Richard Manfredi, Author at Gibson Dunn

Washington, D.C. partner George Hazel and Houston partner Gregg Costa, both former judges, are joined by the Hon. Paul Grimm, a former trial lawyer and judge in the U.S. District Court in Maryland who left the bench in 2022. Judge Grimm is now a professor of law and director of the Bolch Judicial Institute at Duke Law School. He writes extensively and lectures on the topics of evidence and discovery.

The three former judges have a lively discussion about their expectations regarding trial lawyers’ knowledge of evidentiary rules and how it has been affected by less frequent trials; examine how district judges must balance their analytical examination of evidentiary rules without disrupting proceedings; and consider the new challenges for judges and trial lawyers arising from artificial intelligence applications, including deepfakes.

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HOSTS:

Gregg Costa is co-chair of the firm’s Trials Practice Group. Gregg offers clients a unique perspective as a former federal trial and appellate judge. His broad experience—having handled complex civil and criminal matters, at trial and on appeal, as advocate and judge—allows him to offer invaluable skills and strategic insights for both trials and investigations.

George Hazel is a partner in the Washington office of Gibson, Dunn & Crutcher and a member of the firm’s Litigation and White Collar Defense and Investigations Practice Groups. A former federal trial judge and criminal prosecutor, Mr. Hazel brings a broad range of trial experience, having presided over approximately 50 jury trials in federal court and handled 20 jury trials and 30 bench trials as an attorney in federal and state court. Since his return to private practice, Lawdragon has named him one of the “500 Leading Global Litigators” of 2024.

The Climate Change Cases are the first of their kind decided by the Court and constitute a significant legal development requiring considered analysis and reflection.

On 9 April 2024, the Grand Chamber of the European Court of Human Rights (“Court”) rendered its rulings in the “Climate Change Cases”: (i) Verein KlimaSeniorinnen Schweiz and Others v. Switzerland (“KlimaSeniorinnen”), (ii) Carême v. France (“Carême”), and (iii) Duarte Agostinho and Others v. Portugal and 32 Others (the “Portuguese Youth Climate Case”). The Climate Change Cases are the first of their kind decided by the Court. They constitute a significant legal development requiring considered analysis and reflection.

In KlimaSeniorinnen, the Court held that Switzerland had not implemented the measures necessary to fulfil its positive obligations to cut greenhouse gas (“GHG”) emissions in conformity with the requirements under Article 8 (the right to private and family life and the right to a home) of the European Convention on Human Rights (“Convention”). The Convention does not spell out an autonomous right to a clean and healthy environment. However, KlimaSeniorinnen creates what may be seen as a novel right accompanied by a new positive duty on the 46 member States of the Council of Europe (“Convention States”) in the field of climate change. As the Convention is incorporated into the national laws of all Convention States, this finding may directly affect domestic legislation within these jurisdictions.

By contrast, the applications in both Carême and the Portuguese Youth Climate Case were declared inadmissible. In the former, the Court held that the applicant did not have victim status as he no longer had a link to Grande-Synthe, the area of France allegedly affected by the climate crisis where he had served as mayor. In the latter case, the application was dismissed on both jurisdictional grounds and for non-exhaustion of domestic remedies. Below, these decisions are considered separately to KlimaSeniorinnen although it is important to view these rulings as a trilogy of climate cases decided by the Court on the same date.

Overall, the judgment in Klimaseniorinnen, which is the most significant of the three rulings, may have the potential to reverberate on a global level—including exerting a considerable influence on other pending climate change cases both nationally and internationally. Inversely, the findings in Carême and the Portuguese Youth Case are well in line with the existing case law of the Court.

This alert provides an overview of the Court’s findings in each of the three Climate Change Cases and offers our thoughts on some of the potential impacts.

1. KlimaSeniorinnen

(a) Background

The KlimaSeniorinnen proceedings against Switzerland began over nine years ago before the Swiss national courts. The claims were dismissed at all levels (including before the Swiss Federal Supreme Court) on jurisdictional grounds, including for lack of standing (the claims constituting an actio popularis), and were therefore not examined on the merits. Proceedings were then lodged before the Court in 2020.

The applicants (“Applicants”) in the case were: (i) “KlimaSeniorinnen”, a Swiss-registered association established to promote and implement effective climate protection on behalf of its 2,000 female members who all live in Switzerland, and who have an average age of 73 years (the “Association”), and (ii) four individual women who are members of the Association (“Individual Applicants”).

The Applicants argued that they were part of the most vulnerable group affected by climate change owing to their age and sex. They submitted testimony and medical evidence demonstrating, in their view, the negative effects of global warming on their health (including suffering from cardiovascular and respiratory diseases). According to the Applicants, there was no doubt that climate change-induced heatwaves in Switzerland had caused, were causing and would cause further deaths and illnesses to older people and particularly women, in Switzerland.

The Applicants further submitted that Switzerland’s actions to tackle climate change through domestic legislative measures were inadequate, despite being aware of the relevant risks and scientific evidence such as reports by the United Nations Intergovernmental Panel on Climate Change (“IPCC”).

Against this background, the Applicants contended that Switzerland had failed and continued to fail to protect them effectively in violation of Articles 2 (right to life) and 8 of the Convention. Specifically, they argued that the State had a positive duty to put in place the necessary regulatory framework to mitigate climate change, taking into account its particularities and the level of risk. Further, the Applicants complained of a lack of access to a court in violation of Article 6(1) of the Convention, and the lack of an effective remedy in violation of Article 13.

As an evidentiary matter, the Court began by accepting that “anthropogenic climate change exists” and that “the relevant risks are projected to be lower if the rise in temperature is limited to 1.5^oC above pre-industrial levels and if action is taken urgently, and that current global mitigation efforts are not sufficient to meet the latter target”. The Court attached importance to relevant international standards, the decisions of domestic courts and the conclusions of reports and studies by relevant international bodies, such the IPCC (the findings of which had not been called into doubt by Switzerland or intervening States (of which there were a number)). On this basis, the Court examined the admissibility and merits of the complaints.

(b) The Issue of Standing Before the Court

“Victim status”, which is the Court’s threshold standing requirement as set out in Article 34 of the Convention, was one of the salient issues in all three of the Climate Change Cases.

Under Article 34 to the Convention, the Court may receive applications from any person, NGO or group of individuals claiming to be the victim of a violation under the Convention. Therefore, the Court’s well-established case law requires an applicant to establish causation between the alleged violation and the harm allegedly suffered. A complaint to the Court must thus identify a concrete and particularised harm directly or indirectly suffered by the applicant. A so-called actio popularis, in which the applicant only asserts a general public interest in bringing proceedings, is in principle prohibited.

In KlimaSeniorinnen, the Court emphasised that, in accordance with its case law, victim status “cannot be applied in a rigid, mechanical and inflexible way” and that the concept of “victim” must be interpreted in an “evolutive” fashion. The Court considered that in the climate change context, a special approach to victim status was warranted, reasoning that there exists a causal link between State actions or omissions (causing or failing to address climate change) and the harm affecting individuals.

The Court then went on to establish novel tests to be applied to the victim status of applicants in the context of climate change. First, with respect to individual applicants, the Court established the following “Individual Victim Status Criteria”:

(a) the applicant must be subject to a high intensity of exposure to the adverse effects of climate change, that is, the level and severity of (the risk of) adverse consequences of governmental action or inaction affecting the applicant must be significant; and

(b) there must be a pressing need to ensure the applicant’s individual protection, owing to the absence or inadequacy of any reasonable measures to reduce harm.

The Court emphasised that the threshold for fulfilling the Individual Victim Status Criteria “is especially high” and will depend on circumstances such as the prevailing local conditions and individual specificities and vulnerabilities. The Individual Applicants in KlimaSeniorinnen did not, in the Court’s view, meet the high threshold, as it could not be said that they suffered from any critical medical condition whose possible aggravation linked to climate change could not be alleviated through adaptation measures available in Switzerland.

Second, with respect to associations, the Court took an inverse approach, setting out a new and accommodating test for determining their standing in the climate change context—the Court considering that associations play a particularly important function in this context since recourse to such bodies may be “the only mean[s] available” to certain groups of applicants (such as “future generations”, a consideration borrowed from environmental law). Namely, the association must fulfil the following “Associations Victim Status Criteria”:

(a) be lawfully established in the jurisdiction concerned or have standing to act there;

(b) be able to demonstrate that it pursues a dedicated purpose in accordance with its statutory objectives in the defence of the human rights of its members or other affected individuals within the jurisdiction concerned; and

(c) be able to demonstrate that it can be regarded as genuinely qualified and representative to act on behalf of members or other affected individuals within the jurisdiction who are subject to specific threats or adverse effects of climate change on their lives, health or well-being as protected under the Convention.

However, the Court then also went further, holding that the standing of an association to act on behalf of members or other affected individuals will not be subject to a separate requirement of showing that those on whose behalf the case has been brought would themselves have met the Individual Victim Status Criteria.

Applying this novel Criteria to the Association, the Court found that these were met, and noted that this represented “a vehicle of collective recourse aimed at defending the rights and interests of individuals against the threats of climate change in the respondent State”. Therefore, the Court proceeded with examining the merits of the application on this basis.

(c) The Merits: Articles 2 and 8

Assessing the Court’s margin of appreciation (i.e., the deference that it would accord to Convention States) in the climate change context, the Court made a distinction between (i) the State’s commitment to the necessity of combating climate change, and the setting of the requisite aims and objectives in this respect on the one hand, and, on the other, (ii) the choice of means designed to achieve those objectives. As regards (i), the Court explained that the nature and gravity of the threat of climate change, and the general international consensus around the need to reduce GHG emissions through targets, called “for a reduced margin of appreciation”. However, as regards (ii)—the choice of means (including operational choices and policies)—Convention States should be accorded a wide margin of appreciation.

The Court then set out the scope of the Article 2 and 8 Convention rights as considered in previous environmental harm cases before the Court but noted that given the special nature of climate change “the general parameters of the positive obligations must be adapted to th[is] specific context”.

As regards Article 2, the Court referred to the established test that there must be a “real and imminent” risk to life, which may extend to complaints of State action and/or inaction in the context of climate change. In the climate change context, it would be possible to assume this threshold had been met where victim status had been established. That said, the Court examined the Association’s complaint primarily on the basis of Article 8, noting that to a great extent the Court had in its case law applied the same principles to both articles in the context of environmental claims. As such, the Court found that it was unnecessary to examine the applicability of Article 2 in the present case.

Then, for the first time in its history, the Court prescribed the content of the States’ positive obligations under Article 8 in the context of climate change. Significantly, the Court held that Article 8 affords individuals a right to enjoy effective protection by State authorities from serious adverse effects on their life, health, well-being and quality of life arising from the harmful effects and risks caused by climate change. Accordingly, under Article 8, States must “do [their] part” to ensure such protection. As such, States’ primary duty is to adopt, and to effectively apply in practice, “general measures specifying a target timeline for achieving carbon neutrality and the overall remaining carbon budget for the same timeframe”. This includes setting out intermediate GHG emissions reduction targets and pathways (to be updated through due diligence), including by sector, and providing evidence that States have duly complied with the relevant GHG reduction targets. Importantly, States’ positive obligations include acting in “good time and in an appropriate and consistent manner when devising and implementing the relevant legislation and measures”. Unprecedently, the Court then held that States should have “a view to reaching net neutrality within, in principle, the next three decades”.

Furthermore, the Court explained that effective protection of the rights of individuals from serious adverse effects on their life, health, well-being and quality of life requires that the above-noted mitigation measures be supplemented by adaptation measures aimed at alleviating the most severe or imminent consequences of climate change, taking into account any relevant particular needs for protection.

Applied to the case, the Court concluded that Switzerland had failed to fulfil its positive obligation derived from Article 8 to devise a regulatory framework setting out the requisite objectives and goals. In particular, the Court pointed to the fact that the 2025 and 2030 period remains unregulated in Switzerland in terms of GHG emissions, pending the enactment of new legislation, and that Switzerland had not quantified national GHG emissions limitations through, for example, a carbon budget. Furthermore, Switzerland had previously failed to meet its past GHG emission reduction targets. As such, the Court found that there had been a violation of Article 8 of the Convention.

(d) Articles 6 and 13: Victim Status and the Merits

In addition to the substantive complaints made under Articles 2 and 8 of the Convention, the Applicants brought complaints under Articles 6 and 13 alleging a failure of the Swiss national courts to grant them access to court. In KlimaSeniorinnen, the Applicants complained that they had been denied being heard on the merits on jurisdictional grounds, including for lack of standing.

The Court examined the Applicants’ victim status with respect to Article 6 finding that the Association had victim status under this provision because the domestic litigation was “directly decisive” for its “rights” under the Convention. By contrast—and in line with its victim status findings pursuant to Articles 2 and 8—the Court found that the Individual Applicants lacked standing because the dispute they pursued was not directly decisive for their specific rights, and had a tenuous connection with the rights relied upon under national law.

Applied to the merits of the Association’s case, the Court found a violation of its Article 6 right of access to the national courts. The Court furthermore found it unnecessary to examine the Association’s Article 13 complaint, having found in its favour on Article 6.

(e) The Dissenting Opinion of Judge Eicke

Judge Eicke of the United Kingdom issued a strongly worded dissent in KlimaSeniorinnen, opining that the majority had gone “well beyond what I consider to be, as a matter of international law, the permissible limits of evolutive interpretation”. In particular, he questioned the Court’s unnecessary expansion of “victim status” and unjustifiable creation of (i) “a new right (under Article 8 and, possibly, Article 2)”; and (ii) a new “primary duty” on Convention States. He was of the view that neither of these “have any basis in Article 8 or any other provision of or Protocol to the Convention”.

He further expressed concern that, at a policy level, there is a significant risk that the new right / obligation created by the majority (alone or in combination with the much enlarged standing rules for associations) would prove an unwelcome and unnecessary distraction for the national and international authorities in that “it detracts attention from the on-going legislative and negotiating efforts being undertaken as we speak to address the – generally accepted – need for urgent action”. He specifically referred to the “significant risk” that national authorities “will now be tied up in litigation about whatever regulations and measures they have adopted (whether as a result or independently) or how those regulations and measures have been applied in practice…”.

As regards Article 6, although Judge Eicke agreed with the majority that there had been a violation of the right of access to court, his conclusion was on a different (and what he called “more orthodox”) approach. In Judge Eicke’s view, the Individual Applicants’ victim status as it related to Article 6 had been clearly established and not challenged by the Swiss Government. As such, it would “have been more obvious and more appropriate to address the complaint about the denial of access to court first; before then, if necessary, moving on to consider the complaint(s) under Articles 2 and 8 of the Convention”. In his view, such an approach could have vitiated the need for developing a “novel approach” to the issue of the Applicants’ victim status under Articles 2 and 8.

(f) Key Takeaways

As stated at the outset, the Climate Change Cases are the first of their kind decided by the Court. They constitute a significant legal development. At this stage, there are a number of observations which can be highlighted.

First, due to the fact that the Convention is incorporated into the national laws of all 46 Convention States, the findings of the Court in KlimaSeniorinnen may require such States to consider amending national laws to take account of the expansion of victim status. In other words, some Convention States may have to amend their standing laws to reflect the Association Victim Status Criteria in cases leveraging Convention rights in the context of climate change cases.

Second, the Court in KlimaSeniorinnen found, for the first time, an independent actionable right to effective protection by the State for climate change-related harms under Article 8 (leaving the scope and content of any such right under Article 2 undetermined for the time being). This right includes the imposition of positive obligations on Convention States. While these positive obligations remain general on their face, they may be interpreted to require that climate change mitigation measures are “incorporated into a binding regulatory framework”, and, the Court expressly referred to the aim of reaching net neutrality “within, in principle, the next three decades”. This finding may prompt Convention States to enact more rigorous national legislation relating to GHG reductions. This could, in turn, have a significant impact on the private sector operating within those States.

Third, such regulatory changes could also prompt new investor State claims, if such legislative changes (for example, the phase out of production of electricity from certain fossil fuels) were implemented in such a manner that could be considered a breach of the States’ investment treaty obligations. In that context, Convention States may attempt to use the positive obligations imposed by the Court in KlimaSeniorinnen as a defence to such claims. However, we note that the Court’s judgment seems to leave States flexibility in how they seek to accomplish their climate targets.

Lastly, this ruling may influence other pending climate change litigation—especially where claimants are advancing human rights-based arguments. This includes cases pending before the Court which have been adjourned awaiting the rulings in the Climate Change Cases, including Greenpeace Nordic and Others v. Norway (no. 34068/21) (which relates to the issuance of new licenses for oil and gas exploration in the Barents Sea), amongst others—but also proceedings against State parties currently pending before national European courts. In addition, whilst the judgment in KlimaSeniorinnen is limited in application to Convention States as a jurisdictional matter, NGOs and other claimants may seek to leverage the judgment to support new and existing climate lawsuits against private parties. This could, in turn, have an effect on domestic standing laws related to climate change actions. Notably, there have already been examples of claims against private actors in the climate change context in Convention State courts where Convention-based arguments have been put forward.

In jurisdictions outside of the Council of Europe, Klima Seniorinnen may also prove influential where human rights arguments have been raised by the claimant(s). Further, on the international plane, KlimaSeniorinnen may have a persuasive effect on the International Court of Justice’s (“ICJ”) pending decision in connection with UN General Assembly’s request for an advisory opinion relating to States’ international law obligations to ensure protection from climate change for present and future generations. The ICJ is expected to deliver its opinion in this judgment in early 2025.

2. Carême and The Portuguese Youth Climate Case

(a) The Court’s Findings

Carême concerned an action by an individual, Mr Carême, acting on his own behalf and in his capacity as mayor of Grande-Synthe, and in the name and on behalf of the latter municipality. In proceedings before the French courts, the Conseil d’État declared admissible the action brought by the municipality and inadmissible the action brought by Mr Carême. The Conseil d’État found that the measures taken by the French authorities to tackle climate change had been insufficient and ordered the authorities to take additional measures by 31 March 2022 to meet the GHG emissions reduction targets set out in the domestic legislation and Annex I of Regulation (EU) 2018/842.

The Grand Chamber concluded that the complaint in Carême was inadmissible on the basis that Mr Carême lacked “victim status” as required by Article 34 of the Convention. This was because Mr Carême had moved away from Grande-Synthe, the area in France that he alleged was affected by climate change, to Brussels, and otherwise had no other links to Grande-Synthe for the purposes of Articles 2 and 8 of the Convention (which were the articles upon which Mr Carême relied).

Meanwhile, the Portuguese Youth Climate Case was brought by six young persons (who all resided in Portugal) against Portugal and 32 other Convention States, alleging that the respondents had violated human rights by failing to take sufficient action on climate change in violation of Articles 2 and 8, with particular reference to forest fires and heatwaves in Portugal in 2017 and 2018. The applicants sought an order from the Court requiring the respondent States to take more ambitious climate change action.

The Court concluded that although Portugal had territorial jurisdiction for the purposes of Article 1 of the Convention, extra-territorial jurisdiction could not be established in respect of the other 32 respondent States. The Court thus confirmed its existing jurisprudence on extra-territorial jurisdiction and refused to expand that jurisprudence in the climate change context. The claims against the 32 other respondent Convention States were declared inadmissible on that basis. Additionally, the Court declared the claim inadmissible on a second ground: that the applicants had not exhausted domestic remedies available in Portugal.

(b) Key Takeaways

First, and importantly, the Court’s refusal to extend its case law on extraterritorial jurisdiction in the Portuguese Youth Climate Case on the basis of specific arguments grounded on climate change considerations means that climate change related claims brought under the Convention will, in principle, have to be directed at and first resolved in the State in which the individual persons alleging harms are situated.

Second, the Court’s emphasis that domestic remedies must be exhausted in the context of climate change confirms that climate change litigation is, first and foremost, a matter for the national courts in the respective Convention State.

The Gibson Dunn team would be very happy to discuss the wide-ranging ramifications of the Climate Change Cases in more detail with clients.

The following Gibson Dunn lawyers prepared this update: Robert Spano, Stephanie Collins, and Alexa Romanelli.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s International Arbitration or Transnational Litigation practice groups, or the following authors:

Robert Spano – London/Paris (+33 1 56 43 14 07, rspano@gibsondunn.com)
Stephanie Collins – London (+44 20 7071 4216, SCollins@gibsondunn.com)
Alexa Romanelli – London (+44 20 7071 4269, aromanelli@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.

We are pleased to provide you with Gibson Dunn’s ESG monthly updates for March 2024. This month our update covers the following key developments. Please click on the links below for further details.

I. GLOBAL

France and Brazil launch EUR 1.1 billion program to protect Amazon rainforest

On March 26 in Belém, Brazil, the Brazilian and French presidents launched a joint investment program to protect the Brazilian and Guyanese Amazon rainforest “with the aim of leveraging EUR 1 billion in public and private investments in the bioeconomy over the next four years.” The investment plan will involve Brazilian state-run banks, such as the National Bank for Economic and Social Development (BNDES) and Banco da Amazonia (BASA), as well as the French investment agency.

According to the signed declaration the presidents “consider it urgent to focus our efforts on establishing, by COP30, a bioeconomy model that considers the three dimensions of sustainable development — social, economic, and environmental — and allows us to reverse biodiversity loss and tackle climate change.” This pledge to stop deforestation in the Amazon by 2030 comes two years before Brazil hosts the COP30 climate negotiations talks in Belém.

Net Zero Banking Alliance tightens guidelines for banks’ climate targets

On March 13, members of the bank-led, UN-convened Net-Zero Banking Alliance (“NZBA”) voted to adopt a new version of the Guidelines for Climate Target Setting for Banks. One key change is the expanded scope, which now includes not only lending and investment activities but also capital markets arranging and underwriting activities. This extension aims to provide a more comprehensive approach to climate target setting, acknowledging the significant role these activities play in banking portfolios as well as the scientific, regulatory, and methodological changes that have occurred since the original April 2021 Guidelines.

According to the UNEP FI website, the guidelines are a product of an NZBA member bank-led review informed by their own experience of applying the original guidelines, setting and implementing climate targets, and financing transitions in different sectors. The new version “reinforces the guidelines, further outlining key principles to underpin the setting of credible and ambitious targets in line with achieving the objectives of the Paris Agreement”. The updated version of the guidelines will apply to all new targets and any new iterations of existing targets set by NZBA member banks after April 22, 2024.

Saudi Arabia introduces Green Financing Framework to drive sustainability

On March 28, Saudi Arabia announced its Green Financing Framework, which seeks to attract funding for a range of sustainable investment opportunities. The Framework identifies eight types of projects eligible for funding from so-called “green” debt sales, ranging from support for cleaner transportation and renewable energy to projects that may help the desert kingdom adapt to climate change.

The Ministry of Finance stated the structure will allow the government to sell green bonds and sukuk (Sharia compliant bonds) for projects that meet the criteria. Any sale of such debt would be a first for the central government as it aims to cut its greenhouse gas emissions by 278 million tonnes per year by 2030 and have net zero emissions by 2060.

This announcement follows a number of recent initiatives which include the Saudi Green Initiative (“SGI”) to combat the adverse effects of climate change over the past few years. On March 27, the Kingdom celebrated its first Saudi Green Initiative Day organised under the theme “For Our Today and Their Tomorrow: KSA Together for a Greener Future” which aimed to highlight the collaboration of the more than 80 public and private sector projects that are part of the SGI.

II. UNITED KINGDOM

HM Treasury announces consultation on new regulatory regime for ESG ratings

The UK Government confirmed on 6 March, as part of the Spring Budget, that it will regulate providers of ESG ratings to users within the UK. ESG ratings providers will fall within the regulatory perimeter of the Financial Conduct Authority.

This follows the UK Government’s publication in March 2023 of a consultation on the future regulatory regime for ESG ratings providers alongside an updated Green Finance Strategy. Both publications were part of a wider set of ESG-related publications such as the Powering Up Britain – Net Zero Growth Plan and Energy Security Plan and the more recent consultation on addressing carbon leakage risk to support decarbonisation.

UK to enforce tougher emission reduction rules on the oil and gas industry

On March 27, the North Sea Transition Authority (“NSTA”), the UK government’s oil and gas regulator, published new guidelines for emissions reduction in the North Sea. These stricter guidelines for oil and gas producers follows from the 2021 NSTA (then “OGA”) strategy which placed an obligation on the industry to assist “in meeting the net zero carbon by 2050 target”.

The NSTA’s new guidelines set out “four clear contributing factors to decarbonising the industry” — including asset electrification, investment and efficiency and action on flaring and venting. It will also look at “inventory as a whole”, ramping up scrutiny on assets with high emissions intensity. New developments with “a first oil or gas after 1 January 2030 must be either fully electrified or run on alternative low carbon power with near equivalent emission reductions”, the NSTA said. New developments with a first oil or gas date before 2030 should be electrification-ready at minimum.

III. EUROPE

European Council approves Corporate Sustainability Due Diligence Directive

On March 15, the EU Council approved a revised version of the Corporate Sustainability Due Diligence Directive (“CS3D”). The CS3D imposed obligations on companies to conduct thorough due diligence encompassing identification, assessment, prevention, and mitigation of negative environmental and human rights impacts. To mitigate these, the CS3D stipulates that a broad range of elements must be addressed, including child and forced labour, greenhouse gas emissions and deforestation. Importantly, companies are required to examine and document findings beyond their immediate operations, encompassing both indirect business partners and subsidiaries.

The CS3D has two key objectives: (i) to require companies to carry out due diligence to avoid adverse environmental and human rights impacts and (ii) to ensure accountability in case of actual adverse impacts being caused. The key obligations endorsed by the council in relation to due diligence are set out below:

“Chain of activities”: This definition of a company’s downstream and upstream activities in respect of due diligence obligations has now been further narrowed, by excluding downstream activities performed by indirect business; and downstream activities at the product disposal stage (such as dismantling, recycling, composting and landfilling).

