On June 21, 2023, the IRS and Treasury published proposed Treasury regulations (the “Proposed Regulations”) that provide eagerly awaited guidance on rules for receiving refund payments in respect of certain credits (more commonly referred to as “direct pay”) under the Inflation Reduction Act of 2022 (the “IRA”).[1] Taxpayers are permitted to rely on the Proposed Regulations until final regulations are published. The IRS and Treasury also released a temporary regulation (the “Temporary Regulation”) that implements a registration system that taxpayers will need to satisfy before any valid direct pay election can be made. (This system is substantially similar to the system that facilitates cash sales of certain credits. We discussed that system in our previous alert, which can be found here.)
This alert begins with some background regarding section 6417 (the statutory provision permitting direct pay) and provides a short summary of some of the most important aspects of the Proposed Regulations and Temporary Regulation,[2] including some observations regarding key implications of the guidance for market participants.
Background
Historically, federal income tax credits associated with the investment in and production of clean energy and carbon capture technologies have been non-refundable,[3] and using non-refundable tax credits has required current tax liability against which the credits could be applied. In our recent client alert on the rules facilitating cash sales of certain credits, we provided background regarding the complicated tax equity arrangements that have been utilized by developers to monetize credits and explained how new rules authorizing the sale of credits could simplify monetization. The “direct pay” rules are expected to serve a similar, albeit more limited, role in reducing the need for complicated tax equity arrangements.
Direct Payment of Credits
The Proposed Regulations and Temporary Regulation provide substantial practical guidance on direct payment of credits, clarifying who may receive direct payments, what a direct payment election covers, how to compute the amount of the direct payment, how (administratively) to elect to receive such payments, how to avoid new excessive payment penalties, and how the rules apply to passthrough entities.[4] The subsections below describe some of the most significant aspects of the guidance on these topics.
Who May Receive Direct Payments
In general, any taxpayer can receive refund payments for the following three credits for five years of the applicable credit period:
- the carbon capture and sequestration credit (section 45Q);
- the clean hydrogen production credit (section 45V); and
- the advanced manufacturing production credit (section 45X).
For the section 45Q and section 45V credits, the election is available for the first five years of the applicable credit period and, for section 45X the election, is available for any consecutive five-year period for which the credit is available, in each case, only for taxable periods that end before January 1, 2033. The Proposed Regulations clarify that, for these three credits, taxpayers are allowed refund payments for only a single five-year period and cannot re-elect to receive refund payments again once the five-year period has expired or the election has been revoked.
Notably, several types of tax-exempt entities are entitled to direct payments for the three credits above for the entire applicable credit period, as well as for eight other energy-related credits (including the production tax credit under section 45 and the investment tax credit under section 48).[5] In response to significant comments from taxpayers, the Proposed Regulations clarify that applicable tax-exempt entities that can receive direct payments include the District of Columbia and agencies and instrumentalities of states, Indian tribal governments, and Alaska Native Corporations.
The Proposed Regulations also clarify that direct payments cannot be received for purchased credits.
Like the rules for cash sales of credits, the Proposed Regulations confirm that, where a disregarded entity owns the property that generates the tax credit, the relevant taxpayer entitled to pursue a refund under the “direct pay” rules is the regarded owner of the disregarded entity. The Proposed Regulations also impose the same ownership requirement as the credit sale rules, denying direct payment to, for example, contractual counterparties that otherwise are allowed the credits under special rules such as section 45Q(f)(3)(B) (election to allow the section 45Q credit to the party that disposes, utilizes, or uses the qualified carbon oxide) or section 50(d)(5) (election to allow lessees to claim the investment tax credit, i.e., inverted leases).
What is Covered by a Direct Pay Election
Similar to the rules for cash sales of credits, the Proposed Regulations provide that an election to benefit from direct payments generally must be made on a property-by-property basis, with an exception for the investment tax credit, which can be elected on a project-wide basis.
Unlike the credit transfer rules, taxpayers cannot elect direct payment for only a portion of a credit. Moreover, unlike a transfer election, which must be made yearly, a direct pay election would apply for entire applicable five-year window (or, for tax-exempt entities, the entire credit period).
How to Compute Direct Payment Amounts
The amounts otherwise determined as eligible for direct payment are subject to several special computation rules.
- Reduction for Tax-Exempt Financing. First, all production tax credits (sections 45 and 45Y) and investment tax credits (sections 48 and 48E) are subject to as much as a 15% reduction if the construction of the facility is financed with certain tax-exempt debt, regardless of whether direct payments are sought.
- Reduction for Restricted Tax-Exempt Funding. Second, in response to taxpayer concerns, the Proposed Regulations helpfully clarify that, for purposes of receiving direct payments for investment-related credits (i.e., credits that are computed by reference to the entity’s cost basis), exempt income used to fund investments (e.g., certain grants and forgivable loans) in property eligible for credits is generally included in that property’s basis for purposes of computing direct payments, regardless of whether those amounts would have been included in basis under general tax principles. However, this taxpayer-favorable rule comes with a significant exception where the grant, forgivable loan, or other exempt funding was made “for the specific purpose” of purchasing, constructing, reconstructing, erecting, or otherwise acquiring an investment-related credit property. In such a case, if the sum of that restricted exempt funding plus the credit exceeds the cost to acquire or construct the property, then the amount of the credit is reduced so the sum of the credit plus the restricted exempt funding equals the cost of the property.[7]
- Reduction for Failing to Satisfy Domestic Content Requirements. Finally, for projects beginning construction in 2024 and after, direct payments for the investment tax credit (sections 48 and 48E) and the production tax credit (sections 45 and 45Y) will be subject to reduction (and will be unavailable entirely beginning in 2026) unless the project also incorporates specified percentages of U.S.-source steel, iron and manufactured components (discussed in our previous client alert, available here).[8]
How (Administratively) to Elect Direct Payments
A direct payment election is made on a taxpayer’s “annual tax return.”[9] For taxpayers that are already required to file an annual tax return, the due date for making a direct pay election is the due date (including extensions) of the taxpayer’s original tax return.[10] For entities that are not otherwise required to file tax returns, the due date is generally the fifteenth day of the fifth month after the end of the entity’s taxable year (or, until further guidance is issued, six months following that date pursuant to an automatic paperless extension).[11] Certain tax-exempt entities that do not otherwise file tax returns (e.g., governmental entities) will need to file IRS Form 990-T to receive direct payments.
The process and rules for making a direct pay election are substantially similar to those applicable to credit transfers. Those requirements include completing a pre-filing registration process and obtaining a registration number for each eligible credit property with respect to which a direct payment election is made and including the relevant registration numbers on the taxpayers tax return for the year of the election. See a summary of those rules here. Like credit transfers, no direct payment election may be made or revised on an amended return or via a partnership administrative adjustment request, and no late filing relief would be available.
When Direct Payments Are Made
When a direct pay election is made, the credit is treated as a payment made against tax, and therefore the cash payment is not made until after the “annual tax return” is filed and processed.
Taxpayers that are required to file a tax return (such as a partnership that is claiming a direct payment of a section 45Q credit or certain section 501(c)(3) organizations) would become eligible for direct payments on the later of their tax return due date (without extensions) and the date on which the return is filed. Entities that are not required to file a tax return would become eligible for a direct payment on the later of the fifteenth day of the fifth month after the end of the taxable year and the date on which that entity submits a claim for refund.
How to Avoid Excessive Payment Penalties
Rules similar to those under the transferability rules (discussed here) apply for purposes of avoiding excessive payment penalties.
Additionally, some of the credits that are eligible for direct pay (e.g., the investment tax credit) are subject to recapture upon the occurrence of certain events. Recapture will operate the same way as with taxpayers that claim credits on their tax returns, i.e., if the credit property ceases to be eligible credit property within the recapture period, the taxpayer’s tax liability for such taxable year will be increased by the recapture amount. Thus, if an applicable entity received a $100,000 direct pay refund in respect of investment tax credit property, and that property is sold 1.5 years after the property was placed in service, the applicable entity’s tax liability will be increased by $80,000 for the year in which the property is sold.
How the Rules Apply to Passthrough Entities
The Proposed Regulations provide additional rules with respect to passthrough entities electing to treat a credit as a payment against tax. The preamble clarifies that passthrough entities can only receive direct payments in respect of credits under sections 45Q, 45V, or 45X. This holds true regardless of how many “applicable entities” are partners in a partnership and even if, for example, all of a partnership’s partners are tax-exempt entities that would be entitled to direct payments if they owned their interests in the project directly. As a result, tax-exempt entities that hold projects through partnerships will be required to sell credits in many instances.[12]
Consistent with the proposed rules for credit transfers, only a passthrough entity – not the owners of the entity – are permitted to make the direct payment election. Also, the passive activity credit rules do not limit direct payments available to a passthrough entity, even if all of the passthrough entity’s owners otherwise would be subject to the passive activity credit rules in their separate capacity. Direct payments made to a passthrough entity are treated as tax-exempt income and each passthrough entity owner’s share of the tax exempt income is equal to its distributive share of the otherwise applicable credit for each taxable year.[13]
Observations
The refund timeline may result in a significant lag (up almost two years) between outlays and receipt of direct payments, which may require sponsors to obtain bridge financing.
The rules for passthrough entities are particularly counter-intuitive because they introduce enormous pitfalls (and sanction planning) in a manner that would otherwise be anathema to the U.S. system of partnership taxation – namely, under these rules, simply interposing a partnership for tax purposes, where there are otherwise no changes to the parties’ economic arrangement, can dramatically alter consequences for direct payments. While these rules will facilitate investments by individuals otherwise subject to the passive activity credit rules, the rules may well discourage investment by tax-exempt entities, which will need to be especially careful to avoid creating unintended tax partnerships with their financial counterparties. In the case of certain credits (e.g., the investment tax credit under sections 48 and 48E), the stakes will be even higher because the IRS has left in place rules that can render partnership projects funded by tax-exempt partners wholly ineligible for such credits, notwithstanding that such tax-exempt partners are effectively treated as taxpayers for all other purposes relevant to such credits.
Effective Date
Taxpayers may rely on these Proposed Regulations for taxable years beginning after December 31, 2022 and before the date the final regulations are published. The Temporary Regulation (i.e., the pre-filing registration regime) is effective for any taxable year ending on or after June 21, 2023.
_______________________
[1] As was the case with the so-called Tax Cuts and Jobs Act, the Senate’s reconciliation rules prevented Senators from changing the Act’s name, and the formal name of the IRA is actually “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.”
[2] Unless indicated otherwise, all section references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §” or “Prop. Treas. Reg. §” references are to the Treasury regulations or proposed Treasury regulations, respectively, published under the Code.
[3] The investment tax credit for energy property was briefly refundable at its inception (1978-1980) and was effectively payable as a cash grant for projects that began construction in 2009-2011.
[4] For the purposes of this client alert, the term “passthrough” or “passthrough entity” means a partnership or an S corporation, unless otherwise noted.
[5] These entities are (i) any tax-exempt organization exempt from the tax imposed by subtitle A (a) by reason of section 501(a) or (b) because such organization is the government of any U.S. territory or a political subdivision thereof, (ii) any State, the District of Columbia, or political subdivision thereof, (iii) the Tennessee Valley Authority, (iv) an Indian tribal government or subdivision thereof (as defined in section 30D(g)(9)), (v) any Alaska Native Corporation (as defined in section 3 of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(m)), (vi) any corporation operating on a cooperative basis which is engaged in furnishing electric energy to persons in rural areas, or (vii) any agency or instrumentality of any applicable entity described in (i)(b), (ii), or (iv).
[6] These credits include the alternative fuel vehicle refueling property credit (section 30C), the qualified commercial clean vehicle credit (section 45W), the qualifying advanced energy project credit (section 48C), and the investment tax credit (section 48 and 48E).
[7] For example, if a public charity uses $20,000 of its own funds plus a $60,000 tax-exempt grant that it received “for the specific purpose” of building solar energy property, and the energy property would otherwise be entitled to a 50% investment tax credit ($40,000) under the general direct payment rules, the investment tax credit is reduced to $20,000 under this special rule for restricted exempt funding.
[8] Under these rules, a 10-percent haircut applies to projects beginning construction in 2024, a 15-percent haircut applies to projects beginning construction in 2025, and projects beginning construction in 2026 and after are wholly ineligible for refunds, in each case, unless the IRS makes an exception to the applicable domestic content requirements. The IRA authorizes the IRS to provide exceptions to the phaseout if (i) the inclusion of steel, iron, or manufactured products that are produced in the United States either increases the overall costs of construction of projects by more than 25 percent or (ii) there are either insufficient materials of these types produced in the United States or the materials produced in the United States are not of satisfactory quality.
[9] “Annual tax return” is defined in the Proposed Regulations to mean (i) for any taxpayer normally required to file an annual tax return with the IRS, such annual tax return (e.g., IRS Form 1065 for partnerships or IRS Form 990-T for organizations with unrelated business income tax), (ii) for any taxpayer not normally required to file an annual tax return with the IRS (such as taxpayers located in U.S. territories), the return such taxpayer would be required to file if they were located in the U.S., or, if no such return is required (such as for governmental entities), IRS Form 990-T, and (iii) for short tax year filers, the short year tax return.
[10] This date cannot be earlier than February 13, 2023.
[11] For entities located outside the United States, the due date generally is the due date (including extensions) that would apply if the entity were located in the United States.
[12] As noted, passthrough entities can still receive direct payments for credits under sections 45Q, 45V, or 45X.
[13] The Proposed Regulations would also modify the partnership audit rules to specify that direct payments for credits are subject to the partnership audit regime.
This alert was prepared by Mike Cannon, Matt Donnelly, Josiah Bethards, Duncan Hamilton, and Simon Moskovitz.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Tax or Power and Renewables practice groups, or the following authors:
Tax Group:
Michael Q. Cannon – Dallas (+1 214-698-3232, mcannon@gibsondunn.com)
Matt Donnelly – Washington, D.C. (+1 202-887-3567, mjdonnelly@gibsondunn.com)
Josiah Bethards – Dallas (+1 214-698-3354, jbethards@gibsondunn.com)
Duncan Hamilton– Dallas (+1 214-698-3135, dhamilton@gibsondunn.com)
Simon Moskovitz – Washington, D.C. (+1 202-777-9532 , smoskovitz@gibsondunn.com)
Power and Renewables Group:
Gerald P. Farano – Denver (+1 303-298-5732, jfarano@gibsondunn.com)
Peter J. Hanlon – New York (+1 212-351-2425, phanlon@gibsondunn.com)
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, npolitan@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
On June 27, 2023, the Federal Trade Commission, with the concurrence of the Antitrust Division of the Department of Justice, announced proposed changes to the Premerger Notification and Report Form (the “HSR Form”) and associated instructions, as well as to the premerger notification rules implementing the Hart-Scott Rodino (“HSR”) Act. The 133-page Notice of Proposed Rulemaking (NPRM) represents the first major overhaul of the HSR premerger notification requirements since the HSR program was established 45 years ago.
The FTC’s sweeping proposal, which we expect to be adopted and become effective within four to six months, would dramatically change the current merger filing process in the United States for HSR-reportable deals. Companies seeking U.S. merger clearance would need to expend considerably more effort preparing their HSR filings, including by collecting a broader set of business documents and financial data. Merging parties would also be required to prepare written responses to questions related to the transaction, bringing the U.S. more into line with filing requirements in certain foreign merger control regimes like the EU. The additional volume and scope of information contained in merging parties’ HSR filings would also allow the antitrust agencies to potentially apply more rigorous scrutiny of proposed transactions at an earlier stage because the information provided likely will take considerable time for the agency to review. As a result, the proposed rules raise the possibility of enhanced, or at least delayed, scrutiny of transactions that may previously have not triggered additional questions given their benign nature, including increases in the number of occasions when parties need to pull-and-refile their HSR forms to provide the agency additional time to review the contents of the HSR forms.
Key changes under the proposal include:
- Transaction Details and Draft Item 4(c) Documents. Under the proposed rules, filing companies would be required to make a comprehensive disclosure of the details of their transaction, including submission of a transaction diagram, a projected closing timeline, and a detailed description of the strategic rationale for the transaction. Most significantly, the proposed rules would require the submission of drafts of so-called “Item 4” documents (i.e., documents analyzing the deal as it relates to competition-related issues) where such drafts are provided to an officer, director, or deal team lead or supervisor. The FTC noted that this new requirement is designed to prevent filing companies from submitting only the final, “sanitized” versions of Item 4 documents.
- Competition Narratives. The proposed rules would require filing companies to provide narrative responses describing the competitive landscape and the supply chain, as well as certain information pertaining to labor markets and employees. For example, the proposed rules would require disclosing any labor law violations by the filing companies from the past five years. According to the FTC, a history of labor law violations may be indicative of “a concentrated labor market where workers do not have the ability to easily find another job.” This requirement underscores the U.S. antitrust agencies’ current spotlight on labor conditions and use of antitrust law to regulate conditions for employees.
- Prior Acquisitions. The proposed rules would create new disclosure requirements related to the parties’ prior acquisitions. Under the proposal, the acquiror and target would be required to identify all prior acquisitions of any size for the previous ten years in any line of business where there is a potential overlap. The FTC noted that this change is aimed to address the antitrust agencies’ competitive concerns about “roll-up strategies.”
- Periodic Plans and Reports. The proposed rules would expand the document submission requirements to cover certain strategic documents and reports created in the ordinary course of business, even if they do not relate to the proposed transaction. Documents called for under this new requirement would include semi-annual and quarterly plans that discuss markets and competition and that were shared with certain senior executives, as well as other similar plans or reports if they were shared with one of the filing companies’ Boards of Directors.
- Organizational Structure. The proposed rules would require the identification of individuals and entities that may have influence over business decisions or access to confidential business information. On the buyer side, this could include certain minority shareholders and limited partners holding 5% or more of the voting securities or non-corporate interests in the acquiring company or entities controlling or controlled by it.
In light of the significant proposed changes detailed above, firms considering transactions should continue to proactively consult with antitrust counsel to develop appropriate antitrust risk mitigation strategies. Most importantly, merging parties should ensure that they build in considerably more time to prepare their HSR filings, including by not over-committing in Merger Agreements regarding filing deadlines. Currently, it is customary for parties to commit to making HSR filings in Merger Agreements within 7 to 10 business days, a timeframe that likely will be challenging if and when the new filing requirements are adopted. The FTC itself estimates that the proposed new rules could extend the time required to prepare an HSR filing from about 37 hours to 144 hours.
The proposed rules also suggest that firms should pay greater attention to the antitrust risks posed by non-reportable transactions. These transactions, while not reportable at the time they occur, would need to be disclosed in connection with any future HSR-reportable transaction involving a similar line of business. Those prior transactions could come under scrutiny at that time or enhance risk for the larger transaction under review.
Finally, if the proposed rules are adopted, document creation and retention policies – already critical components of any firm’s antitrust compliance program – will become more important than ever. The types of documents that would need to be submitted with the HSR filing would include not just transaction-specific materials but also ordinary course strategic plans and reports related to the relevant businesses. We will continue to keep you posted as developments occur.
The following Gibson Dunn lawyers prepared this client alert: Steve Weissman, Sophia Hansell, Jamie France, Chris Wilson, Steve Pet, and Emma Li.*
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition, Mergers and Acquisitions, or Private Equity practice groups, or the following:
Antitrust and Competition Group:
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, criis@gibsondunn.com)
Sophia A. Hansell – Washington, D.C. (+1 202-887-3625, shansell@gibsondunn.com)
Chris Wilson – Washington, D.C. (+1 202-955-8520, cwilson@gibsondunn.com)
Jamie E. France – Washington, D.C. (+1 202-955-8218, jfrance@gibsondunn.com)
Mergers and Acquisitions Group:
Robert B. Little – Co-Chair, Dallas (+1 214-698-3260, rlittle@gibsondunn.com)
Saee Muzumdar – Co-Chair, New York (+1 212-351-3966, smuzumdar@gibsondunn.com)
Private Equity Group:
Richard J. Birns – Co-Chair, New York (+1 212-351-4032, rbirns@gibsondunn.com)
Ari Lanin – Co-Chair, Los Angeles (+1 310-552-8581, alanin@gibsondunn.com)
Michael Piazza – Co-Chair, Houston (+1 346-718-6670, mpiazza@gibsondunn.com)
*Emma Li is a recent law graduate in the firm’s New York office and not yet admitted to practice law.
