While news about any artificial intelligence-related legal development often remained buried among the more pressing news of other major world events in the first quarter of 2022, that is not to say that nothing notable occurred. Indeed, each of the three branches of the U.S. Government took a number of significant steps towards developing more focused AI strategies, legislation, regulations, and principles of governance. As highlighted below in this quarter’s update, Congress, the Department of Defense, the Department of Energy, the Intelligence directorates, NIST, the FTC, and the EEOC all were active players in early 2022 in matters relating to AI. In addition, the EU continued this quarter in advancing efforts toward a union-wide, general AI policy and regulation, which, if and when ultimately adopted, seems likely to have an influential impact on much of the debate that continues in the U.S. on the need for a national approach. Meanwhile, state and local governments in the U.S. continue to fill some of the perceived gaps left by the continued piecemeal regulatory approach taken to date by the federal government.

Our 1Q22 Artificial Intelligence and Automated Systems Legal Update focuses on these key efforts, and also examines other policy developments within the U.S. and EU that may be of interest to domestic and international companies alike.

I. U.S. POLICY & REGULATORY DEVELOPMENTS

A. U.S. National AI Strategy

1. Department of Defense Announces Release of Joint All-Domain Command and Control Implementation Plan

On March 15, 2022, Deputy Secretary of Defense, Dr. Kathleen Hicks, signed the Department of Defense Joint All-Domain Command and Control (JADC2) Implementation Plan. JADC2 enables the Joint Force to “sense,” “make sense,” and “act” on information across the battle-space quickly using automation, artificial intelligence, predictive analytics, and machine learning to deliver informed solutions via a resilient and robust network environment. The JADC2 Cross-Functional Team will oversee the execution of the JADC2 Strategy, initially announced in June 2021, and the Implementation Plan.[1]

The unclassified summary of the strategy provides six guiding principles to promote coherence of effort across the Department in delivering JADC2 improvements: “(1) Information Sharing capability improvements are designed and scaled at the enterprise level; (2) Joint Force C2 improvements employ layered security features; (3) JADC2 data fabric consists of efficient, evolvable, and broadly applicable common data standards and architectures; (4) Joint Force C2 must be resilient in degraded and contested electromagnetic environments; (5) Department development and implementation processes must be unified to deliver more effective cross-domain capability options; and, (6) Department development and implementation processes must execute at faster speeds.”[2]

The JADC2 Implementation Plan is classified but is described as “the document which details the plans of actions, milestones, and resourcing requirements. It identifies the organizations responsible for delivering JADC2 capabilities. The plan drives the Department’s investment in accelerating the decision cycle, closing operational gaps, and improving the resiliency of C2 systems. It will better integrate conventional and nuclear C2 processes and procedures and enhance interoperability and information-sharing with our mission partners.”[3]

2. Congress Works to Reconcile the America COMPETES Act (passed by the House of Representatives) with a Similar Bill: the U.S. Innovation and Competition Act (passed by the Senate)

On February 4, 2022, the House voted 222-210 to approve the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength Act of 2022 or the America COMPETES Act of 2022, which would allot nearly $300 billion to scientific research and development and improve domestic manufacturing in an effort to boost the country’s ability to compete with Chinese technology.[4] The vote has triggered some divergence with the Senate, which passed a largely similar bill on June 8, 2021, the United States Innovation and Competition Act of 2021.[5] House and Senate members have started discussions to resolve the differences between the bills.

Like the U.S. Innovation and Competition Act, the America COMPETES Act identifies artificial intelligence, machine learning, autonomy and related advances as a “key technology focus area;” however, unlike the Senate bill, the America COMPETES Act does not establish a Directorate of Technology to support research and development in the key technology focus areas and does not include provisions comparable to the “Advancing American AI Act” which was intended to “encourage agency artificial intelligence-related programs and initiatives that enhance the competitiveness of the United States” while ensuring AI deployment “align[s] with the values of the United States, including the protection of privacy, civil rights, and civil liberties.”[6]

Instead, the America COMPETES Act relies on the Director of the National Institute of Science and Technology (NIST) “to support the development of artificial intelligence and data science, and carry out the activities of the National Artificial Intelligence Initiative Act of 2020 authorized in division E of the National Defense Authorization Act for Fiscal Year 2021.”[7] Also, in many instances, the America COMPETES Act incorporates artificial intelligence as an aspect of a broader research objective.[8]

3. Office of Science and Technology Policy Seeks Information Ahead of Updating the National Artificial Intelligence Research and Development Strategic Plan

In June of 2019, the Trump Administration last released an update to the National Artificial Intelligence Research and Development (AI R&D) Strategic Plan.[9] The plan set out eight strategic aims:

Make long-term investments in AI research.
Develop effective methods for human-AI collaboration.
Understand and address the ethical, legal, and societal implications of AI.
Ensure the safety and security of AI systems.
Develop shared public datasets and environments for AI training and testing.
Measure and evaluate AI technologies through standards and benchmarks.
Better understand the national AI R&D workforce needs.
Expand Public-Private Partnerships to accelerate advances in AI.