Financial institutions: The provisional agreement was stated to cover only the upstream but not the downstream activities of financial institutions (thus excluding the investment and lending activities of such institutions). The review clause of the compromise text nonetheless continues to provide that the Commission shall prepare, within two years of the directive’s adoption, a report on the need for additional due diligence requirements tailored to the financial sector.

Groups of companies: As per the provisional agreement, ultimate parent companies are responsible for meeting the due diligence obligations of the directive, save where the parent company’s main activity is holding shares in operational subsidiaries—and now, pursuant to an additional exemption introduced in the concession text, where the parent company does not engage in taking “management, operational or financial decisions” affecting the group or its subsidiaries. The parent company must also now apply to the competent supervisory authority for any such exemption.

Civil liability: The civil liability regime has been further adjusted by making it clear that Member States are free to decide the conditions under which trade unions, non-governmental organizations or national human rights institutions can initiate collective redress mechanisms on behalf of victims. In particular, language referring to the ability of such a body to bring a claim “in its own capacity” has been deleted and the possibility for third-party intervention in support of victims in lieu of direct representation explicitly provided for.

Corporate Sustainability Reporting directive and disclosure of climate risk information

Another of the key obligations endorsed by the European Council under CS3D is the requirement to “adopt and put into effect a transition plan for climate change mitigation” (“Climate Plan”), which must have specific features. Paragraph 50 of the Directive states that Climate Plan must aim “to ensure, through best efforts, that the business model and strategy of the company are compatible with” (i) the transition to a sustainable economy; (ii) limiting global warming to 1.5 °C in line with the Paris Agreement; (iii) the objective of achieving climate neutrality as established in the EU Climate Law, including its intermediate and 2050 targets; and (iv) where relevant, the exposure of the undertaking to coal, oil and gas-related activities.

It must include the following company-specific targets and reporting standards: (i) climate targets including specifically in terms of Scopes 1-3; (ii) identification of decarbonisation levers; (iii) an explanation of transition funding for the Climate Plan; and (iv) description of leadership accountability which must be defined specifically with regard to the Climate Plan.

IV. NORTH AMERICA

U.S. Securities and Exchange Commission adopts final Climate Change Rules

On March 6, the U.S. Securities and Exchange Commission (“SEC”) approved final climate change rules. More information on these rules is available in our client alert available here. The rules were immediately challenged in court by various parties, including several states and the Sierra Club. On March 15, the Fifth Circuit Court of Appeals granted an emergency administrative stay of the SEC’s rules. On March 21, the Judicial Panel on Multidistrict Litigation selected the Eighth Circuit as the court that will consider the petitions for review challenging the SEC’s rule, and on March 22, the administrative stay was dissolved when the Fifth Circuit cases were transferred to the Eighth Circuit. (Subsequently, on April 4, the SEC issued an Order a stay of its final rule “pending the completion of judicial review” of the consolidated Eighth Circuit petitions.)

U.S. introduces bill to exclude ESG factors from Retirement Investment Plans

On March 21, Congressman Greg Murphy introduced the Safeguarding Investment Options for Retirement Act, legislation to prohibit tax-advantaged retirement plan trustees from considering factors other than financial risk and return when making investment decisions on behalf of workers, retirees, and their beneficiaries. In his official press release, the Congressman explained the background to his decision. He stated that in recent years some retirement plans prioritising ESG factors had “performed more poorly compared to traditional investments, raising questions about trustees’ priorities for investment.” Under this legislation, if plans are found to be using non-financial risk and return factors, they risk losing their tax-advantaged status.

The bill proposes to counteract “the left’s environmental and equity agendas”. Specifically, the Department of Labor’s (“DOL”) reversal under the Biden administration of the restrictions imposed under predecessor Donald Trump on retirement plans considering ESG factors when selecting investments. In November 2022, the DOL finalised rules under ERISA that permit fiduciaries of retirement plans governed by ERISA to consider ESG in the selection process for investments of such retirement plans. Congressman Murphy’s bill is indicative of much of the wider Republican response to the DOL’s 2022 rule and follows the January 2023 lawsuit filed in the Northern District of Texas by attorney generals from 25 states which challenges the 2022 rule.

U.S. Government commits $750 million for growth of hydrogen industry in U.S.

On March 14, the Department of Energy (“DOE”) announced that it will allocate $750 million to a series of projects aimed at dramatically reducing the cost of clean hydrogen. Focused on advancing electrolysis technologies, manufacturing and recycling capabilities for clean hydrogen systems, this commitment is indicative of the Biden Administration’s approach to hydrogen as crucial in reducing fossil fuels and emissions from hard to decarbonize industries such as aluminium and cement.

The announcement follows the Biden administration’s release in June 2023 of the U.S. National Clean Hydrogen Strategy and Roadmap, aimed at significantly increasing the production, use, and distribution of low carbon hydrogen in energy intensive industries. It outlines the commitment to scale U.S. clean hydrogen production and use to 10 million metric tonnes by 2030, and as much as 50 million tonnes by 2050.

The new allocations by the DOE will be funded by the Bipartisan Infrastructure Law, which was passed in November 2021 and allocates $9.5 billion to clean hydrogen. The law gives authority to the DOE to allocate the funding, which includes up to $1 billion for research and development of reducing the cost of clean hydrogen produced via electrolysis; as well as $500 million to research and development of improved processes and technologies for manufacturing and recycling clean hydrogen systems and materials.

V. APAC

South Korea unveils $313 billion green financing plan to combat climate change

South Korea has vowed to provide loans worth $313.4 billion to finance carbon-cutting projects, in a joint statement by the government and major banks on 19 March. By 2030, five state financial institutions including Korea Development Bank (“KDB”) will provide those loans to encourage companies to switch to low carbon production, the announcement said. By 2030, these measures are anticipated to achieve a reduction of 85.97 million metric tonnes of greenhouse gases, fulfilling nearly 30% of the government’s ambitious target.

The plan to step up the fight against climate change was unveiled in a meeting between government officials and heads of South Korea’s five major banks. The KDB and other big banks including Woori Bank and Kookmin Bank, will also create a new fund worth KRW 9 trillion for building new green energy facilities, the government added.

Chinese stock exchanges consult on mandatory sustainability reporting requirements for listed companies

China’s three major stock exchanges, the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the Beijing Stock Exchange, have announced new sustainability reporting guidelines for listed companies to begin mandatory disclosure on ESG related topics in 2026.

The reporting requirements will cover four core topics, including governance, strategy, impact and risk and opportunity management, along with indicators and goals. The exchanges are taking a “double materiality” approach, which includes reporting on both the risks and impacts of sustainability issues, along with the companies’ impacts on the environment and society.

The mandatory reporting requirements will capture more than 450 companies listed across the three exchanges, with the reporting set to begin in 2026 for the 2025 reporting period.

Warmest regards,
Susy Bullock
Elizabeth Ising
Perlette M. Jura
Ronald Kirk
Michael K. Murphy
Selina S. Sagayam

Chairs, Environmental, Social and Governance Practice Group, Gibson Dunn & Crutcher LLP

For further information about any of the topics discussed herein, please contact the ESG Practice Group Chairs or contributors, or the Gibson Dunn attorney with whom you regularly work.

The following Gibson Dunn lawyers prepared this update: Lauren Assaf-Holmes, Grace Chong, Elizabeth Ising, Cynthia Mabry, Patricia Tan Openshaw, Charlie Osborne, Selina S. Sagayam, and Helena Silewicz*.

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

Environmental, Social and Governance (ESG):
Susy Bullock – London (+44 20 7071 4283, sbullock@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
Perlette M. Jura – Los Angeles (+1 213.229.7121, pjura@gibsondunn.com)
Ronald Kirk – Dallas (+1 214.698.3295, rkirk@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, mmurphy@gibsondunn.com)
Patricia Tan Openshaw – Hong Kong (+852 2214-3868, popenshaw@gibsondunn.com)
Selina S. Sagayam – London (+44 20 7071 4263, ssagayam@gibsondunn.com)

*Helena Silewicz, a trainee solicitor in the London office, is not admitted to practice law.

Macquarie Infrastructure Corp. v. Moab Partners, L.P., No. 22-1165 – Decided April 12, 2024

On April 12, the Supreme Court unanimously held that a company’s failure to disclose information required under SEC regulations—such as Item 303 of Regulation S-K—cannot support a private securities-fraud claim unless the omission makes the company’s affirmative statements misleading.

“Pure omissions are not actionable under Rule 10b-5(b).”

Justice Sotomayor, writing for the Court

Background:

Regulation S-K requires public companies to provide disclosure on certain prescribed topics. Item 303 of the regulation, the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” (MD&A), specifically requires companies to disclose “known trends or uncertainties that have had or that are reasonably likely to have” a material impact on net sales, revenue, or income. 17 C.F.R. § 229.303(b)(2)(ii). And Rule 10b-5(b) makes it unlawful for companies “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” Id. § 240.10b-5(b). Both the SEC and private parties can sue companies for violations of Rule 10b-5(b).

Several circuits had held that failure to make a disclosure under Item 303 cannot support a securities fraud claim under Rule 10b-5(b) without an affirmative statement that is made misleading by the omission. But the Second Circuit disagreed, holding that an Item 303 violation alone can give rise to a securities-fraud claim. The Supreme Court granted review to resolve the conflict.

Issue:

Whether a failure to make a disclosure required under Item 303 of Regulation S-K can support a private claim under Rule 10b-5(b) even in the absence of an otherwise misleading statement.

Court’s Holding:

No. Rule 10b-5(b) does not prohibit pure omissions, so a failure to disclose information required under Item 303 does not support a private securities-fraud claim under Rule 10b-5(b) without an affirmative statement made misleading by the omission.

What It Means:

The Court’s holding clarifies that Rule 10b-5(b) does not allow private lawsuits based on pure omissions, including omitted information required to be disclosed under SEC regulations like Item 303. Instead, Rule 10b-5(b) permits lawsuits based only on affirmative misrepresentations and “half-truths” that are misleading because they omit critical qualifying information.
The Court rejected the plaintiff’s and government’s argument that the omission of any information required by Item 303 is necessarily misleading because investors expect companies to disclose all known trends or uncertainties. The Court clarified, however, that “private parties remain free to bring claims based on Item 303 violations that create misleading half-truths.” The Court also contrasted Rule 10b-5(b)’s language with Section 11(a) of the Securities Act of 1933, under which the Court observed that Congress expressly imposed liability for pure omissions.
The Court’s decision represents an important check on claims under Rule 10b-5(b), reaffirming that the private right of action the Court recognized many decades ago should not be further extended.
Although the Court framed the question presented in terms of “private” rights of action, the Court’s interpretation of Rule 10b-5(b) does not appear to be limited to that context. Accordingly, the Court’s decision likely means that the SEC itself also will not be able to bring enforcement actions alleging fraud under Rule 10b-5(b) based on a pure omission theory. The Court did make clear, however, that the SEC retains authority to prosecute violations of Item 303 and the SEC’s other regulations that mandate what disclosures must be made in public filings.
The Court did not opine on any issue other than whether a pure omission is actionable under Rule 10b-5(b). It did not address what would qualify as a statement made misleading by an omission, or whether the other parts of Rule 10b-5—the “scheme liability” provisions of Rules 10b-5(a) and 10b-5(c)—support liability for pure omissions. Those issues will likely be the subject of further litigation.

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 Supreme Court. Please feel free to contact the following practice 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: Securities Litigation

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
Jason J. Mendro +1 202.887.3726 jmendro@gibsondunn.com	Michael D. Celio +1 650.849.5326 mcelio@gibsondunn.com

Related Practice: Securities Regulation and Corporate Governance

Elizabeth Ising +1 202.955.8287 eising@gibsondunn.com	James J. Moloney +1 949.451.4343 jmoloney@gibsondunn.com	Lori Zyskowski +1 212.351.2309 lzyskowski@gibsondunn.com
Thomas J. Kim +1 202.887.3550 tkim@gibsondunn.com	Brian J. Lane +1 202.887.3646 blane@gibsondunn.com	Ronald O. Mueller +1 202.955.8671 rmueller@gibsondunn.com

This alert was prepared by associates Patrick Fuster, Matt Aidan Getz, and Robert Batista.

Bissonnette v. LePage Bakeries Park St., LLC, No. 23-51 – Decided April 12, 2024

Today, the Supreme Court unanimously held that the applicability of the Federal Arbitration Act’s exemption for transportation workers in interstate commerce turns on whether a worker is a transportation worker, not whether they work in the transportation industry.

“A transportation worker need not work in the transportation industry to fall within the exemption from the FAA provided by §1 of the Act.”

Chief Justice Roberts, writing for the Court

Background:

The Federal Arbitration Act (“FAA”) broadly requires courts to enforce arbitration agreements but exempts from its application arbitration “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. The Supreme Court in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), held that this exemption applies only to transportation workers.

Neal Bissonnette and Tyler Wojnarowski worked as distributors for Flower Foods, Inc., a baked-goods producer and marketer. After they sued Flowers for allegedly violating state and federal wage laws, Flowers moved to compel arbitration under the FAA pursuant to the arbitration clauses in their distribution agreements.

Bissonnette and Wojnarowski resisted arbitration, arguing that they were exempt under Section 1 of the FAA because they were “workers engaged in foreign or interstate commerce.”

The district court compelled arbitration on the ground that the distributors were not transportation workers but had much broader responsibilities. The Second Circuit affirmed, but on different reasoning: it held that the distributors worked in the bakery industry, not the transportation industry, and therefore did not qualify for the Section 1 exemption.

Issue:

Whether a transportation worker must work for a company in the transportation industry to qualify for the arbitration exemption in Section 1 of the FAA.

Court’s Holding:

No. To qualify as a transportation worker under Section 1 of the FAA, a worker does not have to work for a company in the transportation industry, and can qualify for the exemption if they play “a direct and ‘necessary role in the free flow of goods’ across borders.”

What It Means:

The Court’s decision is narrow. The Court rejected a “transportation industry” test for Section 1 of the FAA. The Court’s decision largely follows from Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022), which held that Section 1 “focuses on the performance of work, rather than the industry of the employer.”
The Court’s decision did not address whether the workers at issue were transportation workers or whether they were engaged in interstate commerce.
This ruling does not meaningfully alter the FAA Section 1 landscape, given that Saxon had already held that the Section 1 inquiry focuses on whether the workers’ job duties render them “transportation workers.” Regardless of industry, employers who use arbitration agreements should consider workers’ job duties when assessing whether the Section 1 exemption might apply.

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 Supreme Court. Please feel free to contact the following practice 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	Theane Evangelis +1 213.229.7726 tevangelis@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com
Brad G. Hubbard +1 214.698.3326 bhubbard@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

Theane Evangelis
+1 213.229.7726
tevangelis@gibsondunn.com

Related Practice: Class Actions

Christopher Chorba
+1 213.229.7396
cchorba@gibsondunn.com

Kahn A. Scolnick
+1 213.229.7656
kscolnick@gibsondunn.com

This alert was prepared by associates Elizabeth Strassner and Salah Hawkins.

Sheetz v. County of El Dorado, No. 22-1074 – Decided April 12, 2024

Today, the Supreme Court held unanimously that land-development permit exactions subject to the Takings Clause must bear an essential nexus and rough proportionality to the expected impacts of the development, even if the exaction is imposed pursuant to legislation.

“The Takings Clause … prohibits legislatures and agencies alike from imposing unconstitutional conditions on land-use permits.”

Justice Barrett, writing for the Court

Background:

The Supreme Court’s prior decisions in Nollan v. California Coastal Commission and Dolan v. City of Tigard held that certain land-development exactions violate the Fifth Amendment’s Takings Clause unless the government can show that the exaction bears (1) an “essential nexus” and (2) a “rough proportionality” to the expected impacts from the development.

George Sheetz applied for a permit from the County of El Dorado, California to build a house on his property. County legislation required Mr. Sheetz to pay a traffic impact mitigation fee as a condition of obtaining a permit, which was set according to a legislatively determined fee schedule that did not account for an individual project’s actual impact on roads. Mr. Sheetz challenged the exaction as an unconstitutional taking under Nollan and Dolan. The California Court of Appeal held that the exaction was immune from constitutional scrutiny because it was authorized by generally applicable legislation, as opposed to an administratively imposed exaction.

Issue:

Is a building permit exaction authorized by legislation exempt from constitutional scrutiny under the test set forth in Nollan and Dolan?

Court’s Holding:

No. The Takings Clause does not distinguish between legislative and administrative land-use permit conditions, and therefore legislatively mandated exactions are not exempt from the “essential nexus” and “rough proportionality” standards established by Nollan and Dolan.

What It Means:

The Court’s decision means that land-development exactions do not evade review under Nollan and Dolan merely because they are authorized pursuant to legislation.
The Court’s ruling gives property developers more opportunities to challenge legislative exactions as unconstitutional takings. The decision could lead to greater predictability in legislative exactions and a reduction in the types and amounts of impact fees and other exactions imposed, as local governments will need to assess whether legislation imposing exaction fees on private property development, if subject to the Takings Clause, comply with Nollan and Dolan’s mandates.
The Court’s decision unanimously declares that “[t]he Constitution’s text does not limit the Takings Clause to a particular branch of government,” which is consistent with the conclusion of Justice Scalia’s 2010 plurality opinion in Stop the Beach Renourishment, Inc. v. Florida Department of Environmental Protection that judicial actions are subject to the Takings Clause.
Justice Kavanaugh’s concurring opinion, joined by Justices Kagan and Jackson, emphasized that the Court today expressly left open the question whether a permit condition imposed on a class of properties is subject to the same standard as a permit condition that targets a particular development. Justice Gorsuch, in another concurrence, offered his answer: Nollan and Dolan should not operate differently when an alleged taking affects a class of properties rather than a specific development, as neither of those precedents involved the targeting of a particular development.
Justice Sotomayor’s concurring opinion, joined by Justice Jackson, expressed the view that the Court had not decided the threshold question whether the traffic impact fee in this case would be a compensable taking if imposed outside of the permitting context.

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 Supreme Court. Please feel free to contact the following practice 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: Real Estate

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

Alan Samson
+44 20 7071 4222
asamson@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 Connie Lee and Robert Batista.

From the Derivatives Practice Group: The CFTC has appointed a new Inspector General, Christopher Skinner. The Office of the Inspector General is an independent organizational unit of the CFTC, with the mission to detect waste, fraud, and abuse and to promote integrity, economy, efficiency, and effectiveness in the CFTC’s programs and operations.

New Developments

CFTC Appoints Christopher Skinner as Inspector General. On April 10, the Commodity Futures Trading Commission announced that Christopher L. Skinner has been appointed CFTC’s Inspector General (IG). The CFTC stated that Mr. Skinner brings 15 years of IG experience, including leading and managing Offices of Inspector’s General (OIG), and conducting investigations, inspections, and audits. Mr. Skinner comes to the CFTC from the Federal Election Commission (FEC) where he served as IG since 2019. [NEW]
SEC Adopts Reforms Relating to Investment Advisers Operating Exclusively Through the Internet. On March 27, the SEC adopted amendments to the rule permitting certain internet investment advisers to register with the Commission (the “internet adviser exemption”). The amendments will require an investment adviser relying on the internet adviser exemption to have at all times an operational interactive website through which the adviser provides digital investment advisory services on an ongoing basis to more than one client. The amendments will also eliminate the current rule’s de minimis exception by requiring an internet investment adviser to provide advice to all of its clients exclusively through an operational interactive website and to make certain corresponding changes to Form ADV.

New Developments Outside the U.S.

New Report Sheds Light on Quality and Use of Regulatory Data Across EU. On April 11, ESMA published the fourth edition of its Report on the Quality and Use of Data aiming to provide transparency on how the data collected under different regulations is used systematically by authorities in the EU, and clarifying the actions taken to ensure data quality. The report provides details on how National Competent Authorities, the European Central Bank, the European Systemic Risk Board and ESMA use the data that is collected through the year from different legislation requirements, including datasets from European Market Infrastructure Regulation, Securities Financing Transactions Regulation, Markets in Financial Instruments Directive, Securitization Regulation, Alternative Investment Fund Managers Directive and Money Market Funds Regulation. [NEW]
UK’s Accelerated Settlement Taskforce Publishes Report on the Path to T+1. On March 28, the UK’s Accelerated Settlement Taskforce published its report on the path to a T+1 settlement cycle. The report finds there is a clear consensus on the need for the UK to move to a T+1 settlement cycle and this shift will require substantial investment in greater automation and standardization. In addition, the report emphasizes a need for ongoing engagement with stakeholders during the transition period and the opportunity to learn from the U.S. move to T+1 in May 2024. The report recommends the immediate creation of a technical group to identify the challenges of transition and formulate solutions and suggests a two-step transition to T+1 before the end of 2027, with the exact date to be determined by the technical group.
ESMA Clarifies Application of Certain MIFIR Provisions, Including Volume Cap. On March 27, the European Securities and Markets Authority (ESMA) published a statement, including practical guidance supporting the transition and the consistent application of the revised Markets in Financial Instruments Regulation (MiFIR).The statement covers guidance on equity transparency and non-equity transparency; the systematic internaliser (SIs) regime; designated publishing entities (DPEs); and reporting. Regarding the volume cap, following the publication by the European Commission, ESMA confirmed that DVC data will continue to be published, with the next publication scheduled for early April.
ESMA Provides Market Participants with Guidance on the Clearing Obligation for Trading with 3rd Country Pension Schemes. On March 27, ESMA issued a public statement on deprioritizing supervisory actions linked to the clearing obligation for third-country pension scheme arrangements (TC PSA), pending the finalization of the review of EMIR. ESMA expects National Competent Authorities (NCAs) not to prioritize supervisory actions in relation to the clearing obligation for derivative transactions conducted with TC PSAs exempted from the clearing obligation under their third-country’s national law. Additionally, ESMA recommends that NCAs apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner. The Council and the European Parliament reached a provisional agreement on February 7. The political agreement on the EMIR 3 text provides for an exemption regime from the EMIR clearing obligation when the TC PSA is exempted from the clearing obligation under that third country’s national law.
ESMA Finalizes First Rules on Crypto-Asset Service Providers. On March 25, ESMA published the first Final Report under the Markets in Crypto-Assets Regulation (MiCA). ESMA stated that Tthe report, which aims to foster clarity and predictability, promote fair competition between crypto-asset service providers (CASPs) and a safer environment for investors across the Union, includes proposals on: (1) information required for the authorization of CASPs; (2) the information required where financial entities notify their intent to provide crypto-asset services; (3) information required for the assessment of intended acquisition of a qualifying holding in a CASP, and (4) how CASPs should address complaints.
ESMA Launches the Third Consultation Under MiCA. On March 25, ESMA published its third consultation package under the MiCA. In the consultation package, ESMA is seeking input on four sets of proposed rules and guidelines, covering: (1) detection and reporting of suspected market abuse in crypto-assets; (2) policies and procedures, including the rights of clients, for crypto-asset transfer services; (3) suitability requirements for certain crypto-asset services and format of the periodic statement for portfolio management; and (4) ICT operational resilience for certain entities under MiCA.
SGX Issues Consultation on Revised Limit on Clearing Members’ Liability for Multiple Defaults. On March 22, Singapore Exchange (SGX) issued a consultation paper proposing to refine the existing cap on a clearing member’s liability to meet default losses arising from multiple events of default. The cap is imposed on clearing members of Singapore Exchange Derivatives Clearing Limited (SGX-DC) and The Central Depository (Pte) Limited (CDP). The proposal purports to limit a non-defaulting clearing member’s liability to meet multiple default losses arising within a 30-day period to three times the aggregate of its funded and unfunded clearing fund contributions (prescribed contribution) as determined at the start of the 30-day period. The revised limit is intended to be independent of the clearing member’s resignation. SGX has also proposed changes to the SGX-DC clearing rules set out in Appendix B of the consultation. SGX is seeking views and comments on: (1) capping the limit for multiple defaults at three times a clearing member’s clearing fund contribution amount for all defaults occurring within a 30-day period; (2) the methodology for calculating the amount of a non-defaulting clearing member’s clearing fund contributions available to meet losses suffered by the SGX central counterparty arising from or in connection with an event of default (as set out in SGX-DC Clearing Rule 7A.06.9.2); and (3) the rule amendments to effect the proposed change. The consultation closes on April 24, 2024.
SFC and HKMA Further Consult on Enhancements to Hong Kong’s OTC Derivatives Reporting Regime. On March 22, 2024, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) launched a joint-further consultation on enhancements to the over-the-counter (OTC) derivatives reporting regime in Hong Kong. This further consultation follows an earlier joint-consultation in April 2019, in which the SFC and HKMA proposed a requirement to identify transactions submitted to the Hong Kong Trade Repository (HKTR) for the reporting obligation by a Unique Transaction Identifier. The current joint-further consultation consults on the implementation of the Unique Transaction Identifier, together with the mandatory use of Unique Product Identifier and Critical Data Elements for submission of transactions to the HKTR. The Interested parties are encouraged to submit responses to the SFC or HKMA on the consultation by May 17, 2024.