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
Join us for a 30-minute briefing covering several M&A practice topics. The program is the third in a series of quarterly webcasts designed to provide quick insights into emerging issues and practical advice on how to manage common M&A problems. Robert Little, co-chair of the firm’s Global M&A Practice Group, acts as moderator.
Topics discussed:
- Doug Horowitz discusses current trends in leveraged acquisition finance
- Quinton Farrar and Brennan Halloran discusses lessons from the Mindbody litigation
- Daniel Alterbaum discusses the implications of the recent McDonald’s decision on officer fiduciary duties for M&A transactions
PANELISTS:
Daniel Alterbaum is a partner in Gibson, Dunn & Crutcher’s New York office and is a member of the firm’s Mergers and Acquisitions and Private Equity Practice Groups. Mr. Alterbaum has been recognized as a “Rising Star” by New York Metro Super Lawyers in the area of mergers and acquisitions from 2015-2022, as well as by The Deal. He represents buyers, sellers and investors in a wide variety of transactions in the private equity, fintech, renewable energy and infrastructure sectors. His experience includes leveraged buyouts, negotiated sales of private companies, carve-out sales and spinoffs of subsidiaries and cross-border asset sales. He also represents issuers and investment funds in connection with venture capital, growth equity and structured preferred equity investments. Mr. Alterbaum is admitted to practice in the states of New York and Connecticut.
Quinton C. Farrar is a partner in Gibson Dunn & Crutcher’s New York office and is a member of the firm’s Mergers and Acquisitions and Private Equity Practice Groups. Mr. Farrar was named “Rising Star” in Private Equity by Euromoney Legal Media Group. He advises public and privately held companies, including private equity sponsors and their portfolio companies, investors, financial advisors, boards of directors and individuals in connection with a wide variety of complex corporate matters, including mergers and acquisitions, asset sales, leveraged buyouts, spin-offs, joint ventures and minority investments and divestitures. He also has substantial experience advising clients on corporate governance issues as well as in advising issuers and underwriters in connection with public and private issuances of debt and equity securities. Mr. Farrar is admitted to practice in the state of New York.
Douglas S. Horowitz is a partner in Gibson, Dunn & Crutcher’s New York office. Mr. Horowitz is the Head of Leveraged and Acquisition Finance, Co-Chair of Gibson Dunn’s Global Finance Practice Group, and an active member of the Capital Markets Practice Group and Securities Regulation and Corporate Governance Practice Group. Mr. Horowitz has been recognized as a leading finance lawyer by Chambers USA, Chambers Global, The Legal 500 and Euromoney’s IFLR 1000: The Guide to the World’s Leading Financial Law Firms. Mr. Horowitz represents leading private equity firms, public and private corporations, leading investment banking firms and commercial banks with a focus on financing transactions involving private credit, syndicated institutional and asset based loans, new issuance of secured and unsecured high-yield debt securities, equity and equity-linked securities, as well as out-of-court restructurings. Mr. Horowitz is admitted to practice in the state of New York.
Robert B. Little is a partner in Gibson, Dunn & Crutcher’s Dallas office, and he is a Global Co-Chair of the Mergers and Acquisitions Practice Group. Mr. Little has consistently been named among the nation’s top M&A lawyers every year since 2013 by Chambers USA. His practice focuses on corporate transactions, including mergers and acquisitions, securities offerings, joint ventures, investments in public and private entities, and commercial transactions. Mr. Little has represented clients in a variety of industries, including energy, retail, technology, infrastructure, transportation, manufacturing and financial services. Mr. Little is admitted to practice in the state of Texas.
Brennan Halloran is an associate in Gibson, Dunn & Crutcher’s New York office. He is a member of the firm’s Mergers and Acquisitions and Private Equity Practice Groups. Mr. Halloran represents both public and private companies and financial sponsors in connection with mergers, acquisitions, divestitures, joint ventures, minority investments, restructurings and other complex corporate transactions. He also advises clients with respect to governance and general corporate matters. Mr. Halloran is admitted to practice in the state of New York.
MCLE CREDIT INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of .50 credit hour, of which .50 credit hour may be applied toward the Ethics & Professionalism. This course is approved for transitional/non-transitional credit.
Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.
Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of .50 Ethics.
California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.
Decided June 27, 2023
Mallory v. Norfolk Southern Railway Co., No. 21-1168
Today, the Supreme Court held in a fractured 5-4 decision that the Due Process Clause does not prohibit Pennsylvania from requiring businesses that register to do business in Pennsylvania to consent to general jurisdiction in the state’s courts, but a majority of the Justices questioned whether other constitutional principles limit states’ power to require such consent.
Background: Robert Mallory sued his former employer, Norfolk Southern, for alleged workplace injuries. Mallory sued in Pennsylvania even though he’s a citizen of Virginia, his injuries allegedly occurred in Ohio and Virginia, and Norfolk Southern was incorporated and had its principal place of business in Virginia. He asserted jurisdiction on the theory that Norfolk Southern registered to do business in Pennsylvania under a statute that requires corporations to submit to general personal jurisdiction in Pennsylvania over all suits.
Norfolk Southern moved to dismiss the suit for lack of personal jurisdiction on the grounds that the suit had no connection to Pennsylvania, and Pennsylvania’s consent-to-jurisdiction statute violates the Due Process Clause. Although the Supreme Court held in Pennsylvania Fire Insurance Co. v. Gold Issue Mining & Milling Co., 243 U.S. 93 (1917), that a similar consent-to-jurisdiction statute did not violate due process, Norfolk Southern argued that Pennsylvania Fire had been implicitly overruled by later cases. The Pennsylvania Supreme Court agreed, holding that the state’s registration statute violated due process by coercing Norfolk Southern to consent to general personal jurisdiction.
Issue: Whether the Due Process Clause prohibits a state from requiring an out-of-state corporation to consent to general personal jurisdiction in that state as a condition of registering to do business there.
Court’s Holding:
No. Due process does not prohibit a state from requiring that businesses consent to general personal jurisdiction as a condition of registering to do business in the state.
“To decide this case, we need not speculate whether any other statutory scheme and set of facts would suffice to establish consent to suit. It is enough to acknowledge that the state law and facts before us fall squarely within Pennsylvania Fire’s rule.”
Justice Gorsuch, writing for the Court
Gibson Dunn submitted an amicus brief on behalf of the Association of American Railroads in support of respondent: Norfolk Southern Railway Co.
What It Means:
- The Court’s opinion was fractured, and the only holding joined by a majority of the Justices was narrow, concluding only that Pennsylvania’s consent-by-registration statute did not violate due process under Pennsylvania Fire. The majority made clear that Pennsylvania Fire had not been implicitly overruled by later cases.
- Justice Alito concurred, providing the necessary fifth vote to vacate the Pennsylvania Supreme Court’s decision and remand for further consideration. Critically, Justice Alito opined that consent-by-registration statutes might violate other constitutional provisions and principles, including the dormant Commerce Clause.
- Justice Barrett dissented, joined by Chief Justice Roberts and Justices Kagan and Kavanaugh, opining that Pennsylvania’s consent-by-registration scheme is inconsistent with both due process and principles of interstate federalism.
- Given the Court’s fractured and narrow opinion, and Justice Alito’s concurrence, it is likely that consent-by-registration statutes will continue to face constitutional challenges.
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: General Litigation
| Reed Brodsky +1 212.351.5334 rbrodsky@gibsondunn.com |
Theane Evangelis +1 213.229.7726 tevangelis@gibsondunn.com |
Veronica S. Moyé +1 214.698.3320 vmoye@gibsondunn.com |
| Helgi C. Walker +1 202.887.3599 hwalker@gibsondunn.com |
The EU Markets in Cryptoassets Regulation (“MiCA”) was published in the EU’s official journal on 9 June 2023 and will enter into force on 29 June 2023, the 20th day following the date of its publication. As a result, the provisions on stablecoins (asset-referenced tokens and e-money tokens) will become applicable 12 months after this date, and will apply from 30 June 2024. The other provisions will apply from 30 December 2024.
MiCA establishes a harmonised pan-EU regime for cryptoassets. This new regulatory framework aims to protect investors and preserve financial stability, while allowing innovation and fostering the attractiveness of the cryptoasset sector. It will apply directly across the EU member states replacing the existing domestic laws and harmonising all national legislation in the area of cryptoassets and activities related to them.
MiCA sets out the framework for the regulation of cryptoassets in the EU but certain details will be settled in technical standards and delegated acts. The European Banking Authority (the “EBA”) is required to develop draft regulatory technical standards by 30 June 2024 to establish standard forms, templates and procedures for the cooperation and exchange of information between national competent authorities, as well as issuing guidelines that cryptoasset service providers should consider when conducting assessments and risk mitigation measures. This client alert provides an overview of MiCA, how it impacts on different market participants and what steps cryptoasset firms need to take now to ensure compliance.
Which cryptoassets are in-scope?
MiCA defines a crypto-asset as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. Although a limited number of cryptoassets are regulated under existing legislation, MiCA catches previously unregulated cryptoassets that did not fall within the regulatory perimeter. MiCA creates a hierarchy of cryptoassets based on the perceived risks posed by these different tokens.
|
Cryptoasset |
Overview |
|
Utility token |
|
|
Stablecoins (being “asset-referenced tokens” and “e-money tokens”) |
Asset-referenced tokens
E-money tokens
|
|
Significant asset-referenced tokens or significant e-money tokens |
|
MiCA leaves several components of the digital world outside its scope for now, including CBDCs and cryptoassets that are unique and non-fungible (“NFTs”). MiCA sets out potential areas for future regulation, and an assessment of the necessity and feasibility of regulating NFTs.
Who does MiCA apply to?
MiCA imposes obligations on issuers of in-scope cryptoassets (i.e., those offering cryptoassets to third parties). MiCA also imposes obligations on firms whose business it is to provide certain cryptoasset services to third parties on a professional basis (i.e., cryptoasset service providers or “CASPs”). In particular, the following services are listed and defined in MiCA:
- providing advice on cryptoassets;
- reception and transmission of orders for cryptoassets;
- execution of orders for cryptoassets;
- custody and administration of cryptoassets;
- operation of a trading platform for cryptoassets;
- exchange of cryptoassets for fiat; and
- placing of cryptoassets.
Cryptoasset lending is one key service not captured by MiCA. The European Commission is expected to publish a report on the need to regulate this service and, if necessary, a legislative proposal by 30 December 2024.
Non-EU businesses – MiCA applies to those engaged in the aforementioned services “in the Union”. Non-EU businesses wishing to carry on cryptoasset activities within the EU or for EU based customers should consider how the territorial scope of MiCA will impact their current and future business models. MiCA contains provisions which relate to “reverse solicitation” where a third-country firm provides cryptoasset services at the exclusive initiative of an EU customer. However, where a third-country firm solicits clients or potential clients or promotes or advertises crypto-asset services or activities to customers in the EU, the licence requirement will be triggered. Further guidelines will be developed which will specify when a third country firm is deemed to solicit clients within the EU to mitigate against an overreliance on reverse solicitation rules.
Passporting – MiCA provides for passporting across the EU, in line with other EU single market measures. However, as mentioned, there are no provisions on third country equivalence, which may cause issues for service providers seeking to offer services globally.
Impact to existing licensed CASPs – Some EU member states already have in place national regulatory frameworks regulating CASPs. MiCA therefore leaves open a possibility for member states to apply a simplified procedure for applications for authorisation submitted by those entities that are already authorised under national law. In such cases, the national competent authorities will be required to ensure that these applicants comply with key requirements under MiCA. While some firms that are currently operating under national frameworks in some EU member states (i.e. Germany or Malta) will likely be able to leverage their existing internal frameworks to obtain a MiCA licence, non-regulated firms need to be prepared to dedicate a sufficient amount of time, financial and human resources to meet the new regulatory requirements under MiCA.
What areas of MiCA should be key areas of focus for cryptoasset firms?
(1) Offering and marketing of cryptoassets (other than asset-referenced tokens and e-money tokens)
- White paper – Subject to certain requirements, issuers may offer such cryptoassets to the public in the EU or apply for admission to a trading platform. Namely, there is a requirement to draw up, notify regulators of, and publish a cryptoasset white paper.
- Exemption from the requirement to publish a white paper – In summary, the white paper requirements do not apply where:
(i) the cryptoassets are offered for free, they are created through mining, are unique and not fungible with other cryptoassets;
(ii) are offered to fewer than 150 persons (natural or legal) per member state where such persons are acting on their own account;
(iii) an offer does not exceed EUR 1 million; or
(iv) the offer is solely addressed to qualified investors.
- Marketing communications – Marketing communications relating to an offer of cryptoassets to the public or admission to trading must be: (i) clearly identifiable as such; (ii) fair, clear and not misleading; (iii) consistent with the white paper; and (iv) clearly state both that the white paper has been published and an address of the website of the issuer concerned.
- Modifications to white paper / marketing communications – The white paper and marketing communications must be updated where there has been a change or new fact that is likely to have a significant influence on the purchase decision of any potential purchaser of the cryptoasset, or on the decision of holders of such cryptoassets to sell or exchange such cryptoassets.
(2) Obligations applying to issuers of asset-referenced tokens
- Authorisation procedure – Issuers of asset-referenced tokens will need to be authorised under MiCA and comply with various conduct of business and prudential requirements. Note that issuers must be EU-established legal entities in order to be granted authorisation. Note that there are certain exemptions for small-scale asset-referenced token and where tokens are marketed, distributed and held exclusively by qualified investors.
- Enhanced white paper requirements – Issuers of asset-referenced tokens must include additional information in white papers to that described above and the white paper must be pre-approved by national competent authorities. The white paper will need to contain certain mandatory disclosures before it can be issued, offered or marketed while issuers of other tokens need only notify the regulator and provide a copy of their white paper before doing so. The white paper will need to be supported by a legal opinion as to why the asset-referenced token is not an e-money token nor a token excluded from MiCA’s scope.
- Prudential and conduct requirements – Issuers must act honestly, fairly and professionally in the best interest of asset-referenced token holders. Requirements also relate to marketing, provision of information, complaints handling, conflicts of interest, governance arrangements, prudential requirements, and maintenance and segregation of reserve assets.
- Claims for damages – MiCA contains provisions that allow for asset-referenced token holders with minimum rights to claim damages against an issuer and its management body for certain infringements.
- Change in control approval – MiCA contains regulatory change in control approval provisions in advance of acquiring a “qualifying holding in an issuer of asset-referenced tokens”.
(3) Additional requirements relating to significant asset-referenced tokens
- Supervision by the EBA – Issuers of significant asset-referenced tokens will be supervised by the EBA given the significant risks they present to financial stability and consumer protection.
- Remuneration policy – Issuers must adopt, implement and maintain a remuneration policy that promotes sound and effective risk management and does not create incentives to relax risk standards.
- Interoperability – Issuers must ensure that such tokens can be held in custody by different crypto-asset service providers.
- Liquidity management policy – Issuers must establish, maintain and implement a liquidity management policy and procedures to ensure that the reserve assets have a resilient liquidity profile that enables issuers of to continue operating normally under scenarios of liquidity stress. Issuers must conduct liquidity stress testing on a regular basis.
(4) Obligations applying to issuers of e-money tokens
- Authorisation – Issuers of e-money tokens will need to be authorised as a credit institution or as an e-money institution under the second Electronic Money Directive (2009/110/EC).
- White paper requirements – Issuers of e-money tokens must ensure that their white papers contain certain required information as specified in Annex III.
- Issuance and redeemability – Upon request by a holder of an e-money token, the issuer must redeem the token, at any time and at par value, by paying in funds, other than electronic money, the monetary value of the e-money token held to the holder of the e-money token. Issuers must prominently state the conditions for redemption in their white paper.
- No interest to token holders – Issuers of e-money tokens shall not grant interest to token holders in relation to e-money tokens.
- Marketing communications – Marketing communications relating to a public offer or to trading of an e-money token must be (a) clearly identifiable; (b) fair, clear and not misleading; (c) consistent with the white paper, and (d) set out certain information about the white paper and the issuer.
- Treatment of funds received – At least 30% of the funds received by issuers in exchange for e-money tokens must be deposited in separate accounts in credit institutions. The remaining funds are to be invested in secure, low-risk assets that qualify as highly liquid financial instruments with minimal market risk, credit risk and concentration risk.
(5) Additional requirements relating to significant e-money tokens
- Dual supervision – Issuers of significant e-money tokens will be subject to dual supervision from national competent authorities and the EBA.
- New obligations for e-money institutions – E-money institutions issuing significant e-money tokens will not be subject to the own funds and safeguarding requirements under the E-Money Directive (2009/110/EC), but will instead be subject to the requirements specified under MiCA.
(6) Requirements for CASPs
- Authorisation procedure – CASPs will need to be authorised under MiCA and have a registered office in the EU. Once authorised in one member state, a CASP will be allowed to provide cryptoasset services throughout the entire EU. Certain institutions which are already authorised under existing financial services legislation do not also need to also be authorised under MiCA to provide cryptoasset services, but must follow certain notification requirements as per Article 60 of MiCA.
- Prudential and conduct requirements – CASPs must act honestly, fairly and professionally in the best interest of their clients and prospective clients. Requirements also relate to (among others) marketing, provision of information, prudential requirements, governance arrangements, complaints handling, conflicts of interest, and custody and administration of assets.
- Requirements for specific types of CASPs – Chapter 3 of MiCA also sets out specific requirements in respect of different crypto-asset services, including but not limited to: (a) providing custody and administration of cryptoassets; (b) operating a trading platform for cryptoassets; (c) exchanging cryptoassets for funds or other cryptoassets; (d) placing of cryptoassets; and (e) providing advice on, and portfolio management of, cryptoassets.
- No new anti-money laundering obligations – MiCA does not include anti-money laundering (AML) provisions with respect to CASPs. However, the Fifth Money Laundering Directive ((EU) 2018/843) (MLD5), which came into force in 2018, contains AML provisions with respect to cryptoasset exchanges and custodian wallet providers. The EU Council also recently agreed its position on a new AML directive (AMLD6), which would extend AML provisions to all CASPs.
(7) Market abuse regime for cryptoassets
Title VI of MiCA establishes a bespoke market abuse regime for cryptoassets. It defines the concept of inside information in relation to cryptoassets and requires the public disclosure of inside information for issuers and offerors seeking admission to trading. It prohibits insider dealing, the unlawful disclosure of inside information, and market manipulation, and expressly imposes requirements relating to systems, procedures and arrangements to monitor and detect market abuse.
When will MiCA enter into force?
MiCA will enter into force 20 days after its publication in the Official Journal of the European Union. The majority of the requirements will apply 18 months after it enters into force. However, the asset-referenced tokens and e-money token requirements will apply 12 months after the entry into force date.
Issuers of asset-referenced tokens other than credit institutions that issued asset-referenced tokens in accordance with applicable law before 12 months after MiCA enters into force may continue to do so until they are granted or refused an authorisation, provided that they apply for authorisation before 13 months after MiCA enters into force. Credit institutions that issued asset-referenced tokens in accordance with applicable law before 12 months after MiCA enters into force may continue to do so until the cryptoasset white paper has been approved or rejected, provided that they notify their competent authority before 13 months after MiCA enters into force.
CASPs already legally providing their services at the date on which MiCA applies may continue to do so until 18 months after the date or they are granted or refused an authorisation, whichever is sooner.
What steps should cryptoasset firms take now?
Firms that are potentially in-scope of MiCA should perform a gap analysis and impact assessment of MiCA on their business models. Ensuring compliance with MiCA is likely to constitute a significant undertaking for firms and firms should not underestimate the time it will take to implement MiCA, including applying for authorisation and implementing MiCA requirements into their systems and processes The first step firm’s should take is consider whether their existing activities fall within scope of MiCA. If so, they will be required to either notify the relevant national regulator or seek authorisation depending on whether they are already authorised financial institutions. Gibson Dunn’s lawyers have a current, substantive and technical understanding of the ever-evolving world of digital assets and would be delighted to assist you with you MiCA implementation projects.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact the following members of Gibson Dunn’s Global Financial Regulatory teams in London and Dubai:
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Martin Coombes – London (+44 (0) 20 7071 4258, mcoombes@gibsondunn.com)
Sameera Kimatrai – Dubai (+971 4 318 4616, skimatrai@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
Gibson, Dunn & Crutcher LLP is advising Otro Capital and its partner RedBird Capital in their investment in Alpine Racing Ltd., a world class F1 team that finished top 4 in the 2022 F1 World Championship. The investment values the team at approximately $900 million and is being made along with Maximum Effort Investments (led by Ryan Reynolds) and its co-investors Michael B. Jordan and Rob McElhenney, and includes participation from the Huntsman Family and Main Street Advisors.