The National AI Initiative Act, which became law on January 1, 2021, calls for regular updates to the National AI R&D Strategic Plan to include goals, priorities, and metrics for guiding and evaluating how the agencies carrying out the National AI Initiative will:

Determine and prioritize areas of artificial intelligence research, development, and demonstration requiring Federal Government leadership and investment;
Support long-term funding for interdisciplinary artificial intelligence research, development, demonstration, and education;
Support research and other activities on ethical, legal, environmental, safety, security, bias, and other appropriate societal issues related to artificial intelligence;
Provide or facilitate the availability of curated, standardized, secure, representative, aggregate, and privacy-protected data sets for artificial intelligence research and development;
Provide or facilitate the necessary computing, networking, and data facilities for artificial intelligence research and development;
Support and coordinate Federal education and workforce training activities related to artificial intelligence;
Support and coordinate the network of artificial intelligence research institutes.[10]

The Office of Science and Technology Policy, on behalf of the National Science and Technology Council’s (NSTC) Select Committee on Artificial Intelligence, the NSTC Machine Learning and AI Subcommittee, the National AI Initiative Office, and the Networking and Information Technology Research and Development National Coordination Office, is currently considering the input provided through comments in order to provide an updated strategic plan to reflect current priorities related to AI R&D.[11]

4. NIST is Reviewing Stakeholder Input Relating to Advancing a More Productive Tech Economy to Inform a Report that will be Submitted to Congress

On November 22, 2021, NIST issued a Request for Information (RFI) about the public and private sector marketplace trends, supply chain risks, legislation, policy, and the future investment needs of eight emerging technology areas, including: artificial intelligence, internet of things, quantum computing, blockchain technology, new and advanced materials, unmanned delivery services, and three-dimensional printing. The RFI sought comments to help identify, understand, refine, and guide the development of the current and future state of technology in the eight identified emerging technology areas to inform a final report that will be submitted to Congress.[12] The comments are currently under review and includes policy suggestions and information regarding current technological trends.

5. The U.S. Department of Energy (DOE) Announces The Establishment of The Inaugural Artificial Intelligence Advancement Council (AIAC)

On April 18, 2022, the U.S. Department of Energy announced the establishment of AIAC, which will lead artificial intelligence governance, innovation and AI ethics at the department. Through internal and external partnerships with industry, academia, and government, the AIAC will coordinate AI activities and define the Department of Energy AI priorities for national and economic competitiveness and security. The AIAC members will offer recommendations on AI strategies and implementation plans in support of a broader DOE AI strategy that is led by the Office of Artificial Intelligence and Technologies.[13] Notably, the DOE also announced on March 24, 2022, that it would issue $10 million in funding for projects in artificial intelligence research to High Energy Physics to support research that furthers understanding of fundamental particles and their interactions by making use of artificial intelligence.[14]

6. Intelligence Advanced Research Projects Activity Launches New Biometric Technology Research Program

On March 11, 2022 the Intelligence Advanced Research Projects Activity (IARPA), the research and development arm of the Office of the Director of National Intelligence, announced the Biometric Recognition & Identification at Altitude and Range (BRIAR) program, a multi-year research effort to develop new software systems capable of performing whole-body biometric identification from great heights and long ranges. The program’s goal is to enable the Intelligence Community and Department of Defense to recognize or identify individuals under challenging conditions, such as from unmanned aerial vehicles (UAVs), at far distances, and through distortions caused by atmospheric turbulence. BRIAR research contracts regarding research objectives have been awarded to several private companies and universities.[15]

B. Algorithmic Fairness & Consumer Protection

1. FTC Policy

a) WW International Settlement

On March 4, 2022, the FTC entered into a settlement with WW International, Inc., formerly known as Weight Watchers, and a subsidiary called Kurbo, Inc. over allegations that they collected information from children through a weight loss app.[16] WW has agreed to pay a $1.5 million penalty and delete personal information it obtained from underage users of the its Kurbo program without parental consent in order to resolve the FTC’s claims that it unlawfully gathered data from thousands of children.

As part of the settlement, WW and Kurbo will also be required to destroy all personal information they’ve already gathered without adequate notice or parental consent from minors through the Kurbo program; delete any models or algorithms they’ve developed using this data; and ensure that, moving forward, parents receive clear and direct notice of the collection, use and disclosure of their children’s information and are able to consent to these practices.

b) FTC Priorities

Following the WW International settlement, Commissioner Rebecca Slaughter discussed the settlement, and noted that she hoped that the FTC’s increased use of algorithmic destruction as an enforcement tool would lead to discussions between the agency and Congress with respect to legislative or rulemaking action on privacy.[17]

Commissioner Slaughter also addressed the changing landscape following the “devastating” ruling in AMG Capital Mgmt., LLC v. FTC, a 2021 Supreme Court case which curtailed the FTC’s authority under Section 13(b) of the FTC Act to seek monetary redress for consumers.[18] She noted that the AMG ruling informed the need for rulemaking authority, since consumers relied on the FTC to protect them and seek redress from companies that have violated the law. Several Senators have introduced bills that would give the FTC the authority to seek restitution in federal district court, but no bills have yet been passed.

The FTC’s recent shift in focus to rulemaking has posed a challenge for the Commission, however, as it has been operating with only a partial slate of four Commissioners, leaving the Commission without a tiebreaker. The Senate has largely deadlocked in their votes on a fifth Commissioner, but recently advanced the nomination of Alvaro Bedoya, which may allow for an acceleration of rulemaking by the FTC if he is ultimately confirmed.