New Industry-Led Developments

ISDA, AIMA, GFXD Publish Paper on Transition to UPI. On April 9, ISDA, the Alternative Investment Management Association (AIMA) and the Global Foreign Exchange Division (GFXD) of the Global Financial Markets Association published a paper on the transition to unique product identifiers (UPI) as the basis for over-the-counter (OTC) derivatives identification across the Markets in Financial Instruments Regulation (MIFIR) regimes. The paper has been sent to the European Commission, which is working on legislation to address appropriate identification of OTC derivatives under MiFIR. [NEW]
IOSCO Seeks Feedback on the Evolution of Market Structures and Proposed Good Practices. On April 4, the International Organization of Securities Commissions (IOSCO) published a consultation report on Evolution in the Operation, Governance and Business Models of Exchanges: Regulatory Implications and Good Practices. The consultation report analyzes the structural and organizational changes within exchanges, focusing on business models and ownership structures. It highlights a shift towards more competitive, cross-border, and diversified operations as exchanges integrate into larger corporate groups. The consultation report discusses regulatory considerations, particularly in the organization of individual exchanges and exchange groups and the supervision of multinational exchange groups. It addresses potential conflicts of interest arising from matrix structures and the challenges of overseeing individual exchanges within exchange groups. Additionally, it outlines a set of six proposed good practices for regulators to consider in the supervision of exchanges, particularly when they provide multiple services and/or are part of an exchange group. The good practices are also complemented by a non-exclusive list of supervisory tools used by IOSCO jurisdictions to address the issues under discussion, in the form of “toolkits”. While the Consultation Report focuses on equities listing trading venues, the findings are also relevant to other trading venues, including non-listing trading venues and derivatives trading venues. IOSCO is seeking input from market participants on the major trends and risks observed, and the proposed good practices on or before July 3, 2024.
ISDA Submits Response to CFTC Proposed Operational Resilience Rules. On April 1, ISDA submitted comments on the CFTC’s notice of proposed rulemaking on requirements to establish an Operational Resilience Framework for Futures Commission Merchants, Swap Dealers and Major Swap Participants, which was published in the Federal Register on January 24, 2024. ISDA recommended that the CFTC adjust adjust portions of the proposed rules relating to governance, third-party relationships, incident notification and implementation period.
ISDA Submits Response to IOSCO Consultation on Post-Trade Risk Reduction. On March 29, ISDA submitted a response to IOSCO consultation on post-trade risk reduction (PTRR) services. According to ISDA, PTRR services are intended to optimize bilateral and cleared derivatives portfolios to minimize the build-up of notional amounts and trade count, counterparty risk, and basis risk respectively, which in turn reduces systemic risk. ISDA stated that it is broadly supportive of IOSCO’s proposed sound practices.
ISDA Submits Joint Response to PRA on Approach to Policy. On March 28, ISDA and the Association for Financial Markets in Europe (AFME) submitted a joint response to the Prudential Regulation Authority (PRA) consultation on its approach to policy. The associations highlighted the importance of considering UK market specificities in meeting the secondary competitiveness and growth objective, and in the implementation of international standards. The associations expressed support for the continuation of structured policy development in dialogue with the industry, while also advocating for the enhancement of the PRA’s stakeholder engagement by re-establishing standing groups and horizon risk scanning groups, and greater industry cooperation during the initiation phase of the policy cycle. ISDA highlighted certain other points in the response, including recommendations on clustering regulatory principles and suggested improvements to the cost-benefit analysis and data collection processes to achieve greater transparency.
ISDA Submits Joint Response to BCBS Crypto Standard Amendments Consultation. On March 28, ISDA, with the Global Financial Markets Association, the Futures Industry Association, the Institute of International Finance and the Financial Services Forum, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on proposed crypto asset standard amendments. ISDA and the other trade associations stated that they welcome the BCBS’s continued focus on designing and improving the prudential framework for crypto assets. The key topics in the consultation response include public permissionless blockchains, classification condition 2 and settlement finality and Group 1b eligibility.

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 (+1 212.351.3869, alapidus@gibsondunn.com)

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

Roscoe Jones Jr., Washington, D.C. (202.887.3530, rjones@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)

On April 4, 2024, the Department of Justice (DOJ) announced[1] that five additional cabinet-level federal agencies have joined a pledge to investigate unfair or discriminatory conduct involving artificial intelligence (AI). The joint statement—which was initially released in April 2023 by DOJ’s Civil Rights Division, the Consumer Financial Protection Bureau, the Equal Employment Opportunity Commission, and the Federal Trade Commission—now includes the Department of Education, the Department of Health and Human Services, the Department of Homeland Security, the Department of Housing and Urban Development, and the Department of Labor. DOJ’s Consumer Protection Branch also joined the pledge.

The announcement follows an April 3, 2024 meeting of senior government officials to enhance coordination on AI-related issues. This was the second such meeting following President Biden’s Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, which directs federal agencies to use their authorities to prevent and address harms that may result from AI.

These actions highlight federal agency efforts to coordinate and pursue actions using existing legal authorities. The addition of DOJ’s Consumer Protection Branch to the pledge particularly signals the likelihood of new criminal investigations into AI-related conduct affecting consumers. Companies involved in the development and use of AI should be thoughtful about planning and avoidance of issues of concern identified in the pledge, including biased inputs, design opacity, and unintended uses.

The Pledge

The joint statement emphasizes the agencies’ focus on their responsibility to ensure that automated systems are “developed and used in a manner consistent with existing federal laws.” Signing agencies also pledge to “monitor the development and use of automated systems,” promote responsible innovation, and “vigorously” protect individuals’ rights. This pledge stems from Section 8 of the President’s Executive Order, which directed federal agencies “to consider using their full range of authorities to protect American consumers from fraud, discrimination, and threats to privacy and to address other risks that may arise from the use of AI.”[2]

Agency Highlights

Existing Federal Laws Apply to AI. The joint statement reiterates the view expressed in the initial April 2023 statement that the federal government believes that regulation of AI falls squarely within the ambit of existing federal laws and the agencies’ collective authority to enforce civil rights, non-discrimination, fair competition, and consumer protection. Indeed, the statement declares that “existing legal authorities apply to the use of automated systems and innovative new technologies just as they apply to other practices.”

Emphasis on Unfair or Discriminatory Conduct. As noted by DOJ in announcing the pledge:

“Federal agencies are sending a clear message: we will use our collective authority and power to protect individual rights in the wake of increased reliance on artificial intelligence in various aspects of American life. As social media platforms, banks, landlords, employers and other businesses choose to rely on artificial intelligence, algorithms, and automated systems to conduct business, we stand ready to hold accountable those entities that fail to address the unfair and discriminatory outcomes that may result.”[3]

This joint statement identifies the following particular issues of governmental concern with AI systems:

Data and Datasets—The agency signers of the pledge note that automated system outcomes can be skewed by unrepresentative or imbalanced datasets, datasets that incorporate historical bias, or datasets that contain other types of errors. Making it clear that avoiding the use of protected characteristics as inputs is not enough, they also express concern that automated systems may correlate data with protected classes, which could lead to discriminatory outcomes.
Model Opacity and Access—The agencies also worry that many automated systems are “black boxes” whose internal workings may not be clear even to the developer of the system. This lack of transparency, the agencies assert, could makes it more difficult for developers, businesses, and individuals to know whether an automated system is fair.
Design and Use—Developers do not always understand or account for the contexts in which private or public entities will use their automated systems, the agencies state. Developers, they explain, may design a system on the basis of flawed assumptions about its users, relevant context, or the underlying practices or procedures it may replace.

Business Implications

The number of federal agencies that have joined the pledge and the scope of regulatory and enforcement priorities outlined in the joint statement are the strongest signals yet from the federal government that it intends to proactively monitor and regulate use cases of AI. Other recent actions of note include the FTC’s blanket authorization—which “will be in effect for 10 years”—of compulsory process in investigations of any products or services “that use or claim to be produced using artificial intelligence or claim to detect its use.”[4] The Department of Justice also has established an Emerging Technology Board[5] and Chief AI Officer[6] to spearhead AI investigations and initiatives.

Companies that develop or use AI (whether directly or indirectly) should take steps to ensure that they are compliant with federal law to the extent applicable to AI-related conduct in the absence of AI-specific requirements. In practice, this includes ensuring that AI systems and business processes that rely on AI are designed with compliance in mind and in accordance with an AI governance framework. Such framework should include, to the extent applicable, processes to stay aligned with current regulatory developments and priorities, including those identified in the pledge and accompanying joint statement.

Gibson Dunn’s leading AI, Privacy and Cybersecurity, and White Collar Investigations and Defense Practice Groups stand ready to help clients design and implement dynamic compliance programs and respond to agency actions.

__________

[1] U.S. Department of Justice Office of Public Affairs, Five New Federal Agencies Join Justice Department in Pledge to Enforce Civil Rights Laws in Artificial Intelligence, April 4, 2024, available here.

[2] Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, Sec. 8 (October 8, 2023), available at https://www.whitehouse.gov/briefing-room/presidential-actions/2023/10/30/executive-order-on-the-safe-secure-and-trustworthy-development-and-use-of-artificial-intelligence/.

[3] Id.

[4] FTC, FTC Authorizes Compulsory Process for AI-related Products and Services, November 21, 2023, available at https://www.ftc.gov/news-events/news/press-releases/2023/11/ftc-authorizes-compulsory-process-ai-related-products-services.

[5] See U.S. Department of Justice, Deputy Attorney General Lisa Monaco Announcement, November 9, 2023, available at https://www.justice.gov/opa/pr/readout-deputy-attorney-general-lisa-monacos-trip-new-york-and-connecticut

[6] See U.S. Department of Justice, Attorney General Garland Designates Jonathan Mayer to Serve as Chief AI Officer, February 22, 2024, available at https://www.justice.gov/opa/pr/attorney-general-merrick-b-garland-designates-jonathan-mayer-serve-justice-departments-first.

The following Gibson Dunn attorneys assisted in preparing this update: Gustav W. Eyler, Svetlana S. Gans, Vivek Mohan, Rosemarie Ring, Alexander Southwell, and Jay Mitchell.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Artificial Intelligence, Privacy, Cybersecurity & Data Innovation, or White Collar Defense & Investigations practice groups, or the authors:

Gustav W. Eyler – Washington, D.C. (+1 202.955.8610, geyler@gibsondunn.com)
Svetlana S. Gans – Washington, D.C. (+1 202.955.8657, sgans@gibsondunn.com)
Vivek Mohan – Palo Alto (+1 650.849.5345, vmohan@gibsondunn.com)
Rosemarie T. Ring – San Francisco (+1 415.393.8247, rring@gibsondunn.com)
Alexander H. Southwell – New York (+1 212.351.3981, asouthwell@gibsondunn.com)
Jay Mitchell – Palo Alto (+1 650.849.5214, jmitchell@gibsondunn.com)

Artificial Intelligence:
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650.849.5203, cgaedt-sheckter@gibsondunn.com)
Vivek Mohan – Palo Alto (+1 650.849.5345, vmohan@gibsondunn.com)
Robert Spano – Paris/London (+33 1 56 43 14 07, rspano@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213.229.7186, evandevelde@gibsondunn.com)

Privacy, Cybersecurity and Data Innovation:
Ahmed Baladi – Paris (+33 1 56 43 13 00, abaladi@gibsondunn.com)
S. Ashlie Beringer – Palo Alto (+1 650.849.5327, aberinger@gibsondunn.com)
Joel Harrison – London (+44 20 7071 4289, jharrison@gibsondunn.com)
Jane C. Horvath – Washington, D.C. (+1 202.955.8505, jhorvath@gibsondunn.com)
Rosemarie T. Ring – San Francisco (+1 415.393.8247, rring@gibsondunn.com)

White Collar Defense and Investigations:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)
Winston Y. Chan – San Francisco (+1 415.393.8362, wchan@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213.229.7269, nhanna@gibsondunn.com)
F. Joseph Warin – Washington, D.C. (+1 202.887.3609, fwarin@gibsondunn.com)

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A quarterly update of high-quality education opportunities for Boards of Directors of public and pre-IPO companies and members of private boards.

Gibson Dunn’s summary of director education opportunities has been updated as of April 2024. A copy is available at this link. Boards of Directors of public and pre-IPO companies find this a useful resource as they look for high quality education opportunities.

This quarter’s update includes a number of new opportunities as well as updates to the programs offered by organizations that have been included in our prior updates. Some of the new opportunities include unique events for members of private boards.

Read More

The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Lori Zyskowski, Elizabeth Ising, and Ronald Mueller, with assistance from Caroline Bakewell, Ben Blefeld, Mason Gauch, To Nhu Huynh, and Mariana Lozano.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. To learn more, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Regulation and Corporate Governance practice group, or the following authors:

Hillary H. Holmes – Houston (+1 346.718.6602, hholmes@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, rmueller@gibsondunn.com)
Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com)

Please also view Gibson Dunn’s Securities Regulation and Corporate Governance Monitor.

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:

America First Legal (AFL), the conservative organization founded and run by former Trump policy advisor Stephen Miller, announced two new actions targeting DEI policies. On March 27, the organization sent a letter to The Walt Disney Company’s CEO Bob Iger, Board of Directors, and management, alleging breaches of fiduciary duty and violations of federal securities laws. AFL claims that Disney’s internal DEI policies and certain diversity-related content in Disney’s children’s streaming programming have contributed to a nearly 40% decline in the company’s market capitalization. AFL has asked Disney to immediately cease and desist from all employment and contracting practices that may discriminate on the basis of race, color, sex, or national origin; disclose the risks associated with its DEI practices and policies in its Form 10-K and proxy statements; and retain an independent counsel for a full investigation of the company’s hiring, promotion, recruitment, and purchasing practices. Two days later, on March 29, AFL released internal research alleging that the Bill and Melinda Gates Foundation is funding DEI programs, highlighting donations made by the Gates Foundation to the Inland Empire Community Foundation’s Black Equity Fund, the Indian American Impact Project, and the Equity in Education Coalition, among others. Miller said in a statement that “these foundation gifts appear to be funding extreme activists and programs that promote illegal racial discrimination against whites and other groups, radically undermine public safety, and foment dangerous anti-cop extremism.” AFL demanded an “explanation and accounting” from the Foundation.

On March 25, the Equal Protection Project of the Legal Insurrection Foundation (EPP), a conservative non-profit organization, filed a complaint with the Department of Education’s Office for Civil Rights (DOE) alleging that the George Floyd Memorial Scholarship at Minnesota’s North Central University violates Title VI of the Civil Rights Act. The scholarship, a four-year, full-tuition award, is granted to one undergraduate Black student based on community recommendations and a written essay. EPP contends that the scholarship discriminates against non-Black students by excluding them from consideration. This complaint follows EPP’s January 22nd complaint against the University of Wisconsin-Madison regarding its Creando Comunidad: Community Engaged BIPOC Fellows program. That scholarship program requires applicants to be a “member of a historically underrepresented racial or ethnic group or community.” EPP alleges that UW’s active promotion of the program violates the Equal Protection Clause of the Fourteenth Amendment and Title VI of the Civil Rights Act. The same day that EPP filed its complaint against North Central University, DOE confirmed it is investigating UW’s program.

On March 21, Idaho Governor Brad Little (R) signed into law Senate Bill 1274, which restricts the use of diversity statements by colleges and universities. The law prohibits public postsecondary institutions from requiring candidates for employment or admission to submit or ascribe to any “diversity statement,” defined broadly to include written or oral statements relating to “race, sex, color, ethnicity, or sexual orientation,” views on DEI and social justice, or experiences working with others of diverse backgrounds. The law also prohibits institutions from requiring or soliciting diversity statements in any contract renewal or promotion process “or as a condition of participation in any administrative or decision-making function of the institution.” The law does not bar students from voluntarily submitting information that would fall under the definition of a diversity statement. Because the law states that it is responsive to an “emergency,” it takes effect on July 1, 2024.

On March 6, the Congressional Black Caucus, chaired by Representative Steven Horsford (D-Nev.), issued a letter to Attorney General Merrick Garland, calling for the Department of Justice to “examine the lawfulness of states acting to dismantle the Diversity, Equity, and Inclusion (DEI) programs at American institutions of higher learning.” The letter emphasizes the historical importance of civil rights laws in promoting the growth of diversity on college campuses, and notes that diverse college students continue to face ongoing challenges in obtaining equal access to higher education. The letter—which follows the recent moves by the University of Florida to eliminate all of its DEI-related spending, Alabama Senate Bill 129 which limits DEI programs and teaching, and Texas Senate Bill 17 that eliminates DEI programs in state colleges—stresses that “Anti-DEI bills have been introduced in more than 30 states as of February 29, 2024.” The letter contends that because these university systems are recipients of federal funding, their anti-DEI actions constitute potential violations of federal anti discrimination laws codified in Title VI and Title IX of the Civil Rights Act of 1964.

Media Coverage and Commentary:

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

Axios, “‘The backlash is real’: Behind DEI’s rise and fall” (April 2): Emily Peck of Axios reports on the recent decline of corporate DEI programs over the past two years in the wake of widespread attacks from lawmakers and conservative activists. Peck suggests that some companies, which may have been less invested in DEI or more concerned about potential lawsuits, are using this moment to back away. Peck reports that these businesses are cutting back funding, trimming DEI staff, and considering limits to initiatives like employee resource groups based on workers’ races, ethnicities or interests. Conversely, according to Peck, companies that are continuing their DEI efforts are doing so quietly and altering their approach.
Bloomberg Law, “States Clash With First Amendment on DEI, Captive Audience Laws” (April 1): Bloomberg Law’s Chris Marr reports on the impact of recent state legislation on private companies’ approach to communications with their employees regarding diversity-related topics. Roughly a half-dozen states, including California and New York, have enacted statutes requiring diversity training, while courts in other states such as Michigan have found diversity training to be an implied part of employers’ obligations under state anti-discrimination laws. However, Marr opines that the First Amendment may be in tension with these diversity statutes, which may be construed as impermissibly requiring content-based communication. Marr also discusses instances where the courts have struck down conservative state legislation aimed at limiting diversity-related discussion in the workplace as a violation of employees’ free-speech rights, such as the Eleventh Circuit’s recent decision in Honeyfund.com, Inc. v. DeSantis, — F.4th —, 2024 WL 909379 (11th Cir. Mar. 4, 2024). Marr notes that states are poised to continue testing the bounds of when and how they can regulate workplace speech, setting up future courtroom clashes over the extent of employers’ First Amendment rights in protecting their communications with employees.
Law.com, “What’s in a Name? Group Urges Full 2nd Circuit to Scrap Rule Against Pseudonymity” (March 29): Avalon Zoppo of Law.com reports on the efforts of conservative nonprofit group Do No Harm to petition the U.S. Court of Appeals for the Second Circuit to scrap its new standing test requiring organizations to provide members’ names when seeking preliminary injunctions. In its petition for en banc review of the court’s recent decision in Do No Harm v. Pfizer, Inc., — F.4th —, 2024 WL 949506 (2d Cir. Mar. 6, 2024), Do No Harm argues that the rule will deter organizations from bringing lawsuits on behalf of individuals who may wish to remain anonymous due to fears of retaliation. Gibson Dunn partner and co-head of the firm’s Labor and Employment practice group Jason Schwartz said the case could affect a recent influx of lawsuits against corporate diversity initiatives, where conservative groups have sued on behalf of anonymous members: “This is a super important threshold question for a lot of this new wave of lawsuits . . . If the court says you have to come forward with real live human beings, that’s going to change the wave of these cases in a material way.”
The Hill, “Texas AG Paxton probes Boeing supplier, takes aim at DEI practices” (March 29): The Hill’s Saul Elbein reports on Texas Attorney General Ken Paxton’s investigation of a major supplier to aerospace company Boeing, whose flagship 737 MAX aircraft has been linked to a series of deadly accidents since 2018. Paxton ordered the supplier, Spirit AeroSystems, to provide documents related to manufacturing defects that resulted in the grounding of numerous Boeing planes. Elbein reports that, as part of his request for information, Paxton also asked for information related to the company’s DEI policy and demanded the company substantiate its claim that a diverse workplace improves product quality, enhances performance, and/or helps Spirit make better decisions. Paxton reportedly also asked the company to explain how company-wide demographics for race, national origin, sexual orientation, and age have changed since 2022, when Spirit first adopted its DEI policy.
CNN, “University of Texas at Austin students say cultural programs are struggling to stay afloat in wake of anti-DEI law” (March 28): CNN’s Nicquel Terry Ellis reports on the impact of Texas SB17 on students at the University of Texas at Austin. Signed into law in 2023 by Texas Governor Greg Abbott, SB17 prohibits public colleges and universities in Texas from maintaining diversity, equity, and inclusion offices; hiring or assigning anyone to perform DEI office duties; giving preference to any job applicants or employees based on race, sex, color, ethnicity or national origin; or requiring anyone to complete DEI training. Ellis reports that, at UT Austin, the implementation of the law has caused cultural and identity groups on campus to struggle to find funding for events, meetings, and conferences previously sponsored by the school. According to Aaliyah Barlow, president of the University’s Black Student Alliance, the anti-DEI law makes marginalized communities feel unwanted on campus. However, UT Austin President Jay Hartzell emphasized that although the University will comply with the new law, it will not change the institution’s “commitment to attracting, supporting, and retaining exceptional talent across diverse backgrounds and perspectives.”
Wall Street Journal, “Government Changes How It Asks About Race and Ethnicity, Adds Middle Eastern” (March 28): The Wall Street Journal’s Paul Overberg and Michelle Hackman report on how, for the first time in 27 years, the U.S. government is changing the racial and ethnic categories used in the federal census and on other government forms. Under the new standard, respondents can now identify with more than one race, including American Indian or Alaska Native; Asian; Black or African-American; Hispanic or Latino; Middle Eastern or North African; Native Hawaiian or Pacific Islander; and white. Overberg and Hackman note that the change marks the first time that “Middle Eastern or North African” is included as its own category. Under the previous standard, individuals from these backgrounds were categorized as white.
CNN, “US House Office of Diversity and Inclusion to be disbanded as part of government spending bill” (March 25): Reporting for CNN, Nicquel Terry Ellis, Chandelis Duster, and Eva McKend cover the dissolution of the U.S. House of Representatives’ Office of Diversity and Inclusion as part of the spending bill that passed on March 22. The office, established in March 2020 with a mission to foster a congressional workforce reflective of the nation’s demographics, will be replaced by a newly-formed entity, the Office of Talent Management.

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:

Roberts & Freedom Truck Dispatch v. Progressive Preferred Ins. Co., et al., No. 23-cv-1597 (N.D. Oh. 2023): On August 16, 2023, plaintiffs represented by AFL sued defendants Progressive Insurance, Hello Alice, and Circular Board, Inc., alleging that the defendants’ grant program that awarded funding specifically to Black entrepreneurs to support their small businesses violated Section 1981.
- Latest update: On March 22, the plaintiffs filed a response to the defendants’ combined motion to dismiss, motion to stay and compel arbitration, and motion to transfer. On March 28, the Equal Protection Project of the Legal Insurrection Foundation (EPP) filed an amicus brief in support of the plaintiffs. EPP argued that the grant of the defendants’ motion would prevent civil rights groups from enforcing laws against civil rights violations by “carving out a massive loophole to characterize discriminatory conduct as protected speech.”
Am. Alliance for Equal Rights v. Zamanillo, No. 1:24-cv-509-JMC (D.D.C. 2024): On February 22, 2024, AAER filed a complaint and motion for a preliminary injunction against Jorge Zamanillo in his official capacity as the Director of the National Museum of the American Latino, part of the Smithsonian Institution. The complaint targets the Museum’s internship program, which aims to provide Latino, Latina, and Latinx undergraduates with training in non-curatorial art museum careers. AAER claimed that the program constitutes race discrimination in violation of the Fifth Amendment because the Museum allegedly considers the race of applicants in choosing interns and purportedly refuses to hire non-Latino applicants. AAER had asked for an injunction to prevent the Museum from closing the application window on April 1, or selecting interns for the program (currently scheduled to begin in late April).
- Latest update: On March 26, AAER filed a notice of settlement and stipulation of dismissal. In the settlement agreement, the Smithsonian agreed to add the following statement to the text of the scoring rubric before the application window for the undergraduate internship closes: “The Undergraduate Internship is equally open to students of all races and ethnicities. Reviewers should not give preference or restrict selection based on race or ethnicity.”
Bradley, et al. v. Gannett Co. Inc., 1:23-cv-01100 (E.D.V.A. 2023): On August 18, 2023, white plaintiffs sued Gannett over its alleged “Reverse Race Discrimination Policy,” claiming that Gannett’s expressed commitment to having its staff demographics reflect the communities it covers violates Section 1981. On November 24, 2023 Gannett moved to dismiss and to strike the plaintiffs’ class action allegations. On February 8, 2024, the plaintiffs moved for a preliminary injunction and for class certification. Gannett filed a motion to stay briefing on the plaintiffs’ motions pending a ruling on Gannett’s motion to dismiss, arguing that it may moot any need for class certification or a preliminary injunction.
- Latest update: On March 20, Gannett filed a notice of supplemental authority in support of its motion to dismiss, bringing the court’s attention to the recent Fourth Circuit opinion in Duvall v. Novant Health, Inc., No. 22-2142 (4th Cir. Mar. 12, 2024), which Gannett contends stands for the proposition that DEI programs are not per se unlawful, as long as they do not entail “a system wide decision making process” for employment based on DEI metrics.
Alexandre v. Amazon, Inc., No. 3:22-cv-1459 (S.D. Cal. 2022): White, Asian, and Native Hawaiian entrepreneur plaintiffs, on behalf of a putative class of past and future Amazon “delivery service partner” (DSP) program applicants, challenged a DEI program that provides $10,000 grants to qualifying delivery service providers who are “Black, Latinx, and Native American entrepreneurs.” The plaintiffs allege violations of California state civil rights laws prohibiting discrimination. On December 6, 2023, Amazon moved to dismiss, and the plaintiffs opposed the motion on February 16, 2024.
- Latest update: On March 20, Amazon filed a reply in support of its motion to dismiss, arguing that the plaintiffs lack standing because only a person who was already an Amazon DSP could suffer the injury of being denied a DSP diversity grant, and the plaintiffs are neither current DSPs nor applicants to become DSPs. Amazon further argued that the plaintiffs waived their claims under Section 1981 (because they did not respond to Amazon’s argument to dismiss that claim) and Section 51.5 of the Unruh Act (because they had already conceded that Section 51 does not apply). On March 26, 2024, the court announced that it would not hold oral argument on the motion.
Do No Harm v. Pfizer, No. 1:22-cv-07908 (S.D.N.Y. 2022), aff’d, No. 23-15 (2d Cir. 2023): 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. To be eligible for the program, applicants must “[m]eet the program’s goals of increasing the pipeline for Black/African American, Latino/Hispanic and Native Americans.” Do No Harm alleged that the criteria violate Section 1981, Title VI of the Affordable Care Act, and multiple New York state laws banning racially discriminatory internships, training programs, and employment. In December 2022, the Southern District of New York dismissed the case for lack of subject matter jurisdiction, finding that Do No Harm did not have standing because it did not identify at least one member by name. On March 6, 2024, the United States Court of Appeals for the Second Circuit 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.
- Latest update: On March 20, Do No Harm petitioned the court for a rehearing en banc, arguing that the panel’s opinion splits with at least two circuits and creates “an irreconcilable line of intracircuit precedent,” and predicting that the panel’s opinion would “deter associations from representing vulnerable members in court.” Do No Harm also moved to supplement the record on appeal with three additional anonymous declarations from potential applicants to the Pfizer Breakthrough Fellowship Program.