The Gibson Dunn corporate team is led by partners Stefan dePozsgay and Nick Tomlinson and includes associates Sarah Leiper-Jennings, Sarah Reder and Percy Gao. Partners Sandy Bhogal and Kathryn Kelly and associates Bridget English, Ryan Rott and Isabella Fladée are advising on tax aspects. Partner A.J. Frey and associates Curtis Vella and Fiona Xin are advising on investment funds aspects. Partner Chris Haynes is advising on capital markets aspects. Partner Daniel Angel and associates Jacqueline Malzone and Libby Pica are advising on IP aspects. Partners Michael Collins and James Cox are advising on executive compensation and benefits aspects. Partner Attila Borsos and associate Ben Nunez are advising on competition and foreign investment aspects.
Decided June 23, 2023
Coinbase, Inc. v. Bielski, No. 22-105
Today, the Supreme Court held 5-4 that appealing the denial of a motion to compel arbitration automatically stays district court proceedings pending resolution of that appeal.
Background: The Federal Arbitration Act (“FAA”) authorizes interlocutory appeals from orders refusing to compel arbitration. 9 U.S.C. § 16(a). The FAA does not expressly address stays pending appeal, and a circuit split developed. The majority position, adopted by the Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits, held that stays pending appeal are mandatory. The minority position, adopted by the Second, Fifth, and Ninth Circuits, held that the usual, four-factor standard for discretionary stays pending appeal applies.
Bielski brought putative class-action claims against Coinbase in the Northern District of California. Coinbase moved to compel arbitration under its user agreement. After the district court denied Coinbase’s motion, Coinbase appealed and sought a stay pending appeal. The district court declined to stay its proceedings, holding that under Ninth Circuit precedent a stay pending appeal was not mandatory and that a discretionary stay was not warranted. The Ninth Circuit likewise denied a stay.
Issue: Is a stay pending appeal of the denial of a motion to compel arbitration mandatory?
Court’s Holding:
Yes. Appealing the denial of a motion to compel arbitration automatically stays district court proceedings pending resolution of the appeal.
“The sole question before this Court is whether a district court must stay its proceedings while the interlocutory appeal on arbitrability is ongoing. The answer is yes.”
Justice Kavanaugh, writing for the Court
What It Means:
- Today’s decision is a win for defendants who appeal the denial of a motion to compel arbitration. Defendants who appeal the denial of a motion to compel arbitration cannot be forced to continue litigating in the district court during the appeal. In practice, this decision also should stay any district court discovery deadlines. This is a significant change for litigants in the Second, Fifth, and Ninth Circuits, which all previously refused to grant such automatic stays.
- In reaching this decision, the Supreme Court applied the general rule that an interlocutory appeal divests a district court of control over the issues on appeal. Because the issue on appeal is whether the case can go forward in the district court, the district court lacks power to require further litigation.
- The Court reasoned that “many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost” without a stay during appeal, even if the court of appeals agrees that arbitration is required. This is especially true in class actions, where “the possibility of colossal liability can lead to . . . blackmail settlements.” Slip op. 5–6.
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: General Litigation
| Reed Brodsky +1 212.351.5334 rbrodsky@gibsondunn.com |
Theane Evangelis +1 213.229.7726 tevangelis@gibsondunn.com |
Veronica S. Moyé +1 214.698.3320 vmoye@gibsondunn.com |
| Helgi C. Walker +1 202.887.3599 hwalker@gibsondunn.com |
Related Practice: International Arbitration
| Cyrus Benson +44 (0) 20 7071 4239 cbenson@gibsondunn.com |
Penny Madden QC +44 (0) 20 7071 4226 pmadden@gibsondunn.com |
Rahim Moloo +1 212.351.2413 rmoloo@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 |
Related Practice: Class Actions
| Christopher Chorba +1 213.229.7396 cchorba@gibsondunn.com |
Kahn A. Scolnick +1 213.229.7656 kscolnick@gibsondunn.com |
In a major development for employers, New York is poised to ban employee non-competition agreements. Governor Kathy Hochul is currently considering a bill that was fast-tracked through the state legislature that voids “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” If signed, the bill will amend the New York Labor Law to prohibit New York employers from entering into a non-compete agreement with any individual who is in a position of “economic dependence on, and under an obligation to perform duties” for an employer. Governor Hochul previously expressed support for eliminating non-compete agreements for workers making below the median wage in New York, but the bill she is considering applies to all employees in New York irrespective of compensation. If approved by the Governor, the law will be effective 30 days later.
Below, we outline the noteworthy takeaways from this likely radical change to New York law.
- Broad Coverage. The bill broadly defines “non-compete agreement” as “any agreement, or clause contained in any agreement, between an employer and a covered individual that prohibits or restricts such covered individual from obtaining employment, after the conclusion of employment with the employer included as a party to the agreement.”[1] The definition of “covered individual” is similarly broad, defining that term as “any other person who, whether or not employed under a contract of employment, performs work or services for another person on such terms and conditions that they are, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person.”
- Limited Express Exceptions. As drafted, the bill expressly states that it does not impact an employer’s ability to enter into a “fixed-term of service” with any covered individual. It also states that employers may continue to enter into agreements that protect trade secrets, confidential and proprietary client information and prohibit solicitation of clients of the employer that the covered individual learned about during employment, “provided that such agreement does not otherwise restrict competition in violation of this section.”
- No Retroactivity. The bill only applies to non-compete agreements entered into on or after its effective date, which is 30 days after the Governor’s approval.
- Private Right of Action. Covered individuals would have a private cause of action against employers violating the law. Such individuals would be permitted to bring lawsuits seeking to void any non-compete that violates the law, obtain injunctive relief against enforcement of the non-compete, and recover for lost compensation, damages, and reasonable attorneys’ fees and costs. The bill also provides that “the court shall award liquidated damages to every covered individual affected under this section.” Liquidated damages are capped at $10,000.
- Two-Year Statute of Limitations. The bill provides a two-year statute of limitations, but employers should be aware that litigation could arise long after entering into the offending agreement. This is because the two-year period runs from the latest of: (i) when the prohibited non-compete agreement was signed; (ii) when the covered individual learns of the prohibited non-compete agreement; (iii) when the employment or contractual relationship is terminated; or (iv) when the employer takes any step to enforce the non-compete agreement.
- Significant Unresolved Questions. The bill is redundant in places and contains numerous ambiguities. For example, it does not address whether it applies to independent contractors or whether paid garden leave and equity forfeiture arrangements are permissible. The bill also does not define a “fixed term of service” agreement, and it is silent about the permissibility of post-employment agreements not to solicit or hire a former employer’s employees. The bill also does not expressly address non-competition agreements arising from the sale of a business, which are common.
If enacted, this is undoubtedly a dramatic change for New York employers. New York will join several other states that have essentially banned post-employment non-compete agreements, including California, Minnesota, North Dakota, and Oklahoma. In recent years, other jurisdictions such as Colorado, Illinois, Maine, Maryland, Nevada, New Hampshire, Oregon, Rhode Island, Virginia, Washington, and Washington, D.C. have also limited the validity of non-compete provisions based on specific factors like compensation and employee classification. Additionally, there has been increased scrutiny on non-competes at the federal level with the Federal Trade Commission’s proposed new rule seeking to ban non-compete clauses[2] and the National Labor Relations Board General Counsel’s memorandum expressing her view that certain non-compete provisions in employment and severance agreements could violate the National Labor Relations Act.[3]
____________________________
[1] N.Y. A01278B § 191-d(a) (emphasis added), https://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A01278&term=&Summary=Y&Actions=Y&Text=Y.
[2] FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (Jan. 5, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.
[3] NLRB General Counsel Issues Memo on Non-competes Violating the National Labor Relations Act (May 30, 2023), https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-issues-memo-on-non-competes-violating-the-national.
The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Harris Mufson, Tiffany Phan, and Emily Lamm.
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 partners:
Harris M. Mufson – New York (+1 212-351-3805, hmufson@gibsondunn.com)
Tiffany Phan – Los Angeles (+1 213-229-7522, tphan@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, ksmith@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
The Pro Bono Committee is thrilled to announce the winners of this year’s Frank Wheat Memorial Awards. This year’s winners demonstrated an unfailing dedication to pro bono, a commitment to excellence, and a passion for service, exemplifying the very best of Gibson Dunn. As in previous years, this year’s winners and nominees worked on a wide variety of matters—including both high-stakes individual pro bono representations and large-scale projects with far-reaching impacts—that reflect the breadth of Gibson Dunn’s pro bono practice.
Frank Wheat, a former Los Angeles partner, was a superb transactional lawyer, SEC commissioner, and president of the Los Angeles County Bar. He was also a giant in the nonprofit community, having founded the Alliance for Children’s Rights in addition to serving as a leader of the Sierra Club and as a founding director of the Center for Law in the Public Interest. He exemplified the commitment to the community and to pro bono service that has always been a core tenet of the Gibson Dunn culture. The Frank Wheat Award is given annually to individual lawyers and teams that have demonstrated leadership and initiative in their pro bono work, obtained significant results for their pro bono clients, and served as a source of inspiration to others. Recipients of the Frank Wheat Memorial Award each receive a $2,500 prize to be donated to pro bono organizations designated by the recipients.
In 2021, a year that presented countless challenges, Gibson Dunn remained committed to pro bono work, devoting more than 140,000 pro bono hours valued at approximately $128 million to hundreds of projects firmwide. Our attorneys averaged more than 90 pro bono hours per attorney in the United States and more than 80 pro bono hours per attorney worldwide.
Decided June 22, 2023
Yegiazaryan v. Smagin, No. 22-381
Today, the Supreme Court in a 6-3 decision rejected a bright-line rule that would have precluded foreign plaintiffs from pursuing civil RICO claims, and instead held that foreign plaintiffs can satisfy civil RICO’s domestic-injury requirement if their injuries arose in the United States.
Background: The Racketeer Influenced and Corrupt Organizations Act (RICO) provides a private right of action that authorizes “[a]ny person injured in his business or property by reason of” a substantive RICO violation to sue for treble damages. 18 U.S.C. § 1964(c). In RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016), the Supreme Court held that this private right of action extended only to domestic injuries, but did not address what constitutes a “domestic” injury.
In 2003, Russian businessmen Ashot Yegiazaryan and Vitaly Smagin partnered on a Moscow real estate project that collapsed in 2009. Yegiazaryan subsequently fled to Beverly Hills to avoid a Russian indictment. Smagin, who remained in Russia, then won an arbitration award against Yegiazaryan in London.
Smagin sued Yegiazaryan in California federal court to enforce the arbitration award. After Yegiazaryan engaged in a number of complex and fraudulent transactions to prevent Smagin from collecting on the California court’s judgment in his favor, Smagin brought a civil RICO claim against Yegiazaryan, alleging that his actions to hide assets and avoid paying the California court’s judgment on the arbitral award constituted a pattern of racketeering activities.
The district court dismissed Smagin’s civil RICO claim, holding that he failed to satisfy RICO’s domestic-injury requirement. The Ninth Circuit reversed, noting that Smagin confirmed the arbitral award in California and that Yegiazaryan’s alleged misconduct to evade the California court’s judgment occurred in California.
Issue: Whether foreign plaintiffs can suffer domestic injuries that would permit them to pursue a civil RICO claim.
Court’s Holding:
Yes. Foreign plaintiffs can suffer an injury that is domestic depending on the facts and circumstances of the alleged RICO violation, as there is no rule that any injury suffered by a foreign plaintiff necessarily arises outside the United States.
“[I]n assessing whether there is a domestic injury, courts should engage in a case-specific analysis that looks to the circumstances surrounding the injury. If those circumstances sufficiently ground the injury in the United States, such that it is clear the injury arose domestically, then the plaintiff has alleged a domestic injury.”
Justice Sotomayor, writing for the Court
What It Means:
- In holding that RICO’s domestic-injury requirement can be satisfied based on the facts and circumstances surrounding the alleged injury, the Court rejected a bright-line rule that would look only to the plaintiff’s place of residence as the place where the economic injury is experienced.
- Today’s decision creates opportunities for judgment creditors to use RICO to pursue assets based on domestic conduct that allegedly injures property rights, including unlawful efforts to frustrate the enforcement of foreign judgments within the United States. In this case, the Court relied on allegations that the foreign plaintiff was “injured in his ability to enforce a California judgment, against a California resident, through racketeering acts that were largely ‘designed and carried out in California’ and were ‘targeted at California.’” Slip.
op. 8. - The Court reaffirmed its longstanding requirement that a plaintiff’s injury must be proximately caused by the defendant’s substantive RICO violation. Slip op. 3 n.3.
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: Judgment and Arbitral Award Enforcement
| Matthew D. McGill +1 202.887.3680 mmcgill@gibsondunn.com |
Robert L. Weigel +1 212.351.3845 rweigel@gibsondunn.com |
Since the European Commission first published its highly anticipated proposal for an AI regulation in April 2021,[1] EU institutions and lawmakers have been making significant strides towards passing what would be the first comprehensive legislative framework for AI, the EU Artificial Intelligence Act (“AI Act”). The AI Act seeks to deliver on EU institutions’ promises to put forward a coordinated European regulatory approach on the human and ethical implications of AI, and once in force would be binding on all 27 EU Member States.[2]
Following on the heels of the European Commission’s 2021 proposal, the Council of the European Union adopted its common position (“general approach”) on the AI Act in December 2022.[3] Most notably, in its general approach the Council narrowed the definition of ‘AI system’ covered by the AI Act to focus on a measure of autonomy i.e., to ensure that simpler software systems were not inadvertently captured.
On June 14, 2023, the European Parliament voted to adopt its own negotiating position on the AI Act,[4] triggering discussions between the three branches of the European Union—the European Commission, the Council and the Parliament—to reconcile the three different versions of the AI Act, the so-called “trilogue” procedure. The Parliament’s position expands the scope and reach of the AI Act in a number of ways, and press reports suggest contentious reconciliation meetings and further revisions to the draft AI Act lay ahead. In this client alert, we offer some key takeaways from the Parliament’s negotiating position.
The AI Act Resonates Beyond the EU’s Borders
The current draft regulation provides that businesses placing AI systems on the market or putting them into service in the EU will be subject to the AI Act, irrespective of whether those providers are established within the EU or in a third country. Given its status as the first comprehensive attempt to regulate AI systems and its extraterritorial effect, the AI Act has the potential to become the key international benchmark for regulating the fast-evolving AI space, much like the General Data Protection Regulation (“GDPR”) in the realm of data privacy.
The regulation is intended to strike a much-debated balance between regulation and safety, citizens’ rights, economic interests, and innovation. Reflecting concerns that an overly restrictive law would stifle AI innovation in the EU market, the Parliament has proposed exemptions for research activities and open-source AI components and promoted the use of so-called “regulatory sandboxes,” or controlled environments, created by public authorities to test AI before its deployment.[5] Establishing harmonized standards for the implementation of the AI Act’s provisions will be critical to ensure companies can prepare for the new regulatory requirements by, for example, building appropriate guardrails and governance processes into product development and deployment early in the design lifecycle.
The Definition of AI Is Aligned with OECD and NIST
The AI Act’s definition of AI has consistently been a key threshold issue in defining the scope of the draft regulation and has undergone numerous changes over the past several years. Initially, the European Commission defined AI based on a series of techniques listed in the annex to the regulation, so that it could be updated as the technology developed. In the face of concerns that a broader definition could sweep in traditional computational processes or software, the EU Council and Parliament opted to move the definition to the body of the text and narrowed the language to focus on machine-learning capabilities, in alignment with the definition of the Organisation for Economic Co-operation and Development (OECD) and the U.S. National Institute of Standards and Technology (“NIST”):[6]
“a machine-based system that is designed to operate with varying levels of autonomy and that can, for explicit or implicit objectives, generate outputs such as predictions, recommendations, or decisions that influence physical or virtual environments.”
In doing so, the Parliament is seeking to balance the need for uniformity and legal certainty against the “rapid technological developments in this field.”[7] The draft text also indicates that AI systems “can be used as stand-alone software system, integrated into a physical product (embedded), used to serve the functionality of a physical product without being integrated therein (non-embedded) or used as an AI component of a larger system,” in which case the entire larger system should be considered as one single AI system if it would not function without the AI component in question.[8]
The AI Act Generally Classifies Use Cases, Not Models or Tools
Like the Commission and Council, the Parliament has adopted a risk-based approach rather than a blanket technology ban. The AI Act classifies AI use by risk level (unacceptable, high, limited, and minimal or no risk) and imposes documentation, auditing, and process requirements on providers (a developer of an AI system with a view to placing it on the market or putting it into service) and deployers (a user of an AI system “under its authority,” except where such use is in a “personal non-professional activity”)[9] of AI systems.
The AI Act prohibits certain “unacceptable” AI use cases and contains some very onerous provisions targeting high-risk AI systems, which are subject to compliance requirements throughout their lifecycle, including pre-deployment conformity assessments, technical and auditing requirements, and monitoring requirements. Limited risk systems include those use cases where humans may interact directly with an AI system (such as chatbots), or that generate deepfakes, which trigger transparency and disclosure obligations.[10] Most other use cases will fall into the “minimal or no risk” category: companies must keep an inventory of such use cases, but these are not subject to any restrictions under the AI Act. Companies developing or deploying AI systems will therefore need to document and review use cases to identify the appropriate risk classification.
The AI Act Prohibits “Unacceptable” Risk AI Systems, Including Facial Recognition in Public Spaces, with Very Limited Exceptions
Under the AI Act, AI systems that carry “unacceptable risk” are per se prohibited. The Parliament’s compromise text bans certain use cases entirely, notably real-time remote biometric identification in publicly accessible spaces, which is intended to include facial recognition tools and biometric categorization systems using sensitive characteristics, such as gender or ethnicity; predictive policing systems; AI systems that deploy subliminal techniques impacting individual or group decisions; emotion recognition systems in law enforcement, border management, the workplace and educational institutions; and scraping biometric data from CCTV footage or social media to create facial recognition databases. There is a limited exception for the use of “post” remote biometric identification systems (where identification occurs via pre-recorded footage after a significant delay) by law enforcement and subject to court approval.
Parliament’s negotiating position on real-time biometric identification is likely to be a point of contention in forthcoming talks with member states in the Council of the EU, many of which want to allow law enforcement use of real-time facial recognition, as did the European Commission in its original legislative proposal.
The Scope of High-Risk AI Systems Subject to Onerous Pre-Deployment and Ongoing Compliance Requirements Is Expanded
High risk AI systems are subject to the most stringent compliance requirements under the AI Act and the designation of high risk systems has been extensively debated during Parliamentary debates. Under the Commission’s proposal, an AI system is considered high risk if it falls within an enumerated critical area or use listed in Annex III to the AI Act. AI systems listed in Annex III include those used for biometrics; management of critical infrastructure; educational and vocational training; employment, workers management and access to self-employment tools; access to essential public and private services (such as life and health insurance); law enforcement; migration, asylum and border control management tools; and the administration of justice and democratic processes.
The Parliament’s proposal clarifies the scope of high-risk systems by adding a requirement that an AI system listed in Annex III shall be considered high-risk if it poses a “significant risk” to an individual’s health, safety, or fundamental rights. The Parliament also proposed additional AI systems to the high risk category, including AI systems intended to be used for influencing elections, and recommendation engines of social media platforms that have been designated as Very Large Online Platforms (VLOPs), as defined by the Digital Services Act (“DSA”).
High-risk AI systems would be subject to pre-deployment conformity assessments, informed by guidance to be prepared by the Commission with a view to certifying that the AI system is premised on an adequate risk assessment, proper guardrails and mitigation processes, and high-quality datasets. Conformity assessment would also be required to confirm the availability of appropriate compliance documentation, traceability of results, transparency, human oversight, accuracy and security.