2. Algorithmic Accountability Act of 2022

The Algorithmic Accountability Act of 2022[19] was introduced on February 3, 2022 by Sen. Ron Wyden, Sen. Cory Booker, and Rep. Yvette Clark. If passed, the bill would require large technology companies across states to perform a bias impact assessment of any automated decision-making system that makes critical decisions in a variety of sectors, including employment, financial services, healthcare, housing, and legal services. The Act’s scope is potentially far reaching as it defines “automated decision system” to include “any system, software, or process (including one derived from machine learning, statistics, or other data processing or artificial intelligence techniques and excluding passive computing infrastructure) that uses computation, the result of which serves as a basis for a decision or judgment.” The Act comes as an effort to improve upon the 2019 Algorithmic Accountability Act after consultation with experts, advocacy groups, and other key stakeholders.

3. NIST

a) NIST Releases Initial Draft of a Framework for AI Risk Management

On March 17, NIST released an initial draft of an AI Risk management Framework.[20] The Framework is “intended for voluntary use in addressing risks in the design, development, use, and evaluation of AI products, services, and systems.” NIST accepted public comments on this draft framework until April 29, 2022.

b) NIST Releases Update to a Special Publication Concerning Standards to Manage Algorithmic Bias

Additionally, on March 16, NIST published an update to a previously released publication, Towards a Standard for Identifying and Managing Bias in Artificial Intelligence (NIST Special Publication 1270).[21] The publication seeks to encourage standards for the adoption of artificial intelligence to help minimize the risk of unintentional biases in algorithms causing widespread societal harm. The main distinction between the draft and final versions of the publication is the “new emphasis on how bias manifests itself not only in AI algorithms and the data used to train them, but also in the societal context in which AI systems are used.”[22]

C. Facial Recognition

Challenges to facial recognition technology have continued in early 2022.

Following bipartisan backlash, the U.S. Internal Revenue Service (IRS) decided to abandon its use of facial recognition software in February 2022.[23] The IRS intended to utilize the software to authenticate taxpayers’ online accounts by having users uploading a video selfie. Taxpayers reported frustration with the process and there were a host of security and privacy concerns raised regarding the collection of biometric data.

In March 2022, a federal proposed class action was filed in Delaware alleging that Clarifai Inc. violated the Illinois Biometric Information Privacy Act (BIPA) by accessing plaintiff’s profile photos on OKCupid and using them to develop its facial recognition technology without her knowledge or consent.[24] The Complaint alleges that Clarifai has gathered biometric identifiers from more than 60,000 OKCupid users in Illinois and claims several violations of BIPA as well as unjust enrichment. Plaintiff also seeks declaratory and injunctive relief, attorney fees, and statutory damages of up to $5,000 for each violation of BIPA.

Also in March 2022, the District Court for the District of Columbia dismissed a suit challenging the U.S. Postal Service’s use of facial recognition in the Internet Covert Operations Program.[25] Plaintiff alleged that the U.S. Postal Service’s collection of personal data was unlawful because it failed to conduct a privacy impact assessment regarding data collection. In addition, plaintiff accused the Postal Service of using Clearview AI’s controversial facial recognition service. The court, however, made clear that failure to publish a privacy impact assessment is not sufficient to create an information injury for standing.

D. Labor & Employment

Employers are soon to be subject to a patchwork of recently enacted state and local laws regulating AI in employment.[26] Our prior alerts have addressed a number of these legislative developments in New York City, Maryland, and Illinois.[27] So far, New York City has passed the broadest AI employment law in the U.S., which governs automated employment decision tools in hiring and promotion decisions and will go into effect on January 1, 2023. Specifically, before using AI in New York City, employers will need to audit the AI tool to ensure it does not result in disparate impact based on race, ethnicity, or sex. The law also imposes posting and notice requirements for applicants and employees. Meanwhile, since 2020, Illinois and Maryland have had laws in effect directly regulating employers’ use of AI when interviewing candidates. Further, effective January 2022, Illinois amended its law to require employers relying solely upon AI video analysis to determine if an applicant is selected for an in-person interview to annually collect and report data on the race and ethnicity of (1) applicants who are hired, and (2) applicants who are and are not offered in-person interviews after AI video analysis.[28]

Washington, D.C. has also stepped into the ring by proposing a law that would prohibit adverse algorithmic eligibility determinations (based on machine learning, AI, or similar techniques) in an individual’s eligibility for, access to, or denial of employment based on a range of protected traits, including race, sex, religion, and disability.[29] If passed, the law would require DC-based employers to conduct audits of the algorithmic determination practices, as well as provide notice to individuals about how their information will be used. As noted above in Section II.b., the Algorithmic Accountability Act of 2022 would also impose requirements upon employers.

The U.S. Equal Employment Opportunity Commission (EEOC) remains in the early stages of its initiative that ultimately seeks to provide guidance on algorithmic fairness and the use of AI in employment decisions.[30] Thus far, the EEOC has completed a listening session focused on disability-related concerns raised by key stakeholders.[31]

E. Privacy

The first quarter of 2022 included several interesting developments for artificial intelligence in privacy litigation. Through its private right of action, a number of Illinois’ Biometric Information Privacy Act (BIPA) lawsuits have been filed in 2022. These cases promise that BIPA will continue to be the focal point for AI privacy law.