2. Employment discrimination and related claims:

Kascsak v. Expedia Inc., 1:23-cv-01373-DII (W.D. Tex. 2023): On November 9, 2023, a white man sued Expedia and a top executive for reverse discrimination in relation to the hiring process for a leadership role. The plaintiff claimed he was passed over in favor of a “diverse” candidate, a Black woman. The plaintiff claimed he was the victim of discrimination on the bases of race and sex in violation of Title VII, Section 1981, and the Texas Labor Code. On January 22, 2024, the defendants moved to dismiss, arguing that (1) the plaintiff lacked personal jurisdiction over the Expedia executive, and (2) the plaintiff failed to sufficiently plead a Section 1981 claim because race was not the sole but-for cause of the adverse hiring decision. The plaintiff opposed the motion on January 29, 2024, and the defendants replied on February 5.
- Latest update: On March 25, the court dismissed all claims against the individual executive defendant for lack of personal jurisdiction. The court denied the motion to dismiss as to Expedia, holding that Section 1981 permits claims where race is not the single but-for cause of an adverse contracting action.
Haltigan v. Drake, No. 5:23-cv-02437-EJD (N.D. Cal. 2023): A white male psychologist sued the University of California Santa Cruz, arguing that a requirement that prospective faculty candidates submit and be evaluated in part on the basis of statements explaining their views and understanding of DEI principles functioned as a loyalty oath that violated his First Amendment rights. The plaintiff claimed that because he is “committed to colorblindness and viewpoint diversity”––which he alleged was contrary to UC Santa Cruz’s position on DEI––he would be compelled to alter his political views to be a viable candidate for the position. The plaintiff sought a declaration that the University’s DEI statement requirement violated the First Amendment and a permanent injunction against the enforcement of the requirement. On January 12, 2024, the district court granted UC Santa Cruz’s motion to dismiss with leave to amend.
- Latest update: On March 1, the defendant moved to dismiss the plaintiff’s second amended complaint, arguing that the plaintiff lacks standing and failed to state claims of First Amendment viewpoint discrimination or compelled speech. On March 29, the plaintiff filed an opposition, arguing that he has standing because he was “as ready and able to apply [for the faculty position] as anyone could be.” The plaintiff also argued that the DEI statement is viewpoint discrimination because it is a “political litmus test,” and an unconstitutional condition rather than speech subject to Pickering balancing.

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

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 Governor Ivey to ensure there are no fewer than two individuals “of a minority race” on the Alabama Real Estate Appraisers Board (AREAB). The AREAB consists of nine seats, including one for a member of the public with no real estate background (the at-large seat), 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 will require 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.
- Latest update: On March 19, the district court denied AAER’s motion for a temporary restraining order/preliminary injunction. The court ordered AAER to confidentially disclose of the identity of Member A, the anonymous member of AAER who asserted an injury. It also ordered the parties to submit briefing, due in early April, on why Member A should be allowed to proceed anonymously in the case.

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, 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)

Lennar Homes of Tex. Inc. v. Rafiei, No. 22-0830 – Decided April 5, 2024

In a unanimous per curiam opinion, the Texas Supreme Court held on Friday that when an arbitration agreement contains a clause delegating questions of arbitrability to the arbitrator, an unconscionability challenge must be supported with specific evidence showing that the cost of arbitrating any arbitrability issues is itself excessive. Because the plaintiff’s evidence went only to the overall costs of arbitration, the Court found no basis to conclude that the delegation clause was itself unconscionable.

“[T]he record fails to support a finding that the parties’ delegation clause is itself unconscionable due to prohibitive costs to adjudicate this threshold issue in arbitration.”

Per curiam

Background:

Rafiei bought a house from Lennar Homes. The purchase contract required the parties to submit their disputes to arbitration and delegated decisions about the arbitrability of disputes to the arbitrator. Rafiei later sued for personal injuries that he attributed to improper installation of a garbage disposal. Lennar moved to compel arbitration, and Rafiei opposed the motion, arguing that the agreement was unconscionable because arbitration was prohibitively expensive. In support of his unconscionability challenge, Rafiei submitted the AAA fee schedules and affidavits from himself and his attorney. The trial court denied Lennar’s motion, and the Fourteenth Court of Appeals affirmed.

Issue:

When an arbitration agreement delegates arbitrability issues to an arbitrator, may a court deny a motion to compel arbitration on unconscionability grounds absent evidence that the delegation provision is itself excessively costly?

Court’s Holdings:

No. “When an agreement delegates arbitrability issues to an arbitrator,” the only question for the court in an unconscionability challenge is whether the cost of arbitrating the “delegated threshold issue of unconscionability is excessive, standing alone.” Rafiei failed to “show that the delegation provision itself is unconscionable” as the supporting affidavits discussed only “the cost to arbitrate the overall dispute”—not “the cost to arbitrate the arbitrability question.” Nor did he present evidence of how the AAA fee schedule “would be applied to resolve the unconscionability challenge” itself. He also failed to establish that he could “afford litigation but not arbitration.” So the Court found no basis to set aside the delegation clause on unconscionability grounds. It refrained from deciding, however, whether the arbitration agreement as a whole was unconscionable because that issue was “reserved for the arbitrator.”

What It Means:

The Court continues to uphold the enforceability of arbitration agreements. When an agreement contains a delegation clause, a court’s inquiry on a motion to compel arbitration is “narrow.” Courts will order arbitration absent proof that the “delegation clause is itself unconscionable.”

Plaintiffs challenging arbitration agreements on unconscionability grounds face an uphill climb in Texas. They must adduce “specific evidence” showing (1) “the relevant costs between litigating in court and in arbitration”; and (2) their lack of “ability to pay the difference in such costs.” And if the agreement contains a delegation clause, plaintiffs must “estimate the actual costs associated with arbitrating the arbitrability question”—not the costs of the overall arbitration.

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 Texas Supreme Court. Please feel free to contact the following practice 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
Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Texas General Litigation

Trey Cox +1 214.698.3256 tcox@gibsondunn.com	Collin Cox +1 346.718.6604 ccox@gibsondunn.com	Gregg Costa +1 346.718.6649 gcosta@gibsondunn.com
Andrew LeGrand +1 214.698.3405 alegrand@gibsondunn.com	Russ Falconer +1 346.718.3170 rfalconer@gibsondunn.com

This alert was prepared by Texas associates Elizabeth Kiernan, Stephen Hammer, and Joseph Barakat.

From the Derivatives Practice Group: ISDA submitted responses to proposals from various bodies this week, both domestically and abroad.

New Developments

CFTC’s Energy and Environmental Markets Advisory Committee to Meet. The CFTC’s Energy and Environmental Markets Advisory (EEMAC) will hold a public meeting from 9:00 a.m. to 12:00 p.m. (CDT) on Wednesday, April 10 at the University of Missouri – Kansas City in Kansas City, Missouri. At this meeting, the EEMAC will continue its discussion on the federal prudential financial regulators’ proposed rules implementing Basel III and the implications for and impact on the derivatives market. There will also be presentations and discussions on the state of crude oil markets and the future of power markets. Finally, the two EEMAC subcommittees will offer updates on their continued work related to traditional energy infrastructure and metals markets.
CFTC’s Agricultural Advisory Committee to Meet. The CFTC’s Agricultural Advisory Committee (AAC) will hold a public meeting on April 11 from 9:30 a.m. to 11:00 a.m. (CDT) at the Sheraton Overland Park Hotel in Overland Park, Kansas. At this meeting, the AAC will discuss topics related to the agricultural economy and recent developments in the agricultural derivatives markets.
SEC Adopts Reforms Relating to Investment Advisers Operating Exclusively Through the Internet. On March 27, the SEC adopted amendments to the rule permitting certain internet investment advisers to register with the Commission (the “internet adviser exemption”). The amendments will require an investment adviser relying on the internet adviser exemption to have at all times an operational interactive website through which the adviser provides digital investment advisory services on an ongoing basis to more than one client. The amendments will also eliminate the current rule’s de minimis exception by requiring an internet investment adviser to provide advice to all of its clients exclusively through an operational interactive website and to make certain corresponding changes to Form ADV.
CFTC’s Market Risk Advisory Committee to Meet. The CFTC’s Market Risk Advisory Committee (MRAC) will meet on April 9 at 9:30 am ET. The MRAC will introduce recommendations, reports and presentations on current topics and developments, including an approach to manage the resilience, recovery or wind down of central counterparties, the implications of concentration risk in intermediation, the U.S. treasury cash-futures basis trade and risk-management considerations, a work plan for the integration of artificial intelligence in the markets; possible recommendations regarding efforts to manage climate-related market risks; and updates on the work of several workstreams on block implementation rules, post-trade risk reduction services, and margin transparency, margin procyclicality and margin calls.

New Developments Outside the U.S.

UK’s Accelerated Settlement Taskforce Publishes Report on the Path to T+1. On March 28, the UK’s Accelerated Settlement Taskforce published its report on the path to a T+1 settlement cycle. The report finds there is a clear consensus on the need for the UK to move to a T+1 settlement cycle and this shift will require substantial investment in greater automation and standardization. In addition, the report emphasizes a need for ongoing engagement with stakeholders during the transition period and the opportunity to learn from the U.S. move to T+1 in May 2024. The report recommends the immediate creation of a technical group to identify the challenges of transition and formulate solutions and suggests a two-step transition to T+1 before the end of 2027, with the exact date to be determined by the technical group. [NEW]
ESMA Clarifies Application of Certain MIFIR Provisions, Including Volume Cap. On March 27, the European Securities and Markets Authority (ESMA) published a statement, including practical guidance supporting the transition and the consistent application of the revised Markets in Financial Instruments Regulation (MiFIR).The statement covers guidance on equity transparency and non-equity transparency; the systematic internaliser (SIs) regime; designated publishing entities (DPEs); and reporting. Regarding the volume cap, following the publication by the European Commission, ESMA confirmsed that DVC data will continue to be published, with the next publication scheduled for early April.
ESMA Provides Market Participants with Guidance on the Clearing Obligation for Trading with 3rd Country Pension Schemes. On March 27, ESMA issued a public statement on deprioritizing supervisory actions linked to the clearing obligation for third-country pension scheme arrangements (TC PSA), pending the finalization of the review of EMIR. ESMA expects National Competent Authorities (NCAs) not to prioritize supervisory actions in relation to the clearing obligation for derivative transactions conducted with TC PSAs exempted from the clearing obligation under their third-country’s national law. Additionally, ESMA recommends that NCAs apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner. The Council and the European Parliament reached a provisional agreement on February 7. The political agreement on the EMIR 3 text provides for an exemption regime from the EMIR clearing obligation when the TC PSA is exempted from the clearing obligation under that third country’s national law.
ESMA Finalizes First Rules on Crypto-Asset Service Providers. On March 25, ESMA published the first Final Report under the Markets in Crypto-Assets Regulation (MiCA). ESMA stated that Tthe report, which aims to foster clarity and predictability, promote fair competition between crypto-asset service providers (CASPs) and a safer environment for investors across the Union, includes proposals on: (1) information required for the authorization of CASPs; (2) the information required where financial entities notify their intent to provide crypto-asset services; (3) information required for the assessment of intended acquisition of a qualifying holding in a CASP, and (4) how CASPs should address complaints.
ESMA Launches the Third Consultation Under MiCA. On March 25, ESMA published its third consultation package under the MiCA. In the consultation package, ESMA is seeking input on four sets of proposed rules and guidelines, covering: (1) detection and reporting of suspected market abuse in crypto-assets; (2) policies and procedures, including the rights of clients, for crypto-asset transfer services; (3) suitability requirements for certain crypto-asset services and format of the periodic statement for portfolio management; and (4) ICT operational resilience for certain entities under MiCA.
SGX Issues Consultation on Revised Limit on Clearing Members’ Liability for Multiple Defaults. On March 22, Singapore Exchange (SGX) issued a consultation paper proposing to refine the existing cap on a clearing member’s liability to meet default losses arising from multiple events of default. The cap is imposed on clearing members of Singapore Exchange Derivatives Clearing Limited (SGX-DC) and The Central Depository (Pte) Limited (CDP). The proposal purports to limit a non-defaulting clearing member’s liability to meet multiple default losses arising within a 30-day period to three times the aggregate of its funded and unfunded clearing fund contributions (prescribed contribution) as determined at the start of the 30-day period. The revised limit is intended to be independent of the clearing member’s resignation. SGX has also proposed changes to the SGX-DC clearing rules set out in Appendix B of the consultation. SGX is seeking views and comments on: (1) capping the limit for multiple defaults at three times a clearing member’s clearing fund contribution amount for all defaults occurring within a 30-day period; (2) the methodology for calculating the amount of a non-defaulting clearing member’s clearing fund contributions available to meet losses suffered by the SGX central counterparty arising from or in connection with an event of default (as set out in SGX-DC Clearing Rule 7A.06.9.2); and (3) the rule amendments to effect the proposed change. The consultation closes on April 24, 2024. [NEW]
SFC and HKMA Further Consult on Enhancements to Hong Kong’s OTC Derivatives Reporting Regime. On March 22, 2024, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) launched a joint-further consultation on enhancements to the over-the-counter (OTC) derivatives reporting regime in Hong Kong. This further consultation follows an earlier joint-consultation in April 2019, in which the SFC and HKMA proposed a requirement to identify transactions submitted to the Hong Kong Trade Repository (HKTR) for the reporting obligation by a Unique Transaction Identifier. The current joint-further consultation consults on the implementation of the Unique Transaction Identifier, together with the mandatory use of Unique Product Identifier and Critical Data Elements for submission of transactions to the HKTR. The Interested parties are encouraged to submit responses to the SFC or HKMA on the consultation by May 17, 2024.
ESMA Publishes Feedback on Shortening Settlement Cycle. On March 21, the ESMA published feedback received to its Call for Evidence on shortening the settlement cycle in the EU. According to ESMA’s report on the feedback, respondents focused on four areas: (1) many operational impacts, beyond adaptations of post-trade processes, were identified as the result of a reduction of the securities settlement cycle in the EU; (2) respondents identified a wide range of both potential costs and benefits of a shortened cycle, with some responses supporting a thorough impact assessment; (3) respondents provided suggestions around how and when a shorter settlement cycle could be achieved, with a strong demand for a clear signal from the regulatory front at the start of the work and clear coordination between regulators and the industry; and (4) stakeholders made clear the need for a proactive approach to adapt their own processes to the transition to T+1 in other jurisdictions. Additionally, according to ESMA, some responses warned about potential infringements due to the misalignment of the EU and North America settlement cycles.

New Industry-Led Developments

IOSCO Seeks Feedback on the Evolution of Market Structures and Proposed Good Practices. On April 4, the International Organization of Securities Commissions (IOSCO) published a consultation report on Evolution in the Operation, Governance and Business Models of Exchanges: Regulatory Implications and Good Practices. The consultation report analyzes the structural and organizational changes within exchanges, focusing on business models and ownership structures. It highlights a shift towards more competitive, cross-border, and diversified operations as exchanges integrate into larger corporate groups. The consultation report discusses regulatory considerations, particularly in the organization of individual exchanges and exchange groups and the supervision of multinational exchange groups. It addresses potential conflicts of interest arising from matrix structures and the challenges of overseeing individual exchanges within exchange groups. Additionally, it outlines a set of six proposed good practices for regulators to consider in the supervision of exchanges, particularly when they provide multiple services and/or are part of an exchange group. The good practices are also complemented by a non-exclusive list of supervisory tools used by IOSCO jurisdictions to address the issues under discussion, in the form of “toolkits”. While the Consultation Report focuses on equities listing trading venues, the findings are also relevant to other trading venues, including non-listing trading venues and derivatives trading venues. IOSCO is seeking input from market participants on the major trends and risks observed, and the proposed good practices on or before July 3, 2024. [NEW]
ISDA Submits Response to CFTC Proposed Operational Resilience Rules. On April 1, ISDA submitted comments on the CFTC’s notice of proposed rulemaking on requirements to establish an Operational Resilience Framework for Futures Commission Merchants, Swap Dealers and Major Swap Participants, which was published in the Federal Register on January 24, 2024. ISDA recommended that the CFTC adjust adjust portions of the proposed rules relating to governance, third-party relationships, incident notification and implementation period. [NEW]
ISDA Submits Response to IOSCO Consultation on Post-Trade Risk Reduction. On March 29, ISDA submitted a response to IOSCO consultation on post-trade risk reduction (PTRR) services. According to ISDA, PTRR services are intended to optimize bilateral and cleared derivatives portfolios to minimize the build-up of notional amounts and trade count, counterparty risk, and basis risk respectively, which in turn reduces systemic risk. ISDA stated that it is broadly supportive of IOSCO’s proposed sound practices. [NEW]
ISDA Submits Joint Response to PRA on Approach to Policy. On March 28, ISDA and the Association for Financial Markets in Europe (AFME) submitted a joint response to the Prudential Regulation Authority (PRA) consultation on its approach to policy. The associations highlighted the importance of considering UK market specificities in meeting the secondary competitiveness and growth objective, and in the implementation of international standards. The associations expressed support for the continuation of structured policy development in dialogue with the industry, while also advocating for the enhancement of the PRA’s stakeholder engagement by re-establishing standing groups and horizon risk scanning groups, and greater industry cooperation during the initiation phase of the policy cycle. ISDA highlighted certain other points in the response, including recommendations on clustering regulatory principles and suggested improvements to the cost-benefit analysis and data collection processes to achieve greater transparency. [NEW]
ISDA Submits Joint Response to BCBS Crypto Standard Amendments Consultation. On March 28, ISDA, with the Global Financial Markets Association, the Futures Industry Association, the Institute of International Finance and the Financial Services Forum, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on proposed crypto asset standard amendments. ISDA and the other trade associations stated that they welcome the BCBS’s continued focus on designing and improving the prudential framework for crypto assets. The key topics in the consultation response include public permissionless blockchains, classification condition 2 and settlement finality and Group 1b eligibility.
ISDA Responds to CFTC on Clearing Member Funds Protection. On March 18, ISDA responded to the CFTC’s consultation on proposed rules for the protection of clearing member funds held by derivatives clearing organizations (DCOs), including the assets of futures commission merchants (FCMs). According to ISDA, it proposed that the CFTC should finalize the enhanced protection for clearing member assets in connection with an intermediated DCO only, which includes multiple FCMs, unaffiliated with the DCO, as its members. Regarding a DCO providing direct clearing without multiple FCMs unaffiliated with the DCO, ISDA suggested the CFTC should wait to propose enhanced protection for clearing members’ assets, once a full assessment of the risks and complications associated with a DCO providing direct clearing has been completed. At which point, in ISDA’s opinion, it would be appropriate for the CFTC to propose a comprehensive framework to address these risks holistically. Otherwise, ISDA said, the current notice of proposed rulemaking would create a sense of safety for the disintermediated model, which is superficial due to the rule not creating a comprehensive safety regime for disintermediated central counterparties (CCPs), with many risks arising from such models being left unaddressed.
ISDA Responds to FASB on Induced Conversion of Convertible Debt. On March 18, ISDA submitted a response to the Financial Accounting Standards Board’s (FASB) exposure draft on File Reference No. 2023-ED600, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. ISDA indicated that it supports FASB’s proposals in the exposure draft and believes it achieves the objective of improving the application and relevance of the induced conversion guidance to cash convertible debt instruments.

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

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 (+1 212.351.3869, alapidus@gibsondunn.com)

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

Roscoe Jones Jr., Washington, D.C. (202.887.3530, rjones@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)

The Delaware Supreme Court announced that MFW remains the lodestar of earning the business judgment rule’s protections for all conflicted controller transactions, and a single conflict on a special committee can be fatal to those efforts.

On April 4, 2024, the Delaware Supreme Court issued its highly anticipated decision in In re Match Group, Inc. Derivative Litigation, — A.3d —, 2024 WL 1449815 (Del. Apr. 4, 2024), which we previewed in our 2023 Year-End Securities Litigation Update. The opinion includes two notable holdings.

First, the Court held that the entire fairness standard is the default standard of review applicable to all transactions with a controlling stockholder in which the controller receives a non-ratable benefit. For the transaction at issue, involving IAC/InterActiveCorp’s reverse spinoff from its controlled subsidiary March Group, Inc., the Court concluded that in order to invoke more deferential business judgment rule review, both requirements of Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) must be satisfied: review and approval by an independent and well-functioning special committee, and the informed approval of disinterested stockholders.

Second, the Court held that to satisfy the first MFW element, all members of the special committee reviewing and approving the transaction must be independent of the controller. The Court found that one committee member’s historical business ties with the controller were sufficient at the pleadings stage to compromise the member’s independence, and therefore cast “a reasonable doubt” on “the entire [s]eparation [c]ommittee’s independence.” The Court therefore reversed the Court of Chancery’s holding that MFW can be satisfied when a majority of a special committee’s members are independent of the controller.

Takeaways

This decision confirms the Delaware Supreme Court’s view of transactions involving a controlling stockholder and their potential for coerciveness. Because any transaction with a controlling stockholder from which the controller conceivably derives a non-ratable benefit presumptively will be reviewed under the entire fairness standard, careful attention and adherence to all aspects of the MFW framework is important to parties seeking to invoke its protections.

That is especially true after In re Match Group, Inc. with respect to the independence of special committee members. The Delaware Supreme Court’s holding expressly requires the independence of all members of a special committee, meaning that even a foot-fault in committee-member independence could subject a transaction to lengthy and expensive litigation. This was the case even though the Court of Chancery found that the conflicted special committee member “did not ‘infect’ or ‘dominate’ the separation committee process”—a finding that was unchallenged on appeal. Thus, even a rigorous, arms-length process alone will not be sufficient to invoke the protections of the business judgment rule at the pleadings stage if even one member lacks independence from a controlling stockholder.

Together, these holdings provide important clarity to parties undertaking transactions in which a conflicted controller is, or may be, present. In short, MFW remains the lodestar of earning the business judgment rule’s protections for all conflicted controller transactions, and a single conflict on a special committee can be fatal to those efforts.

The following Gibson Dunn lawyers participated in preparing this update: Monica K. Loseman, Brian M. Lutz, Colin B. Davis, Mark H. Mixon, Jr., Chase Weidner, and Dasha Dubinsky.

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

Christopher D. Belelieu – New York (+1 212.351.3801, cbelelieu@gibsondunn.com)
Jefferson Bell – New York (+1 212.351.2395, jbell@gibsondunn.com)
Michael D. Celio – Palo Alto (+1 650.849.5326, mcelio@gibsondunn.com)
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Jonathan D. Fortney – New York (+1 212.351.2386, jfortney@gibsondunn.com)
Monica K. Loseman – Co-Chair, Denver (+1 303.298.5784, mloseman@gibsondunn.com)
Brian M. Lutz – Co-Chair, San Francisco (+1 415.393.8379, blutz@gibsondunn.com)
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Jason J. Mendro – Washington, D.C. (+1 202.887.3726, jmendro@gibsondunn.com)
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Lissa M. Percopo – Washington, D.C. (+1 202.887.3770, lpercopo@gibsondunn.com)
Jessica Valenzuela – Palo Alto (+1 650.849.5282, jvalenzuela@gibsondunn.com)
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Mark H. Mixon, Jr. – New York (+1 212.351.2394, mmixon@gibsondunn.com)

This edition of Gibson Dunn’s Federal Circuit Update for March 2024 summarizes the current status of several petitions pending before the Supreme Court, and recent Federal Circuit decisions concerning indefiniteness, obviousness, eligibility under Section 101, and the safe harbor provision under Section 271.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

There were no new potentially impactful petitions filed before the Supreme Court in March 2024. We provide an update below of the petitions pending before the Supreme Court that were summarized in our February 2024 update:

In Vanda Pharmaceuticals Inc. v. Teva Pharmaceuticals USA, Inc. (US No. 23-768), after the respondents waived their right to file a response, the Court requested a response, which was filed on March 18, 2024. Three amicus curiae briefs have been filed.

The Court denied the petition in Ficep Corp. v. Peddinghaus Corp. (US No. 23-796).

Upcoming Oral Argument Calendar

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

Key Case Summaries (March 2024)

Chewy, Inc. v. International Business Machines Corporation, No. 22-1756 (Fed. Cir. Mar. 5. 2024): Chewy sued IBM seeking a declaratory judgment of noninfringement of several patents including two patents relating to improvements in web-based advertising. Following claim construction, the district court granted Chewy’s motion for summary judgment of noninfringement of the asserted claims for one patent, because it determined no reasonable factfinder could find Chewy’s accused products “establish[] characterizations for respective users based on the compiled data” as required by the claims. The district court also granted a motion for summary judgment that claims from the second patent were ineligible under 35 U.S.C. § 101.