A key challenge companies should anticipate when implementing the underlying governance structures for high risk AI systems is accounting for and tracking model changes that may necessitate a re-evaluation of risk, particularly for unsupervised or partially unsupervised models. In certain cases, independent third-party assessments may be necessary to obtain a certification that verifies the AI system’s compliance with regulatory standards.
The Parliament’s proposal also includes redress mechanisms to ensure harms are resolved promptly and adequately, and adds a new requirement for conducting “Fundamental Rights Impact Assessments” for high-risk systems to consider the potential negative impacts of an AI system on marginalized groups and the environment.
“General Purpose AI” and Generative AI Will Be Regulated
Due to the increasing availability of large language models (LLMs) and generative AI tools, recent discussions in Parliament focused on whether the AI Act should include specific rules for GPAI, foundation models, and generative AI.
The regulation of GPAI—an AI system that is adaptable to a wide range of applications for which it was not intentionally and specifically designed—posed a fundamental issue for EU lawmakers because of the prior focus on AI systems developed and deployed for specific use cases. As such, the Council’s approach had contemplated excluding GPAI from the scope of the AI Act, subject to a public consultation and impact assessment and future regulations proposed by the European Commission. Under the Parliament’s approach, GPAI systems are outside the AI Act’s classification methodology, but will be subject to certain separate testing and transparency requirements, with most of the obligations falling on any deployer that substantially modifies a GPAI system for a specific use case.
Parliament also proposed a regime for regulating foundation models, consisting of models that “are trained on broad data at scale, are designed for generality of output, and can be adapted to a wide range of distinctive tasks,” such as GPT-4.[11] The regime governing foundation models is similar to the one for high-risk AI applications and directs providers to integrate design, testing, data governance, cybersecurity, performance, and risk mitigation safeguards in their products before placing them on the market, mitigating foreseeable risks to health, safety, human rights, and democracy, and registering their applications in a database, which will be managed by the European Commission.
Even stricter transparency obligations are proposed for generative AI, a subcategory of foundation models, requiring that providers of such systems inform users when content is AI-generated, deploy adequate training and design safeguards, ensure that synthetic content generated is lawful, and publicly disclose a “sufficiently detailed summary” of copyrighted data used to train their models.[12]
The AI Act Has Teeth
The Parliament’s proposal increases the potential penalties for violating the AI Act. Breaching a prohibited practice would be subject to penalties of up to €40 million, or 7% of a company’s annual global revenue, whichever is higher, up from €30 million, or 6% of global annual revenue. This considerably exceeds the GDPR’s fining range of up to 4% of a company’s global revenue. Penalties for foundation model providers who breach the AI Act could amount to €10 million or 2% annual revenue, whichever is higher.
What Happens Next?
Spain will take over the rotating presidency of the Council in July 2023 and has given every indication that finalizing the AI Act is a priority. Nonetheless, it remains unclear when the AI Act will come into force, given anticipated debate over a number of contentious issues, including biometrics and foundation models. If an agreement can be reached in the trilogues later this year on a consensus version to pass into law—likely buoyed by political momentum and seemingly omnipresent concerns about AI risks—the AI Act will be subject to a two-year implementation period during which its governance structures, e.g., the European Artificial Intelligence Office, would be set up before ultimately becoming applicable to all AI providers and deployers in late 2025, at the earliest.
In the meantime, other EU regulatory efforts could hold the fort until the AI Act comes into force. One example is the DSA, which comes fully into effect on February 17, 2024 and regulates content on online platforms, establishing specific obligations for platforms that have been designated as VLOPs and Very Large Online Search Engines (VLOSEs). Underscoring EU lawmakers’ intent to establish a multi-pronged governance regime for generative models, the Commission also included generative AI in its recent draft rules on auditing algorithms under the DSA.[13] In particular, the draft rules reference a need to audit algorithmic systems’ methodologies, including by mandating pre-deployment assessments, disclosure requirements, and comprehensive risk assessments.
Separately, Margrethe Vestager, Executive Vice-President of the European Commission for a Europe fit for the Digital Age, at the recent meeting of the US-EU Trade and Technology Council (TTC) promoted a voluntary “Code of Conduct” for generative AI products and raised expectations that such a code could be drafted “within weeks.”[14]
We are closely monitoring the ongoing negotiations and developments regarding the AI Act and the fast-evolving EU legal regulatory regime for AI systems, and stand ready to assist our clients in their compliance efforts. As drafted, the proposed law is complex and promises to be challenging for companies deploying or operating AI tools, products and services in the EU to navigate—particularly alongside parallel legal obligations under the GDPR and the DSA.”
_________________________
[1] EC, Proposal for a Regulation of the European Parliament and of the Council laying down Harmonised Rules on Artificial Intelligence and amending certain Union Legislative Acts (Artificial Intelligence Act), COM(2021) 206 (April 21, 2021), available at https://digital-strategy.ec.europa.eu/en/library/proposal-regulation-european-approach-artificial-intelligence. For more details, please see Gibson Dunn, Artificial Intelligence and Automated Systems Legal Update (1Q21), https://www.gibsondunn.com/artificial-intelligence-and-automated-systems-legal-update-1q21/#_EC_Publishes_Draft.
[2] If an agreement can be reached in the trilogues, the AI Act will be subject to a two-year implementation period before becoming applicable to companies. The AI Act would establish a distinct EU agency independent of the European Commission called the “European Artificial Intelligence Office.” Moreover, while the AI Act requires each member state to have a single overarching supervisory authority for the AI Act, there is no limit on the number of national authorities that could be involved in certifying AI systems.
[3] For more details, please see Gibson Dunn, Artificial Intelligence and Automated Systems 2022 Legal Review, https://www.gibsondunn.com/artificial-intelligence-and-automated-systems-2022-legal-review/
[4] European Parliament, Draft European Parliament Legislative Resolution on the Proposal For a Regulation of the European Parliament and of the Council on Laying Down Harmonised Rules on Artificial Intelligence (Artificial Intelligence Act) and Amending Certain Union Legislative Acts (COM(2021)0206 – C9‑0146/2021 – 2021/0106(COD)) (June 14, 2023), https://www.europarl.europa.eu/doceo/document/A-9-2023-0188_EN.html#_section1; see also the DRAFT Compromise Amendments on the Draft Report Proposal for a regulation of the European Parliament and of the Council on harmonised rules on Artificial Intelligence (Artificial Intelligence Act) and amending certain Union Legislative Acts (COM(2021)0206 – C9 0146/2021 – 2021/0106(COD)) (May 9, 2023), https://www.europarl.europa.eu/news/en/press-room/20230505IPR84904/ai-act-a-step-closer-to-the-first-rules-on-artificial-intelligence („Draft Compromise Agreement”).
[5] See, e.g., Open Loop, Open Loop Report “Artificial Intelligence Act: A Policy Prototyping Experiment” EU AI Regulatory Sandboxes (April 2023), https://openloop.org/programs/open-loop-eu-ai-act-program/.
[6] See NIST, AI Risk Management Framework 1.0 (Jan. 2023), https://www.nist.gov/itl/ai-risk-management-framework (defining an AI system as “an engineered or machine-based system that can, for a given set of objectives, generate outputs such as predictions, recommendations, or decisions influencing real or virtual environments [and that] are designed to operate with varying levels of autonomy”). For more details, please see our client alert NIST Releases First Version of AI Risk Management Framework (Jan. 27, 2023), https://www.gibsondunn.com/nist-releases-first-version-of-ai-risk-management-framework/.
[7] Draft Compromise Agreement, https://www.europarl.europa.eu/news/en/press-room/20230505IPR84904/ai-act-a-step-closer-to-the-first-rules-on-artificial-intelligence, Art. 3(1)(6)-(6b).
[8] Id., Art. 3(1)(6(b).
[9] Id., Art 3(2)-(4).
[10] Id., Art. 52.
[11] Id., Art. 3(1c), Art. 28(b).
[12] Id., Art. 28(b)(4)(c).
[13] European Commission, Digital Services Act – conducting independent audits, Commission Delegated Regulation supplementing Regulation (EU) 2022/2065 (May 6, 2023), https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13626-Digital-Services-Act-conducting-independent-audits_en.
[14] Philip Blenkinsop, EU tech chief sees draft voluntary AI code within weeks, Reuters (May 31, 2023), https://www.reuters.com/technology/eu-tech-chief-calls-voluntary-ai-code-conduct-within-months-2023-05-31/.
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 member or leader of the firm’s Artificial Intelligence practice group, or the following authors:
Kai Gesing – Munich (+49 89 189 33 180, kgesing@gibsondunn.com)
Joel Harrison – London (+44 (0) 20 7071 4289, jharrison@gibsondunn.com)
Vivek Mohan – Palo Alto (+1 650-849-5345, vmohan@gibsondunn.com)
Robert Spano – London (+44 (0) 20 7071 4902, rspano@gibsondunn.com)
Frances A. Waldmann – Los Angeles (+1 213-229-7914, fwaldmann@gibsondunn.com)
Christoph Jacob – Munich (+49 89 1893 3281, cjacob@gibsondunn.com)
Yannick Oberacker – Munich (+49 89 189 33-282, yoberacker@gibsondunn.com)
Hayley Smith – London (+852 2214 3734, hsmith@gibsondunn.com)
Artificial Intelligence Group:
Cassandra L. Gaedt-Sheckter – Co-Chair, Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)
Vivek Mohan – Co-Chair, Palo Alto (+1 650-849-5345, vmohan@gibsondunn.com)
Eric D. Vandevelde – Co-Chair, Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
On June 14, 2023, the IRS and Treasury issued proposed Treasury regulations (the “Proposed Regulations”) that provide eagerly awaited guidance on the rules for selling certain tax credits pursuant to a new regime introduced in the Inflation Reduction Act of 2022 (the “IRA”).[1] Taxpayers are permitted to rely on the Proposed Regulations until final regulations are published. In a separate regulatory package issued on the same date, the IRS and Treasury released a Temporary regulation (the “Temporary Regulation”) that implements a registration system (discussed below) with the IRS that parties will need to satisfy before any valid sale of credits; the Temporary Regulations will be effective as of June 21, 2023.[2]
On the same day, the IRS and Treasury also issued proposed and temporary Treasury regulations addressing rules under the IRA that make certain credits refundable under certain circumstances (so-called “direct pay”). We will address the proposed and temporary “direct pay” regulations in a subsequent alert.
The Proposed Regulations and Temporary Regulation are detailed, and a comprehensive discussion of them is beyond the scope of this alert. Instead, this alert begins with some background regarding section 6418[3] (the statutory provision permitting credit transfers), provides a short summary of some of the most important aspects of the Proposed Regulations and Temporary Regulation, and concludes with some observations regarding key implications of the guidance for market participants. The IRS and Treasury received hundreds of taxpayer requests for guidance on these issues, and the regulatory package is commendable for its breadth. As discussed below, some aspects of the guidance are very taxpayer-friendly, including clear guidance that a transferee who acquires a credit at a discount will not be subject to tax based upon that discount. By contrast, there are other aspects that are less taxpayer-friendly, such as a burdensome requirement that each individual energy property must be pre-registered with the IRS on an annual basis in order to transfer credits. We expect market participants will push for adjustments to these less taxpayer-friendly aspects of the Proposed Regulations before they are finalized.
Background
Historically, federal income tax credits associated with the investment in and production of clean energy and carbon capture technologies have been non-refundable,[4] and using non-refundable tax credits has required tax liability against which the credits could be applied. Because developers of clean energy (e.g., wind, solar) and carbon capture projects often earn credits in excess of their tax liability, these developers frequently enter into complex arrangements with third-party investors that have consistent and significant federal income tax liabilities (referred to as tax equity investors), such as banks, to shift entitlement to the project’s tax attributes (typically, credits and accelerated tax depreciation) to the tax equity investor. These arrangements require significant and costly structuring. Section 6418 is expected to reduce the need for complicated tax equity arrangements because it authorizes a number of eligible credits[5] to be simply sold by an eligible taxpayer to an unrelated third-party for cash.[6]
Transferring a Credit
The Proposed Regulations provide substantial practical guidance on transferability, clarifying who is eligible to transfer, who is effectively able to purchase, what can be transferred, what can be paid for a transfer, how the transfer is treated for income tax purposes by the transferor and transferee, how (administratively) to transfer the credits, which taxpayer is subject to recapture, how excessive credit transfer penalties can be avoided, and how these rules apply to passthrough entities that are transferors or transferees. The subsections below describe some of the most significant aspects of the guidance on these topics.
Who May Transfer Credits
Only “eligible taxpayers” are authorized to transfer eligible tax credits. The IRA broadly defines “eligible taxpayers” to include most U.S. taxpayers,[7] including passthrough entities, but excludes certain “applicable entities” for which the IRA makes credits refundable.[8] The Proposed Regulations confirm that, where a disregarded entity owns the property that generates the tax credit, the “eligible taxpayer” is the regarded owner of the disregarded entity. The Proposed Regulations also impose a strict ownership requirement on transferors that denies transferability in the case of, for example, contractual counterparties who otherwise are allowed the credits under special rules such as section 45Q(f)(3)(B) (election to allow the section 45Q credit to the party that disposes, utilizes, or uses the qualified carbon oxide) or section 50(d)(5) (election to allow lessees to claim the investment tax credit, i.e., inverted leases).
Further, a credit may be transferred only once. The preamble clarifies that any arrangement in which the ownership of an eligible credit transfers first from an eligible taxpayer to a dealer or intermediary and then to a transferee taxpayer would violate the single transfer limitation.[9] However, an arrangement using a broker to match eligible taxpayers and transferee taxpayers should not violate this limitation, assuming the arrangement at no time transfers the ownership of the eligible credit to the broker or any taxpayer other than the transferee taxpayer.
Who May Purchase Credits
Taxable C corporations seem likely to make up most of the buy-side market for transferrable credits.[10] The Proposed Regulations will effectively prevent most individuals, trusts, and estates from purchasing credits because the Proposed Regulations provide that, for purposes of the passive activity credit rules (section 469), the transferee taxpayer will be considered to earn eligible credits through the conduct of a trade or business related to the eligible credit but will not materially participate in that trade or business.[11] As a result, individuals would be required to treat the credits as passive activity credits, which (other than in certain limited circumstances) cannot offset tax liabilities attributable to wage income or portfolio income.
What Can be Transferred
As previously noted, the credits that may be transferred include those credits enumerated in section 6418, and the Proposed Regulations make clear that part or all of the credit that otherwise would be available to the transferor (including any “bonus” adder) may be transferred to one or more buyers. Circumscribing this flexible rule, however, is a “vertical slice” restriction, which provides that a taxpayer has to transfer an undivided portion (including all bonus amounts) of the credit generated with respect to a particular energy property (e.g., 1 percent of the total credit).
In addition, the Proposed Regulations make clear that the credit transferred is determined on an energy-property-by-energy-property basis, meaning taxpayers can choose to transfer credits with respect to one property but not with respect to another property, even if that other property is of the same class (or, apparently, even if the properties are part of the same project).[12]
What Can be Paid for a Credit
Section 6418 states that any amounts paid by a transferee taxpayer in connection with the transfer of an eligible credit must be paid in cash. The Proposed Regulations define “cash” and clarify when a payment needs to be made. A “cash” payment is one made in United States dollars by cash, check, cashier’s check, money order, wire transfer, automated clearing house (ACH) transfer, or other bank transfer of immediately available funds. Prepayments had raised several issues (e.g., that time value was invalid consideration for the credits), and the Proposed Regulations include a rule that blesses any payment made within the period beginning on the first day of the taxable year during which the credit is determined and ending on the due date (including extensions) for the transferor’s tax return for that year.[13] Moreover, a transferee is permitted to make a contractual commitment to purchase eligible credits in advance of the date the credit is transferred to such transferee taxpayer, as long as all payments comply with the timing rules described in the preceding sentence. If any consideration provided by a transferor to a transferee does not satisfy these requirements, the entire payment fails the test, and the credit transfer fails and is invalid for federal income tax purposes.
How the Transferor is Treated for Income Tax Purposes
Section 6418 provides that payments received by a transferor in exchange for a transfer of eligible credits is not included in the transferor’s gross income, as long as those amounts are received “in connection with” a transfer election. The Proposed Regulations clarify that an amount paid is “in connection” with a transfer election of an eligible credit (or portion thereof) if: (i) it is paid in cash, (ii) it directly relates to the specified credit portion (discussed below), and (iii) is not related to an excessive credit transfer. Thus, under the Proposed Regulations, it is clear that if a transfer election is ineffective for some reason, or if the actual amount of the credit is less than anticipated, the excess cash paid does not qualify for the gross income exclusion.
How the Transferee is Treated for Income Tax Purposes
Payments made by a transferee “in connection with” a transfer election (under the rules discussed above) are not deductible by the transferee taxpayer. In addition, the Proposed Regulations clarify that the transferee does not recognize gross income if it buys an eligible credit at a discount. The Proposed Regulations make specific note of not yet addressing the income tax treatment of transaction costs (for the transferor or the transferee), or the deductibility of losses incurred by a transferee who ultimately (i.e., after an audit) is determined to have overpaid for a credit, but the Treasury and the IRS note that they are currently developing rules on these general issues and are seeking taxpayer comments.
From a timing standpoint, the transferee takes the transferred credit into account in the first taxable year of the transferee ending with, or after, the taxable year of the transferor in which the credit was generated. If the taxable years of a transferor and transferee end on the same date, the transferee will take the eligible credit into account in that taxable year. If, however, their taxable years end on different dates, the transferee will take the eligible credit into account in the transferee’s first taxable year that ends after the taxable year of the transferor in which the credit was determined. Importantly, under the Proposed Regulations, a transferee may take into account a credit that it has purchased, or intends to purchase, when calculating its estimated tax payments.
How (Administratively) to Transfer Credits
The Temporary Regulation prescribes several detailed requirements that must be complied with in order to file an election to transfer credits. In addition to prescribing the information that transferors and transferees must include on their tax returns in order to make the transfer election,[14] there are several other significant administrative requirements under the Temporary Regulation.
Pre-Filing Registration Process. Would-be transferors must complete a pre-filing registration process and obtain a registration number for each eligible credit property with respect to which a transfer election is expected to be made. A substantial amount of information is required to be submitted to obtain a registration number, and a registration number must be obtained for each energy property. An eligible taxpayer who does not obtain a registration number and report the registration number on its return with respect to an eligible credit property is ineligible to make a transfer election. This registration number is valid only for the taxable year in which the credit is determined for the eligible credit property for which the registration is completed, and, in the case of transferees, for a transferee’s taxable year in which the eligible credit is taken into account.[15]
Transfer Election Statement. The transferor and transferee must agree to a “transfer election statement,” which is a written document that describes the transfer of the eligible credit entered into between a transferor and transferee. The detailed statement must be completed before the transferor files the tax return for which the eligible credit is determined and before the transferee files a tax return for the year in which the eligible credit is taken into account, and is required to comply with a substantial number of requirements laid out in the Temporary Regulations.[16]
How to Avoid Excessive Credit Transfer Penalties
Under the IRA, a tax is imposed on credit transferees equal to any “excessive credit transfer” (generally, a redetermination of the initial credit amount not arising from a post-determination recapture event). In addition, a 20-percent penalty tax will apply unless the transferee shows “reasonable cause” for the excessive credit transfer.
The Proposed Regulations state that reasonable cause will be determined based on the relevant facts and circumstances, but that generally the most important factor is the extent of the transferee’s efforts to determine that the amount of the credit to be transferred is not excessive and has not already been transferred to another taxpayer by the transferor. These efforts may be shown by reviewing records and reasonably relying on third-party expert reports and representations by the transferor that the credit is not excessive and has not been transferred to another taxpayer.
Which Taxpayer Is Subject to Recapture
Some of the credits that are eligible to be transferred (e.g., the investment tax credit) are subject to recapture upon the occurrence of certain events. The Proposed Regulations clarify that, in general, regular credit recapture rules apply to the transferee, even in a circumstance in which the recapture is caused solely by an action of the transferor. An exception applies to recapture resulting from certain actions that occur at the partner or shareholder level with respect to partnership or S corporation transferors (discussed below). The preamble makes clear that taxpayers can contract for indemnities for recapture events, without jeopardizing a transfer.