1. Specific Personal Jurisdiction

Rule 9 Challenges to the forum’s exercise of jurisdiction over a defendant continue to be a good first option for defendants seeking an early exit from an BIPA-based lawsuit.[32] A key inquiry for BIPA cases is typically the defendant’s contacts with the forum state. Indeed, the Northern District recently held that an Illinois plaintiff’s choice to download an app, without much more, failed to create specific jurisdiction.[33] In that case, Wemagine, a Canadian app developer, allegedly used artificial intelligence to extract a person’s face from a photo and transform it to look like a cartoon. The Guitierrez court distinguished other cases with a greater connection to Illinois, noting that the defendant was “not registered to do business in Illinois, ha[d] no employees in Illinois,” did not undertake “Illinois-specific shipping, marketing, or advertising, [n]or sought out the Illinois market in any way” and granted dismissal.[34]

However, while this dismissal tactic may useful, another recent case illustrates how it may only offer temporary reprieve, at least when plaintiffs are motivated to continue the fight elsewhere. In a BIPA case filed in Illinois federal court, Clarifai, a technology company incorporated in Delaware and based in New York, allegedly accessed OKCupid dating profile images to build its facial recognition database.[35] However, the Northern District of Illinois held that the company’s profile photo collection from Illinois-based residents and sale of pre-trained visual recognition models to two Illinois customers did not provide sufficient contacts with the state.[36] Rather than be deterred, Plaintiffs subsequently refiled their complaint in Delaware, Clarifai’s state of incorporation.[37]

2. Novel Biometrics

The BIPA litigation landscape often involves technologies that use facial recognition and fingerprints.[38] However, in 2021, the plaintiffs’ bar also began to explore the potential to use voice recordings, which have proliferated through automated business processing systems, as a foundation for BIPA lawsuits. Many of these initial lawsuits suffered from factual pleading deficiency issues relating to how the business actually used the audio recording. In such cases, Plaintiffs cannot simply claim that a defendant recorded a plaintiff’s appearance or voice. Instead, they must show that the audio was used to create some “set of measurements of a specified physical component . . . used to identify a person.”[39]

The Northern District of Illinois recently emphasized this distinction as applied to audio recordings in deciding a motion to dismiss.[40] In this case, plaintiff alleged that McDonald’s “deploys an artificial intelligence voice assistant in the drive-through lanes” to facilitate food orders and violated BIPA by collecting voiceprint biometrics.[41] In assessing how the technology worked, the court noted that:

“[C]haracteristics like pitch, volume, duration, accent and speech pattern, and other characteristics like gender, age, nationality, and national origin—individually—are not biometric identifiers or voiceprints. They surely can help confirm or negate a person’s identity, but one cannot be identified uniquely by these characteristics alone . . . .”[42]

Noting some skepticism and explicitly drawing inferences in the plaintiff’s favor the court nonetheless held that this was enough to survive a motion to dismiss, stating “[b]ased on the facts pleaded in the complaint . . . it is reasonable to infer—though far from proven—that Defendant’s technology mechanically analyzes customers’ voices in a measurable way such that McDonald’s has collected a voiceprint from Plaintiff and other customers.”[43]

For businesses subject to federal regulation, preemption arguments similar to those pled for fingerprint and facial recognition technologies may also provide a successful strategy to avoid BIPA liability for audio recordings. In another recent case, American Airlines faced a BIPA complaint for using an interactive voice response software in the airline’s customer service hotline.[44] The plaintiff alleged that “American’s voice response software collects, analyzes, and stores callers’ actual voiceprints to understand or predict the caller’s request, automatically respond with a personalized response, and ‘trace’ callers” customer interactions.[45] In response, American argued that the Airline Deregulation Act preempted the BIPA lawsuit. The court agreed, granting the motion to dismiss on the basis of federal preemption and holding that “[because] the state-law claims directly impact American’s interactions with its customers, and directly regulate the airline’s provision of services, that state law inherently interferes with the [Airline Deregulation Act]’s purpose.”[46]

These cases indicate that the plaintiffs’ bar will continue to think of creative applications for BIPA.[47]

F. Intellectual Property

Intellectual property has historically offered uncertain protection to AI works. Authorship and inventorship requirements are perpetual stumbling blocks for AI-created works and inventions. For example, in the United States, patent law has rejected the notion of a non-human inventor. Last year, the Artificial Inventor Project and its leader, Dr. Thaler, made several noteworthy challenges to the paradigm. First, the team created DABUS, the “Device for the Autonomous Bootstrapping of Unified Sentience”—an AI system that has created several inventions.[48] The project then partnered with attorneys to lodge test cases in the United States, Australia, the EU, and the UK.[49] These ambitious cases reaped mixed results, likely to further diverge as AI inventorship proliferates.

DABUS’ attempt to gain protection under a copyright theory recently failed in the United States. The Copyright Review Board considered the copyrightability of a two-dimensional artwork, created by DABUS, titled “A Recent Entrance to Paradise.” The board previously refused to register the work in August 2019 and March 2020. In February, the board rejected a second request for reconsideration and the argument that human authorship was not necessary for registration. While the specific question of copyright registration appeared to be a matter of first impression and no express requirement for human authorship exists in the Copyright Act, the board explained that “Thaler must either provide evidence that the Work is the product of human authorship or convince the Office to depart from a century of copyright jurisprudence.”[50] The board reached back to Supreme Court decisions from 1884, which defined an “author” as “he to whom anything owes its origins” and a number of other sources to build a wall against the concept of non-human authorship. For now, “A Recent Entrance to Paradise” is a dead end under U.S. copyright law.