The Federal Circuit (Moore, C.J., joined by Stoll and Cunningham, JJ.) affirmed-in-part and reversed-in-part. The Court reversed the grant of summary judgment of noninfringement, because it determined that Chewy’s privacy policy and other documents created a genuine dispute of material fact regarding whether Chewy “establish[es] characterizations for respective users.” Indeed, the privacy policy explained that the ads were based on information such as “browsing or purchasing,” and drawing all inferences in the nonmoving party’s favor, this provided evidence that Chewy uses a specific user’s browsing or purchasing history to provide personalized or targeted ads. The Court affirmed the grant of summary judgment that the second patent was ineligible under § 101, determining that the patent was directed to the abstract idea of “identifying advertisements based on search results.” The Court concluded that the patent claims as an ordered combination did not recite an inventive concept because none of the three distinctive concepts raised by IBM—(1) a generic database configured to associate search results with advertisements, (2) offline batching process, and (3) assigning session identifiers to a search query—transformed the claimed abstract idea into patent-eligible subject matter.

Maxell, Ltd. v. Amperex Technology Limited, No. 23-1194 (Fed. Cir. Mar. 6, 2024): Maxell sued Amperex for infringement of Maxell’s patent directed to a rechargeable lithium-ion battery. The district court conducted claim construction proceedings and held that the claims were indefinite because the claim language recited a contradiction—one limitation did not require the presence of cobalt (it was optional), whereas the second limitation did.

The Federal Circuit (Taranto, J., joined by Prost and Chen, JJ.) reversed and remanded. The Court concluded that the claim language was not indefinite because even “[i]f there are two requirements,” if “it is possible to meet both, there is no contradiction.” Moreover, “[t]hat there are other ways of drafting the claim does not render the claim language contradictory or indefinite.”

Edwards Lifesciences Corp. et al. v. Meril Life Sciences Pvt. Ltd. et al., No. 22-1877 (Fed. Cir. Mar. 25, 2024): Edwards sued Meril for patent infringement after Meril imported two transcatheter heart valve systems into the United States that it intended to display at a conference in order to, among other things, find clinical investigators for its FDA premarket submission. The district court held that their importation fell within the safe harbor provision of 35 U.S.C. § 271(e)(1), and therefore granted summary judgment of noninfringement to Meril.

The majority (Stoll, J., joined by Cunningham, J.) affirmed. Section 271(e)(1) “is a safe harbor for defendants for what would otherwise constitute infringing activity.” It states that it “shall not be an act of infringement to . . . import into the United States a patented invention . . . solely for uses reasonably related to the development and submission of information under a Federal law . . . .” The majority held that “solely” in § 271(e)(1) modifies the phrase “for uses,” meaning that a use falls within the safe harbor provision if it is reasonably related to preparing a regulatory submission, even if the use also has additional (e.g., commercial) purposes.

Judge Lourie dissented, reasoning that the Court has consistently erred in interpreting the word “solely” in the safe harbor provision and that the question could benefit from en banc review. Specifically, Judge Lourie explained that the plain meaning of “solely” and the legislative history of § 271(e)(1) requires an otherwise infringing use to be carried out only for regulatory purposes (i.e., not for additional or commercial purposes) to benefit from the safe harbor.

Virtek Vision International ULC v. Assembly Guidance Systems, Inc., No. 22-1998 (Fed. Cir. Mar. 27, 2024): Assembly Guidance d/b/a Aligned Vision challenged Virtek’s patent directed to an improved method for aligning a laser project with respect to a work surface in an inter partes review (“IPR”). The Patent Trial and Appeal Board (“Board”) had found that a skilled artisan would have been motivated to use the 3D coordinate system in one prior art reference (Briggs) instead of the angular direction systems found in the other prior art references (Keitler, Bridges), and that it would have been obvious to try because Briggs disclosed both. The Board issued a final written decision holding that certain claims of the patent were unpatentable.

The Federal Circuit (Moore, C.J., joined by Hughes and Stark, JJ.) reversed-in-part and affirmed-in-part. The Court concluded that the Board erred as a matter of law with regard to the motivation to combine. The Court found that although Briggs disclosed that different possible arrangements existed, this did not provide a reason why a skilled artisan would have substituted the one-camera angular direction system in Keitler and Bridges with the two-camera 3D coordinate system disclosed in Briggs. “In short, this case involves nothing other than an assertion that because two coordinate systems were disclosed in a prior art reference and were therefore ‘known,’ that satisfies the motivation to combine analysis. That is an error as a matter of law. It does not suffice to simply be known. A reason for combining must exist.”

The following Gibson Dunn lawyers assisted in preparing this update: Blaine Evanson, Jaysen Chung, Audrey Yang, Julia Tabat, Michelle Zhu, and Evan Kratzer.

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)

As we wrap up the first quarter of 2024, Gibson Dunn’s Media, Entertainment and Technology Practice Group highlights some of the notable rulings, developments, deals, and trends from 2023 forward that will inform the industry this year and beyond.

TABLE OF CONTENTS

1. Copyright
2. Artificial Intelligence
3. Trademark
4. Music
5. Fashion & Entertainment
6. Sports
7. Transactions/Deals

_______________________

1. COPYRIGHT

Fourth Circuit Sets Aside $1 Billion Jury Verdict and Orders New Trial on Damages for Contributory Copyright Infringement by Cox Communications

On February 20, 2024, the Fourth Circuit set aside a $1 billion jury verdict against Cox Communications, Inc. for contributory and vicarious copyright infringement in a suit brought by more than 50 record labels and music publishers.[1] The plaintiffs, including Sony Music Entertainment, Warner Music Group, and Universal Music Group, alleged that users of Cox’s internet service downloaded or distributed music over the internet without permission, resulting in the infringement of over 10,000 copyrighted works.[2] After the Fourth Circuit previously held that the Digital Millennium Copyright Act (DMCA)’s safe harbor defense—which protects internet service providers from monetary liability resulting from copyright infringement by their users—did not apply to Cox because of its failure to reasonably implement an anti-piracy policy, the case proceeded to trial.[3] The jury found Cox liable for both willful contributory infringement and vicarious infringement, and awarded $1 billion in statutory damages.[4]

On appeal, the Fourth Circuit affirmed the jury’s willful contributory infringement verdict, holding that sufficient evidence was presented to the jury that Cox “knew of specific instances” of infringement, “traced those instances to specific users,” and “chose” to continue providing internet service to those users in order to preserve its revenue stream.[5] However, the court reversed the vicarious infringement verdict, because the plaintiffs failed to show (a) that infringing users subscribed to Cox’s services, as opposed to a competitor’s, because it gave them a better ability to infringe due to Cox’s more lenient policies, and (b) that users paid more for faster internet so as to engage in infringement.[6] Instead, the court concluded that Cox received the same monthly fees from subscribers, regardless of whether those subscribers engaged in infringing activity.[7] Because the jury’s damages award was a “global figure” for liability under both claims, the Fourth Circuit remanded for a new damages trial to determine damages for solely the willful contributory infringement claim.[8] In doing so, the Fourth Circuit rejected arguments by Cox that certain works should be excluded from the damages calculation because they were being double-counted.[9] Specifically, Cox argued that individual sound recordings compiled in a single album should be counted as one work, and that a music composition and its derivative sound recording should also be counted as one work.[10] The Fourth Circuit, without deciding the merits of Cox’s theories, held that Cox had failed to present evidence that would have allowed the jury to determine which works were derivative or part of a compilation, and declined to reduce the number of copyrighted works at issue.[11]

Supreme Court Holds New Meaning Alone Is Not Sufficient for the Fair Use Defense

On May 18, 2023, the Supreme Court ruled that the Andy Warhol Foundation for the Visual Arts’s (“AWF’s”) licensing of an Andy Warhol-created illustration of a photograph of Prince to a magazine was not a fair use of the underlying photograph of Prince under copyright law.[12] In 1981, professional photographer Lynn Goldsmith was commissioned to photograph the musician Prince.[13] Years later, she licensed her photo to Vanity Fair for a one-time use as an artist’s reference.[14] Warhol created a purple silkscreen portrait of Prince to appear in Vanity Fair.[15] In total, Warhol created 16 silkscreen portraits, now known as the Prince Series, that he derived from Goldsmith’s original copyrighted photograph of Prince.[16] In 2016, Condé Nast, Vanity Fair’s parent company, purchased a license from AWF to publish another Warhol work from the series, Orange Prince, for a commemorative issue on Prince.[17]

After Goldsmith notified AWF of her belief that Orange Prince infringed on her original photo’s copyright, AWF sued Goldsmith for a declaratory judgment of noninfringement or, alternatively, fair use.[18] Goldsmith counterclaimed for infringement.[19] The sole question presented to the Court was whether the first fair use factor, “the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes,” 17 U.S.C. § 107(1), weighed in favor of AWF’s recent commercial licensing to Condé Nast.[20] The Court rejected AWF’s transformative use argument, finding that Goldsmith’s original photograph and Warhol’s illustration shared the substantially same purpose, i.e., both were portraits of Prince used in magazine stories about him.[21] Although the Court acknowledged that a derivative work might add a new expression, that alone does not equate to a transformative use that dispenses with the need for licensing.[22] Moreover, AWF’s use of the photograph was commercial, also weighing against a finding of fair use.[23] As such, the Court affirmed the Second Circuit’s decision that the first fair use factor favored Goldsmith.[24]

Ninth Circuit Concludes That Epic Games’ Dance Animations Share Substantial Similarities with Copyrighted Choreographic Works

On November 1, 2023, the United States Court of Appeals for the Ninth Circuit reversed the dismissal of choreographer Kyle Hanagami’s copyright claim against Epic Games, finding that Hanagami had plausibly alleged that the company released a virtual animation, or “emote,” that was “substantially similar” to Hanagami’s copyrighted choreographic material.[25] In 2022, Hanagami alleged that the emote, released for purchase on Epic Games’ Fortnite in August 2020, included four “counts of movement” that copied the most recognized portion of a five-minute choreographic work that Hanagami created.[26] The United States District Court for the Central District of California found that Hanagami’s dance steps were not protectable under copyright laws on their own, because the “individual poses” at issue were only a “small component” of the work.[27] The court found that copyright law protected Hanagami’s work “only for the way the Steps are expressed in his registered choreography.”[28] Because “[t]he two works contain[ed] a series of different poses performed in different settings and by different types of performers,” the district court reasoned that the works were not “substantially similar as a matter of law” and dismissed Hanagami’s copyright claims.[29]

The Ninth Circuit disagreed, rejecting the district court’s contention that choreography can be analyzed by breaking down a routine into “individual poses.”[30] The Ninth Circuit stated that copyright protects the “[o]riginal selection, coordination, and arrangement” of individual dance movements in a manner akin to an analysis of the original elements inherent in music or photography.[31] Consequently, the Ninth Circuit concluded that the proper analysis for the original elements in a choreographic work centers less on analyzing “poses” in isolation and instead evaluates them alongside myriad elements including “body position, body shape, body actions, [and] use of space.”[32] By applying this analysis, the court found that the copied portion of Hanagami’s work was “the most recognizable and distinctive portion of his work, similar to the chorus of a song.”[33] Because the copied portion “ha[d] substantial qualitative significance to the overall Registered Choreography” and was a “complex, fast-paced series of patterns and movements,” it could receive the benefit of copyright protections.[34] Accordingly, the Ninth Circuit reversed the district court’s dismissal and remanded the case for further proceedings. The parties ultimately entered into an agreement settling the dispute on February 12, 2024.

Supreme Court Takes Up Question of Time Limit On Copyright Infringement Damages

On September 29, 2023, the Supreme Court granted certiorari in Warner Chappell Music, Inc. v. Nealy, a long-running music copyright dispute, to address the limited question of whether the discovery accrual rule and the Copyright Act allow a copyright plaintiff to recover damages for acts that allegedly occurred more than three years before the filing of a lawsuit.[35]

In the underlying case, the United States Court of Appeals for the Eleventh Circuit held that in certain cases a copyright plaintiff “may recover retrospective relief for infringement that occurred more than three years prior to the filing of the lawsuit.”[36] As the Eleventh Circuit acknowledged, the federal Copyright Act establishes a three-year statute of limitations, stating that that “[n]o civil action shall be maintained . . . unless it is commenced within three years after the claim accrued.”[37] Under the Eleventh Circuit’s “discovery rule,” however, “a copyright ownership claim accrues, and therefore the limitations period starts, when the plaintiff learns, or should as a reasonable person have learned, that the defendant was violating his ownership rights.”[38] The Eleventh Circuit held that neither imposes a bar on retrospective relief for an otherwise timely copyright claim.[39]

In holding that a copyright plaintiff may in certain cases recover for infringement occurring more than three years before a lawsuit’s filing, the Eleventh Circuit has entered an ongoing circuit split, as various appellate courts around the country disagree on the relevance of the discovery rule to a plaintiff’s ability to recover retrospective relief for copyright claims.[40] The Supreme Court held oral argument on February 21, 2024 and may soon provide clarity on this long-disputed issue.

Southern District of New York Holds That Scanning and Lending Print Books for Free Infringes Publishers’ Copyrights

On March 24, 2023, the United States District Court for the Southern District of New York, on a motion for summary judgment, held that scanning lawfully acquired books and lending them out like a library violates the copyright of the books’ publishers.[41] The lawsuit concerned Internet Archive’s (“IA”) “controlled digital lending” (“CDL”) practice for sharing books. Under this practice, IA would electronically lend out fully scanned copies of books that it had lawfully acquired through purchase or subscription.[42] In June 2020, the publishers of 127 books challenged IA’s CDL practices, stating that the publishers possessed the exclusive right to publish the works in print and digital form.[43] In response, IA argued that its lending of the books was protected under copyright’s fair use doctrine. Id. Both parties cross-moved for summary judgment.

District Judge John Koeltl found in favor of the publishers, concluding that a straightforward application of copyright law’s four-factor fair use text compelled summary judgment. Focusing on the first prong of the test, the court found that “[t]here is nothing transformative about IA’s copying and unauthorized lending of the Works in Suit.” In doing so, the court rejected IA’s argument that its CDL practice was inherently transformative by “making the delivery of library books more efficient and convenient.”[44] The court distinguished IA’s CDL practice from other utility expanding transformative uses of copyrighted works, because lending ebooks in full “merely replace[s]” the original print books and does not “provid[e] information” about the books in a novel or interesting way.[45] Similarly, the court rejected IA’s argument that IA did not lend the books for a commercial use, both because the company did not charge patrons to borrow books and also because private reading is noncommercial in nature.[46] In so finding, the court noted that IA’s lending practices would help the company by “attract[ing] new members, solicit[ing] donations, and bolster[ing] its standing in the library community.”[47] In assessing the fourth fair use factor—”the effect of the [copying] use on the potential market for or value of the copyrighted work,”—the court noted that IA’s offer of “complete ebook editions of the Works in Suit” without paying a licensing fee to Publishers for those books would “‘bring[ ] to the marketplace a competing substitute’ for library ebook editions of the Works in Suit, ‘usurp[ing] a market that properly belongs to the copyright holder.’”[48] Following the March 2023 opinion, the court approved and entered a negotiated consent judgment that declared IA’s CDL practices to constitute copyright infringement, and further permanently enjoined IA from lending scanned copyrighted works that are available digitally.[49] IA appealed the district court’s ruling to the Second Circuit and submitted its opening brief in December 2023;[50] Hachette filed its answering brief on March 15, 2024.[51] The case has not been set for oral argument.

2. ARTIFICIAL INTELLIGENCE

Getty Images Sues Stability AI

In February 2023, Getty Images (US) sued Stability AI in federal district court in Delaware for allegedly infringing more than 12 million of Getty’s photographs and their associated captions and metadata, in connection with two of Stability AI’s products—Stable Diffusion and DreamStudio—which generate images in response to text prompts. Getty Images also brought trademark and unfair competition claims, alleging the generative output of Stability AI’s products have included Getty Images watermarks.[52] The copyright claims are based on Stability AI having allegedly reproduced images from Getty’s collection without authorization and by using a version of the Getty watermark in Stable Diffusion output.[53] The Lanham Act claims and the state law claims allege Stability AI’s products are causing the public to mistakenly believe that Getty has authorized Stability AI to use and alter its images, resulting in lower quality products.[54] Stability AI has challenged the lawsuit on personal jurisdiction grounds, and the case is currently in jurisdictional discovery.[55]

Artists File Class Action Against Stability AI, Midjourney, and DeviantArt

In January 2023, artists Sarah Andersen, Kelly McKernan, and Karla Ortiz, along with a proposed class of “at least thousands” of other artists, filed a class action complaint against Stability AI, Midjourney, and DeviantArt. The complaint alleges direct and vicarious copyright infringement, DMCA violations and right of publicity violations, and unfair competition based on the creation and functionality of the defendants’ generative AI products.[56] The named plaintiffs, all artists, allege the defendants allegedly used their art to train their artificial intelligence models. The complaint also seeks to certify a class of individuals whose work was used to train any of the defendants’ artificial intelligence products.[57] Plaintiffs’ copyright, DMCA, and state law claims assert that the defendants used plaintiffs’ art in their products for training and other commercial purposes without licensing or in violation of existing contracts.[58] The defendants have moved to dismiss under Rule 12(b)(6).

District of Columbia District Court Holds AI-Generated Art Is Not Copyrightable

On August 18, 2023, the D.C. District Court affirmed the Copyright Office’s denial of the plaintiff’s application to register visual artwork generated by the “Creativity Machine”—an artificial intelligence system owned by Stephen Thaler.[59] The court agreed with the Copyright Office’s determination that a work generated autonomously by a machine, without human input, is not copyrightable because it lacks the requisite “authorship” under the Copyright Act.[60]

In holding that the Register of Copyrights did not err in denying Thaler’s application, the court determined that the Copyright Act’s plain text—conferring protection to “original works of authorship”—requires protectable works to have an “author,” and that authorship is necessarily “human creation.”[61] Because the administrative record reflected Mr. Thaler’s admissions that the Creativity Machine “autonomously” created the work, the court rejected Mr. Thaler’s new arguments before the district court that he provided instructions to and directed the AI system to create such work.[62] The court acknowledged, however, that “[t]he increased attenuation of human creativity from the actual generation of the final work will prompt challenging questions regarding how much human input is necessary to qualify the user of an AI system as an ‘author.’”[63]

New York Times Files Lawsuit against AI Companies, Alleging Copyright Infringement

On December 27, 2023, the New York Times filed a lawsuit against Microsoft and its partner OpenAI, accusing the companies of copyright infringement and other related claims.[64] The Times alleges that Microsoft and OpenAI “directly infringed The Times’s exclusive rights in its copyrighted works” by using the newspaper’s registered, copyrighted works to train artificial intelligence models like ChatGPT.[65] According to the Complaint, Microsoft and OpenAI “seek to free-ride on The Times’s massive investment in its journalism by using it to build substitutive products without permission or payment” by essentially providing Times content directly to consumers.[66]

In response to the lawsuit, OpenAI published a statement on its website addressing the allegations, calling The Times’ claims “without merit.”[67] According to the OpenAI statement, “[t]raining AI models using publicly available internet materials is fair use,” but regardless, OpenAI still has “led the AI industry in providing a simple opt-out process for publishers,” including the New York Times.[68] According to OpenAI, the Times “intentionally manipulated prompts, often including lengthy excerpts of articles, in order to get [ChatGPT] to regurgitate” information, which forms the basis of the lawsuit.[69] OpenAI also highlighted its collaboration with various prominent news organizations, noting that one of the company’s goals is “to support a healthy news ecosystem.”[70]

The Times is seeking damages and injunctive relief.[71] Both OpenAI and Microsoft have filed motions to dismiss the lawsuit.[72] The Times reported that its lawsuit “could test the emerging legal contours of generative A.I. technologies . . . and could carry major implications for the news industry.”[73]

3. TRADEMARK

The Supreme Court Holds That Source-Identifying Uses of Trademarks Are Not Afforded First Amendment Protection against Infringement Claims

In June 2023, the Supreme Court unanimously held that VIP, a dog toy maker that made chewable dog toys designed to look like a bottle of Jack Daniel’s whiskey, could not rely on the First Amendment as a shield against Jack Daniel’s trademark claims.

VIP had originally sought a declaratory judgment that its toy neither infringed nor diluted Jack Daniel’s trademarks. Jack Daniel’s counterclaimed for infringement and dilution. VIP conceded that while its “Bad Spaniels” mark was meant to communicate a humorous message, it also used its “Bad Spaniels” trademark and trade dress as source identifiers.[74] The defendant sought to rely on the Second Circuit’s Rogers test, which affords limited First Amendment protections to the use of trademarks in “expressive works.”[75] The Court held the test does not apply when a trademark is used to indicate the source of a product, as it was here, and remanded the case to the district court to assess Jack Daniel’s claim on the merits. The Court also held that the Lanham Act’s exclusion from liability for dilution for “non-commercial” uses of a mark does not apply to parody, criticism, or commentary when the alleged infringer uses a mark to designate the source of its own goods.[76]

The Supreme Court Clarifies the Lanham Act’s Extraterritorial Reach

On June 29, 2023, the Supreme Court harmonized the extraterritoriality framework of trademark law with recent developments in the Court’s presumption against extraterritoriality jurisprudence. Hetronic International, a domestic manufacturer of radio remote controls for construction equipment, sued six foreign parties (collectively Abitron) for trademark infringement under the Lanham Act.[77] As one of Hetronic’s authorized distributors, Abitron claimed it held the rights to much of Hetronic’s intellectual property, including the marks at issue, in connection with selling its own Hetronic-branded products—mostly in Europe, but some in the United States.[78] Hetronic sought damages for Abitron’s alleged infringement worldwide, while Abitron countered that Hetronic’s claims required an impermissible extraterritorial application of the Lanham Act.[79]

In applying the presumption against extraterritoriality, the Court held that the two provisions of the Lanham Act that prohibit trademark infringement through the unauthorized use in commerce of a protected trademark that is likely to cause confusion (15 U.S.C. § 1114(1)(a) and § 1125(a)(1)) are not extraterritorial, and apply only to claims where the infringing “use in commerce” is domestic.[80] “Use in commerce” means the legitimate use of a mark in the ordinary course of trade where the mark has a source-identifying function, serving to identify and distinguish the goods.[81] The Court held that the location in which the infringing “use in commerce” of a trademark occurs dictates whether the Lanham Act provisions at issue may apply extraterritorially.[82] The Court remanded the case for fact-finding on that issue.[83]

4. MUSIC

Ed Sheeran Successfully Defends against Copyright Claim in New York

In May 2023, following a jury trial in the Southern District of New York, singer Ed Sheeran won a copyright lawsuit over the hit song “Thinking Out Loud,” which Plaintiff Ed Townsend alleged infringed on Marvin Gaye’s “Let’s Get It On.”[84] Subsequently, U.S. District Judge Louis Stanton dismissed Structured Asset Sales, LLC’s closely related complaint on a motion for reconsideration of a prior verdict, finding that the parts of “Let’s Get It On” that Sheeran was accused of infringing—namely, the chord progression and harmonic rhythm—were too common for copyright protection.[85] The court concluded that protecting the combination of these musical elements in “Let’s Get It On” would give the song an “impermissible monopoly over a basic musical building block.”[86] If such a “selection and arrangement” were “protected and not freely available to songwriters,” the court noted, “the goal of copyright law . . . would be thwarted.”[87]

Plaintiffs Claim That over 1,600 Songs by Reggaeton Artists, Like Bad Bunny and Pitbull, Infringe a 1989 Work

Popular artists Bad Bunny, Pitbull, and Daddy Yankee found themselves among hundreds of artists targeted in a lawsuit that threatens the entire genre of “Reggaeton” music—a blend of reggae music with Latin American dance hall music, with hip-hop influences.[88] This litigation, which began in 2021 in the Central District of California, will address the extent to which rhythm is deemed protectable under Copyright Law. Specifically, Plaintiffs Cleveland Browne and the estate of Wycliffe Johnson, who performed under the name Steely & Clevie, allege that the 100-plus artists named in the litigation infringed on the rhythm of the 1989 song “Fish Market.”[89] In June 2023, Bad Bunny moved to dismiss Plaintiffs’ Second Consolidated Amended Complaint. Bad Bunny argued Plaintiffs were seeking to protect the “basic building block(s)” of the genre, which belong in the public domain.[90] The parties are awaiting a decision.