How the Rules Apply to Passthrough Entities
The Proposed Regulations provide detailed and extensive rules with respect to passthrough entities that are transferors or transferees. Although the Proposed Regulations confirm that passthrough entities may be both transferors and transferees, they also clarify that any partner or S corporation shareholder is prohibited from further transferring any credits allocated to it by a partnership or S corporation, as applicable, that directly holds (including via a disregarded entity) the credit-generating property. Consistent with the single transfer requirement, partners and shareholders in a transferee passthrough entity are not permitted to transfer credits that are allocated to them; importantly, however, the Proposed Regulations make clear that an allocation of credits by a transferee passthrough entity to its partners or shareholders does not constitute a transfer that runs afoul of the single transfer requirement. The Proposed Regulations contain additional rules (discussed below) designed to prevent partnerships, including tiered partnerships, from being used to avoid the single transfer requirement.
Notably, the rules clarify that certain characteristics of a transferor passthrough entity’s owners do not limit the amount of credits that a transferor passthrough entity is able to transfer. Most importantly, passthrough entity transferors will not be limited by the application of the passive activity credit rules (which apply at the partner or shareholder level).[17] There are, however, several exceptions to this general proposition. First, passthrough entities are required to apply the “at-risk” rules of section 49 based on how those rules would apply to the passthrough entities’ partners or shareholders, as applicable. Second, in the case of partnerships transferring certain credits (e.g., investment tax credits), the tax-exempt use property limitations will continue to reduce the amount of credits that can be transferred by certain partnerships with tax-exempt partners.
The Proposed Regulations provide that income received as consideration for transferred credits is treated as tax exempt and generally is allocated to each passthrough entity owner based on the amount of the underlying credit that would have been allocated to that passthrough entity owner in the absence of a transfer. This rule applies through tiers of partnerships. Thus, if a partnership (a lower-tier partnership) allocates tax-exempt income to a partner that is itself a partnership (an upper-tier partnership), the upper-tier partnership must allocate the tax-exempt income to its partners in the same manner that the credit would have been allocated to its partners absent the transfer election.
With respect to transferor partnerships that transfer less than all of their transfer-eligible credits, the Proposed Regulations allow income to be allocated to those partners that wished to transfer their share of the credits so long as (1) the amount of credits allocated to any partner does not exceed the amount of credits such partner would have received if no transfer were made and (2) the amount of tax-exempt income allocated to any partner does not exceed the partner’s “proportionate share of tax-exempt income.” A partner’s proportionate share of tax-exempt income is determined based on the amount of credits a partner would have received if the entire credit was transferred, adjusted for any credits actually allocated to the partner. The Proposed Regulations provide an example illustrating this rule and calculating the amount of credits and tax-exempt income allocated to each partner.
On the transferee partnership side, the rules clarify that purchased credits will be treated as “extraordinary items” within the meaning of Treas. Reg. § 1.706-4(e)(2). This treatment generally will prevent the allocation of purchased credits to partners who are not partners in a partnership on the first day that the transferee partnership makes a cash payment for the credit.[18] Purchased credits will be allocated among a partnership’s partners in proportion to their shares of the nondeductible expenses used to fund the purchase of the credits that year.
The Proposed Regulations also provide specific recapture guidance for passthrough entities. Under those rules, a transfer of an interest in a transferor partnership or S corporation (that, in the absence of a credit transfer, would have caused recapture of tax credits allocated to the transferring partner or shareholder, as applicable) will trigger recapture for the transferring partner or shareholder. However, the transfer will not trigger recapture for the transferee if the transfer of the interest in the transferor partnership or S corporation did not cause the property in the hands of the transferor partnership to cease to be eligible property (e.g., depending on the terms of the transferor’s partnership agreement, the transferee may still suffer recapture on the sale by a partner of its interest in the transferor partnership if the buyer is a tax-exempt entity).[19]
Commentary
Many aspects of the Proposed Regulations are taxpayer friendly and will help facilitate credit transfer transactions, but other aspects of the guidance are less taxpayer friendly and could be adjusted to better promote Congressionally intended transfer transactions. Numerous new rules with the potential for complete “cliff effect” disqualification of intended transfers will require great care in structuring unless those rules are modified when the Proposed Regulations are finalized.
- No Inverted Lessee Transferors. The rule allowing only the actual owner of the underlying property to transfer credits will prevent lessees in “inverted lease” structures from transferring credits. In an inverted lease structure (which dates to the 1962 origins of the investment tax credit), the lessor and the lessee elect for investment tax credit purposes to treat the lessee as having acquired the energy property for its fair market value. Market participants had been hopeful that the transferability rules would allow these lessees to transfer the investment tax credit, but the Proposed Regulations do not allow this. That said, the IRS and Treasury’s stated rationale for denying transferability in inverted lease structures is likely to meet meaningful criticism.
- Partnership Syndications. The Proposed Regulations make clear that a partnership can be a transferee, which should make it feasible to functionally transfer the credits broadly with a single transfer election. However, the “extraordinary item” rules impose a significant limitation that will require careful consideration in structuring payments for credits.
- No Selling Bonus Credits Separately. The Proposed Regulations authorize transferors to transfer some or all of their eligible credits, authorize transfers to an unlimited number of transferees, and make it feasible to transfer on an energy-property-by-energy-property basis. While these rules combine to provide substantial flexibility, they do not permit a transferor to transfer anything other than a vertical slice of a credit. Many tax credits that are eligible to be transferred include both a base credit amount and various bonus adders (g., energy community bonus, domestic content bonus). Taxpayers had requested to be able to transfer some or all of these bonus adders (which may bear more risk because of ongoing eligibility issues) separately from the base amount, but the Proposed Regulations make clear that this is not feasible.
- Cash Consideration Requirement – Some Flexibility, with Limits.
- The Proposed Regulations make clear that the only consideration that may be paid to a transferor is cash consideration. A peppercorn of noncash consideration will invalidate the entire transfer—a huge trap for the unwary.
- The Proposed Regulations provide some limited flexibility in terms of when payments may be made, but essentially limit payments so they are quasi-contemporaneous with the generation of the credits. The Proposed Regulations do authorize advance contractual commitments to purchase eligible credits, as long as actual payments are made in the prescribed regulatory window (which could be as long as 21-1/2 months). This advance contractual commitment authorization will be essential to securing bridge financing and to the orderly functioning of the burgeoning brokerage market, but still will impose some potentially significant limitations on sponsors seeking to monetize a stream of tax credits (g., production tax credits under section 45) over time, likely putting the transferability rules at a further disadvantage to traditional tax equity financing (which allows for a significant up-front payment based on both anticipated depreciation and tax credits). Additional authorization for advance commitments coupled with substantial prepayments would help close this gap between traditional tax equity and transferability.
- Tax-Free Discount Purchases. Market participants had been concerned about whether a purchase by a transferee at a discount to the face amount of the credit would result in the transferee recognizing taxable income on the difference. The Proposed Regulations follow the position previously articulated by the Joint Committee on Taxation and make clear that this discount is not income.[20] This rule is favorable to all stakeholders and will avoid transferees “grossing down” credit prices.
- Burdensome Transfer Requirements. Various aspects of the transfer regime in the Proposed Regulations likely will prove administratively burdensome, making it more challenging for taxpayers to avail themselves of the rules.
- For example, a separate transfer election must be made for each property (with a potential exception for the transfer of the investment tax credit, which may be able to be made on a project-wide basis). This requirement could be construed to require, for example, a separate election for each wind turbine comprising a wind facility. Adding to this complexity is the fact that, for a production tax credit-eligible project, transfers must be made on a yearly basis. And where there are multiple buyers, separate transfer elections must be made for each of them. Taken together, the specificity of these requirements could mean that a large number of elections may need to be made with respect to a single project. We appreciate and support the government’s efforts to eliminate fraud or other duplication of credits, but we think these objectives could be achieved with rules that allow for a smaller number of transfer elections (g., allowing aggregation of all facilities in a wind farm using “single project” factors similar to those that have been used in earlier “begun construction” guidance).
- In addition to potentially having to make numerous transfer elections with respect to a single project, the Proposed Regulations also impose a requirement for potential transferors to register the credits they intend to transfer before transferring them, prescribing a process that will require the submission of substantial information to obtain pre-registration. The rules also require that transferors and transferees agree upon a transfer election statement with detailed requirements and further prescribe a host of other tax return requirements, mandating yearly transfer elections. These requirements will serve as a barrier for all but the most sophisticated and well-financed taxpayers, limiting the reach and benefit of the transfer rules. In light of the fact that the rules in section 6418 were intended to eliminate the complexity and cost inherent in tax equity financing transactions, we are hopeful that the IRS and Treasury will consider ways to reduce the administrative complexity for would-be transferors in order to maximize the reach of the tax credit transfer rules.
- Recapture Risk. A number of market participants had been hopeful that recapture risk for credit transferees would be substantially limited, but the Proposed Regulations make clear that buyers generally bear recapture risk, although buyers are authorized to obtain contractual protection to reallocate this risk. The Proposed Regulations do provide, however, that where the tax credit transferor is a partnership, transfers by the partners of interests in that partnership generally do not cause recapture to a credit transferee as long as the transfer of the partnership interest does not cause the partnership’s property to cease to be credit eligible (g., as long as transferee of the partnership interest does not cause tax-exempt use property issues). As time goes on, the continued application of the tax-exempt use rules to transferor partnerships is likely to serve as a trap for the unwary because their application is counterintuitive (and even counter-policy) after the enactment of IRA. That is, the tax-exempt use rules were designed to prohibit tax-exempt entities from monetizing their tax-exempt status; those rules serve an uncertain (at best) role in this IRA credit regime in which tax-exempt entities are effectively treated as taxpayers for all purposes relevant to such credits.
- Useful Allocation Rules for Transferor Partnerships. The Proposed Regulations provide taxpayer-friendly rules that will be particularly useful for sponsors wishing to transfer the credits that are allocated to them in tax equity partnerships. Under a typical tax equity partnership, the bulk of the tax credits (usually 99 percent) are allocated to the tax equity investor until it achieves its “flip yield,” with the remaining 1 percent of the credits being allocated to the sponsor, who may not be able to use those credits. The Proposed Regulations authorize a tax equity partnership to transfer a single partner’s share of the otherwise applicable credits and specially allocate the income from that transfer (this income is tax exempt) to that partner. This should allow for more efficient credit monetization by sponsors, particularly given that the regulations make clear that the cash generated by a tax credit sale by a partnership can be used in whatever manner the partners decide.
Effective Date
Taxpayers may rely on these Proposed Regulations for taxable years beginning after December 31, 2022 and before the date the final regulations are published. The Temporary Regulation (i.e., the pre-filing registration regime) is effective for any taxable year ending on or after June 21, 2023.
___________________________
[1] As was the case with the so-called Tax Cuts and Jobs Act, the Senate’s reconciliation rules prevented Senators from changing the Act’s name, and the formal name of the so-called Inflation Reduction Act is actually “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.”
[2] The text of the Temporary Regulation was also included in the Proposed Regulations.
[3] Unless indicated otherwise, all section references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §” or “Prop. Treas. Reg. §” references are to the Treasury regulations or proposed Treasury regulations, respectively, promulgated under the Code.
[4] The investment tax credit for energy property was briefly refundable at its inception (1978-1980) and was effectively payable as a cash grant for projects that began construction in 2009-2011.
[5] “Eligible credit” means the alternative fuel vehicle refueling property credit determined under section 30C to the extent treated as a credit listed in section 38(b), the renewable electricity production credit under section 45(a), the credit for carbon oxide sequestration under section 45Q(a), the zero-emission nuclear power production credit under section 45U(a), the clean hydrogen production credit under section 45V(a), the advanced manufacturing production credit under section 45X(a), the clean electricity production credit under section 45Y(a), the clean fuel production credit under section 45Z(a), the energy credit under section 48, the qualifying advanced energy project credit under section 48C, and the clean electricity investment credit under section 48E. Credit carryforwards and carrybacks are not eligible credits.
[6] The terms “transferee,” “transferees,” and “transferee taxpayer” mean any taxpayer that is not related (within the meaning of sections 267(b) or 707(b)(1)) to the eligible taxpayer making the transfer election to which an eligible taxpayer transfers a specified credit portion of an eligible credit.
[7] U.S. taxpayers include those with employment or excise tax liability, not just those with income tax liability.
[8] The term “applicable entity” means (i) any tax-exempt organization exempt from the tax imposed by subtitle A (a) by reason of section 501(a) or (b) because such organization is the government of any U.S. territory or a political subdivision thereof, (ii) any State, the District of Columbia, or political subdivision thereof, (iii) the Tennessee Valley Authority, (iv) an Indian tribal government or subdivision thereof (as defined in section 30D(g)(9)), (v) any Alaska Native Corporation (as defined in section 3 of the Alaska Native Claims Settlement Act (43 U.S.C. 1602(m)), (vi) any corporation operating on a cooperative basis which is engaged in furnishing electric energy to persons in rural areas, or (vii) any agency or instrumentality of any applicable entity described in (i)(b), (ii), or (iv). For the purposes of this client alert, the term “passthrough” or “passthrough entity” means a partnership or an S corporation, unless otherwise noted.
[9] Unless otherwise stated, all references to the “preamble” are to the preamble to the Proposed Regulations.
[10] Importantly, the new federal corporate alternative minimum tax (commonly referred to as “CAMT”), also enacted by the IRA, can be wholly offset by transferrable credits.
[11] The rule also will limit the utility of credit purchases by certain closely held personal service corporations.
[12] This approach deviates from the general class-by-class approach that applies for purposes of electing out of “bonus” depreciation under section 168(k).
[13] This rule is described in the preamble as safe harbor but operates as a requirement.
[14] Note that the transferor must make the election on its original return, including extensions (no late-election relief is available), and no transfer election may be made or revised on an amended return or on a partnership administrative adjustment request.
[15] Transferees are also required to report the registration number received from a transferor taxpayer on Form 3800 as part of the return for the taxable year with respect to which the transferee taxpayer takes the transferred specified credit portion into account.
[16] For example, an eligible taxpayer that determines eligible credits with respect to two properties would need to make a separate election with respect to each property. For production-based credits that are available over a 10- or 12-year period, the election would need to be made each taxable year that the transferor elects to transfer credits.
[17] As discussed above, the passive activity credit rules will apply to credit transferees.
[18] If the transferee partnership and the transferor have different taxable years, the credit will be allocated only to partners in the transferee partnership as of the date that is the later of (i) the first day that the transferee partnership makes a cash payment for the credit and (ii) the first date the transferee partnership takes the credit into account under section 6418(d).
[19] The passthrough transferor is not required to provide notice of such transfers to the transferee.
[20] Joint Committee on Taxation, Description of Energy Tax Changes Made by Public Law 117-169, JCX-5-23, 97 (April 17, 2023).
This alert was prepared by Mike Cannon, Matt Donnelly, Emily Brooks, Alissa Fromkin Freltz*, Duncan Hamilton, and Simon Moskovitz.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Tax or Power and Renewables practice groups, or the following authors:
Tax Group:
Michael Q. Cannon – Dallas (+1 214-698-3232, mcannon@gibsondunn.com)
Matt Donnelly – Washington, D.C. (+1 202-887-3567, mjdonnelly@gibsondunn.com)
Kathryn A. Kelly – New York (+1 212-351-3876, kkelly@gibsondunn.com)
Josiah Bethards – Dallas (+1 214-698-3354, jbethards@gibsondunn.com)
Emily Risher Brooks – Dallas (+1 214-698-3104, ebrooks@gibsondunn.com)
Duncan Hamilton– Dallas (+1 214-698-3135, dhamilton@gibsondunn.com)
Simon Moskovitz – Washington, D.C. (+1 202-777-9532 , smoskovitz@gibsondunn.com)
Power and Renewables Group:
Gerald P. Farano – Denver (+1 303-298-5732, jfarano@gibsondunn.com)
Peter J. Hanlon – New York (+1 212-351-2425, phanlon@gibsondunn.com)
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, npolitan@gibsondunn.com)
*Alissa Fromkin Freltz is an associate working in the firm’s Washington, D.C. office who currently is admitted to practice only in Illinois and New York.
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
Decided June 16, 2023
United States, ex rel. Polansky v. Executive Health Resources, Inc., No. 21-1052
Today, the Supreme Court held 8-1 that the federal government may move at any time to dismiss a False Claims Act lawsuit over the objection of a relator, so long as it first intervenes in the action.
Background: The False Claims Act (FCA) allows private individuals, known as relators, to bring claims on behalf of the government against parties who have allegedly defrauded the federal government. When a relator files a complaint based on an alleged violation of the FCA, the government has the opportunity to intervene and litigate the action itself, or it can decline to intervene and allow the relator to litigate the action on its behalf. The statute provides that the Government “may dismiss the action”—notwithstanding the objections of the relator—if “the court has provided the [relator] with an opportunity for a hearing on the motion.” 31 U.S.C. § 3730(c)(2)(A).
Jesse Polansky brought an FCA claim against Executive Health Resources. The government initially declined to intervene. After Polansky spent five years litigating the case, the government moved to dismiss the case, citing discovery costs, the low likelihood that the lawsuit would succeed, and concerns about Polansky’s credibility. The district court granted the government’s motion and the Third Circuit affirmed, rejecting Polansky’s argument that the government lacks authority to seek dismissal under § 3730(c)(2)(A) after declining to intervene at the outset of the case.
Issue: Whether the government can seek dismissal of an FCA suit despite initially declining to intervene and, if so, what standard applies.
Court’s Holding:
The government may seek to dismiss an FCA lawsuit even after initially declining to intervene, as long as it intervenes before moving to dismiss. Federal Rule of Civil Procedure 41(a)’s generally applicable standards—which permit voluntary dismissals “on terms that the court considers proper”—govern the government’s dismissal motion, but courts applying those standards should grant the government’s views substantial deference.
“[W]e hold that the Government may seek dismissal of an FCA action over a relator’s objection so long as it intervened sometime in the litigation, whether at the outset or afterward.”
Justice Kagan, writing for the Court
Gibson Dunn submitted an amicus brief on behalf of Pharmaceutical Research and Manufacturers of America in support of the winning respondent: Executive Health Resources, Inc.
What It Means:
- Today’s decision confirms what lower courts have widely held for years: the government should be given wide latitude to dismiss an FCA suit when litigation of the suit is not in the government’s interest, including because it imposes discovery costs on federal employees and agencies that exceed any potential benefits or because it interferes with federal policy priorities. The decision also could present additional opportunities for defendants facing abusive FCA litigation to enlist support from the government even at advanced stages of the litigation.
- The Court’s decision is consistent with the Department of Justice’s 2018 “Granston” memo, which required department lawyers to consider pursuing dismissal of cases brought by relators that are shown to be frivolous, parasitic or opportunistic, or otherwise contrary to the government’s policies and programs. Michael D. Granston, U.S. Dep’t of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018). The Department has, even after the Granston memo, exercised its authority to dismiss FCA lawsuits very sparingly, but may have more confidence to seek dismissal of FCA lawsuits now that the Court has confirmed its authority to do so at any stage.
- Justice Thomas questioned the constitutionality of the FCA’s provisions allowing private relators to bring False Claims Act actions on behalf of the federal government. Justices Kavanaugh and Barrett, concurring in the Court’s decision, agreed with Justice Thomas’s view that there are “substantial arguments” that permitting private relators to represent the government is “inconsistent” with Article II and stated that the Court should address this “Article II issue” in a future case. These arguments have previously failed in lower courts, but these separate opinions will draw new attention to the issue, which is of significant importance given the enormous growth of qui tam FCA litigation in recent decades.
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 |
False Claims Act / Qui Tam Defense & FDA and Health Care Practices
| John D.W. Partridge +1 303.298.5931 jpartridge@gibsondunn.com |
Jonathan M. Phillips +1 202.887.3546 jphillips@gibsondunn.com |
Winston Y. Chan +1 415.393.8362 wchan@gibsondunn.com |
| Gustav W. Eyler +1 202.955.8610 geyler@gibsondunn.com |
How do you win cases in the highest court in the U.S.? Ted Olson and Ted Boutrous are back to discuss the strategies that helped them win landmark cases before the U.S. Supreme Court. This insider’s look also examines what it takes to craft and deliver legal arguments to secure success in the highest court in the land. Understanding your audience, knowing your arguments and keeping your cool are all essential, they say.