II. EU POLICY & REGULATORY DEVELOPMENTS

The April 2021 European Commission’s proposal for the Regulation of Artificial Intelligence (“Artificial Intelligence Act”) continues to be the focus in the EU regarding AI matters. Various players, from EU Member States to European Parliament Committees, are publishing suggested amendments and opinions, based on public consultations, to address the underlying shortcomings of the Act.

First, France assumed the Presidency of the Council of the EU in January 2022, a role formerly held by Slovenia, and has circulated additional proposed amendments to the Artificial Intelligence Act, particularly regarding definitions about “high-risk” AI systems.[51] While the current Artificial Intelligence Act considers risks to “health, safety, and fundamental rights,” to be “high-risk,” some Member States argue that “economic risks” should also be factored in the same category. Moreover, it was proposed that providers of “high-risk” AI technology should be liable for ensuring that their systems have human oversight under Article 14(4).[52] Additionally, France suggested that the Commission’s desire for data sets to be “free of errors and complete” under Article 10(3) is unrealistic and that instead datasets should be complete and free of error to the “best extent possible,” which affords some leeway for providers of AI systems.[53] Ultimately, finding a consensus among all relevant actors regarding the Artificial Intelligence Act is still far away: indeed, some EU countries have yet to form official positions on the Act.

Second, several European Parliament committees, such as the Committee on Legal Affairs (“JURI”) and the Committee on Industry, Research and Energy (“ITRE”) have published their draft opinions about the Artificial Intelligence Act. After its public consultation in February 2022, JURI published its draft opinion in 2 March 2022: the opinion focuses on addressing the need to balance innovation and the protection of EU citizens; maximizing investment; and harmonizing the digital market with clear standards.[54] ITRE published its draft opinion a day later and called for an internationally recognised definition of artificial intelligence; emphasized the importance of fostering social trust between businesses and citizens; and flagged the need to future-proof the Artificial Intelligence Act given the onset of the “green transition” and continued advancements in AI technologies.[55] Finally, after their joint hearing in 21 March 2022, the European Parliament’s Committee on the Internal Market and Consumer Protection and the Committee on Civil Liberties, Justice and Home Affairs, who are jointly leading the negotiations of the Artificial Intelligence Act, are expected to produce a draft report in April.

Ultimately, the Artificial Intelligence Act continues to be discussed by co-legislators, the European Parliament and EU Member States. This process is expected to continue until 2023 before the Artificial Intelligence Act becomes law.[56]

____________________________

[1] U.S. Department of Defense, DoD Announces Release of JADC2 Implementation Plan, U.S. Department of Defense (March 17, 2022), available at https://www.defense.gov/News/Releases/Release/Article/2970094/dod-announces-release-of-jadc2-implementation-plan/.

[2] U.S. Department of Defense, Summary of the Joint Command and Control (JADC2) Strategy, U.S. Department of Defense (March 17, 2022), available at https://media.defense.gov/2022/Mar/17/2002958406/-1/-1/1/SUMMARY-OF-THE-JOINT-ALL-DOMAIN-COMMAND-AND-CONTROL-STRATEGY.PDF.

[3] U.S. Department of Defense, DoD Announces Release of JADC2 Implementation Plan, U.S. Department of Defense (March 17, 2022), available at https://www.defense.gov/News/Releases/Release/Article/2970094/dod-announces-release-of-jadc2-implementation-plan/.

[4] Catie Edmondson and Ana Swanson, House Passes Bill Adding Billions to Research to Compete With China, New York Times (Feb. 4, 2022), available at https://www.nytimes.com/2022/02/04/us/politics/house-china-competitive-bill.html.

[5] For more information, please see our Artificial Intelligence and Automated Systems Legal Update (2Q21).

[6] H.R.4521, 117th Cong. (2021-2022); S. 1260, 117th Cong. (2021).

[7] H.R.4521, 117th Cong. (2021-2022).

[8] See id. (“In general.–The Secretary shall support a program of fundamental research, development, and demonstration of energy efficient computing and data center technologies relevant to advanced computing applications, including high performance computing, artificial intelligence, and scientific machine learning.”).

[9] For more information, please see our Artificial Intelligence and Automated Systems Legal Update (2Q19).

[10] Science and Technology Policy Office, Request for Information to the Update of the National Artificial Intelligence Research and Development Strategic Plan, Federal Register (June 2, 2022), available at https://www.federalregister.gov/documents/2022/02/02/2022-02161/request-for-information-to-the-update-of-the-national-artificial-intelligence-research-and.

[11] Id.

[12] National Institute of Science and Technology, Study To Advance a More Productive Tech Economy, Federal Register (January 28, 2022), available at https://www.federalregister.gov/documents/2022/01/28/2022-01528/study-to-advance-a-more-productive-tech-economy#:~:text=The%20National%20Institute%20of%20Standards%20and%20Technology%20(NIST)%20is%20extending,Register%20on%20November%2022%2C%202021; comments available at https://www.regulations.gov/document/NIST-2021-0007-0001/comment.

[13] Artificial Intelligence and Technology Office, U.S. Department of Energy Establishes Artificial Intelligence Advancement Council, energy.gov (April 18, 2022), available at https://www.energy.gov/ai/articles/us-department-energy-establishes-artificial-intelligence-advancement-council.