5. FASHION & ENTERTAINMENT

Hermès Prevails in Request for Permanent Ban on US “MetaBirkin” NFT Sales

In June 2023, in Hermes International v. Rothschild, U.S. District Judge Jed Rakoff permanently blocked Mason Rothschild and his associates from selling or minting MetaBirkin non-fungible tokens (NFTs).[91] This ruling was made pursuant to Hermès’s request to block Rothschild’s sales of “MetaBirkin” NFTs following a jury verdict that the NFTs violated Hermès’s trademark rights in its popular Birkin bags.[92] That jury had found Rothschild liable on all three counts of trademark violations in February 2023, and awarded Hermès damages in the amount of $133,000 for Rothschild’s use of the Birkin mark in his “MetaBirkin” NFTs.[93]

The court found Hermès satisfied the four threshold requirements for a permanent injunction articulated by the Supreme Court in eBay Inc. v. MercExchange, L.L.C., specifically that (i) Hermès suffered an irreparable injury, (ii) the remedies available at law are inadequate, (iii) a remedy in equity is warranted due to the balance of hardships between Hermès and Rothschild, and (iv) the public interest would not be disrupted by a permanent injunction.[94] The court ordered Rothschild to transfer the metabirkins.com domain name and relevant materials to Hermès; however, the court refused to order the transfer of the NFTs and smart contracts out of an abundance of caution related to First Amendment concerns, as the court reasoned that “MetaBirkins NFTs are at least in some respects works of art.”[95]

Historic Strike Ends following SAG-AFTRA’s Approval of Agreement

In November 2023, SAG-AFTRA’s negotiating committee unanimously voted to approve a tentative three-year agreement that ended a 118-day strike—the longest actors’ strike against the television and film studios in Hollywood history. Union leadership voted to ratify the deal shortly thereafter.[96] The deal included historic protections for actors against artificial intelligence, increases in health and pension contributions, a “streaming participation bonus,” and an unprecedented pay increase.[97] The deal resulted in a 7% pay increase effective immediately after it was approved, another 4% increase in July 2023, and another 3.5% increase set to take effect in July 2024.[98]

Chanel Prevails in Trademark Dispute against Luxury Reseller

On February 6, 2024, a New York federal jury found luxury reseller What Goes Around Comes Around (“WGACA”) liable on all four of Chanel’s claims for trademark infringement, false advertising, unfair competition, and counterfeiting.[99] Chanel brought the action in 2018, accusing WGACA of, among other allegations, (1) selling counterfeit Chanel bags, including bags bearing serial numbers tied to stolen bags and bags made from materials not used by Chanel’s factories; and (2) creating consumer confusion by using Chanel’s marks in advertising and consumer communications in violation of the Lanham Act.[100] On July 26, 2021, both parties moved for summary judgment.[101] Chanel sought findings of liability for the trademark infringement and false association claims, and WGACA sought summary judgment in its favor with respect to all claims. The court granted Chanel’s motion in part, finding WGACA liable for trademark infringement for selling handbags loaned to retailers for display that were never authorized for sale, and several handbags bearing serial numbers associated with those reported as stolen or pirated. The court emphasized Chanel’s rights to control the quality of its marks.[102] By selling handbags that were never authorized for sale or whose serial numbers confirm they never went through Chanel’s quality control procedures, WGACA sold non-genuine products in violation of the Lanham Act.[103] The court also granted WGACA’s motion for summary judgment in part, but only with respect to Chanel’s New York state law claims because it determined issues of material fact existed as to the remaining federal claims.[104] The case proceeded to a jury trial, after which the jury returned a verdict in favor of Chanel for all surviving claims, awarding the company $4 million in statutory damages.[105]

6. SPORTS

N.Y. Knicks Say Former Employee Took Trade Secrets to the Toronto Raptors

In August 2023, the New York Knicks filed a lawsuit in federal district court against Maple Leaf Sports & Entertainment, the parent company of the Toronto Raptors, Darko Rajakovi, Noah Lewis, and Ikechukwu Azotam (together “Raptors”), over an alleged theft of the Knicks’ trade secrets, seeking damages over $10 million.[106] The Knicks claim that a former team employee, Ikechukwu Azotam, stole proprietary information from the Knicks franchise, and took the information with him to the Toronto Raptors, where he assumed the role of assistant coach.[107] The alleged stolen proprietary information includes scouting files, season preparation books, play reports, and other materials.[108] The Knicks further allege that Azotam stole this information under the instruction of the Toronto Raptors, including head coach Darko Rajakovic.[109]

On October 16, 2023, the Raptors filed a motion to dismiss, denying all allegations and arguing that the alleged stolen proprietary information is not a protected trade secret because the information was not unique to the Knicks and contained data on all NBA teams that could be gathered by watching televised games.[110] The motion further argued that federal court was the improper forum for commencing the action and that, per the NBA Constitution, the Knicks and Raptors were to arbitrate their dispute.[111]

On November 20, 2023, the Knicks filed their response to the Raptors’ motion to dismiss, arguing the dispute is not governed by the NBA Constitution because it is not a dispute about “basketball operations,” but rather a dispute over “the theft of trade secrets by a disloyal employee.”[112] The parties are awaiting a decision.[113]

7. TRANSACTIONS/DEALS

Lionsgate Acquires eOne

On December 27, 2023, Lionsgate announced its acquisition of studio Entertainment One (eOne) from toy company Hasbro for $375 million.[114] The acquisition added 6,500 film and television titles to Lionsgate’s library.

Artémis Acquires Majority Stake in CAA

On October 2, 2023, Artémis, an investment company run by French billionaire Francois-Henri Pinault, agreed to acquire a majority stake in Creative Artists Agency (CAA) that was previously held by global investment firm TPG.[115] Although an exact figure has not been disclosed, the sale has been reported to be for around $7 billion.

AMC Entertainment Executes Distribution Agreements with Beyoncé and Taylor Swift

In mid-2023, AMC Entertainment struck deals with Beyoncé and Taylor Swift to distribute the artists’ concert films: “Taylor Swift: The Eras Tour” and “Renaissance: A Film by Beyoncé.”[116] The films represented the first ever movies distributed by AMC, and bypassed the usual protocol where studios distribute the films to theaters.[117] The deals also included minimum ticket prices for both films: starting at $19.89 for Eras and $22 for Renaissance.[118] The deals boosted AMC’s earnings, with AMC’s CEO attributing AMC’s 2023 fourth quarter revenue and EBITDA increases entirely to the two films, which collectively earned more than $115 million at the domestic box office on their opening weekends.[119] According to reports, AMC shared in 43% of the profits from the Eras film with Taylor Swift taking home the remaining 57%, whereas Beyoncé split box office earnings from the Renaissance film roughly 50% with exhibitors while AMC accepted a small distribution fee.[120]

Music Catalog Acquisitions

The market for music catalog acquisitions—which includes master recordings, music publishing, and other trademark and IP—cooled in 2023 due to rising interest rates.[121] Catalog acquisitions had become extremely lucrative revenue streams for investors, who use the songs in licensing deals, film and television, and advertisements, but became less attractive in the past year given rising borrowing costs.[122] Nonetheless, the year still saw major acquisitions by companies like Sony Music Group, Universal Music Group, Litmus Music, and Hipgnosis. Some highlights from the past year include:

Universal Music Group and Shamrock Capital Acquire Dr. Dre’s Music Catalog

In January 2023, Universal Music Group and Shamrock Capital purchased various passive income streams from Dr. Dre’s catalog, including producer royalties, his share of N.W.A artist royalties, and the writer’s share of the song catalog where he does not own the publishing.[123] Reported to be at around $200 million, the deal was the largest-ever hip-hop catalog deal for a single artist.

Litmus Music Acquires Katy Perry’s Music Catalog

On September 18, 2023, Litmus Music announced its $225 million purchase of Katy Perry’s master rights royalties and publishing income from her five albums released between 2008 and 2020.[124] Litmus Music is a music rights company founded in 2022, backed by private equity company Carlyle Group LLC. The deal marked the year’s largest artist catalog transaction.

Hipgnosis Acquires Justin Bieber’s Music Catalog

On January 24, 2023, Hipgnosis Songs Capital announced that it had reached a deal to purchase all of Justin Bieber’s publishing royalties, artist royalties from his master recordings, and neighboring rights.[125] The catalog included 290 titles, covering songs released through the end of 2021. The deal was reported to be valued at around $200 million.

Sony Music Group Acquires Half of Michael Jackson’s Music Catalog

On February 9, 2024, Sony Music Group announced that it had reached a deal to acquire half of Michael Jackson’s publishing and recorded masters catalog in a transaction that reportedly valued the total catalog at over $1.2 billion, which could be the highest-ever valuation of a single artist’s work.[126] Sony reportedly paid at least $600 million for its stake. The deal also included assets from Jackson’s Mijac publishing catalog, including songs by Sly & the Family Stone and Ray Charles.

Vice Media Group Acquired by Consortium of Lenders

Gibson Dunn represented Fortress Investment Group and a consortium of lenders, including Soros Fund Management and Monroe Capital, in the debtor-in-possession financing and acquisition of Vice Media Group in its chapter 11 filing. With its secured lenders’ support, Vice Media filed for Chapter 11 on May 15, 2023.[127] On July 31, 2023, the lenders, represented by Gibson Dunn, closed on the sale of substantially all of Vice Media’s assets, including its international next-gen media and entertainment platform for a purchase price of $350 million, plus the assumption of certain liabilities.[128] In a joint statement, the lender group said, “We are very pleased to complete the acquisition of Vice and we are excited to build upon the achievements of one of the most iconic brands in news and entertainment. We look forward to growing a strong business that is committed to serving audiences, brands and partners with award-winning content.”[129]

RedBird IMI Takes Stake in Media Res

Gibson Dunn advised RedBird Capital Partners in RedBird IMI’s investment in Media Res, the production studio behind Apple TV+ shows The Morning Show and Pachinko.[130] The investment, announced in January 2024, is RedBird IMI’s first investment in scripted entertainment.[131] Jeff Zucker, CEO of RedBird IMI, said, “Media Res was a natural partnership for us as we continue to expand our presence across all forms of scripted, unscripted and children’s entertainment as well as news and information.”[132] The studio, founded by former HBO executive Michael Ellenberg, will use the investment to “strike new strategic partnerships” and continue “championing artists’ original ideas and sourcing projects from exceptional IP.”[133]

NFL and Skydance Media Partner to Form Skydance Sports

Gibson Dunn represented the NFL in its joint venture with Skydance Media to form Skydance Sports, a premier global multi-sports production studio.[134] NFL Films Senior Executive Ross Ketover said, “Through this new venture, we will be able to expand our storytelling acumen into different areas of content by tapping into the expertise and creativity of a highly accomplished media company in Skydance.”[135] Via the partnership, the studio will produce both scripted and unscripted sports media content.[136] In May 2023, the studio announced the first project to come from the joint venture, which is a docuseries chronicling Dallas Cowboys owner Jerry Jones and the Cowboys franchise.[137] The series is currently in development and will feature never-before-seen content from the NFL Films archive.[138]

Investment Partnership Led by Josh Harris Acquires the Washington Commanders

On July 21, 2023, a partnership led by Josh Harris, founder of Apollo Global Management, announced the closing of its acquisition of the Washington Commanders.[139] The Harris group includes 20 limited partners, including NBA legend Magic Johnson.[140] The acquisition closed for a North American sports franchise record $6.05 billion.[141] Dan Snyder, the former Commanders owner, bought the franchise in 1999 for $800 million.[142]

WWE and UFC Merge to Create TKO Group

On April 3, 2023, Endeavor Group Holdings, UFC’s parent company, announced the closing of its merger with WWE and the formation of the new publicly listed TKO Group.[143] The newly merged TKO Group has a valuation of $21.4 billion.[144] Former WWE majority shareholder and chairman Vince McMahon will serve as executive chairman of TKO, while Dana White, former UFC president, is named as UFC CEO.[145] Shares in TKO began trading on September 12, 2023, pegged to WWE’s stock price, which closed at $100.65/share on its final day of trading.[146]

Microsoft’s Acquisition of Activision Blizzard

In October 2023, Microsoft closed its $69 billion acquisition of the gaming firm Activision Blizzard, the largest deal in Microsoft’s 48-year history.[147] The deal, which was announced in January 2022, underwent a lengthy and robust review from regulators, including the U.K.’s Competition and Markets Authority, before finally being cleared nearly two years later.[148]

Disney’s Acquisition of Comcast’s Stake in Hulu

On November 1, 2023, the Walt Disney Company (“Disney”) announced its intention to acquire the 33% stake in Hulu, LLC held by Comcast Corp.’s NBCUniversal (“NBCU”) by December for an anticipated $8.6 billion.[149] The deal has a $27.5 billion guaranteed floor value but will be subject to an appraisal process by which Hulu’s equity fair value will be assessed as of September 30, 2023.[150] Under this process, “if the value is ultimately determined to be greater than the guaranteed floor value, Disney will pay NBCU its percentage of the difference between the equity fair value and the guaranteed floor value.”[151] According to a company press release, the acquisition is anticipated to “further Disney’s streaming objectives.”[152]

Production Company M&A

Blumhouse Productions and James Wan’s Atomic Monster Merge

On January 2, 2024, Jason Blum’s Blumhouse Productions and James Wan’s Atomic Monster, two of the world’s leading horror film production houses, merged in a deal that resulted in a three-way ownership structure split amongst Blum, Wan, and Universal Pictures.[153] Blumhouse and Atomic Monster will continue to operate as separate labels, but Blum and Wan look forward to increased content output as a result of their collaboration.[154] The merged company retains and expands Blumhouse’s long-standing first-look deal with Universal Pictures, which Gibson Dunn represented in connection with the merger.

The North Road Company Expands with Key Acquisitions

On November 7, 2023, Peter Chernin’s production studio, North Road, acquired an undisclosed stake in Questlove’s production house, Two One Five Entertainment.[155] The purchase is the latest in a series of acquisitions by North Road in 2023, including the Turkish film and television studio, Karga Seven Pictures on June 6, 2023.[156] North Road also received $150 million capital investment from the Qatar Government Investment Fund back in January, 2023, adding to the capital base of $300 million from Apollo and up to $500 million from Providence Equity Partners that North Road secured at its launch in July 2022.[157]

__________

[1] [ ] Sony Music Ent. v. Cox Commc’ns, Inc., 93 F.4th 222 (4th Cir. 2024).

[2] Id. at 229.

[3] Id. at 227-28.

[4] Id. at 229.

[5] Id. at 236.

[6] Id. at 232-33.

[7] Id. at 232.

[8] Id. at 237.

[9] Id. at 238.

[10] Id.

[11] Id. at 239-41.

[12] Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 598 U.S. 508, 508-09 (2023).

[13] Id. at 508.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[7] Id.

[18] Id.

[19] Id. at 508-09.

[20] Id. at 535-36.

[21] Id. at 541.

[22] Id. at 537.

[23] Id. at 551.

[24] Hanagami v. Epic Games, 85 F.4th 931, 935 (9th Cir. 2023).

[25] Id.

[26] Id.

[27] Id. at 938.

[28] Id.

[29] Id. at 943.

[30] Id.

[31] Id.

[32] Id. at 946.

[33] Id. at 947.

[34] Warner Chappell Music, Inc. v. Nealy, 216 L. Ed. 2d 1313 (Sept. 29, 2023).

[35] Nealy v. Warner Chappell Music, Inc., 60 F.4th 1325, 1334 (11th Cir. 2023).

[36] 17 U.S.C. § 507(b).

[37] Nealy, 60 F.4th at 1330.

[38] Id. at 1334.

[39] Id. at 1331.

[40] Hachette Book Grp., Inc. v. Internet Archive, 664 F. Supp. 3d 370, 374 (S.D.N.Y. 2023).

[41] Id. at 375-76.

[42] Id. at 377.

[43] Id. at 380.

[44] Id. at 382.

[45] Id. at 383.

[46] Id.

[47] Id. at 388 (quoting Fox News Network, LLC., v. Tveyes, Inc., 883 F.3d 169, 179 (2d Cir. 2018)).

[48] Consent J. and Permanent Inj., Hachette Book Grp. v. Internet Archive, 664 F. Supp. 3d 370 (S.D.N.Y. 2023) (No. 1:20-cv-04160), ECF No. 215.

[49] Docketing Notice, Hachette Book Grp. v. Internet Archive, No. 23-1260 (2d Cir. Sept. 15, 2023).

[50] Brief of Appellee, Hachette Book Grp. v. Internet Archive, No. 23-1260 (2d Cir. Mar. 15, 2023).

[51] Getty Images (US), Inc. v. Stability AI, Inc., et. al., No. 1:23-cv-00135-UNA (D. Del.).

[52] Getty Images (US), Inc. v. Stability AI, Inc., et. al., No. 1:23-cv-00135-UNA (D. Del.).

[53] Id.

[54] Id.

[55] Id.

[56] Andersen v. Stability AI, et al., No. 3:23-cv-00201 (N.D. Cal.).

[57] Id.

[58] Id.

[59] Thaler v. Pelmutter, No. CV 22-1564 (BAH) (D.D.C. Aug. 18, 2023).

[60] Id.

[61] Id. at 9-10.

[62] Id. at 14.

[63] Id. at 13.

[64] Complaint, New York Times Co. v. Microsoft Corp., No. 23-CV-11195 (S.D.N.Y. Dec. 27, 2023).

[65] Id.

[66] Id.

[67] OpenAI, OpenAI and Journalism (Jan. 8, 2024) https://openai.com/blog/openai-and-journalism.

[68] Id.

[69] Id.

[70] Id.

[71] Id.

[72] Motion to Dismiss, New York Times Co. v. Microsoft Corp., No. 23-CV-11195 (S.D.N.Y. Feb. 26, 2024); Motion to Dismiss, New York Times Co. v. Microsoft Corp., No. 23-CV-11195 (S.D.N.Y. Mar. 4, 2024).

[73] Michael M. Grynbaum and Ryan Mac, The Times Sues OpenAI and Microsoft Over A.I. Use of Copyrighted Work, N.Y. Times, Dec. 27, 2023.

[74] Jack Daniel’s Properties, Inc. v. VIP Prod. LLC, 599 U.S. 140, 159-60 (2023).

[75] Id. at 153.

[76] Id. at 161-63.

77] Abitron Austria GmbH v. Hetronic Int’l, Inc., 600 U.S. 412, 415-16 (2023).

[78] Id. at 416.

[79] Id.

[80] Id. at 419-20.

[81] Id. at 428.

[82] Id. at 422-24.

[83] Id. at 423.

[84] Ben Sisario, Ed Sheeran Wins Copyright Case Over Marvin Gaye’s ‘Let’s Get It On’, New York Times (May 4, 2023), https://www.nytimes.com/2023/05/04/arts/music/ed-sheeran-marvin-gaye-copyright-trial-verdict.html.

[85] Structured Asset Sales, LLC v. Sheeran et al, 1:18CV05839, Dkt. 217 at 13 (S.D.N.Y May 16, 2023); Bill Donahue, Ed Sheeran Wins Another Copyright Case Over ‘Let’s Get It On’, Billboard (May 16, 2023) https://www.billboard.com/pro/ed-sheeran-wins-second-lets-get-it-on-lawsuit/.

[86] Id.

[87] Id. at 15.

[88] Grace Flynn, Reggaeton: Origin and Evolution of a Genre, Marquette Wire (Nov. 28, 2011).

[89] Cleveland Constantine Browne et al v. Rodney Sebastian Clark Donalds et al, 2:21CV02840, Dkt. 305 (C.D.C.A) (April 21, 2023).

[80] Cleveland Constantine Browne et al v. Rodney Sebastian Clark Donalds et al, 2:21CV02840, Dkt. 330 (C.D.C.A) (June 30, 2023).

[91] Blake Brittain, Hermes wins permanent ban on ‘MetaBirkin’ NFT sales in US lawsuit, Reuters (2023), https://www.reuters.com/business/hermes-wins-permanent-ban-metabirkin-nft-sales-us-lawsuit-2023-06-23/ (last visited Feb 10, 2024).

[92] Id.

[93] Hermes Int’l v. Rothschild, No. 22-CV-384 (JSR), 2023 WL 4145518 (S.D.N.Y. June 23, 2023).

[94] Melanie J. Howard & Jennifer Kahn, Hermès International v. Rothschild, Loeb & Loeb LLP (2023), https://www.loeb.com/en/insights/publications/2023/06/hermes-international-v-rothschild (last visited Feb 10, 2024).

[95] Id.

[96] Gene Maddus, SAG-AFTRA Approves Deal to End Historic Strike, Variety (2023) https://variety.com/2023/biz/news/sag-aftra-tentative-deal-historic-strike-1235771894/ (last visited Feb 10, 2024).

[97] Id.

[98] Andrew Dalton, Hollywood Actors Union Board Approves Strike-Ending Deal as Leaders Tout Gains, TIME (2023) https://time.com/6334007/hollywood-actors-union-approves-deal-strike-ends (last visited Feb 10, 2024).

[99] Chanel, Inc. v. What Comes Around Goes Around LLC et al., No. No. 18-CV-2253 (LLS), Dkt. 407 (S.D.N.Y.).

[100] Chanel, Inc. v. What Comes Around Goes Around LLC et al., No. 18-CV-2253 (LLS), 2022 WL 902931, at *1 (S.D.N.Y. Mar. 28, 2022).

[101] Id.

[102] Id.

[103] Id.

[104] Id.

[105] Chanel, Inc. v. What Comes Around Goes Around LLC et al., No. No. 18-CV-2253 (LLS), Dkt. 407 (S.D.N.Y.).

[106] Compl., N.Y. Knicks vs. Maple Leaf Sports & Ent. Ltd., No. 1:2023cv07394 (Aug. 21, 2023).

[107] Id.

[108] Id.

[109] Id.

[110] Memorandum of Law in Support of Motion to Dismiss, N.Y. Knicks vs. Maple Leaf Sports & Ent. Ltd., No. 1:2023cv07394 (Oct. 16, 2023).

[111] Id.

[112] Mike Vorkunov & Eric Koreen, Knicks Argue Lawsuit Against Raptors Should Stay in Federal Court and Not Be Moved to NBA-Run Arbitration, Athletic (Nov. 20, 2023), https://theathletic.com/5078586/2023/11/20/knicks-raptors-lawsuit-nba.

[113] Alder Almo, Raptors Label Knicks Lawsuit a PR Stunt, Push for Dismissal, Heavy (Feb. 20, 2024), https://heavy.com/sports/new-york-knicks/raptors-slams-knicks-lawsuit/.

[114] Jennifer Maas, Lionsgate Closes eOne Acquisition for $375 Million, Variety (Dec. 27, 2023), https://variety.com/2023/tv/news/lionsgate-closes-eone-375-million-1235851625.

[115] Nellie Andreeva, Francois-Henri Pinault’s Artémis Closes Deal For Majority Stake In CAA – Update, Deadline (Oct. 2, 2023), https://deadline.com/2023/10/caa-tpg-majority-stake-iacquired-francois-henri-pinault-artemis-bryan-lourd-ceo-1235539266.

[116] Nardine Saad, No Surprise Here: Taylor Swift, Beyoncé Concern Films Boost AMC Quarterly Earnings, L.A. Times (Feb. 29, 2024, 2:03 PM), https://www.latimes.com/entertainment-arts/business/story/2024-02-29/taylor-swift-beyonce-concert-films-boost-amc-earnings.

[117] Id.

[118] Ephrat Livni & Michael J. de la Merced, How Beyoncé and Taylor Swift Struck a New Kind of Movie Deal, N.Y. Times (Oct. 7, 2023), https://www.nytimes.com/2023/10/07/business/dealbook/how-beyonce-and-taylor-swift-struck-a-new-kind-of-movie-deal.html.

[119] Nardine Saad, No Surprise Here: Taylor Swift, Beyoncé Concern Films Boost AMC Quarterly Earnings, L.A. Times (Feb. 29, 2024, 2:03 PM), https://www.latimes.com/entertainment-arts/business/story/2024-02-29/taylor-swift-beyonce-concert-films-boost-amc-earnings.

[120] Id.

[121] Glenn Peoples, The 10 Biggest Music Business Deals of 2023, Billboard (Dec. 29, 2023), https://www.billboard.com/lists/biggest-music-deals-2023-katy-perry-justin-bieber-hybe.

[122] Id.; Anna Nicolaou & Eric Platt, Rising Interest Rates Rock Private Equity’s Billion-Dollar Bets On Music, Fin. Times (Dec. 14, 2023), https://www.ft.com/content/86bb6d35-91f6-4002-9e9e-5412e609be52.

[123] Peoples, supra.

[124] Jem Aswad, Katy Perry Sells Catalog Rights to Litmus Music for $225 Million, Variety (2023), https://variety.com/2023/music/news/katy-perry-sells-catalog-rights-litmus-music-1235726293.

[125] Ethan Millman, Justin Bieber Sells Publishing and Recorded Catalog for Reported $200 Million, Rolling Stone (2023), https://www.rollingstone.com/music/music-news/justin-bieber-sells-catalog-hipgnosis-1234651518.

[126] Ed Christman, Sony Music Buys Stake in Michael Jackson Catalog, Valuing Rights at Over $1.2B, Billboard (Feb. 9, 2024), https://www.billboard.com/business/business-news/michael-jackson-estate-sells-music-rights-sony-valuation-1235604155.

[127] Jesse Whittock, Vice Media Files for Chapter 11 Bankruptcy, Deadline (May 15, 2023, 1:01 AM), https://deadline.com/2023/05/vice-media-chapter-11-bankruptcy-1235366640/.

[128] Todd Spangler, Vice Media Closes $350 Million Sale to Investors Fortress, Soros Fund Management and Monroe Capital, Variety (July 31, 2023, 6:58 AM), https://variety.com/2023/digital/news/vice-media-closes-sale-post-bankruptcy-investors-fortress-soros-monroe-1235683295.

[129] Id.

[130] Dade Hayes, Jeff Zucker-Led RedBird IMI Takes Stake In ‘The Morning Show’ Studio Media Res, Deadline (Jan. 4, 2024, 6:09 AM), https://deadline.com/2024/01/jeff-zucker-redbird-imi-invests-in-the-morning-show-pachinko-studio-media-res-1235695014.

[131] Todd Spangler, Jeff Zucker-Led RedBird IMI Takes Minority Stake in ‘Morning Show’ Producer Media Res, Variety (Jan. 4, 2024, 7:15 AM), https://variety.com/2024/tv/news/jeff-zucker-redbird-imi-media-res-investment-minority-stake-1235861452.

[132] Id.

[133] Id.

[134] Dade Hayes, NFL and Skydance Team To Create Multi-Sport Production Studio, Deadline (Nov. 15, 2022, 10:05 AM), https://deadline.com/2022/11/nfl-skydance-team-up-for-multi-sport-production-studio-1235172891/.

[135] Id.

[136] Press Release, The National Football League, NFL, Skydance Media partner to expand Skydance Sports into the preeminent global sports content studio (Nov. 15, 2022, 12:52 PM), https://www.nfl.com/news/nfl-skydance-media-partner-to-expand-skydance-sports-into-the-preeminent-global-.