Previous Episode | Next Episode
All episodes of The Two Teds are available on GibsonDunn.com and wherever you listen to podcasts. You can also subscribe to be notified of new episodes via e-mail.
HOSTS:
Ted Boutrous – Theodore J. Boutrous, Jr., a partner in the Los Angeles office of Gibson, Dunn & Crutcher LLP, is global Co-Chair of the firm’s Litigation Group and previously led the firm’s Appellate, Crisis Management, Transnational Litigation and Media groups. He also is a member of the firm’s Executive and Management Committees. Recognized for a decade of excellence in the legal profession, the Daily Journal in 2021 named Mr. Boutrous as a Top Lawyer of the Decade for his victories. As a tireless advocate and leader for high-stakes and high-profile cases, Mr. Boutrous was also named the 2019 “Litigator of the Year, Grand Prize Winner” by The American Lawyer.
Ted Olson – Theodore B. Olson is a Partner in Gibson, Dunn & Crutcher’s Washington, D.C. office; a founder of the Firm’s Crisis Management, Sports Law, and Appellate and Constitutional Law Practice Groups. Mr. Olson was Solicitor General of the United States during the period 2001-2004. From 1981-1984, he was Assistant Attorney General in charge of the Office of Legal Counsel in the U.S. Department of Justice. Except for those two intervals, he has been a lawyer with Gibson, Dunn & Crutcher in Los Angeles and Washington, D.C. since 1965.
The New York Court of Appeals, the highest court in New York, recently issued a decision regarding several elements of New York’s defamation law, including what plaintiffs qualify as “public figures” for purposes of determining their burden of proof for defamation claims, the applicability of New York privileges against defamation liability, and the scope of certain of the 2020 amendments to New York’s anti-SLAPP law. Those amendments to sections 70-a and 76-a of the New York Civil Rights Law strengthened the protections for defendants in so-called SLAPP suits (“strategic lawsuits against public participation”) that seek to punish and chill the exercise of the rights of petition and free speech. Notably, this appears to be the first decision from New York’s highest court regarding the amendments New York adopted to its anti-SLAPP law in 2020.
Background
In Gottwald v. Sebert,* the New York Court of Appeals considered a dispute between the singer/songwriter Kesha Rose Sebert, known as “Kesha,” and the music producer Lukasz Gottwald, known as “Dr. Luke.”[1] In 2014, Kesha, who had been under contract with Gottwald in connection her recording career, sued Gottwald in California alleging that Gottwald had sexually assaulted her and seeking to void her contractual arrangements with him.[2] The same day, Gottwald sued Kesha in New York, alleging that Kesha and her attorneys had defamed him.[3]
While Gottwald’s defamation action was pending, New York amended its existing anti-SLAPP law in a number of ways.[4] New York’s previous anti-SLAPP law, enacted in 2008, was limited to litigation arising from a public application or permit, “usually in a real estate development situation.”[5] Among other things, as relevant here, the 2020 amendments “substantially expanded” the definition of “an action involving public petition and participation” to which the anti-SLAPP law would apply.[6] The anti-SLAPP law already required a plaintiff in any action to which the anti-SLAPP law applied to meet the “actual malice” standard, so expanding the scope of actions to which the anti-SLAPP law applies also expanded the actions in which plaintiffs were required to show actual malice.[7] Similarly, the anti-SLAPP law already allowed defendants to file a counterclaim to seek compensatory and punitive damages; expanding the scope of the anti-SLAPP law also expanded the set of actions in which defendants could seek that relief. And the 2020 amendments also created a mandatory fee-shifting provision, meaning that courts are required to award attorneys’ fees to defendants who defeat actions to which the anti-SLAPP law applies.[8]
After New York amended its anti-SLAPP law, Kesha sought leave to assert a counterclaim under the amended anti-SLAPP law for attorneys’ fees, damages for emotional distress, and punitive damages, as the amended law permits.[9]
After initial rulings at the trial court, the First Department intermediate appellate court issued two separate rulings on Kesha’s defenses, ruling that Gottwald was not a public figure; that whether Kesha’s statements were protected by New York privileges against defamation liability was a fact question that only the jury could resolve; and that the amended anti-SLAPP law did not apply to Gottwald’s claims because he had filed his claims before the amendments to the anti-SLAPP law were adopted.[10]
Kesha appealed both those rulings to the New York Court of Appeals, New York’s highest court. On June 13, 2023, the New York Court of Appeals reversed the appellate court in whole or in part on each issue.[11]
Public Figure Status
Under governing precedent from the United States Supreme Court, as a matter of federal constitutional law, a defamation plaintiff found to qualify as a “public figure” can only establish defamation liability if he proves by clear and convincing evidence that defamatory statements were made about him with “actual malice,” meaning with knowledge that the statement was false or with reckless disregard as to whether the statement was false.[12] Public figures come in two varieties. A general or “all-purpose public figure” is so prominent as to qualify as a public figure for all purposes, regardless of what defamatory statements are made or what subject matter those statements address.[13] Alternatively, plaintiffs will qualify as a “limited-purpose public figure” even if they do not have such broad notoriety if they nonetheless have invited and achieved public attention with respect to the subject matter the defamatory statements address.[14]
In the Gottwald case, the First Department intermediate appellate court held that Gottwald was not a general-purpose public figure because he was not a “celebrity” or a “household word.”[15] And the court held he was not a limited-purpose public figure with respect to Kesha’s allegedly defamatory statements about him because those statements accused him of sexual assault and Gottwald had done nothing to achieve public prominence with respect to the “specific public dispute . . . [of] sexual assault and the abuse of artists in the entertainment industry.”[16] Therefore, the court found, Gottwald’s acknowledged fame as a music producer and the notoriety he had achieved for his relationships with the artists he represented was irrelevant.[17]
A dissent at the First Department intermediate appellate court authored by Justice Saliann Scarpulla argued that the majority had misapplied the standard to determine when a plaintiff qualifies as a public figure.[18] The dissent argued that Gottwald probably qualified even as a general-purpose public figure because, though not a “household name” everywhere, he was “a household name to those that matter.”[19] But even if not, the dissent argued that Gottwald was at minimum a limited-purpose public figure “in connection with the dynamics of his relationship to the artists with whom he works and upon which he has built his well-known professional reputation.”[20] The dissent argued that the panel’s application of the public-figure analysis was too narrow: “That Dr. Luke has not spoken publicly about Kesha’s allegations of sexual assault is not surprising, is not relevant, and does not preclude a finding that he is a limited purpose public figure. The definition of limited purpose public figure is not so cramped as to only include individuals and entities that purposefully speak about the specific, narrow topic (in this case a protégé’s sexual assault) upon which the defamation claim is based.”[21]
The New York Court of Appeals reversed, “agree[ing] with the dissent below” that Gottwald met the standard to qualify as a limited-purpose public figure, because he had “purposefully sought media attention for himself, his businesses, and for the artists he represented, including Sebert, to advance those business interests.”[22] Therefore, Gottwald will be required to prove that Kesha made statements about him with “actual malice” to establish her liability.[23]
Privileges Against Defamation Liability
Kesha also argued that certain statements identified in Gottwald’s complaint were protected by certain of New York privileges against defamation liability: New York’s absolute common-law privilege for statements made in connection with judicial proceedings; its qualified common-law privilege for statements made in anticipation of litigation; and its statutory privilege codified at Civil Rights Law Section 74 for “fair and true reports” of judicial proceedings.[24]
Absolute Common-Law Privilege For Statements Made In Connection With Judicial Proceedings
New York courts have held that statements made in connection with judicial proceedings are absolutely privileged against defamation liability if they are pertinent to that proceeding.[25] Since 1986,[26] lower New York courts, beginning with the First Department intermediate appellate court, have identified an exception to that doctrine termed the “sham” exception, holding that the absolute privilege “will not be conferred where the underlying lawsuit was a sham action brought solely to defame the defendant.”[27] The First Department intermediate appellate court reaffirmed this exception as recently as 2015, when it expressly rejected a trial court’s conclusion that the First Department’s “sham” exception had “waned” in value.[28]
In Gottwald, the First Department intermediate appellate court held that whether the “sham” exception applied was a fact question that turned on whether Kesha sued Gottwald in good faith or as a sham.[29] Therefore, Kesha could not obtain summary judgment on the basis of that privilege; only the jury could decide whether Kesha could benefit from the absolute privilege for statements made in connection with judicial proceedings.[30]
The New York Court of Appeals reversed, holding that it was “error” to apply a “sham exception” to New York’s common-law absolute privilege for statements made in connection with judicial proceedings.[31] It was “inconsistent” with the Court of Appeals’ prior decisions regarding the absolute privilege for a court to examine the motive of the speaker.[32] Instead, if a statement was made in connection with a judicial proceeding and was pertinent to that proceeding, the absolute privilege applies.[33] The New York Court of Appeals therefore held that the absolute privilege applied to statements Kesha and her attorneys made in connection with her litigation against Gottwald.[34]
Qualified Common-Law Privilege For Statements Made In Anticipation Of Litigation
New York courts have also recognized a qualified privilege for statements made in good-faith anticipation of litigation.[35] However, unlike the absolute privilege for statements made in connection with a judicial proceeding, New York’s qualified privilege can be “lost . . . where a defendant proves that the statements were not pertinent to a good faith anticipated litigation.”[36] And because Gottwald had argued there is a factual dispute as to whether Kesha actually had a good-faith anticipation of litigation at the time she made some challenged statements, the Court of Appeals agreed with the lower courts that the jury would have to determine whether the qualified privilege applied only after determining whether Kesha actually had a good-faith anticipation of litigation at the time that she and her agents made the relevant statements.[37]
Civil Rights Law Section 74 Fair Report Privilege
Finally, New York has adopted a statutory privilege immunizing statements that publish a “fair and true report of any judicial proceeding” where the statement is “substantially accurate.”[38] The New York Court of Appeals has previously held that, unlike the common-law absolute privilege for statements made in connection with judicial proceedings, the statutory “fair report” privilege does include an exception for statements made by a plaintiff who “maliciously institute[s] a judicial proceeding” in order to make defamatory statements in connection with that proceeding.[39] In Gottwald, the New York Court of Appeals agreed with the lower courts that whether the fair report privilege applied was a question for the jury after determining whether Kesha’s claims against Gottwald “were brought . . . in good faith or maliciously to defame Gottwald.”[40]
Applicability Of Amended Anti-SLAPP Law
Finally, the New York Court of Appeals considered whether the amendments to the anti-SLAPP law applied “retroactively” and applied to Gottwald’s claims even though he filed them before the New York anti-SLAPP law was amended.[41] If the amendments applied “retroactively,” they would apply to Gottwald’s claims in their entirety throughout the entire course of the litigation, including over the six years the matter was litigated before the amendments were adopted in 2020.
Kesha primarily argued that two separate elements of the 2020 amendments to New York’s anti-SLAPP law should apply retroactively in Gottwald. First, Kesha argued that Gottwald should be required to meet the “actual malice” standard, regardless of whether he qualified as a public figure.[42] Second, Kesha argued that she should be entitled to file a counterclaim under the amended anti-SLAPP law that would entitle her to recover attorneys’ fees, damages for emotional distress, and punitive damages if she ultimately prevailed in the litigation.[43]
Until the Gottwald case was decided by the First Department intermediate appellate court, a significant number of state and federal courts had held that the 2020 amendments to the anti-SLAPP law did apply retroactively to any matter pending at the time they were adopted.[44] The First Department intermediate appellate court in Gottwald was the first court to hold otherwise, holding instead that the amendments did not apply retroactively and applied only to claims filed after the amendments were adopted.[45] The First Department intermediate appellate court reached that decision as to both the question of whether Gottwald was required under the amended anti-SLAPP law to meet the “actual malice” standard and as to the question of whether Kesha could file a counterclaim under that law for attorneys’ fees and damages—answering both questions in the negative.[46]
Because the New York Court of Appeals had already held that Gottwald did qualify as a public figure and therefore was required to meet the “actual malice” standard, it did not consider the question of whether the 2020 amendments to the anti-SLAPP law also independently required him to do so.[47]
The New York Court of Appeals held that the provisions of New York’s amended anti-SLAPP law authorizing a defendant to counterclaim for attorneys’ fees and damages did not apply retroactively.[48] The Court held that the legislature did not expressly provide that the amendments should apply retroactively.[49] In particular, the Court held that because the amendments that allowed a defendant to bring a counterclaim for attorneys’ fees and damages constituted a “statute imposing damages,” they should not “presumptively apply in pending cases.”[50]
Instead, the Court held that because the amendments to the anti-SLAPP law provided that defendants could recover attorneys’ fees and damages for an action “commenced or continued” improperly, the amendments could apply to Gottwald’s claims, but only with respect to events that occurred after the amendments were adopted.[51] This did not constitute “retroactive” application, the Court held, because “these provisions are applied, according to their terms, to the continuation of the action beyond the effective date of the amendments.”[52] In other words, the Court held that Kesha may bring a counterclaim under New York’s amended anti-SLAPP law to recover attorneys’ fees and damages, but only for attorneys’ fees and damages that arose after the amendments were enacted, and not before: “Because Gottwald’s liability [under the amended anti-SLAPP law] attached, if at all, when he chose to continue the defamation suit after the effective date of the statute, any potential calculation of attorneys’ fees or other damages begins at the statute’s effective date.”[53]
Dissent
Judge Jenny Rivera of the New York Court of Appeals dissented in part.[54]
Judge Rivera argued in dissent that the majority had erred regarding the scope of New York’s qualified privilege for statements made in anticipation of litigation.[55] Judge Rivera would have held that on the undisputed record, the statements in question were clearly made in anticipation of litigation because they were made while pre-suit settlement negotiations were ongoing, shortly before Kesha filed suit in California against Gottwald, and were made either in connection with settlement negotiations or as part of sharing information with the press under pre-suit embargo.[56] Judge Rivera argued that requiring a jury to decide whether Kesha had a good-faith anticipation of litigation on that record “severely limits settlement efforts” by allowing potential defamation liability to attach.[57]
Judge Rivera also argued in dissent that the majority had erred regarding the scope of New York’s statutory “fair report” privilege.[58] Judge Rivera would have held that the statements of Kesha and her attorneys about litigation with Gottwald qualified as a “fair report” without examining her motives in bringing the litigation.[59] Judge Rivera argued that the Gottwald majority had “extend[ed]” the “sham” exception to the New York statutory “fair report” privilege in a way that “risk[ed] eroding the privilege altogether.”[60]
Finally, Judge Rivera argued in dissent that the majority had erred regarding the retroactivity of the 2020 amendments to the New York anti-SLAPP law.[61] Judge Rivera would have held that those amendments were retroactive and applied to Gottwald’s suit in its entirety, dating to the day it was commenced.[62] In particular, Judge Rivera argued that the majority was wrong to treat the amendments that allowed defendants to assert a counterclaim for attorneys’ fees and damages as a new law that “introduced damages liability” for the first time.[63] Judge Rivera argued that the 2020 amendments instead articulated a specific version of a remedy that always existed—the availability of sanctions, including attorneys’ fees and damages, for filing a frivolous lawsuit—and so should not be treated as a statute imposing liability on past conduct that had not been a basis for liability at the time that conduct occurred.[64] Judge Rivera disagreed with the majority’s interpretation of the statutory phrase “commenced or continued,” which she would have found was a reason to hold the amendments applied retroactively, rather than applying only as of the date the amendments were adopted. In Judge Rivera’s view, “[t]he majority’s prospective-only construction of the ‘commenced or continued’ language . . . is an overly narrow construction of that phrase. The fact that any action continued at the time of the effective date of the amendments falls within the scope of the statute means just that; it does not necessarily or by implication mean that monetary relief is measured from the effective date. Despite the majority’s effort to complicate straightforward language, the meaning and effect of the word ‘commenced’ in the phrase ‘commenced or continued’ tracks to the person who commenced the prohibited legal action.”[65]
Conclusion
This decision from the highest court of New York provides additional precedent regarding the categories of plaintiffs who will qualify as public figures under New York law, the availability of New York common-law and statutory privileges against defamation liability, the retroactivity of New York’s amended anti-SLAPP law, and the analysis New York courts should apply to evaluate whether newly enacted laws should have retroactive effect. The New York Court of Appeals expressly left open the question of whether other provisions of New York’s amended anti-SLAPP statute will have retroactive effect as to cases pending at the time those amendments were adopted.
* Gibson, Dunn & Crutcher LLP represents Sony Music Entertainment with respect to third-party discovery in the trial court in Gottwald v. Sebert, No. 653118/2014 (Sup. Ct. N.Y. Cty.); claims against Sony Music Entertainment in the trial court have been dismissed.
________________________
[1] Gottwald v. Sebert (“Gottwald III”), No. 32, 2023 WL 3959051 (N.Y. June 13, 2023).
[2] Id. at *1.
[3] Id.
[4] Id. at *2.
[5] 2020 N.Y. Senate Bill No. 52-A/Assembly Bill No. 5991A (July 22, 2020), https://www.nysenate.gov/legislation/bills/2019/s52/amendment/a.
[6] Gottwald III, 2023 WL 3959051 at *5.
[7] Palin v. New York Times Co., 510 F. Supp. 3d 21, 28–29 (S.D.N.Y. 2020)(citing New York Times v. Sullivan, 376 U.S. 254 (1964) and N.Y. Civil Rights Law § 76-a(2)).
[8] Gottwald III, 2023 WL 3959051 at *5.
[9] Gottwald III, 2023 WL 3959051 at *2.
[10] Gottwald v. Sebert (“Gottwald II”), 165 N.Y.S.3d 38 (App. Div. 1st Dept. 2022); Gottwald v. Sebert (“Gottwald I”), 148 N.Y.S.3d 37 (App. Div. 1st Dept. 2021).
[11] Gottwald III, 2023 WL 3959051.
[12] Huggins v. Moore, 94 N.Y.2d 296, 301 (1999); New York Times Co. v. Sullivan, 376 U.S. 254, 279–80 (1964).
[13] Gottwald III, 2023 WL 3959051, at *2, *14 n.8.
[14] Gottwald III, 2023 WL 3959051, at *2.
[15] Gottwald I, 148 N.Y.S.3d at 43.
[16] Id. at 43–45.
[17] Id. at 44–45.
[18] Id. at 47–51 (Scarpulla, J., dissenting).
[19] Id. at 48–49 (Scarpulla, J., dissenting).
[20] Id. at 49–51 (Scarpulla, J., dissenting).
[21] Id. at 50 (Scarpulla, J., dissenting).
[22] Gottwald III, 2023 WL 3959051, at *2–3.
[23] Id. at *3.
[24] Id. at *3–4.
[25] Front, Inc. v. Khalil, 24 N.Y.3d 713, 718 (2015).
[26] Halperin v. Salvan, 117 A.D.2d 544, 548 (1st Dept. 1986).
[27] Gottwald I, 148 N.Y.S. at 46.
[28] Flomenhaft v. Finkelstein, 127 A.D.3d 634, 638 (1st Dep’t 2015).
[29] Gottwald I, 148 N.Y.S.3d at 46.
[30] Id.
[31] Gottwald III, 2023 WL 3959051, at *3.
[32] Id.
[33] Id.
[34] Id.
[35] Id. at *4.
[36] Id.
[37] Id.
[38] Id. (citing Civil Rights Law § 74, Holy Spirit Assn. for Unification of World Christianity v. New York, 49 N.Y.2d 63, 67 (1979)).
[39] Williams v. Williams, 23 N.Y.2d 592, 599 (1969).
[40] Gottwald III, 2023 WL 3959051, at *4.
[41] Id. at *5–7.
[42] Id. at *5.
[43] Id. at *6.
[44] Memorandum of Law in Support of Motion of Defendant-Respondent for Reargument or, in the Alternative, Leave to Appeal, Gottwald v. Sebert, No. 2021-03036, Dkt. 20 at 15 n.1 (N.Y. App. Div. 1st Dep’t Apr. 11, 2022).
[45] Gottwald II, 165 N.Y.S.3d at 39–40.
[46] Id.