[14] Office of Science, Department of Energy Announces $10 Million for Artificial Intelligence Research for High Energy Physics, energy.gov (March 24, 2022), available at https://www.energy.gov/science/articles/department-energy-announces-10-million-artificial-intelligence-research-high.

[15] Office of the Director of National Intelligence, IARPA Launches New Biometric Technology Research Program, Office of the Director of National Intelligence (March 11, 2022), available at https://www.dni.gov/index.php/newsroom/press-releases/press-releases-2022/item/2282-iarpa-launches-new-biometric-technology-research-program.

[16] The Federal Trade Commission, Weight Management Companies Kurbo Inc. and WW International Inc. Agree to $1.5 Million Civil Penalty and Injunction for Alleged Violations of Children’s Privacy Laws, Office of Public Affairs (March 4, 2022), available at https://www.justice.gov/opa/pr/weight-management-companies-kurbo-inc-and-ww-international-inc-agree-15-million-civil-penalty; United States v. Kurbo Inc and WW International, Inc, No. 3:22-cv-00946-TSH (March 3, 2022) (Dkt. 15).

[17] Rebecca Kelly Slaughter, Commissioner, Fed. Trade Comm’n, Fireside Chat with FTC Commissioner Rebecca Slaughter, Privacy + Security Forum (March 24, 2022).

[18] 593 U.S. ___ (2021).

[19] 117th Cong. H.R. 6580, Algorithmic Accountability Act of 2022 (February 3, 2022), available at https://www.wyden.senate.gov/imo/media/doc/Algorithmic%20Accountability%20Act%20of%202022%20Bill%20Text.pdf?_sm_au_=iHVS0qnnPMJrF3k7FcVTvKQkcK8MG.

[20] NIST, AI Risk Management Framework: Initial Draft (March 17, 2022), available at https://www.nist.gov/system/files/documents/2022/03/17/AI-RMF-1stdraft.pdf.

[21] NIST Special Publication 1270, Towards a Standard for Identifying and Managing Bias in Artificial Intelligence (March 2022), available at https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.1270.pdf.

[22] NIST Pres Release, There’s More to AI Bias Than Biased Data, NIST Report Highlights (March 16, 2022), available at https://www.nist.gov/news-events/news/2022/03/theres-more-ai-bias-biased-data-nist-report-highlights.

[23] IRS, IRS announces transition away from use of third-party verification involving facial recognition (Feb. 7, 2022), available at https://www.irs.gov/newsroom/irs-announces-transition-away-from-use-of-third-party-verification-involving-facial-recognition.

[24] Stein v. Clarifai, Inc., No. 1:22-cv-00314 (D. Del. Mar. 10, 2022).

[25] Electronic Privacy Information Center v. United States Postal Service, No. 1:21-cv-02156 (D.D.C. Mar. 25, 2022).

[26] For more details, see Danielle Moss, Harris Mufson, and Emily Lamm, Medley Of State AI Laws Pose Employer Compliance Hurdles, Law360 (Mar. 30, 2022), available at https://www.gibsondunn.com/wp-content/uploads/2022/03/Moss-Mufson-Lamm-Medley-Of-State-AI-Laws-Pose-Employer-Compliance-Hurdles-Law360-Employment-Authority-03-30-2022.pdf.

[27] For more details, see Gibson Dunn’s Artificial Intelligence and Automated Systems Legal Update (4Q20) and Gibson Dunn’s Artificial Intelligence and Automated Systems Annual Legal Review (1Q22).

[28] Ill. Public Act 102-0047 (effective Jan. 1, 2022).

[29] Washington, D.C., Stop Discrimination by Algorithms Act of 2021 (proposed Dec. 8, 2021), available at https://oag.dc.gov/sites/default/files/2021-12/DC-Bill-SDAA-FINAL-to-file-.pdf.

[30] For more details, see Gibson Dunn’s Artificial Intelligence and Automated Systems Annual Legal Review (1Q22).

[31] EEOC, Initiative on AI and Algorithmic Fairness: Disability-Focused Listening Session, YouTube (Feb. 28, 2022) available at https://www.youtube.com/watch?app=desktop&v=LlqZCxKB05s.

[32] For past examples of these tactic, see, e.g., Gullen v. Facebook.com, Inc., No. 15 C 7681, 2016 WL 245910 at *2 (N.D. Ill. Jan. 21, 2016) (holding that no specific jurisdiction existed because “plaintiff does not allege that Facebook targets its alleged biometric collection activities at Illinois residents, [and] the fact that its site is accessible to Illinois residents does not confer specific jurisdiction over Facebook.”).

[33] Gutierrez v. Wemagine.AI LLP, No. 21 C 5702, 2022 WL 252704, at *2 (N.D. Ill. Jan. 26, 2022) (“There was no directed marketing specific to Illinois, and the fact that Viola is used by Illinois residents does not, on its own, create a basis for personal jurisdiction over Wemagine.”).

[34] Id. at *3.

[35] Stein v. Clarifai, Inc., 526 F. Supp. 3d 339 (N.D. Ill. 2021).

[36] Id. at 346.

[37] Stein v. Clarifai, Inc., No. 22-CV-314 (D. Del. March 10, 2022).

[38] See, e.g., Rosenbach v. Six Flags Ent. Corp., 129 N.E.3d 1197 (Ill. 2019) (fingerprints); Patel v. Facebook Inc., 290 F. Supp. 3d 948 (N.D. Cal. 2018) (facial biometrics).