[137] BreAnna Bell, Jerry Jones Docuseries in Development at Skydance Media, Variety (May 3, 2023, 12:00 PM), https://variety.com/2023/tv/news/jerry-jones-docuseries-skydance-media-1235602545/.

[138] Id.

[139] Josh Harris Announces Acquisition of Washington Commanders, Washington Commanders (July 21, 2023), https://www.commanders.com/news/josh-harris-announces-acquisition-of-washington-commanders.

[140] Bruce Haring, NFL’s Washington Commanders Sold For $6.05B, A North American Sports Franchise Record, Deadline (July 20, 2023), https://deadline.com/2023/07/nfl-washington-commanders-sold-for-6-05b-north-american-sports-franchise-record-1235443619/.

[141] Id.

[142] Id.

[143] Endeavor Announces UFC® and WWE® to Form a $21+ Billion Global Live Sports and Entertainment Company, WWE (April 3, 2023), https://corporate.wwe.com/investors/news/press-releases/2023/04-03-2023-115019034.

[144] Marc Raimondi, UFC, WWE officially combine under TKO umbrella, ESPN (September 12, 2023), https://www.espn.com/mma/story/_/id/38386430/ufc-wwe-officially-combine-tko-umbrella.

[145] Id.

[146] Todd Spangler, WWE, UFC Officially Merge to Form TKO Group, New Stock to Start Trading, Variety (September 12, 2023), https://variety.com/2023/tv/news/wwe-ufc-deal-closes-tko-group-1235719908/.

[147] Josh Novet, Microsoft closes $69 billion acquisition of Activision Blizzard after lengthy regulatory review, CNBC (October 13, 2023), https://www.cnbc.com/2023/10/13/microsoft-closes-activision-blizzard-deal-after-regulatory-review.html.

[148] Id.

[149] The Walt Disney Company, The Walt Disney Company to Purchase Remaining Stake in Hulu from Comcast, (November 1, 2023), https://thewaltdisneycompany.com/disney-hulu/.

[150] Id.

[151] Id.

[152] MoneyWatch, Disney reaches $8.6 billion deal with Comcast to fully acquire Hulu, (November 1, 2023), https://www.cbsnews.com/news/disney-8-6-billion-dollar-deal-fully-acquire-hulu-from-comcast/.

[153] Aaron Couch, Jason Blum’s Blumhouse and James Wan’s Atomic Monster Close Merger Deal, The Hollywood Reporter (Jan. 2, 2024).

[154] Id.

[155] Jennifer Maas, North Road Acquires Significant Stake in Questlove and Black Thought’s Two One Five Entertainment, Variety (November 7, 2023), https://variety.com/2023/tv/news/questlove-black-thought-production-company-two-one-five-north-road-1235782787/.

[156] Nick Vivarelli, Peter Chernin’s The North Road Company Buys Turkish Film and TV Powerhouse Karga Seven Pictures, Variety (June 6, 2023), https://variety.com/2023/film/global/peter-chernin-north-road-company-karga-seven-pictures-1235634663/.

[157] Todd Spangler, Peter Chernin’s North Road Receives $150 Million From Qatar Government Investment Fund, Variety (January 31, 2023), https://variety.com/2023/film/news/peter-chernin-north-road-qatar-investment-authority-1235507929/.

The following Gibson Dunn attorneys assisted in preparing this update: Scott Edelman, Ilissa Samplin, Brian Ascher, Jillian London, Marissa Mulligan, Shaun Mathur, Doran Satanove, Dillon Westfall, Cate Harding, Monica Woolley, Sasha Dudding, Zachary Montgomery, Elise Widerlite, Peter Jacobs, Amanda Bello, Maya Halthore, Ignacio Martinez Castellanos, Maryam Asenuga, Narayan Narasimhan, Zachary Goldstein, and Sophia Amir.

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

Scott A. Edelman – Co-Chair, Los Angeles (+1 310.557.8061, sedelman@gibsondunn.com)
Kevin Masuda – Co-Chair, Los Angeles (+1 213.229.7872, kmasuda@gibsondunn.com)
Benyamin S. Ross – Co-Chair, Los Angeles (+1 213.229.7048, bross@gibsondunn.com)
Theodore J. Boutrous, Jr. – Los Angeles (+1 213.229.7000, tboutrous@gibsondunn.com)
Orin Snyder – New York (+1 212.351.2400, osnyder@gibsondunn.com)
Brian C. Ascher – New York (+1 212.351.3989, bascher@gibsondunn.com)
Jillian N. London – Los Angeles (+1 213.229.7671, jlondon@gibsondunn.com)
Ilissa Samplin – Los Angeles (+1 213.229.7354, isamplin@gibsondunn.com)

From the Derivatives Practice Group: This issue addresses ESMA’s ongoing process to potentially shorten the settlement cycle in EU Markets, developments in Hong Kong and Australia, and a couple responses from ISDA to regulators.

New Developments

CFTC’s Global Markets Advisory Committee Advances Three Recommendations. On March 7, the CFTC’s Global Markets Advisory Committee (GMAC), sponsored by Commissioner Caroline D. Pham, advanced three new recommendations intended to (1) promote U.S. Treasury markets resiliency and efficiency, (2) provide resources on the upcoming transition to T+1 securities settlement, and (3) publish a first-ever digital asset taxonomy to support U.S. regulatory clarity and international alignment.
CFTC’s Market Risk Advisory Committee to Meet. The CFTC’s Market Risk Advisory Committee (MRAC) will meet on April 9 at 9:30 am ET. The MRAC will consider current topics and developments in the areas of central counterparty risk and governance, market structure, climate-related risk, and emerging technologies affecting derivatives and related financial markets.

New Developments Outside the U.S.

ESMA Publishes Feedback on Shortening Settlement Cycle. On March 21, the European Securities and Markets Authority (ESMA) published feedback received to its Call for Evidence on shortening the settlement cycle in the EU. According to ESMA’s report on the feedback, respondents focused on four areas: (1) many operational impacts, beyond adaptations of post-trade processes, were identified as the result of a reduction of the securities settlement cycle in the EU; (2) respondents identified a wide range of both potential costs and benefits of a shortened cycle, with some responses supporting a thorough impact assessment; (3) respondents provided suggestions around how and when a shorter settlement cycle could be achieved, with a strong demand for a clear signal from the regulatory front at the start of the work and clear coordination between regulators and the industry; and (4) stakeholders made clear the need for a proactive approach to adapt their own processes to the transition to T+1 in other jurisdictions. Additionally, according to ESMA, some responses warned about potential infringements due to the misalignment of the EU and North America settlement cycles. [NEW]
HKMA Issues New SPM Modules on Market Risk and CVA Risk Capital Charges. On March 15, the Hong Kong Monetary Authority (HKMA) released a circular informing the industry that it has issued new Supervisory Policy Manual (SPM) modules MR-1: Market Risk Capital Charge and MR-2: CVA Risk Capital Charge as statutory guidance, which will come into effect on a day to be appointed by the HKMA (intended to be January 1, 2025). The HKMA said that the revised market risk and credit valuation adjustment (CVA) risk capital frameworks will be set out in Part 8 and Part 8A of the Banking (Capital) Rules, respectively. The SPM MR-1: Market Risk Capital Charge covers the standardized approach for market risk, the internal models approach, the simplified standardized approach and requirements related to the boundary between the trading book and banking book, while the SPM MR-2: CVA Risk Capital Charge covers the reduced basic CVA approach, the full basic CVA approach and the standardized CVA approach. According to the HKMA, both new SPM modules are designed not just to provide additional technical details in addition to the rules but to integrally cover all of the related requirements. They set out the minimum standards that all locally incorporated authorized institutions are expected to adopt for the calculation of their market risk and CVA risk capital charges. [NEW]
ASIC Finalizes Minor and Technical Changes to OTC Derivatives Reporting Rules. On March 13, the Australian Securities and Investments Commission (ASIC) finalized the minor and technical changes to the ASIC Derivative Transaction Rules (Reporting) 2024 under ASIC Derivative Transaction Rules (Reporting) 2024 Amendment Instrument 2024/1 to implement the proposed changes to the 2024 rules set out in Consultation Paper 361a ASIC Derivative Transaction Rules (Reporting) 2024: Follow-on consultation on changes to data elements and other minor amendments (CP 361a). The changes include (1) seven additional data elements; (2) provide clarifications and administrative updates to the data elements; (3) make consequential changes to Chapter 2: Reporting Requirements; and (4) make other administrative updates including re-referencing the location of definitions in the Corporations Act 2001 that have been moved by the Treasury Laws Amendment (2023 Law Improvement Package No. 1) Act 2023. According to ISDA, feedback to CP 361a was broadly supportive. In response to industry requests, the final changes also (1) provide for an additional circumstance where the name of Counterparty 2 is not reported and (2) change how the amount of one kind of collateral is reported. [NEW]

New Industry-Led Developments

ISDA Responds to CFTC on Clearing Member Funds Protection. On March 18, ISDA responded to the CFTC’s consultation on proposed rules for the protection of clearing member funds held by derivatives clearing organizations (DCOs), including the assets of futures commission merchants (FCMs). According to ISDA, it proposed that the CFTC should finalize the enhanced protection for clearing member assets in connection with an intermediated DCO only, which includes multiple FCMs, unaffiliated with the DCO, as its members. Regarding a DCO providing direct clearing without multiple FCMs unaffiliated with the DCO, ISDA suggested the CFTC should wait to propose enhanced protection for clearing members’ assets, once a full assessment of the risks and complications associated with a DCO providing direct clearing has been completed. At which point, in ISDA’s opinion, it would be appropriate for the CFTC to propose a comprehensive framework to address these risks holistically. Otherwise, ISDA said, the current notice of proposed rulemaking would create a sense of safety for the disintermediated model, which is superficial due to the rule not creating a comprehensive safety regime for disintermediated central counterparties (CCPs), with many risks arising from such models being left unaddressed. [NEW]
ISDA Responds to FASB on Induced Conversion of Convertible Debt. On March 18, ISDA submitted a response to the Financial Accounting Standards Board’s (FASB) exposure draft on File Reference No. 2023-ED600, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. ISDA indicated that it supports FASB’s proposals in the exposure draft and believes it achieves the objective of improving the application and relevance of the induced conversion guidance to cash convertible debt instruments. [NEW]
ISDA Submits Response to IOSCO Voluntary Carbon Markets Consultation. On March 1, ISDA submitted a response to IOSCO’s Voluntary Carbon Markets Consultation Report. The response welcomes IOSCO’s work on developing good practices for regulation of voluntary carbon markets (VCMs), as well as its recognition of the critical role that financial market participants play in VCMs. ISDA explains that clear legal and regulatory categorization of voluntary carbon credits is key to building liquidity in order to support scaling VCMs and to develop safe, efficient markets in Voluntary Carbon Credit derivatives.
ISDA Submits Response to the UK Financial Conduct Authority’s Money Market Funds Consultation. On March 8, ISDA responded to the UK Financial Conduct Authority’s (FCA) consultation on updating the regime for money market funds (MMF). In the response, ISDA highlights its support for using MMFs as collateral for non-cleared derivatives margin requirements and the advancement of tokenized MMFs to be used as collateral to increase collateral mobility, reduce collateral-related transaction costs and related settlement risks.
ISDA Publishes Whitepaper Charting the Next Phase of India’s OTC Derivatives Market. On March 4, ISDA published a new whitepaper that explores the growth of India’s financial markets and makes a series of market and policy recommendations to encourage the further development of a safe and efficient over-the-counter (OTC) derivatives market. The whitepaper proposes several initiatives that industry participants and regulators could take that ISDA believes will create deeper and more liquid domestic derivatives markets and enhance risk management practices. The recommendations are centered on five key pillars: (1) Broaden product development, innovation and diversification; (2) Foster adoption of similar market and risk principles across regulatory regimes; (3) Enhance market access and diversification of participants in the OTC derivatives market; (4) Ensure growth in a safe and efficient manner; and (5) Encourage greater alignment with international principles and practices.

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

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 (+1 212.351.3869, alapidus@gibsondunn.com)

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

Roscoe Jones Jr., Washington, D.C. (202.887.3530, rjones@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)

Misc. Docket Nos. 24-9004 & 24-9005 – Issued February 6, 2024

The Texas Supreme Court preliminarily approved proposed rules of procedure for Texas’s new business court and 15th Court of Appeals. The public is invited to comment on the new rules and amendments by May 1, 2024.

Background:

Seeking to provide a faster, more efficient dispute resolution mechanism for businesses in Texas’s growing economy, the Texas Legislature enacted House Bill 19—creating a specialized business court designed to handle complex commercial disputes. That law, now codified at Texas Government Code 25A, also provides for a new 15th Court of Appeals to hear appeals from the business court. Both courts will begin hearing cases on September 1, 2024.

With that date approaching, the Texas Supreme Court has preliminarily approved a proposed set of rules and amendments governing the procedures for the business court and 15th Court of Appeals. The public is invited to submit comments on the proposed rules to rulescomments@txcourts.gov by May 1, 2024. Otherwise, the proposed rules and amendments are set to take effect on September 1, 2024.

Key Proposed Texas Rules of Civil Procedure for the Business Court:

Rule 352 states that, to the extent consistent with the new rules of practice in the business court, the general rules of civil procedure, the rules of practice in district and county courts, and the rules relating to ancillary proceedings apply in the business court, too.

Rule 354 prescribes the requirements for pleading, challenging venue or authority, and requesting transfer or dismissal in the business court. Notably, Rule 354 imposes an additional pleading requirement for plaintiffs filing suit in the business court—requiring plaintiffs provide facts establishing the business court’s authority to hear the case and establishing venue in a county in one of the business court’s operating divisions. The proposed rule also affords parties the right to challenge the business court’s authority to hear the case as well as the venue. And the proposed rule provides that the business court can determine on its own that it doesn’t have authority to hear the case, in which case the court must transfer the action to a district or county court or dismiss the case without prejudice.

Rule 355 implements the procedure for removal of a case from a district or county court to the business court. Under the proposed rule, litigants must notify the court where the case was originally filed, identify the business court that they are removing the case to, plead facts establishing that court’s authority and venue, and state whether all parties agree to removal. When removal is contested, litigants have only 30 days to seek removal from the time that they discovered or reasonably should have discovered that the business court had the authority to hear the case. Similarly, litigants contesting removal must move to remand within 30 days either after the notice of removal is filed or, if the notice is filed before a party is served, within 30 days after that party enters an appearance. The business court may also determine on its own that removal is improper.

Rule 356 creates a mechanism for original courts to request that their cases be transferred to the business court. Under this proposed rule, the court in which an action is originally filed may request the presiding judge for its administrative judicial region to transfer a case to the business court if it believes the business court has authority to hear the case. A court requesting a transfer must notify the parties, and the regional presiding judge may transfer the case if doing so will “facilitate the fair and efficient administration of justice.” A party may petition for mandamus relief to challenge a denial of a judge’s motion to transfer.

Rule 357 provides that if the business court dismisses an action or claim, and a litigant files that same action or claim in a different court within 60 days, the applicable statute of limitations is suspended for the period between the filings.

Rule 358 prohibits the business court from requiring parties or lawyers to appear electronically in proceedings in which oral testimony will be heard without the consent of the parties. And it is prohibited from allowing a participant to appear electronically for jury trials altogether. The proposed rule specifies that aside from those prohibitions, Rule 21d governs remote proceedings.

Rule 359 requires the business court to issue a written opinion for a dispositive ruling if requested by a party and for a decision on an important state issue. Otherwise, whether to issue a written opinion is a matter of discretion.

Proposed Texas Rules of Appellate Procedure for the 15th Court of Appeals:

Rule 25.1, which provides the procedure for perfecting appeals, will be amended to require litigants to provide additional information in their notices of appeal. An appealing party must include in its notice whether the appeal concerns a matter: (1) brought by or against a state entity; (2) brought by or against a state officer or employee and arising out of that person’s official conduct; or (3) in which a party is challenging the constitutionality or validity of a state statute or rule and the attorney general is a party to the case.

Rule 27a prescribes the procedure for transferring appeals between the courts of appeals for cases that either have been improperly taken to the 15th Court of Appeals or over which the 15th Court of Appeals has exclusive intermediate appellate jurisdiction. Parties seeking to transfer an appeal must move to transfer within 30 days after the appeal is perfected but before the appellee files its brief. The moving party must file in the court in which the appeal is pending (the transferor court) and also immediately notify the court to which the party wishes to transfer the appeal (the transferee court). The transferor court can transfer the appeal (1) if no party objects to the transfer within 10 days of the motion’s filing and (2) the transferee court agrees to the transfer. Once the transferee court receives a decision from the transferor court, it has 20 days to file a letter in the transferor court explaining whether it agrees with the transferor court’s decision. The transferor court can also start this process on its own initiative. The Supreme Court must receive notice of all transfers. If there is a dispute between courts over whether to transfer the appeal, the transferor court must forward to the Texas Supreme Court specific materials relating to the transfer dispute within 20 days after receiving the transferee court’s letter explaining its disagreement, absent special circumstances. The Texas Supreme Court will then decide whether transfer is appropriate.

What the Proposed Rules and Amendments Mean:

Starting in September 2024, parties will be able to take their cases to the new business court and 15th Court of Appeals. But with those new avenues of relief come several procedural requirements of which to be aware. Close familiarity with those new procedural mechanisms will offer an edge to litigants in both courts.
In particular, litigants should be aware of the various removal and transfer mechanisms provided under the proposed rules. Those mechanisms would allow parties to move cases either to or from the business court and 15th Court of Appeals, regardless of where the case was originally filed.
Anyone wishing to comment on the newly proposed rules must do so by May 1, 2024. Comments on the proposed new and amended rules should be submitted in writing to rulescomments@txcourts.gov.

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 Texas Supreme Court. Please feel free to contact the following practice 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
Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com

Related Practice: Texas Litigation

Trey Cox
+1 214.698.3256
tcox@gibsondunn.com

Collin Cox
+1 346.718.6604
ccox@gibsondunn.com

This alert was prepared by Texas associates Elizabeth Kiernan, Stephen Hammer, John Adams, and Jaime Barrios.

The Final Rule sets new emissions standards for light- and medium-duty vehicles, including greenhouse gas emissions standards, and imposes new warranty, durability, and certification requirements, including for electric vehicles.

On March 20, 2024, the U.S. Environmental Protection Agency (“EPA”) finalized its Multi-Pollutant Emissions Standards for model year (“MY”) 2027 and later light- and medium-duty vehicles (“Final Rule”),[1] following promulgation of a proposed rule on May 5, 2023 (“Proposed Rule”).[2] This Final Rule sets new, strict U.S. emissions standards for light- and medium-duty vehicles, including greenhouse gas (“GHG”) emissions standards. It also confirms a number of changes to vehicle certification, testing, durability, warranty provisions, and credit provisions, including new in-use requirements for electric vehicles (“EVs”) and updates regarding emission-related parts and auxiliary emission control device (“AECD”) disclosures.

Emission Standards. Like the Proposed Rule, the Final Rule covers MY 2027 and later light- and medium-duty vehicles, and sets new standards for both GHGs and criteria pollutants that will phase-in over MYs 2027 and 2032.

GHGs. The Final Rule utilizes technology-neutral performance standards and as such, in contrast to the approach taken by the California Air Resources Board (“CARB”) in its Advanced Clean Cars II rule (“ACC II”),[3] continues to avoid an explicit EV mandate. Structurally, EPA’s approach employs the same framework currently used for U.S. GHG standards (i.e., a fleet average with “footprints” assigned to specific vehicle models).In the Proposed Rule, EPA set forth a preferred approach under which the industry-wide average GHG emissions target for the light-duty fleet would be 82 g/mi in MY 2032, representing a 56 percent reduction in average emission target levels from the existing MY 2026 standards. Citing comments from the automotive industry, EPA enacted via the Final Rule standards that ramp up more slowly in earlier model years and result in an industry-wide average GHG emissions target for the light-duty fleet of 85 g/mi in MY 2032. This represents a 49-percent reduction compared to MY 2026.EPA also eased the medium-duty fleet standards, particularly for earlier model years. In the Proposed Rule, industry-wide average GHG emissions targets for the medium-duty fleet were 438 g/mi in MY 2027 and 275 g/mi in MY 2032. As enacted in the Final Rule, they are 461 g/mi in MY 2027 and 274 g/mi in MY 2032.

Non-Methane Organic Gases Plus Nitrogen Oxides (“NMOG+NOx”). EPA has similarly tightened NMOG+NOx emissions standards, but again, the standards in the Final Rule are slightly more relaxed than those in the Proposed Rule. For light-duty vehicles, EPA proposed NMOG+NOx standards that would phase-down to a fleet average level of 12 mg/mi by MY 2032; it has enacted via the Final Rule a standard of 15 mg/mi by MY 2032, representing a 50 percent reduction from the existing standards for MY 2025. For medium-duty vehicles, EPA proposed NMOG+NOX standards that would require a fleet average level of 60 mg/mi by MY 2032; it has enacted via the Final Rule a standard of 75 mg/mi, representing a 58-70 percent reduction from current Tier 3 standards. EPA also finalized cold temperature (-7°C) NMOG+NOX standards for light- and medium-duty vehicles to ensure robust emissions control over a broad range of operating conditions.
Particulate Matter (“PM”). EPA enacted its proposed PM standard of 0.5 mg/mi for light- and medium-duty vehicles and a requirement that the standard be met across three test cycles, including a cold temperature (-7°C) test. However, it has given manufacturers more time to meet these standards as compared to the Proposed Rule, generally providing an additional year to comply (until 2030 or 2031, depending on vehicle class). Notably, EPA’s technical analysis on the proposed stringency of the PM standard contemplated the use of gasoline particulate filters (“GPFs”), similar to ACC II. EPA explained that its decision to allow additional time to achieve compliance was in part in recognition of the fact that GPFs are not “drop-in” technology and manufacturers will need lead time to adopt the technology for U.S. applications.

EV Durability and Warranty Requirements. Similar to ACC II, EPA is adding a new battery durability requirement for light- and medium-duty battery-electric vehicles (“BEVs”) and plug-in hybrid electric vehicles (“PHEVs”). In addition, the Agency has revised regulations to include BEV and PHEV batteries and associated electric powertrain components under existing emission-related warranty provisions.

Durability. EPA has finalized a new battery durability program, the requirements and framework of which are largely identical to those outlined in the United Nations Economic Commission for Europe’s Global Technical Regulation No. 22 (“GTR No. 22”), which is incorporated by reference in the Final Rule. GTR No. 22 includes three components—battery state-of-health monitoring, monitoring accuracy requirements, and minimum performance requirements. Thus, the Final Rule requires manufacturers to develop and implement an on-board battery state-of-health monitor and demonstrate its accuracy through in-use vehicle testing. The Final Rule also requires minimum performance requirements for the battery throughout the vehicle’s useful life. EPA has created additional testing requirements for BEVs and PHEVs by manufacturers (to be performed several times during their useful life), and reporting requirements to demonstrate that the vehicles are meeting the proposed durability requirements.
Warranty. For both light- and medium-duty BEVs and PHEVs, EPA has also finalized its designation of the high-voltage battery and associated electric powertrain components as “specified major emission control components” under Clean Air Act Section 207(i)(2), subjecting these parts to a warranty period of 8 years or 80,000 miles.

Legal Authority. In the Final Rule, EPA addressed comments—particularly from the Alliance for Automotive Innovation—that it does not have authority to adopt durability and warranty requirements for batteries in BEVs. EPA has taken the position that batteries are emission-related by nature because battery integrity is vital to the vehicle’s emission performance, e., the battery is the component that allows a BEV to operate without emissions and is thus emission-related.

Other Certification Changes. The Final Rule contains a number of changes to the requirements applicable to the certification and testing of vehicles.

Changes to the Part 2 Application – GHG Emission-Related Parts and AECDs. Consistent with the Proposed Rule, EPA has in the Final Rule revised the regulatory text regarding certification applications to make clear that manufacturers must include part numbers and descriptions of GHG emission-related parts, components, systems, software or elements of design, and AECDs. The new language for 40 C.F.R. § 86.1844-0.1(e) requires manufacturers to “Identify all emission-related components, including those that can affect GHG emissions. Also identify software, AECDs, and other elements of design that are used to control criteria, GHG, or evaporative/refueling emissions.”

Changes to AECD Determinations. The Final Rule includes certain changes relating to the use and disclosure of AECDs. First, it prohibits the use of commanded enrichment as an AECD for either power or component protection during normal operation and use. Second, as it relates to manufacturers’ consideration of allowable AECDs, the rule points to the regulatory definition of “normal operation and use,” which is “vehicle speeds and grades of public roads, and vehicle loading and towing within manufacturer recommendations, even if the operation occurs infrequently.” In particular, the inclusion of towing as “normal operation and use” mirrors CARB’s move to strengthen medium-duty standards under ACC II, citing the need to ensure that vehicles used for towing have sufficient emission controls during the higher-load operations associated with towing.

Non-EV Warranties. EPA has also revised the emission-related warranty provisions for non-electric vehicles by designating additional components as “specified major emission control components” subject to the 8 year/80,000 mile warranty period—specifically selective catalytic reduction (“SCR”) catalysts, exhaust gas recirculation components, and diesel and gasoline particulate filters. EPA has also confirmed that it considers pumps, injectors, sensors, tanks, heaters, and other components related to these systems to be within the definition of “specified major emission control components” and thus subject to this longer warranty period. The amended regulatory text of 40 C.F.R. § 85.2103(d)(1) lists the following components subject to these warranty terms: “(i) Catalytic converters and SCR catalysts, and related components[;] (ii) [p]articulate filters and particulate traps, used with both spark-ignition and compression-ignition engines[;] (iii) [c]omponents related to exhaust gas recirculation with compression-ignition engines[;] (iv) [e]mission control module; and (v) [b]atteries serving as a Renewable Energy Storage System for electric vehicles and plug-in hybrid electric vehicles, along with all components needed to charge the system, store energy, and transmit power to move the vehicle.”