[47] Gottwald III¸ 2023 WL 3959051, at *5.
[48] Id. at *6–8.
[49] Id. at *6.
[50] Id. at *7.
[51] Id. at *6.
[52] Id.
[53] Id.
[54] Gottwald III, 2023 WL 3959051, at *8–17 (Rivera, J., dissenting).
[55] Id. at *14–15 (Rivera, J., dissenting).
[56] Id.
[57] Id. at *14 (Rivera, J., dissenting).
[58] Id. at *15–16 (Rivera, J., dissenting).
[59] Id.
[60] Id. at *16 (Rivera, J., dissenting).
[61] Id. at *9–13 (Rivera, J., dissenting).
[62] Id. at *10–11 (Rivera, J., dissenting).
[63] Id. at *10 n.4, *12–13 (Rivera, J., dissenting).
[64] Id.
[65] Id.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Theodore Boutrous, Annie Champion, Connor Sullivan, Alexandra Perloff-Giles, and Angela Coco.
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)
Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com)
Michael H. Dore – Los Angeles (+1 213-229-7652, mdore@gibsondunn.com)
Ilissa Samplin – Los Angeles (+1 213-229-7354, isamplin@gibsondunn.com)
Angela A. Coco – New York (+1 332-253-7657, acoco@gibsondunn.com)
Alexandra Perloff-Giles – New York (+1 212-351-6307, aperloff-giles@gibsondunn.com)
Connor Sullivan – New York (+1 212-351-2459, cssullivan@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
Colorado has developed a reputation in recent years as one of the more employee-friendly jurisdictions in the United States. One reason for this reputation is the much-publicized Equal Pay for Equal Work Act, particularly its wage transparency rules, which purported to require employers with even one Colorado-based remote employee to include specific compensation-and-benefits information in job postings and to announce all “promotional opportunities,” regardless of where within the company those opportunities are located or whether anyone in Colorado is qualified for them.
The Colorado legislature spent much of the latest session not only amending these job-posting requirements, but passing additional bills intended to offer workers greater protections. In May 2023, the Colorado legislature passed several bills that Governor Jared Polis recently signed into law. These new laws amend existing laws, for instance by introducing new worker protections, modifying standards of proof, and updating record retention requirements. The new laws include the following:
I. Senate Bill 23-105, Ensure Equal Pay For Equal Work Act (EEPEWA), introducing additional requirements concerning equal pay and job posting disclosures;
II. Senate Bill 23-172, Protecting Opportunities and Workers’ Rights (POWR) Act, expanding the reach of anti-discrimination laws;
III. Senate Bill 23-058, Job Application Fairness Act, prohibiting employers from asking about age-related information in initial job applications;
IV. Senate Bill 23-017, Additional Uses Paid Sick Leave, adding new qualifying reasons to use paid sick leave;
V. House Bill 23-1076, Workers’ Compensation, expanding employees’ medical impairment and disability benefits; and
VI. Senate Bill 23-111, Public Employees’ Workplace Protection Act, providing additional protections for public employees.
These laws likely will affect how employers draft and implement their employment policies and practices, and may give rise to litigation. Key additions and revisions to Colorado employment law are described below:
I. SB23-105 (Ensure Equal Pay for Equal Work Act) Amends Job Posting Disclosure Requirements.
The EEPEWA amends the Equal Pay for Equal Work Act (effective January 1, 2021), which imposed equal pay requirements and, more controversially, required employers to disclose salary ranges and employee benefits in job postings and disclose promotional opportunities to their employees, making it the first in a series of state pay transparency laws.
The EEPEWA, which was signed into law on June 5, 2023 and will go into effect on January 1, 2024, expands the investigatory mandate of the Colorado Department of Labor and Employment (CDLE) and both augments and reduces employers’ job posting disclosure requirements. Most notably, employers will have to disclose internally certain additional information about recently hired candidates to current employees, but (until July 1, 2029) will no longer have to make detailed salary and benefits disclosures if the employer has no physical presence in Colorado and has fewer than 15 remote employees in Colorado. Further details follow:
A. The EEPEWA Requires the CDLE to Take Further Protective and Investigative Measures.
The EEPEWA requires the CDLE to create and implement systems to accept and mediate complaints regarding violations of the sex-based wage equity provision of the Equal Pay for Equal Work Act and create new rules as necessary to accomplish this purpose. Previously, the Equal Pay for Equal Work Act simply permitted the CDLE to take these measures, but did not make them mandatory.
Furthermore, the EEPEWA requires the CDLE to investigate complaints or leads related to sex-based wage inequity (employing fact-finding procedures from the Equal Pay for Equal Work Act), promulgate rules as needed, and order compliance and relief if a violation is found. However, these enforcement actions will “not affect or prevent the right of an aggrieved person from commencing a civil action.”
In addition, starting January 1, 2024, individuals bringing sex-based wage discrimination claims may seek back pay going back twice as long as they could previously: up to six years instead of three.
B. The EEPEWA Requires Employers to Announce “Job Opportunities,” Whether or Not “Promotional,” But Not “Career Development” or “Career Progression” Opportunities.
Under the EEPEWA, employers must take reasonable steps to ensure that every “job opportunity” is announced, posted, or made known to all employees on the same day and before any selection decisions are made. However, employers physically outside Colorado that have fewer than 15 remote employees in Colorado need only provide notice of remote job opportunities through July 1, 2029. Perhaps anticipating complications related to temporary or stopgap employment, the EEPEWA further directs the CDLE to establish rules regarding “temporary, interim, or acting” job opportunities that require immediate hire.
According to new definitions in the EEPEWA, a “job opportunity” is a “current or anticipated vacancy” for which an employer is considering or interviewing candidates, or that an employer has posted publicly. Notably, a “job opportunity” does not encompass either a “career development” or a “career progression.” “Career development,” as defined in the statute, refers to changes in an employee’s terms of “compensation, benefits, full-time or part-time status,” or job title that recognize an employee’s performance or contributions. And “career progression” means moving from one position to another based on objective metrics or time spent in a role.
C. The EEPEWA Requires Disclosing Information About Job Opportunities, Career Progression, and Selected Candidates.
The EEPEWA also imposes new disclosure requirements for “job opportunities,” requiring employers to include in job opportunity notices not only salary ranges and a general description of employee benefits but also “the date the application window is anticipated to close.”
Furthermore, within 30 days of selecting a candidate for a job opportunity, the EEPEWA requires the employer to make reasonable efforts internally to disclose certain information about the selected candidate—at a minimum, informing employees who will work with the new hire. This includes (a) the candidate’s name, (b) their former job title (if the candidate was an internal hire), (c) their new job title, and (d) information on how employees can express interest in similar job opportunities in the future, unless any such disclosure would violate the candidate’s privacy rights under other relevant laws or pose a risk to their health and safety.
For positions with “career progression,” moreover, the EEPEWA requires employers to make available to “eligible employees” information about the requirements for such progression, in addition to information about each position’s compensation, benefits, full-time or part-time status, responsibilities, and further advancement.
II. SB23-172 (POWR Act) Amends Colorado’s Anti-Discrimination Law.
On June 6, 2023, Governor Polis signed SB23-172, Protecting Opportunities and Workers’ Rights Act (POWR Act), into law. This Act amends Colorado’s anti-discrimination laws, including with regard to workplace harassment.
First, the POWR Act creates a new definition for “harassment” and modifies the standard of proof in workplace harassment claims. Currently, a complainant alleging harassment is required to demonstrate a hostile work environment. The POWR Act replaces the definition of “harassment” with one that includes “any unwelcome physical or verbal conduct.” Additionally, on any charge form or intake mechanism form, a complainant may select “harassment” as a basis or description of a discriminatory or unfair employment practice. The POWR Act also replaces the prior court-created “severe or pervasive” standard in determining whether workplace harassment is a discriminatory or unfair employment practice, instead introducing “a standard that prohibits unwelcome harassment.”
If an employee establishes harassment by a supervisor, the employer may benefit from an Ellerth/Faragher-type affirmative defense (providing employers a safe harbor from vicarious liability resulting from sexual harassment claims against a supervisory employee) if it can show that (1) it takes prompt, reasonable action to investigate or address alleged harassment when warranted; (2) it communicated to supervisors and non-supervisors the existence and details of its complaint and investigation/remediation process; and (3) the employee unreasonably failed to take advantage of this process.
The POWR Act also amends a provision of the Colorado Anti-Discrimination Act (CADA) regarding reasonable accommodation for people with disabilities. The prior version of the CADA provided that an employer could not be held liable for discriminating against individuals with disabilities by taking an adverse employment action “if the disability has a significant impact on the job.” The POWR Act removes this language from the CADA.
Furthermore, the POWR Act makes “marital status” a protected class in Colorado. The Act also imposes new recordkeeping mandates, requiring employers to maintain personnel and employment records for a minimum of five years, and to “maintain an accurate, designated repository of all written or oral complaints of discriminatory or unfair employment practices.”
Finally, the POWR Act voids nondisclosure provisions that limit an employee’s ability to disclose or discuss alleged discriminatory or unfair employment practices, unless they satisfy certain conditions.
Either an employee/applicant or the Colorado Civil Rights Commission may bring a complaint under the POWR Act. Individuals may recover actual damages, costs, and attorneys’ fees. Penalties and punitive damages also may be assessed in appropriate circumstances, including a potential $5,000 penalty for each instance in which an employer includes in an agreement a noncompliant nondisclosure provision.
The Act is expected to be effective on August 7, 2023, 90 days after the final adjournment of Colorado’s General Assembly on May 8, 2023. However, if a referendum petition is filed, the Act will need to be approved through a general election in November 2024.
III. SB23-058 Imposes New Rules Regarding Age-Related Questions in Job Applications.
SB23-058, the Job Application Fairness Act (JAFA), was signed into law on June 2, 2023. Starting July 1, 2024, the JAFA prohibits employers from seeking a prospective employee’s age-related information via the initial job application. This includes details such as date of birth and dates of attendance at, or graduation from, an educational institution.
The JAFA provides exceptions, however, for example where the employer seeks application materials such as copies of certifications and transcripts, if it adheres to certain processes. Additionally, employers may ask individuals to verify compliance with the age requirements under other laws and guidelines, such as the following:
- A bona fide occupational qualification pertaining to public or occupational safety;
- A federal law or regulation; or
- A state or local law or regulation based on a bona fide occupational qualification.
The CDLE will be in charge of enforcing the JAFA. The CDLE may issue warnings and compliance orders and impose civil penalties for repeated violations. Notably, a violation of the JAFA does not create a private right of action. If an individual believes their rights have been violated, they can file a complaint with the CDLE, which will investigate the complaint unless it determines pre-investigation that the complaint lacks merit.
Finally, the JAFA mandates that the CDLE adopt rules regarding handling complaints of violations, the process for notifying employers of alleged violations, and the requirements for maintaining and retaining employment records while an investigation is ongoing.
Before July 2024, Colorado employers should consider reviewing their hiring materials, including job postings and applications, and training employees involved in the hiring process to comply with JAFA requirements.
IV. SB23-017 Introduces Additional Uses for Paid Sick Leave.
On June 2, 2023, Governor Polis signed into law SB23-017, which expands the acceptable uses of paid sick leave under the Colorado Healthy Families and Workplaces Act (HFWA). The HFWA provides that employees can use paid sick leave to obtain medical care or legal services in certain situations for themselves or their family members.
SB23-017 introduces additional qualifying reasons to use paid sick leave, including taking time off to grieve, attend funeral services or memorials, or handle financial and legal matters that arise after the death of a family member; caring for a family member when that family member’s school or place of care has been closed under certain circumstances; or evacuating an employee’s place of residence in certain unexpected situations.
Employers must notify employees of their right to take paid leave under the HFWA, including the qualifying reasons for taking such leave. In addition to providing the required notice, employers may wish to update their leave policies to reflect these additional uses.
SB23-017 is expected to become effective in early August 2023, about 90 days after the final adjournment of Colorado’s General Assembly in May. This may change if a referendum petition is filed, in which case the law would need to be approved through a general election in November 2024.
V. HB23-1076 Expands the Workers’ Compensation Act of Colorado.
HB23-1076, amending the Workers’ Compensation Act of Colorado, was signed on June 6, 2023. The Workers’ Compensation Act of Colorado currently mandates that businesses with employees operating in Colorado provide workers’ compensation insurance covering medical and lost-wage benefits to employees injured on the job, whether they are part-time or full-time.
HB23-1076 expands the existing medical-impairment-benefits limit from 12 to 36 weeks. Further, when an employee’s temporary total disability benefits end, HB23-1076 allows the employee to ask to return to regular work with a doctor’s written release.
HB23-1076 is expected to take effect on August 7, 2023, but if a referendum petition is filed, the Act would need to be approved through a general election in November 2024.
VI. SB23-111 Creates New Workplace Protections for Public Employees.
On June 7, 2023, Colorado enacted SB23-111, the Public Employees’ Workplace Protection Act, which aims to protect certain public employees from retaliation. The employees covered under this Act include those “employed by counties, municipalities, fire authorities, school districts, public colleges and universities, library districts, special districts, public defender’s offices, the university of Colorado hospital authority, the Denver health and hospital authority, the general assembly, and a board of cooperative services.” Public Employees’ Workplace Protection, Colo. Gen. Assemb., https://leg.colorado.gov/bills/sb23-111 (last visited June 7, 2023).
The Act also codifies public employees’ right to freely discuss or express views concerning public employee representation or workplace issues and to full participation in the political process. Moreover, the Act “prohibits certain public employers from discriminating against, coercing, intimidating, interfering with, or imposing reprisals against a public employee for engaging in any of the rights granted.” Id.
The Act grants the CDLE rulemaking and enforcement powers. The Act’s Section 29-33-105(3) (regarding the adjudication authority of the CDLE’s Division of Labor Standards and Statistics) is set to take effect on July 1, 2024. The rest of the Act is expected to take effect in August 2023, but this may change if the Act goes through a referendum and general election in November 2024.
The following Gibson Dunn attorneys assisted in preparing this client update: Jessica Brown and Marie Zoglo.
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, any member of the firm’s Labor and Employment practice group, or Jessica Brown, Jason Schwartz or Katherine Smith:
Jessica Brown – Partner, Labor & Employment Group, Denver
(+1 303-298-5944, brown@gibsondunn.com)
Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, ksmith@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
For nearly 200 years, the New York Court of Appeals has resolved issues of paramount significance for New York and the nation. As the state’s court of last resort, its judges regularly issue landmark decisions on issues ranging from state common law to the United States Constitution. Moreover, its broad jurisdiction over a wide array of cases in New York often results in rulings of great importance in commercial and other matters. The last two years have marked an important turning point for the Court, with the appointment of a new Chief Judge and four new judges to the seven-member bench. At the same time, the Court continued to resolve a number of significant issues, often through split opinions with lengthy concurrences and dissents. In this exclusive one-hour presentation, three experienced appellate practitioners – Mylan Denerstein, Akiva Shapiro, and Seth Rokosky – explain key developments at the Court. They discuss not only relevant background and changes to the Court, but also recent and pending cases of interest in a broad array of areas, including constitutional law, jurisdiction, civil procedure, torts, insurance, consumer protection, and employment law.
PANELISTS:
Mylan L. Denerstein is a litigation partner in the New York office of Gibson, Dunn & Crutcher. Ms. Denerstein is a Chair of the Public Policy Practice Group and a member of the Crisis Management, White Collar Defense and Investigations, Financial Institutions, Labor and Employment, Securities Litigation, and Appellate Practice Groups. Ms. Denerstein leads complex litigation and internal investigations, representing companies confronting a wide range of legal issues, in their most critical times. Ms. Denerstein is known not only for her effective legal advocacy, but also for her ability to solve problems. In addition, Ms. Denerstein is Global Chair of the Firm’s Diversity Committee and Co-Partner in Charge of the New York office. Ms. Denerstein was previously a member of the Firm’s Executive Committee. Ms. Denerstein has served in a wide variety of roles in government, including in the New York State Governor’s Office, the New York State Attorney General’s Office, the U.S. Attorney General’s Office for the Southern District of New York, and the New York City Fire Department.
Akiva Shapiro is a litigation partner in Gibson, Dunn & Crutcher’s New York office, Chair of the Firm’s New York Administrative Law and Regulatory Practice Group, Co-Chair of its Religious Liberty Working Group, and a member of the Firm’s Appellate and Constitutional Law, Media, Entertainment and Technology, and Securities Litigation Practice Groups, among others. Mr. Shapiro’s practice focuses on a broad range of high-stakes constitutional, administrative, commercial, and appellate litigation matters. He is regularly engaged in front of New York’s trial courts, federal and state courts of appeal, and the U.S. Supreme Court.
Seth M. Rokosky is of counsel in the New York office of Gibson, Dunn & Crutcher. He is a member of the firm’s Litigation Department and focuses his practice in the Appellate and Constitutional Law group. Mr. Rokosky rejoined Gibson Dunn after serving in the New York Attorney General’s Office. As an Assistant Solicitor General in the Bureau of Appeals and Opinions, his public service included representing the State and its agencies as principal attorney on 43 appellate matters. He is currently serving as Co-Chair of the Appellate Practice Committee of the New York State Bar Association’s Commercial and Federal Litigation Section.
MCLE CREDIT INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.
Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 General hour.
Gibson, Dunn & Crutcher LLP is authorized by the Solicitors Regulation Authority to provide in-house CPD training. This program is approved for CPD credit in the amount of 1.0 hour. Regulated by the Solicitors Regulation Authority (Number 324652).
Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1 hour toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.
Application for approval is pending with the Colorado, Virginia, Texas and Washington State Bars.
We are pleased to provide you with Gibson Dunn’s ESG monthly updates for May 2023. This month, our update covers the following key developments. Please click on the blue links below for further details.
1. PRI Minimum requirements reporting guidance on human rights
In May 2023, the United Nations Principles for Responsible Investment (“PRI”) released a report on “Minimum Requirements for PRI Investor Signatories”, which provides guidance to accompany the Policy, Governance and Strategy module of the 2023 Reporting Framework. The report outlines minimum requirements that investment managers and asset owner signatories must satisfy in their annual reporting obligations to PRI and can be used as a tool to determine whether companies are meeting certain mandatory key performance indicators. The guidance comprises three minimum requirements: (i) responsible investment policy – investor signatories must have formalised structures in place for responsible investment and more than the majority of assets under management must be covered by guidelines on ESG factors, (ii) senior-level oversight and accountability – senior individuals within an organization must have official oversight for the execution of a responsible investment strategy and any related policies and objectives, and be held accountable if such targets are not achieved, and (iii) responsibility for implementation – at least one individual within an organization must manage the organisation’s overall performance in relation to its responsible investment strategy by fostering a forward-thinking and ESG-aware approach to investment decisions, ensuring that the business has robust ESG policies in force and/or seeking opportunities to improve the existing ESG practices of holdings, policy makers, or other key stakeholders through voting and engagement.
2. SBTN releases first corporate science based targets for nature
On May 24, 2023, the Science Based Targets Network (“SBTN”) announced the release of inaugural science-based corporate targets for nature and biodiversity in an effort to encourage companies to voluntarily assess and prioritise their environmental impact and to set specific targets to address these issues. This follows initial guidance published in September 2020 and is the first release, which forms part of a multi-year plan to equip all businesses with comprehensive objectives founded on scientific research. In addition, the first release is just the beginning of SBTN’s journey in supporting companies in setting nature targets with scientific backing, and such targets which continue to widen in scope in line with science and technology progress. A paper that explains the inclusion of biodiversity in the first release has also been published as well as initial guidance on local stakeholder engagement.
1. Heightened consumer protection obligations for UK businesses
New regulatory obligations for the UK Consumer Duty (“CD”) are due to come into force on July 31, 2023. This follows the publication of the final rules and guidance on July 27, 2022, which sets expectations to mitigate the risks to retail consumers investing in financial products and services. The CD applies to the regulated and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000, the Payment Services Regulations 2017 and E-money Regulations 2011. Firms should now have completed their reviews to ensure that they align with the new regulations under the CD, which set higher and clearer standards of consumer protection for financial institutions. The new rules seek to ensure that consumer needs are prioritised by introducing: (i) a new Consumer Principle, which requires institutions to deliver positive outcomes for retail consumers, (ii) ‘cross-cutting rules’ with increased clarity to help businesses understand the four outcomes (which relate to (a) products and services, (b) price and value, (c) consumer understanding, and (d) consumer support) and (iii) requirements which reflect key components of the business-to-consumer relationship, which are central in driving good outcomes for customers. The underlying principle of the CD is reasonableness. This is an objective standard, which necessitates that firms act prudently, honestly and equitably in their dealings with consumers. Businesses have therefore been advised to incorporate their CD obligations into the relevant updates they are implementing to meet their ESG obligations to ensure that both sets of conditions are satisfied prior to the implementation deadline of the CD.