[39] Rivera v. Google Inc., 238 F. Supp. 3d 1088, 1096 (N.D. Ill. 2017).

[40] Carpenter v. McDonald’s Corp., No. 1:21-CV-02906, 2022 WL 897149 (N.D. Ill. Jan. 13, 2022).

[41] Id. at *1.

[42] Id. at *3 (emphasis added).

[43] Id.

[44] Kislov v. Am. Airlines, Inc., No. 17 C 9080, 2022 WL 846840 (N.D. Ill. Mar. 22, 2022).

[45] Id. at *1.

[46] Id. at *2.

[47] Other recent complaints also include a lawsuit against a testing company for hand vein scans that are used to verify test taker identity (Velazquez v. Pearson Education, No. 2022-CH-00280 (Cook Co. Cir. Court Jan. 13, 2022)), AI-powered vehicle cameras that record facial geometry to monitor driver safety (Arendt v. Netradyne, Inc., No. 2022-CH-00097 (Cook Co. Cir. Court Jan. 5, 2022)), and an insurer’s use of an AI chat bot to analyze videos submitted by consumers for fraud (Pruden v. Lemonade, Inc., et al., No. 1:21-cv-07070-JGK (S.D.N.Y. Aug. 20, 2021).

[48] The Artificial Inventor Project ambitiously describes DABUS as an advanced AI system. DABUS is a “creative neural system” that is “chaotically stimulated to generate potential ideas, as one or more nets render an opinion about candidate concepts” and “may be considered ‘sentient’ in that any chain-based concept launches a series of memories (i.e., affect chains) that sometimes terminate in critical recollections, thereby launching a tide of artificial molecules.” Ryan Abbott, The Artificial Inventor behind this project, available at https://artificialinventor.com/dabus/.

[49] Ryan Abbott, The Artificial Inventor Project, available at https://artificialinventor.com/frequently-asked-questions/.

[50] Ryan Abbott, Second Request for Reconsideration for Refusal to Register A Recent Entrance to Paradise (Correspondence ID 1-3ZPC6C3; SR # 1-7100387071), United States Copyright Office, Copyright Review Board (Feb. 14, 2022), available at https://www.copyright.gov/rulings-filings/review-board/docs/a-recent-entrance-to-paradise.pdf (emphasis added).

[51] European Union (French Presidency), Laying Down Harmonised Rules on Artificial Intelligence (Artificial Intelligence Act) and Amending Certain Union Legislative Acts Chapter 2 (Articles 8 – 15) and Annex IV Council Document 5293/22 (12 January 2022), available at https://www.statewatch.org/media/3088/eu-council-ai-act-high-risk-systems-fr-compromise-5293-22.pdf.

[52] Id.

[53] Id.

[54] European Parliament Committee on Legal Affairs, Draft Opinion on the proposal for a regulation of the European Parliament and of the Council 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)) (2 March 2022), available at https://www.europarl.europa.eu/doceo/document/JURI-PA-719827_EN.pdf.

[55] European Parliament Committee Industry, Research and Energy, Draft Opinion on the proposal for a regulation of the European Parliament and of the Council 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)) (3 March 2022), available at https://www.europarl.europa.eu/doceo/document/ITRE-PA-719801_EN.pdf.

[56] Nuttall, Chris, EU takes lead on AI laws (21 April 2021), available at https://www.ft.com/content/bdbf8d8b-fdcc-410d-9d37-fec99b889f20.

The following Gibson Dunn lawyers prepared this client update: H. Mark Lyon, Frances Waldmann, Tony Bedel, Iman Charania, Kevin Kim, Brendan Krimsky, Emily Lamm, and Prachi Mistry.

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 Artificial Intelligence and Automated Systems Group, or the following authors:

H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Frances A. Waldmann – Los Angeles (+1 213-229-7914,fwaldmann@gibsondunn.com)

Please also feel free to contact any of the following practice group members:

Artificial Intelligence and Automated Systems Group:
H. Mark Lyon – Chair, Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com)
Patrick Doris – London (+44 (0)20 7071 4276, pdoris@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33 180, kgesing@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310-552-8581, alanin@gibsondunn.com)
Robson Lee – Singapore (+65 6507 3684, rlee@gibsondunn.com)
Carrie M. LeRoy – Palo Alto (+1 650-849-5337, cleroy@gibsondunn.com)
Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33 180, mwalther@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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On April 25, 2022, the Consumer Financial Protection Bureau announced that it will begin relying upon a “largely unused legal provision” of the Dodd-Frank Act to supervise nonbank financial companies that purportedly pose risks to consumers. To facilitate that process, the CFPB simultaneously promulgated a procedural rule that authorizes it to publish its decisions about whether certain nonbank entities present such a risk. The CFPB has stated that it intends for these decisions to provide nonbank entities with guidance about the circumstances in which they may be subject to regulation. Left unstated is the reality that the threat to publicly designate an entity as posing risks to consumers will provide the CFPB with additional leverage over such entities.

