with knowledge or intent to violate the rule, the maximum civil penalty is $1,000,000 per violation, and if the violator is a natural person, they may also face criminal prosecution and imprisonment of up to 20 years. In addition to monetary penalties and criminal sanctions, the proposed rule authorizes the Secretary of the Treasury to order a U.S. person to divest a covered transaction if the Secretary determines that such divestment is necessary to protect the national security of the United States.

As with other regulatory enforcement regimes, the proposed rule provides a process for U.S. persons to submit a voluntary self-disclosure (“VSD”) of a potential violation to Treasury, which may result in a reduction or mitigation of penalties, depending on the circumstances and the level of cooperation by the U.S. person.

III. Changes From the ANPRM

In response to significant interest and input from regulated industries during the ANPRM’s comment period, which Gibson Dunn previously reviewed, Treasury has continued to refine the exceptions and definitions that will be promulgated in the final outbound investment rule. In particular, the following provisions have been substantially revised from the ANPRM:

The definition and scope of covered transactions involving “AI systems”;
The knowledge standard that would govern when a U.S. person has “reason to know” of a covered transaction’s compliance obligations;
A new exception for the acquisition by a U.S. person of a voting interest in a covered foreign person following its default on a loan made by a syndicate of banks;
A new exception for transactions involving persons of third countries that have similar measures aimed at outbound investments as designated by the Secretary of the Treasury;
A new exception for securities traded on non-U.S. exchanges; and
Scope of the exception for acquisitions of limited partnership interests.

Below, we address each of these new provisions in detail, as well as certain other proposals Treasury notably declined to incorporate.

A. Covered Transactions Involving “AI Systems”

After the ANPRM was published in August 2023, the White House released EO 14110 on “Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence” in October 2023. The new NPRM incorporates EO 14110’s definitions of “artificial intelligence” and “AI systems” in its definition of “AI system,” to include:

A machine-based system that can, for a given set of human-defined objectives, make predictions, recommendations, or decisions influencing real or virtual environments—i.e., a system that uses data inputs to:

Perceive real and virtual environments;
Abstract such perceptions into models through automated or algorithmic statistical analysis; and
Use model inference to make a classification, prediction, recommendation, or decision.

This definition also includes “any data system, software, hardware, application, tool, or utility that operates in whole or in part using” an “AI system.”

Importantly, in response to comments recommending the inclusion of “frontier AI systems,” the new NPRM would also expand the prohibition on transactions developing “AI systems” to include not only those systems designed for military or government intelligence and surveillance end uses, but also any AI system “that is trained using a quantity of computing power greater than” a certain proposed threshold. As noted above, certain lower computing power thresholds are proposed for notifiable transactions. Treasury is seeking comments on the appropriate computational threshold for these provisions.

B. Knowledge Standard

The NPRM proposes a knowledge standard to determine whether a U.S. person knew or reasonably should have known that it was undertaking a covered transaction involving a covered foreign person. Treasury’s proposed definition of knowledge would include any of the following:

Actual knowledge that a fact or circumstance exists or is substantially certain to occur;
An awareness of a high probability of a fact or circumstance’s existence or future occurrence; or
Reason to know of a fact or circumstance’s existence.

In response to commenters’ request for greater clarity on the applicable knowledge standard, section § 850.104 of the NPRM provides that, in assessing whether a U.S. person has undertaken a reasonable and diligent inquiry, Treasury will consider the following factors:

Inquiry conducted by a U.S. person, its legal counsel, or its representatives, including questions asked of the investment target or relevant counterparty, as of the time of the transaction;
The contractual representations or warranties the U.S. person has obtained or attempted to obtain from the counterparty;
Efforts by the U.S. person to obtain available non-public information relevant to the determination of a transaction’s status;
Efforts undertaken by the U.S. person to review public information, and the degree to which other information available to the U.S. person at the time of the transaction is consistent or inconsistent with such publicly available information;
Whether the U.S. person, its legal counsel, or its representatives purposefully avoided learning or sharing relevant information;
Warning signs such as evasive responses or non-responses from an investment target or relevant counterparty to questions or a refusal to provide information, contractual representations, or warranties; and
The use of public and commercial databases to verify relevant information of an investment target or relevant counterparty.

C. Loans Made by a Banking Syndicate to a Defaulting Covered Foreign Person

Signaling its commitment not to disrupt secondary or intermediary financial services such as debt rating, underwriting, or prime brokerage, Treasury has included a new exception from “covered transactions” in § 850.501 of the NPRM for loans made by a banking syndicate that includes U.S. persons to a defaulting covered foreign person, provided that the U.S. person has a passive voting interest but “cannot initiate action vis-à-vis the debtor on its own and does not have a lead role in the syndicate.”