Credits. Beyond emission standards, the Final Rule includes a number of important changes to certain optional credit programs, although it offers greater flexibility than the Proposed Rule.

Air Conditioning (“AC”) Credits. In the Proposed Rule, EPA proposed limiting eligibility for AC system efficiency credits to only vehicles with internal combustion engines starting in MY 2027. It has finalized this proposal. In addition, EPA proposed eliminating credits for the use of low refrigerant leakage systems and for the use of alternative low global warming potential refrigerants. However, the Final Rule takes a different approach—EPA is instead phasing down available credits for MYs 2027–2030 and will retain a small permanent leakage credit for MY 2031 and later.
Off-Cycle Credits. EPA had also proposed to sunset the off-cycle credits program for both light- and medium-duty vehicles, phasing down credit availability starting in MY 2028 and eliminating credits altogether in MY 2031. Finding that the off-cycle program achieved its goal of incentivizing the adoption of innovative technologies to reduce emissions, while stating that some vehicles would still benefit from these off-cycle technologies and that manufacturers may have already made use of off-cycle credits in planned compliance strategies, the Final Rule instead begins to limit off-cycle credits in MY 2031. Credits will no longer be available starting in MY 2033.

Comparison to ACC II and Key Takeaways.

The emissions standards in the Final Rule and in ACC II diverge in several meaningful respects. Most significantly, the agencies have articulated fundamentally different approaches to try to reduce the prevalence of internal combustion engine vehicles: EPA has presented its rule as continuing with the traditional footprint-based approach, ostensibly allowing a wide variety of technologies to be combined in a manufacturer’s compliance plan, whereas CARB is using a fleet composition mandate focused on EVs.
From a practical implementation perspective, the divergences between the rules with respect to warranty and durability are significant because manufacturers will have to ensure (and track) compliance with distinct EPA and CARB regulations—not only for emissions standards, but also for the novel regulatory provisions attached to EVs. For example, CARB’s new “propulsion-related parts” warranty in ACC II is different than the EPA-mandated warranty coverage of the high-voltage battery and associated electric powertrain components. The federal and state rules also vary significantly on their approach to battery durability. And while EPA will accept compliance with the entirety of ACC II in lieu of the EPA durability program, manufacturers must declare their intention to use this pathway if this is how they intend to comply.
Like the new concept of propulsion-related parts in ACC II, under the EPA Final Rule, manufacturers may need to set up new processes and guidelines to identify all components that “can affect GHG emissions” for their AECD disclosures by MY 2027.
Although EPA did not update the definition of “defeat device” in this rulemaking, prior EPA guidance has indicated the Agency considers the Clean Air Act’s defeat device prohibition applicable to EVs. Manufacturers should ensure that certification range testing procedures consider EPA guidance on the use of drive modes and adaptive features.

__________

[1] Multi-Pollutant Emissions Standards for Model Years 2027 and Later Light-Duty and Medium-Duty Vehicles (Mar. 20, 2024), available at https://www.epa.gov/system/files/documents/2024-03/lmdv-veh-standrds-ghg-emission-frm-2024-03.pdf.

[2] Proposed Rule, Multi-Pollutant Emissions Standards for Model Years 2027 and Later Light-Duty and Medium-Duty Vehicles, 88 Fed. Reg. 29184 (May 5, 2023).

[3] See Advanced Clean Cars II (ACC II) Regulations, CA.Gov, https://ww2.arb.ca.gov/rulemaking/2022/advanced-clean-cars-ii (last updated Aug. 22, 2022).

The following Gibson Dunn attorneys assisted in preparing this update: Stacie Fletcher, Rachel Levick, Mia Donnelly, and Veronica J.T. Goodson.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Environmental Litigation and Mass Tort practice group:

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)
Mia Donnelly – Washington, D.C. (+1 202.887.3617, mdonnelly@gibsondunn.com)
Veronica J.T. Goodson – Washington, D.C. (+1 202.887.3719, vgoodson@gibsondunn.com)

This update provides an overview of China’s major antitrust developments during 2023.

In 2023, China introduced a flurry of new regulations to help implement and clarify the amended Anti-Monopoly Law (“AML”), which came into effect in 2022 (see our 2022 Review). These refreshed rules provide valuable insights and guidance on the interpretation and application of the amended AML. On the merger control side, we have seen lengthy reviews involving semiconductors and other sensitive technologies where geopolitical factors might come into play. Meanwhile, authorities are continuing their enforcement efforts in industries that are close to people’s livelihood, with a focus on pharmaceuticals and cartels organized by trade associations. Lastly, there have been a number of high-profile litigation cases, including the largest damage award ever issued in the history of private antitrust litigation in China.

I. Legislative and Regulatory Developments

Amendments to the implementing rules of the AML. Following the amended AML, the State Administration for Market Regulation (“SAMR”) finalized a series of implementing rules and guidelines in 2023 to better facilitate the interpretation and enforcement of the amended AML. SAMR also revised or introduced some regulations to further develop China’s antitrust framework. These include:

Provisions on Review of Concentration of Undertakings (the “Merger Provisions”)
Regulations on Filing Thresholds for Concentration of Undertakings (the “Merger Notification Thresholds Regulations”)
Guidelines for Anti-Monopoly Compliance for Concentration of Undertakings (the “Merger Control Compliance Guidelines”)
Provisions on Prohibition of Monopoly Agreements (the “Monopoly Agreements Provisions”)
Provisions on Prohibition of Abuse of Dominance (the “Abuse of Dominance Provisions”)
Provisions on Prohibition of Elimination and Restriction of Competition Through Abuse of Administrative Powers
Provisions on Prohibition of Elimination and Restriction of Competition Through Intellectual Property Rights (the “IP Provisions”)

Key regulatory highlights include the following.

The Merger Provisions. These provisions importantly provide more clarity on what constitutes “control” for the purposes of merger control, including factors such as historical shareholder or board meeting attendance and voting patterns. In addition, the provisions provide further guidance on turnover calculations, as well as the procedures for “stopping the clock” and reviewing below-threshold transactions, which are both issues that arose prominently in two conditional merger clearance cases in 2023 (discussed further below).

Revised merger notification thresholds. In addition, SAMR also issued the revised Regulations on Filing Thresholds for Concentrations of Undertakings, which came into effect on 26 January 2024. This is the first amendment to the turnover thresholds since the introduction of the AML in 2008. Specifically, the filing thresholds are increased to reflect economic growth, such that undertakings must obtain merger clearance from SAMR if:

The undertakings’ combined worldwide turnover is more than RMB 12 billion (~USD 1.7 billion) (an increase from RMB 10 billion (~USD 1.4 billion)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (~USD 113.5 million) (an increase from RMB 400 million (~USD 57 million)); or
The undertakings’ combined Chinese turnover is more than RMB 4 billion (~USD 568 million) (an increase from RMB 2 billion (~USD 284 million)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (an increase from RMB 400 million).

Note that the alternative threshold (aimed at capturing “killer acquisitions”) as suggested in the draft amendments in 2022 is not included in the final version of the revised thresholds.

The Merger Control Compliance Guidelines. SAMR introduced these guidelines predominantly to encourage undertakings to implement antitrust compliance systems, in particular, systems to prevent gun-jumping and other violations of China’s merger control regime. The guidelines clarify the sanctions for gun-jumping, which can be up to 10% of the undertaking’s revenue in the prior year for cases that have the effect of restricting competition (that can be multiplied by two to five times for particularly serious cases) or up to RMB 5 million (~ USD 700,000) for cases that do not restrict competition. The guidelines further provide detailed guidance on SAMR’s expectations in relation to antitrust compliance systems, and “strongly encourage” undertakings with more than RMB 400 million revenue in China (~ USD 66 million) to implement such systems. Most notably, the guidelines indicate that an anti-gun-jumping compliance system may be considered a mitigating factor for gun-jumping enforcement actions.

The Monopoly Agreements Provisions. In the draft version published in 2022, SAMR clarified that vertical agreements would come within the “safe harbour” in the amended AML if the parties could show, among other things, that they did not exceed a 15% market share threshold. Unfortunately, the welcome clarification was dropped in the final version. Nevertheless, SAMR introduced greater clarity in other areas by explaining that an undertaking may be in breach of the AML for coordinating/facilitating others to enter into monopoly agreements if it: (i) has “decisive influence” over the content of the agreement (even if it is not a party to the agreement); or (ii) acts as the conduit for others to communicate and reach a horizontal agreement (i.e., a hub-and-spoke arrangement). SAMR also clearly signaled its continued focus on the platform economy by adding a specific provision banning undertakings from using data, algorithms and technology to effectively exchange information or coordinate conduct in order to conclude a monopoly agreement. The provisions also provide for an ostensibly broad leniency regime that appears to apply to any undertaking that voluntarily reports the conclusion of a monopoly agreement to the authorities.

The Abuse of Dominance Provisions. In addition to providing general guidance on how to determine market dominance, SAMR added guidance indicating that a refusal to trade can be indirectly inferred from a dominant entity imposing unreasonable prices against trading counterparties, and included a new provision stipulating that a refusal to trade may be justified in the platform economy context if a dominant undertaking has refused to trade on the grounds that the counterparty has failed to comply with rules on fairness, reasonableness and non-discrimination in the platform economy (which appears to be a reference to SAMR’s 2021 platform economy regulations). Further, the final Abuse of Dominance Provisions (unlike the draft) expressly designate national security, cybersecurity and data security as factors to be considered when determining whether there are justifications for certain forms of abusive conduct (e.g. restrictions of trade), which aligns with the growing importance of those issues in China in general.

The IP Provisions. SAMR’s 2023 revisions to the IP Provisions confirmed that there will be a safe harbour for IP-related vertical agreements (e.g. an exclusive IP licensing agreement) where the parties have less than 30% share in any relevant markets and there are at least four substitutes to the relevant intellectual property. In addition, the revised provisions specifically prohibit “excessive pricing” in IP licensing transactions, and introduce a new rule that prohibits an IP licensor from unreasonably requiring an IP licensee to cross-license its own IP rights to the licensor without the licensor providing “reasonable consideration”.

Further Legislative Efforts. In addition to the various finalized regulations discussed above, SAMR introduced several draft regulations in 2023, including the Draft Anti-Monopoly Guidelines for Industry Associations and Draft Anti-Monopoly Guidelines for Standard Essential Patents. Indeed, it appears that sustained legislative efforts can be expected in 2024, given indications from the Ministry of Justice that it would accelerate efforts to revise the Anti-Unfair Competition Law, and announcements by SAMR that it would begin formulating antitrust guidelines for the pharmaceutical sector, as well as horizontal merger guidelines.

II. Merger Control

In 2023, SAMR closed 797 merger review cases in total. Of these, 782 (~98%) received unconditional approval, four received conditional clearance, and eleven were withdrawn by the filing parties after SAMR’s acceptance of their case.

Overall, SAMR took an average of just over 3 weeks to close a case, which is likely because around 90% of cases were reviewed under the simplified procedure, and the fact that SAMR is increasingly delegating simplified cases to its provincial branches for more efficient reviews. In the context of conditional clearances, SAMR took an average of 309 days to complete its review, which is a decrease from the average of over 450 days in 2022. Notably, in the latter three conditional clearances of the year, SAMR consistently exercised its new power to extend the review period by “stopping the clock”—which it did for an average of 131 days. Stop-the-clock is considered SAMR’s new tool to extend its review period, and is likely to gradually phase out the previous practice of “pull and refile”.

As noted, SAMR issued four conditional clearances in 2023, which are summarized below. Three decisions are worth highlighting: the Broadcom/VMware megamerger (where Gibson Dunn represented VMware as global counsel), MaxLinear/Silicon Motion and Simcere/Tobishi (SAMR’s first-ever “below threshold” conditional approval).

(1) Broadcom/VMware. On 6 September 2022, Broadcom and VMware submitted their notification to SAMR, but SAMR did not formally accept the case until 25 April 2023. On 25 September 2023, SAMR decided to stop the clock, and resumed the clock on 17 November 2023.

SAMR finally issued a conditional approval on 21 November 2023. As part of the conditional clearance, SAMR imposed a set of behavioural remedies on a 10-year basis to address its antitrust concerns. These include:

No tying or bundling of the merged entity’s relevant products, or any restriction or discrimination against customers that purchase those products separately;
Requirements to maintain interoperability between VMware’s virtualization software and third-party hardware products sold in China;
Requirements for Broadcom to maintain its certification practice to ensure interoperability with third-party virtualization software; and
Measures to protect confidential information of third-party hardware manufacturers.

(2) MaxLinear/Silicon Motion. The MaxLinear/Silicon Motion case was conditionally cleared by SAMR in July 2023. The case was officially accepted for review on 28 October 2022. SAMR then decided to stop the clock on 6 January 2023, and only restarted the clock on 14 July 2023, marking an approximately 6-month suspension.

Substantively, SAMR raised several concerns regarding the market for NAND flash controllers. Despite effectively finding that the parties had no horizontal or vertical overlaps, SAMR imposed (among others) the following commitments:

Continue supplying Chinese customers on FRAND terms;
Maintain existing business contracts and relationships with Chinese customers;
Keep Silicon Motion’s existing China field engineers as part of the merged entity’s R&D function, such that Chinese customers of Silicon Motion’s NAND flash controllers can continue to receive technical support; and
Keep Silicon Motion’s NAND flash controller R&D functions in Taiwan.

(3) Simcere/Tobishi. This case marked the first time that SAMR has imposed remedies on a deal that fell below the merger notification thresholds. By way of context, Simcere had a monopoly over Batroxobin, an active pharmaceutical ingredient (“API”), in China. Post-transaction, the merged entity will have 100% market share in the relevant upstream and downstream markets. In addition, SAMR has previously fined Simcere for abuse of dominance back in January 2021. These were suspected to be the reasons why Simcere voluntarily notified SAMR of its acquisition of Tobishi, despite the deal falling below the filing thresholds.

As part of the conditional clearance, SAMR imposed a series of behavioural remedies on Simcere, for a period of 6 years:

Terminate its exclusivity agreement with DSM, which is the only global manufacturer of Batroxobin;
Divest all its assets for developing its Batroxobin injection, and supply the divestiture buyer with the API and necessary assistance to establish a direct supply relationship with DSM;
Reduce the price of Batroxobin injections by at least 20% post-transaction (or 50% if the divestiture is not completed), and guarantee supply to meet domestic demand in China;

(4) Wanhua/Juli. This concerned the acquisition of Yantai Juli Fine Chemical by Wanhua Chemical Group. This was one of the first conditional clearances that SAMR issued on a domestic acquisition. The behavioural remedies include SAMR’s typical measures, such as, requiring the parties to: (i) sell to customers on fair, reasonable and non-discriminatory terms; (ii) maintain or increase their production volumes; (iii) continue their research and development efforts; and (iv) stay away from coercive exclusive dealing.

III. Non-Merger Enforcement

Like previous years, the enforcement decisions published by SAMR indicate that enforcement efforts in 2023 continued to focus on the usual suspects, including public utilities, pharmaceutical corporations, energy suppliers, construction material manufacturers, and industry associations.

The number of major actions and the size of the fines brought against pharmaceutical companies stood out (although these remain very modest compared to fines in other jurisdictions). In total, SAMR and local AMRs brought enforcement actions against over ten companies in six cases of anticompetitive conduct, and imposed an average fine of ~RMB 196 million (~USD 27 million). Half of the published pharmaceutical enforcement actions were focused on abusive price gouging, and the remaining cases were primarily focused on anticompetitive agreements related to cartel behavior or resale price maintenance.

The largest single fine against a pharmaceutical company, which also appears to have been the largest single fine among the published decisions of 2023, was ~RMB 689 million (~USD 97 million). The fine was imposed on one of the entities involved in the Sph No. 1 Biochemical & Pharmaceutical case, where four pharmaceutical companies were penalized for having abused their collective total dominance of the Chinese market for polymyxin B sulfate injections.

IV. Antitrust Litigation

In September 2023, the Supreme People’s Court (“SPC”) published ten representative cases concerning monopoly and unfair competition issues. There are two cases worth highlighting:

The General Motors case[1], in which the SPC held that, where a regulator / authority has issued an administrative decision against an undertaking for monopolistic or anti-competitive conduct, the claimant in the follow-on actions for civil damages will have a lower burden of proof. Specifically, the claimant will not need to prove that the defendant engaged in monopolistic conduct (as that had already been established in the administrative decision), and will only need to prove that: (i) the defendant is indeed the undertaking referred to in the administrative decision; and (ii) the claimant suffered loss because of the defendant’s monopolistic conduct.
The Tobishi/Simcere case[2], in which the SPC held that, the jurisdiction of a refusal to deal case should be where the effect of the conduct took place. For example, in this case, Simcere refused to supply APIs to Tobishi , which prevented Tobishi from producing the relevant downstream product. The SPC found that the effects of Simcere’s refusal to deal took place where Tobishi’s factory was (i.e. in Beijing). Therefore, the Beijing Intellectual Property Court should have jurisdiction over the case.

There are also a number of interesting cases which offer valuable insights into the legal issues and possible interpretations of the AML from an antitrust litigation perspective:

JD.com v. Alibaba – In December 2023, the High People’s Court of Beijing ruled that Alibaba had engaged in coercive exclusivity conduct (known as “choose one out of two) and was in breach of the AML. The lawsuit first started in 2018, when JD.com filed a complaint against Alibaba for abusing its dominance of its online marketplace and mandating online merchants to choose between Alibaba and JD.com, thereby forcing merchants into exclusivity agreements. In the decision, the Court ordered Alibaba to pay JD.com RMB 1 billion, which is the largest damage award in the history of private antitrust litigation in China.
Li Zhen v. Alibaba – This concerned a claim filed by an individual consumer against Alibaba for abuse of dominance. Specifically, the plaintiff alleged that Alibaba and its affiliates forced consumers to only use Alipay’s payment services on Taobao and Tmall. In October 2023, the Shanghai Intellectual Property Court ruled in favour of Alibaba, noting that:
1. Payment service is not a standalone service but an integral part of the overall online-retail platform service. There is no independent transactional relationship between consumers or merchants on one hand, and payment service providers on the other hand. Therefore, no exclusivity or restrictions on the transaction can be imposed by Alibaba in this respect;
2. Since Alipay’s payment service is part of the wider online retail platform service, there is no payment or non-payment service separately sold to consumers and merchants on Taobao and Tmall. As a result, there is no basis to claim that Taobao and Tmall tied payment and non-payment services together; and
3. There was no evidence that Taobao and Tmall refused the access of third-party payment services to their platforms.

The plaintiff is now appealing the case to the SPC.

Hitachi Metals – In December 2023, the SPC overruled the finding that Hitachi Metals’ refusal to license a non-standard essential patent to four Chinese manufacturers amounted to an abuse of dominance. This marked the end of a 9-year lawsuit, and was also the first decision in China touching on refusal to license non-standard essential patent. In particular, the SPC rejected the lower court’s analysis and determined that Hitachi Metals did not possess the alleged level of market dominance, and hence the SPC did not proceed to examine the alleged abusive practices. The SPC also took the view that the patents in dispute were neither essential nor critical, and there were many alternative options available in the market.

V. Conclusion

Since the amendment of the AML, we have seen continued efforts by SAMR to establish a more defined and comprehensive antitrust framework. Going forward, we expect to see further guidelines and directions from SAMR to refine the applications of the amended AML. Indeed, as noted above, both the Ministry of Justice and SAMR have announced that efforts to further develop and sophisticate China’s antitrust regulatory framework are continuing in earnest. Businesses are encouraged to self-assess regularly and introduce internal antitrust compliance protocols to minimize any risk of infringement. In addition, reviews of concentrations in sensitive sectors (e.g. semiconductors) will continue to be challenging in view of the geopolitical climate.

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[1] Supreme People’s Court (2020) Supreme Law of the People’s Republic of China No. 1137

[2] Beijing Intellectual Property Court (2022) No. 1136 of Beijing 73 Minchu

The following Gibson Dunn attorneys prepared this update: Sébastien Evrard, Katie Cheung, and Peter Chau*.

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

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Katie Cheung (+852 2214 3793, kcheung@gibsondunn.com)

*Peter Chau, a trainee solicitor in the Hong Kong office, is not admitted to practice law.

The case illustrates the Hong Kong Court’s commitment to upholding party autonomy in arbitration and its longstanding policy of minimal curial intervention.

On 27 February 2024, the Honourable Madam Justice Mimmie Chan delivered her reasons for dismissing an application to set aside an arbitral award in CNG v G & G [2024] HKCFI 575.[1] Mimmie Chan J reiterated that such applications under section 81 of the Arbitration Ordinance (“Ordinance”) are of an “exceptional nature” and should not be lightly made. Her Ladyship urged legal professionals to play a more vigilant role in upholding Hong Kong’s policy of being supportive of arbitration agreements and awards, and to refrain from facilitating issuance of unmeritorious setting aside applications by “massaging” a case to fall within s 81 of the Ordinance.

Gibson Dunn represented the “G Parties”.

Background

This case involved a dispute between shareholders of a company (“SIL”) which owned and operated a mining project. The arbitration claimants (“G Parties”) claimed that the arbitration respondents (“CNG”) were in breach of the shareholders’ agreement by (i) failing to honour a right of first refusal to purchase CNG’s shareholding in SIL (“Share Transfer Claim”) and (ii) failing to honour a contractual Notice of Default with respect to an unauthorised shutdown of operations at the mining project (“Defaulting Shareholder Claim”).

By a First Partial Award issued on 8 February 2023 (“Award”), the Tribunal found in favour of the G Parties on the Share Transfer Claim and held that CNG was bound to sell its SIL shares to the G Parties in accordance with the shareholders’ agreement. The Tribunal further stated that, as the Defaulting Shareholder Claim was an alternative to the Share Transfer Claim, it was not necessary to make operative orders on the Defaulting Shareholder Claim.

CNG applied to the Hong Kong Court to set aside the Award on numerous grounds, including that the Tribunal allegedly failed to deal with issues and give reasons in the Award and that there was procedural unfairness resulting in CNG’s inability to present its case in the arbitration.

Mimmie Chan J’s Decision

2.1 Failure to deal with issues or give reasons

Mimmie Chan J rejected CNG’s argument that the Tribunal had failed to deal with key issues arising in the arbitration or to give reasons for its decision. Her Ladyship emphasised the relevant principles:

The approach of the Court is to read an award generously, remedying only meaningful and readily apparent breaches of natural justice. The Court will only draw an inference that a tribunal had missed a pleaded issue if such inference is “clear and virtually inescapable”.
A tribunal is not required to answer every question that qualified as an issue, nor is the tribunal obliged to structure its award in accordance with parties’ submissions. It is sufficient for the tribunal to deal with the essential issues for it to come fairly to its decision on the dispute.
A list of issues submitted by the parties does not dictate how the Tribunal deals with issues raised in the award – it is not an exam paper with compulsory questions for the Tribunal to answer.
To argue (as CNG did) that the tribunal had placed undue reliance on any aspect of the evidence is impermissible, as it is not the function of the Court to review the evidence again to make its own findings.

2.2 Procedural unfairness

Mimmie Chan J also rejected CNG’s complaints regarding alleged procedural unfairness in the arbitration. Such complaints were directed against, inter alia, the tight procedural timetable in the arbitration, late applications by the G Parties to admit secret recordings and the attitude of the President of the tribunal when CNG’s witnesses were examined, all of which (CNG argued) deprived it of its ability to present its case. Her Ladyship explained that:

The tribunal is the master of its procedures, and is in the best position to decide on the most appropriate manner in which the arbitration should be conducted. The Court will not interfere with the tribunal’s case management decisions unless there was a serious denial of justice.
Section 46 of the Ordinance only requires the tribunal to give the parties “a reasonable opportunity” (as opposed to a “full opportunity”) to present their case. No party can claim to be entitled to all the time it requires to prepare for a hearing.
Despite CNG’s present complaints, it was able to comply with all procedural deadlines in the arbitration and never sought an adjournment. The case took 1.5 years to come to the evidential hearing with both sides supported by large and sophisticated legal teams. Her Ladyship found that there were no unusual features for an international arbitration of this scale, and there was nothing referred to by CNG which can constitute serious and egregious errors on the part of the tribunal.

Comments

CNG v G & G is a prime illustration of the Hong Kong Court’s commitment to upholding party autonomy in arbitration and its longstanding policy of minimal curial intervention. As Mimmie Chan J noted, arbitration is a consensual process of final dispute resolution with only limited avenues of appeal and challenge to the award. It is not for the Court to sit on appeal against the tribunal’s findings of fact or law, and it is impermissible for aggrieved parties to “ask the Court after the event to go through the award with a fine-tooth comb, to look for defects and imperfections” or to “rehearse once again before the Court arguments already made before the Tribunal, or to have different counsel reargue its case with a different focus”. The Hong Kong Court routinely grants costs on an indemnity basis for unsuccessful challenges to arbitral awards.

Parties should bear in mind the above when considering whether to agree to submit their contractual disputes to arbitration.

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[1] Available here.

The following Gibson Dunn lawyers assisted in preparing this alert: Penny Madden KC, Brian Gilchrist, Elaine Chen, Alex Wong, and Andrew Cheng.

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, or the following authors in the firm’s Litigation and International Arbitration practice groups:

Penny Madden KC – London (+44 20 7071 4226, pmadden@gibsondunn.com)
Brian W. Gilchrist OBE – Hong Kong (+852 2214 3820, bgilchrist@gibsondunn.com)
Elaine Chen – Hong Kong (+852 2214 3821, echen@gibsondunn.com)
Alex Wong – Hong Kong (+852 2214 3822, awong@gibsondunn.com)
Andrew Cheng – Hong Kong (+852 2214 3826, aocheng@gibsondunn.com)