2. FRC introduces new corporate governance code and changes to audit committee
The Financial Reporting Council (“FRC”) launched an ongoing public consultation on May 24, 2023, on proposed revisions to the UK Corporate Governance Code (the “Code”). The purpose of the review is to strengthen the Code’s effectiveness in promoting good corporate governance, which plays a fundamental role in assessing sustainability-related risks and opportunities, and setting targets using internal controls, assurance and resilience. Five areas of development were identified in the report: (i) a revision to the sections of the Code which deal with the requirement for a framework of prudent and effective controls to provide a more solid springboard for reporting on and evidencing their effectiveness, (ii) emphasis on the importance of the board and audit committee’s responsibility for sustainability and ESG reporting and appropriate assurance in accordance with the company’s audit and assurance policy, (iii) the launch of the new Audit Committee Standard into the Code, (iv) an improvement to the application of comply-or-explain, where reporting is currently weaker, to reflect the latest FRC research and reports and (v) the relevance of the Code in remaining up to date with developments to legal and regulatory requirements as detailed in the UK government’s response to the White Paper, including enhanced reporting on malus and clawback arrangements.
On ESG matters, the Code underlines the importance of management adopting a considered approach to investment decisions by factoring environmental and social impact into how the company generates and maintains long-term growth, and to ensure that remuneration outcomes are clearly aligned to the company’s ESG objectives and overarching strategy. In addition, audit committees will need to report on how ESG targets were addressed and commissioned by the board in their annual report and conduct a review of sustainability matters. The consultation is expected to close on September 13, 2023, following which, the Code is anticipated to apply to accounting years commencing on or after January 1, 2025, to enable adequate time for implementation. The Code will form part of a broader reform package that seeks to improve accountability and therefore increased confidence by ‘Restoring trust in audit and corporate governance’ and supporting sustainable investments and stewardship decisions in the UK.
1. Update on the EU Artificial Intelligence Act
A draft negotiating mandate was adopted by the Internal Market Committee and Civil Liberties Committee on May 11, 2023, which sets out inaugural rules for artificial intelligence (“AI”) with 84 votes in favor, seven against and 12 abstaining. Members of European Parliament (“MEP”) are aiming to strike a balance between fostering AI innovation and protecting the general public. To that end, AI systems must be overseen by people and be used in a safe manner which is environmentally-friendly, transparent and traceable and not discriminatory or invasive. The mandate promotes the human-centric and ethical development of AI in Europe through a risk-based approach to the nascent technology. The environment has been identified as a high-risk AI area, which requires immediate and enhanced protection of fundamental rights, as well as an ongoing assessment of AI’s impact on the environment to mitigate such risks and to ensure compliance. MEPs have also included a list of prohibited intrusive and discriminatory uses of AI systems such as “real-time” remote biometric identification systems in public spaces and biometric categorization systems using sensitive characteristics such as gender, race, ethnicity, religion or political orientation. Before negotiations can commence on the final legislation, this draft-negotiating mandate needs to be unanimously supported by Parliament. The vote is expected to take place during the week commencing June 12-15, 2023.
2. Sustainable finance package to come in June 2023
A significant sustainable finance package is due to be published later this month by the EU as part of their long-term vision to make Europe climate-neutral by 2050. The EU’s financial services chief has said that the package will include a proposal on ESG ratings as well as new secondary legislation under the EU’s classification of economic activities eligible for green finance; its ‘green taxonomy.’ The proposal on the green taxonomy will comprise of guidance and six environmental objectives to make the framework more accessible and to encourage transition finance. The framework has been criticised, however, from businesses claiming that it is difficult to measure how green they are, using the classifications, whilst others oppose the deeming of certain nuclear and gas projects as ‘transitional’ activities, justifying green investment. The legal challenges are currently ongoing. There are plans for the EU executive to publish standards on sustainability reporting shortly following the release of the June package. The standards, which will implement the Corporate Sustainability Reporting Directive, will include further detail on disclosure requirements and will expand the scope of these requirements to a greater number of EU companies. It is expected that there will be a delay to the release of the second set of standards in order to allow companies to implement the upcoming measures.
3. EU Parliament adopts new deforestation regulation
The final text of a new EU Regulation aimed at tackling deforestation and forest degradation was adopted by the European Parliament on April 19, 2023 (the “Deforestation Regulation”). Under the Deforestation Regulation, companies will be required to conduct due diligence into the origin of a range of commodities, including cattle, cocoa, coffee, palm oil, rubber, soya and wood, to verify that they have not be obtained through deforestation. The purpose of the Deforestation Regulation is to address the growing rate of deforestation and degradation, and will form part of the European Green Deal initiative, which includes proposals to ensure that EU consumption does not contribute to worldwide deforestation and forest degradation. The Deforestation Regulation will repeal and replace the existing regime under the EU Timber Regulation (995/2010/EU) and will cover a much broader scope than the former legislation. Before offering products to the EU market, businesses will be required to ensure that products are ‘deforestation-free’ by submitting a due-diligence statement to the authorities before placing products on the market or exporting products to confirm that an adequate verification procedure has been conducted and to identify the source of the commodities used in respect of such products. The level of due diligence will be subject to a benchmarking exercise set out by the EU, which will assess countries based on their current risk of deforestation and forest degradation. Once in effect, businesses will have 18 months to implement the new rules, meaning that the Deforestation Regulation will likely be applicable from early 2025.
4. ESAs publish progress reports on greenwashing in the financial sector
On May 31, 2023, the three European Supervisory Authorities (i) the European Banking Authority (“EBA”); (ii) the European Insurance and Occupation Pensions Authority (“EIOPA”); and (iii) the European Securities and Markets Authority (“ESMA”) (collectively, the “ESAs”) published a Progress Report on the risks associated with greenwashing (the “Report”), with a formal press release put out on June 1, 2023. The Report provides a high-level assessment of the impact of greenwashing on industry players across various financial industries, including banking, insurance, occupational pensions and European securities. In particular, it explores the practical implications of greenwashing whereby ESG-related statements, declarations, actions, or communications are disseminated and misconstrued so that they are not a transparent or fair reflection of the essential sustainability composition of an entity, financial product or services, which in turn can mislead consumers, investors and other market participants.
The ESMA section of the Report demonstrated that the sustainable investment value chain is at risk of greater exposure to greenwashing due to the proliferation of false or misleading claims which arise in respect of a product’s sustainability profile. The EBA section of the Report focuses on greenwashing in the banking industry and its effect on banks, investment firms and payment service providers. The risk is perceived as low or medium for banks and medium to high for investment firms, however this is anticipated to increase in the future. The EIOPA section of the Report approaches greenwashing from the perspective of insurance and pension providers and concludes that the risk of greenwashing varies at different stage of the insurance and pensions lifecycle.
1. Latest ISS Report analysis
According to the latest Report by ISS Corporate Solutions, there has been a polarization of opinions in U.S. annual general meetings during the first half of this year, as shareholder proposals are divided between those in favor of supporting ESG-related issues with and those with a growing anti-ESG sentiment, albeit still a minority of proposals with none having been passed to date. The volume of shareholder proposals has increased by 14% in the last three years, particularly due to the rise in anti-ESG shareholder resolutions, which, although are still in the minority of opinions, have grown by more than 400% since 2020. ESG matters now account for more than 35% of proposals on social issues raised at annual general meetings and while the volume of environmental proposals has decreased in 2023, climate remains the most prevalent subcategory of proposals. While proposals have increased, support has fallen, with only 30.2% of shareholder proposals being submitted for final vote as of May 16, 2023.
2. U.S. states remain split on their approach to ESG matters
A bill was recently signed into law in Florida by Ron DeSantis, prohibiting public officials from investing state money into ESG objectives and banning ESG-bond sales. The legislation makes it obligatory for fund managers to include disclaimers in specific communications with portfolio companies to highlight that they do not represent Floridians’ views. This is one of the most far-reaching steps introduced by U.S. Republicans against sustainable investment and is against a backdrop of a highly political influx of anti-ESG laws. This legislation will impact existing ESG initiatives of financial businesses operating in Florida, therefore it is advisable that such organizations audit and align their current ESG policies with the new requirements imposed by the bill. Similarly, in Kansas, the Senate approved a similar piece of legislature, which prevents Kansas state officials from referencing ESG factors when investing in public funds or determining who receives government contracts.
By comparison, in New York City in April 2023, two of the five employee pension funds (the Teachers Retirement System and the New York City Employees’ Retirement System) adopted Net Zero Implementation strategies to achieve their ambitious goals of net zero emissions in their investment portfolios by 2040.
3. EPA proposes new rules to accelerate the use of “clean vehicles”
On April 12, 2023, the US Environmental Protection Agency (“EPA”) introduced new federal emissions standards to promote cleaner vehicles and to fuel a more rapid transition to a carbon-neutral future. The proposed standards would prevent nearly 10 billion tons of carbon dioxide emissions, improve air quality throughout the U.S., promise financial savings on fuel for drivers and reduce the nation’s reliance on oil imports.
4. Supreme Court adopts “Continuous Surface Connection” test for whether wetlands are covered by the Clean Water Act
On May 25, 2023, the Supreme Court held that the Clean Water Act only applies to those wetlands with a continuous surface connection to bodies of water that are “waters of the United States,” and therefore wetlands that fall outside this scope will not be in the remit of the Clean Water Act.
1. Philippine SEC adopts ASEAN sustainable and responsible funds standards
The Philippine Securities Exchange Commission (“SEC”) has adopted the Association of Southeast Asian Nations’ (“ASEAN”) Sustainable and Responsible Funds Standards (“SFRS”), setting out new guidance that will enable local and ASEAN-member investment companies, and collective investment schemes, to provide sustainable and responsible funds locally and across the region. The SFRS outlines minimum disclosure and reporting requirements, which address and target the need for a comparable, uniform and clear disclosure of information to safeguard against greenwashing.
2. Hong Kong consultation paper on mandatory climate-related disclosures for listed companies
The Hong Kong Stock Exchange published a consultation paper on April 14, 2023, proposing to make climate-related disclosures obligatory in ESG reports for all listed companies. There will be a two-year interim reporting period following the effective date of January 1, 2024, to enable businesses to adjust to the requirements.
3. India has approved new ESG disclosure rules to be made mandatory over time
The Securities and Exchange Board of India has approved new ESG disclosure rules, ratings and investing principles, which will develop the previous requirements under the Business Responsibility and Sustainability Report framework, outline ESG performance targets and will gradually make these items mandatory for the top 1000 listed companies over the next few years. The consultation paper recognizes that assurance of transparent disclosures is fundamental in enhancing the credibility of any sustainability related reporting.
4. MAS launches Finance for Net Zero Action Plan
The Monetary Authority of Singapore (“MAS”) has published a net zero financing plan, which expands on MAS’ Green Finance Action Plan launched in 2019, as part of Singapore’s long-term climate and sustainability agenda. The Finance for Net Zero Action Plan (“FiNZ”) seeks to achieve four strategic outcomes in connection with (i) data, definitions and disclosure, (ii) the climate resilience of the financial industry, (iii) the adoption of credible transition plans and (iv) the endorsement of green transition solutions and markets. The FiNZ includes finance mobilization strategies to catalyze Asia’s net zero transition and to support decarbonization activities in Singapore.
Please let us know if there are other topics that you would be interested in seeing covered in future editions of the monthly update.
Warmest regards,
Susy Bullock
Elizabeth Ising
Perlette M. Jura
Ronald Kirk
Michael K. Murphy
Selina S. Sagayam
Environmental, Social and Governance Practice Group Leaders, Gibson, Dunn & Crutcher LLP
The following Gibson Dunn lawyers prepared this client update: Ayshea Baker, Grace Chong, Cynthia Mabry, Patricia Tan Openshaw, and Selina S. Sagayam.
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) Group Leaders and Members:
Susy Bullock – London (+44 (0) 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 (0) 20 7071 4263, ssagayam@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
On June 6, 2023, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment a draft auditing standard, A Company’s Noncompliance with Laws and Regulations, PCAOB Release 2023-003, that could significantly expand the scope of audits and potentially alter the relationship between auditors and their SEC-registered clients. In a rare move, two PCAOB Board members—Duane DesParte and Christina Ho (the two accountants on the Board)—dissented from the proposal based on a range of concerns, including that it would unduly expand the scope of the public company audit.
This alert provides a high-level summary of the proposed standard, which runs more than 140 pages. We also review the objections articulated by Board Members DesParte and Ho.
Overview
The proposal issued by the PCAOB would replace existing AS 2405, Illegal Acts by Clients (“Current AS 2405”), with a new AS 2405, A Company’s Noncompliance with Laws and Regulations (“Proposed AS 2405”). The principal ways in which the Proposed AS 2405 would go beyond the Current AS 2405 include the following:
- The Current AS 2405 mirrors in substantial part Section 10A of the Securities Exchange Act of 1934, which requires the auditor to perform “procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts,” 15 U.S.C. § 78j-1(a)(1) (emphasis added). The Proposed AS 2405 would go further and require the auditor to: (i) identify all laws and regulations “with which noncompliance could reasonably have a material effect on the financial statements” (emphasis added), (ii) incorporate potential noncompliance with those laws and regulations into the auditor’s risk assessment, and (iii) identify whether noncompliance may have occurred through enhanced procedures and testing. Proposed Standard ¶¶ 4-5. As part of these procedures, an auditor would be required, among other things, to obtain an understanding of management’s own processes to identify relevant legal obligations and investigate potential noncompliance. ¶ 6(a)(2).
- Upon identifying an instance of potential noncompliance, the auditor must perform procedures to understand the nature of the matter, as well as to evaluate whether in fact noncompliance with a law or regulation has occurred. ¶¶ 7-11. These procedures go beyond those required by the Current AS 2405 and Section 10A. Importantly, the proposed procedures would appear to require the auditor to undertake significant steps even in cases where it appears unlikely that the identified conduct will have a material effect on the financial statements and even in cases where the noncompliance itself is still in question.
- After identifying an instance of potential noncompliance, the auditor would communicate both with management, the audit committee (unless the matter is clearly inconsequential), and, in some cases, the board of directors as a whole. ¶¶ 12-15. The Proposed AS 2405 contemplates that this communication may occur in two stages, the first after the auditor learns of the matter and the second after the auditor has conducted an evaluation of the matter.
Objections of Board Members DesParte and Ho
Board Members DesParte and Ho each issued a statement explaining the basis for their dissent from the proposal. Some of the most significant concerns that they raised included:
- That the requirement to understand all laws and regulations that potentially could materially affect the financial statements would likely impose an undue burden on auditors;
- That, in Board Member DesParte’s words, the Proposed AS 2405 might require an auditor “to identify any and all information that might indicate instances of noncompliance [with] any law or regulation across the company’s entire operations, without regard to materiality,” a potentially significant expansion of responsibility that could require the auditor to rely increasingly on legal specialists;
- That the requirement to consider management’s disclosure about a potential instance of noncompliance may exceed the requirements of AS 2710, Other Information in Documents Containing Audited Financial Statements; and
- That the proposal does not adequately take smaller firms and smaller audit engagements into account.
Notably, Board Member DesParte concluded his remarks by expressing that, in light of the PCAOB’s aggressive standard-setting initiative overall,
I am increasingly concerned we are establishing new auditor obligations and incrementally imposing new auditor responsibilities in ways that will significantly expand the scope and cost of audits, and fundamentally alter the role of auditors without a full and transparent vetting of the implications, including a comprehensive understanding of the overall cost-benefit ramifications. I also wonder whether we are further contributing to the expectations gap by imposing responsibilities on auditors not aligned with their core competencies or the fundamental purpose of a financial statement audit.
The statements from Board Members DesParte and Ho underscore both the significance of this proposal and the range and magnitude of the concerns, for auditors and SEC registrants alike. Indeed, the procedures described above, as well as other aspects of the Proposed AS 2405 and other proposed amendments to PCAOB auditing standards, likely would substantially expand the scope of most audits in relation to identifying, assessing, and addressing potential noncompliance with laws and regulations, particularly for audits of complex, global organizations. Among other things, the proposal appears not to fully consider the consequences—either for the auditor or for the issuer—of expanding the role of the auditor to include responsibilities that might lie outside the auditor’s core competencies, such as legal analysis. The auditor’s increased responsibility to identify, evaluate, and report on legal compliance could alter what information the issuer may need to share with the auditor to help ensure that sufficient audit evidence is obtained, as well as the training and quality controls that might be necessary to achieve reasonable assurance that the auditor can evaluate and act on the information received. Notably, too, the increased sharing of information from the audit client to the auditor that is required under the Proposed AS 2405 would present significant increased risk to the audit client’s legal privileges. These are but a few of the significant issues that suggest that the Proposed AS 2405 would mean costlier and potentially more expansive audits, with the likely upshot that SEC registrants correspondingly also will need to undertake more expansive compliance initiatives (and share the results of such initiatives with the auditor) in order to satisfy the proposed audit requirements. Both companies and their auditors will want to follow these proposals carefully and many will likely want to comment on these issues after having reviewed the Board’s proposal.
Conclusion
We encourage interested parties to consider submitting comments concerning this proposal. Especially in light of the dissents by Board Members DesParte and Ho, the comment process should play an important role in shaping whether this proposal moves forward and in the Board’s consideration of this matter.
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 member of the firm’s Accounting Firm Advisory and Defense practice group, or the following practice leaders and authors:
Accounting Firm Advisory and Defense Group:
James J. Farrell – New York (+1 212-351-5326, jfarrell@gibsondunn.com)
Ron Hauben – New York (+1 212-351-6293, rhauben@gibsondunn.com)
Monica K. Loseman – Denver (+1 303-298-5784, mloseman@gibsondunn.com)
Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, mscanlon@gibsondunn.com)
David C. Ware – Washington, D.C. (+1 202-887-3652, dware@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
In this webcast, panelists from Gibson Dunn and Deloitte provide a comprehensive discussion of New York City’s Local Law 144, a groundbreaking law that regulates the use of AI tools in hiring and promotion. The law will be enforced beginning on July 5, 2023. The webcast delves into the notice and bias auditing requirements of Local Law 144 as well as the implications of the Department of Consumer and Worker Protection’s final rules implementing it. The panelists also explore open questions that remain and discuss practical approaches for conducting an assessment of an automated decision tool or system. Additionally, the panelists discuss trends they are observing from the EEOC and in proposed laws at the state and local level that focus on automated decision tools.
PANELISTS:
Danielle J. Moss is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the firm’s Labor and Employment and Litigation Practice Groups. She is recognized for representing employers across a wide range of matters, including high-stakes discrimination, harassment and retaliation claims, as well as wage and hour and restrictive covenant issues. She has also led numerous highly sensitive internal investigations.
Emily Maxim Lamm is an associate in the Washington, D.C. office of Gibson, Dunn & Crutcher. Ms. Lamm’s practice focuses on employment litigation, counseling, and investigations. Ms. Lamm has particular expertise counseling on the legal and policy developments surrounding artificial intelligence and automation across the employment lifecycle. She has also represented technology companies involving allegations of discrimination related to the use of algorithms and AI. Ms. Lamm frequently speaks and writes on AI issues in employment and holds a program certificate from Wharton Online in Artificial Intelligence for Decision Making.
Ryan Hittner is a Managing Director at Deloitte. With over 17 years of risk management experience related to models and advanced algorithms, Ryan leads the AI & Algorithmic Assurance practice which focuses on helping businesses responsibly build AI trust.
Morgan Dove is a Senior Manager at Deloitte. Morgan works within the AI & Algorithmic Assurance practice, with over 8 years of experience specializing in strategic transformations, model validation, and quantitative risk management.
MCLE CREDIT INFORMATION:
This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.
Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.
Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.
California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.