D. Transactions Involving Third Countries with Outbound Investment Rules

As part of Treasury’s continued commitment to engage with allies and partners regarding the national security goals of the proposed rule, Treasury has in § 850.501 of the NPRM excepted certain types of transactions “involving a person of a country or territory outside of the United States designated by the Secretary, after taking into account whether the country or territory is addressing national security concerns posed by outbound investment” in accordance with criteria to be developed. No countries have yet been designated, and Treasury is continuing to solicit feedback on the range of factors it ought to consider in evaluating the adequacy of measures taken by other countries or territories to address the relevant national security concerns.

E. Securities Traded on Non-U.S. Exchanges

After commenters requested that Treasury align its definition of “publicly traded security” in the new regulations with the definition used by OFAC in connection with the NS-CMIC List, Treasury agreed to broaden the definition of an “excepted transaction” in § 850.501 of the NPRM to include “a security traded on a non-U.S. exchange, or a security traded ‘over-the-counter’ in addition to a security traded on a U.S. exchange.” Treasury agreed that this exception aligns with the national security goals undergirding the regulation due to the lower likelihood of the purchase of publicly traded securities resulting in the transfer of intangible benefits to “covered foreign persons” targeted by the proposed regulations.

F. Acquisitions of Limited Partnership Interests

The ANPRM envisioned an exception from the definition of “covered transactions” for a U.S. person’s limited partnership interest in a foreign venture capital fund where the U.S. person’s contribution is solely capital and the U.S. person did not have the ability to “approve, disapprove, or otherwise influence or participate in the investment decisions of the fund.” While the NPRM retains this exception, it contemplates adding one of two alternatives limiting this exception based on the size of the investment. The first alternative would except an acquisition of a limited partner interest only if the “limited partner’s committed capital is not more than 50 percent of the total assets under management of the fund, aggregated across any investment and co-investment vehicles that comprise the fund.” The second alternative would except such an acquisition only if “the limited partner’s committed capital is not more than $1,000,000, aggregated across any investment and co-investment vehicles that comprise the fund.” Treasury acknowledged that the latter $1,000,000 threshold proposal would likely cover a greater number of limited partner investments (along with potentially increasing compliance costs) but stated that such a bright-line approach might make compliance easier for U.S. persons.

G. Treasury Declined Requests for a De Minimis Threshold and Narrower Scoping for AI Systems

Although Treasury made a number of revisions and updates to the proposed rule, some comments were considered and rejected. For example, in response to the ANPRM, Treasury received comments requesting that the definition of covered foreign person include a de minimis threshold to scope out certain covered activities. Treasury considered, but ultimately declined, to propose a de minimis threshold, explaining that any such threshold tied to financial metrics might not sufficiently correlate to the national security significance of a given “covered activity.” This approach aligns with how the U.S. government has treated national security risk in the context of inbound investment, and we would not expect Treasury to reevaluate its stance on this issue in the final rule.

In addition, while some commenters expressed concern that the definition of “AI system” may unnecessarily sweep in civilian uses of AI systems, Treasury expressed that the current broader definition may be necessary to adequately address national security concerns, indicating that it is instead focused on whether the definition of AI system is broad enough, inviting commenters to discuss whether other AI systems not currently contemplated as subject to the notification requirements or prohibitions contained in the NPRM should nevertheless be included. We expect that this topic and the scope of such requirements could be the subject of additional comments.

IV. Next Steps in The Regulatory Process

The current open comment period ends August 4, 2024. Treasury specifically seeks comments regarding the:

Breadth of the rule;
Clarity of the “knowledge” standard;
Compliance and diligence burdens imposed by the rule;
Effect, if any, on the definition of “covered transaction” for the conversion of contingent equity interests or acquisition of limited-partnership interests;
Definitions of “person of a country of concern” and/or “covered foreign person” as applied to U.S. entities;
Scope of “covered activities”; and
Scope of “excepted transactions.”

V. Key Takeaways

Although the rule is likely to be finalized by the end of the year, the NPRM is not a final rule and will likely undergo revisions after the comment period has closed. Treasury is continuing to solicit feedback before the text of the final outbound investment rule is released. Nevertheless, it is important for clients to be aware of the following points at this stage of the rulemaking process:

Congressional action is possible, but less likely. Separate from EO 14105 and proposed rulemaking, Congress came close to legislating its own outbound investment notification protocols in the FY 2024 National Defense Authorization Act signed into law last year. Further attempts to legislate outbound investment provisions are unlikely, at least in the 118th Congress. House Speaker Mike Johnson and House Financial Services Committee Chairman Patrick McHenry blocked last year’s amendment on the grounds that limiting investments would reduce U.S. influence in the PRC and create unnecessary bureaucracy for U.S. business. Given that the Administration is making progress with its own restrictions, congressional supporters of an outbound investment regime likely will not see a need to continue their previous efforts to negotiate with Speaker Johnson and Chairman McHenry to codify restrictions in statute.
The rule implicates not only U.S. but also non-U.S. private equity funds. As described above, Treasury is considering alternatives in how it scopes the rule’s applicability to U.S. limited partner investment through non-U.S. funds, including with the suggestion of a $1 million cap on investment across a fund. The practical result could be to place additional regulatory compliance obligations on the general partners and investment managers of these non-U.S. funds. U.S.- and non-U.S. fund managers alike should follow this rulemaking carefully to better understand any new obligations.
Focus on emerging technologies may result in further updates. As also described above, Treasury updated the NPRM to reflect post-ANPRM developments in how the U.S. government is addressing the rapid development of AI. We expect Treasury may further refine the description of covered activities both during this rulemaking process and after. We may see that a primary use of outbound investment notifications will be to enable Treasury to better track developments and emerging risks in critical technology areas, and to respond by attempting to promulgate refinements and clarifications to rules on more of an ongoing basis, meaning that companies operating in covered areas will need to devote ongoing attention to technological and regulatory developments.
The rule raises potential investor confidentiality concerns. Regulated companies might be particularly interested in Treasury’s request for comments on the confidentiality of submissions regarding notifiable transactions. Some commenters have already highlighted the potential “unintended chilling effect” that the notification requirements may pose. Although Treasury acknowledges that situations may arise where it could disclose confidential corporate information to partner countries and allies—or even to the public when such disclosure would be in the national interest—the NPRM makes clear that such actions would not supersede applicable statutory obligations that restrict the sharing of certain confidential information such as trade secrets. Nevertheless, commenters may wish to provide feedback on the confidentiality of sensitive corporate disclosures more generally for covered transactions, especially given the heightened interest in the conduct of negotiating transactions, evidenced by clarifications in the rule’s “knowledge” standard.
The rule foreshadows outbound investment rulemaking, particularly in the UK/EU. The rule has implications for the U.S. government’s coordination and cooperation with its allies and partners in addressing the challenges posed by the PRC’s investment in critical sectors with the inclusion of a provision that may exempt certain transactions involving third countries that have similar measures to restrict or monitor outbound investment in national security technologies and products. As seen with inbound foreign direct investment rules, we expect to see other countries work to develop and refine their own outbound investment regimes. The fact sheet released by Treasury on the same date at the proposed rule notes that the UK and European Commission are concurrently considering mechanisms to address outbound investment risks in their own jurisdictions.

Gibson Dunn attorneys are monitoring the outbound investment regime developments closely and are available to counsel clients regarding potential or ongoing transactions and other compliance or public policy concerns.

The following Gibson Dunn lawyers prepared this update: Chris Mullen, Mason Gauch, Michelle Weinbaum, Stephenie Gosnell Handler, Amanda Neely, Jayee Malwankar, Adam Smith, and David Wolber.

United States:
Ronald Kirk – Co-Chair, Dallas (+1 214.698.3295, rkirk@gibsondunn.com)
Adam M. Smith – Co-Chair, Washington, D.C. (+1 202.887.3547, asmith@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202.955.8510, shandler@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202.887.3690, ctimura@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202.887.3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213.229.7269, nhanna@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202.955.8685, cmbrown@gibsondunn.com)
Amanda H. Neely – Washington, D.C. (+1 202.777.9566, aneely@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202.887.3509, ssewall@gibsondunn.com)
Michelle A. Weinbaum – Washington, D.C. (+1 202.955.8274, mweinbaum@gibsondunn.com)
Chris R. Mullen – Washington, D.C. (+1 202.955.8250, cmullen@gibsondunn.com)
Sarah L. Pongrace – New York (+1 212.351.3972, spongrace@gibsondunn.com)
Anna Searcey – Washington, D.C. (+1 202.887.3655, asearcey@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202.955.8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202.887.3588, stoussaint@gibsondunn.com)
Claire Yi – New York (+1 212.351.2603, cyi@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202.955.8270, szhang@gibsondunn.com)

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Susy Bullock – London (+44 20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 207 071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 20 7071 4205, sharber-kelly@gibsondunn.com)
Michelle M. Kirschner – London (+44 20 7071 4212, mkirschner@gibsondunn.com)
Penny Madden KC – London (+44 20 7071 4226, pmadden@gibsondunn.com)
Irene Polieri – London (+44 20 7071 4199, ipolieri@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Nikita Malevanny – Munich (+49 89 189 33 160, nmalevanny@gibsondunn.com)