The CFPB’s announcement marks a significant expansion of its supervisory reach. The CFPB said that it intends to “conduct examinations” of “fintech” companies and “to hold nonbanks to the same standards that banks are held to.” And it is expected that the CFPB will assert the same authority over crypto firms. The CFPB’s announcement comes at a time of increasingly intense competition among regulators to assert jurisdiction over fintech and digital assets firms. Gibson Dunn represents many clients at the forefront of crypto and fintech innovation, and has deep experience challenging over-extension of agencies’ regulatory authority, including by financial regulators. We stand ready to help guide industry players as the CFPB moves forward with its ambitious plans.

I. The CFPB’s Authority to Regulate Nonbank Entities

Historically, only banks and credit unions were subject to federal financial supervision. That changed when Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

Under Dodd-Frank, the CFPB has supervisory authority over several categories of nonbank entities, including entities that provide mortgage, private student loan, or payday loan services. 12 U.S.C. § 5514(a)(1)(A), (D)–(E). In addition, and most relevant here, the CFPB may regulate nonbank entities when it “has reasonable cause to determine”—after providing notice and an opportunity to respond—that the entity “poses risks to consumers” regarding the provision of consumer financial products or services. Id. § 5514(a)(1)(C).

The CFPB issued a procedural rule in 2013 delineating the risk-determination process, but it has never before used this authority to supervise a nonbank. As the CFPB’s April 25, 2022 announcement explains, however, that is about to change. In the announcement, the CFPB said that it will begin exercising its “dormant authority” under Dodd-Frank to supervise nonbank entities—including “fintech” firms—that it has determined pose a risk to consumers.

The Dodd-Frank Act and the CFPB’s implementing regulations detail the risk-determination process and the consequences of being subject to regulation.

The Risk-Determination Process. The CFPB promulgated detailed procedures for the process it uses to determine whether nonbank entities are a risk to consumers, and thus subject to regulation under Dodd-Frank. See 12 C.F.R. §§ 1091.100–.115. Those procedures give the CFPB discretion to initiate the risk-determination process through issuing a “Notice of Reasonable Cause,” id. § 1091.102, or through bringing charges in an adjudicatory proceeding, id. § 1091.111. Whichever path the CFPB chooses, it must provide notice of the basis for the apparent risk and an opportunity for the nonbank entity to respond. The CFPB has stated that it may base its risk determinations on “complaints collected by the CFPB, or on information from other sources, such as judicial opinions and administrative decisions,” as well as “whistleblower complaints, state partners, federal partners, or news reports.” After considering the available evidence and any responses from the nonbank entity, the Director will decide whether it has “reasonable cause” to find a risk to consumers. The Director’s decision to subject an entity to regulation under Dodd-Frank is subject to review under the Administrative Procedure Act.

Regulation under Dodd-Frank. If the CFPB determines that a nonbank entity is subject to regulation based on a risk determination, then it faces the same level of regulation as banks. Among other things, the CFPB can conduct examinations to ensure compliance with consumer financial laws, 12 U.S.C. § 5514(b)(1), require entities to comply with recordkeeping requirements, id. § 5514(b)(7), and is generally vested with exclusive enforcement authority over federal consumer financial laws, id. § 5514(c). Notwithstanding the formal processes for making risk determinations, entities may also voluntarily consent to regulation under Dodd-Frank. 12 C.F.R. §§ 1091.110(a), 1091.111(a).

Petition for Termination. In the event the CFPB determines after the Issuance of a Notice of Reasonable Cause that a nonbank entity poses a risk to consumers and is thus subject to regulation under Dodd-Frank, that entity may file a petition before the Director to terminate the decision and escape regulation under the Act. 12 C.F.R. § 1091.113(a). That petition may be filed “no sooner than two years after” the decision, and only one petition may be filed per year. Id. The Director’s decision on a petition qualifies as “final agency action” that may be subject to review under the Administrative Procedure Act. Id. § 1091.113(e)(3).

II. New Rule Allowing Publication of Risk-Determination Decisions

Accompanying its announcement to begin supervising fintech nonbanks, the CFPB issued a procedural rule amending the risk-determinations procedures. Supervisory Authority Over Certain Nonbank Covered Persons Based on Risk Determination; Public Release of Decisions and Orders, 87 Fed. Reg. 25397 (proposed Apr. 29, 2022).

As a general matter, materials submitted in connection with a risk determination are considered confidential. 12 C.F.R. § 1091.115(c). But with this new rule, which took effect on April 29, 2022, the CFPB may in the Director’s discretion publish decisions and orders made during the risk-determination process on the CFPB’s website. According to the CFPB, this is designed to “increase the transparency of the risk-determination process” and give nonbank entities guidance about how the CFPB will enforce the Dodd-Frank Act moving forward. Of course, the measure also affords the CFPB an opportunity to make headlines regarding its efforts to bring large, innovative, and/or well-known entities under its supervisory control. The rule gives the nonbank entity subject to the order or decision an opportunity to file a submission with the CFPB regarding publication of the CFPB’s determination. The Director also decides whether to publish on the CFPB’s website the decision about whether the risk determination will be publicly released.

The CFPB has requested public comments on the rule, which must be received by May 31, 2022. Interested parties should consider commenting on the proposal to express any concerns, propose improvements, and to preserve their ability to bring a legal challenge to the rule. For regulated entities, a challenge to the rule may be preferable to raising objections only after the CFPB has identified the entity by name in a published risk determination.

III. Implications for Fintech and Crypto Companies

The CFPB’s announcement of its intent to begin supervising fintech firms—which is believed to include crypto firms as well—represents a muscular expansion of the agency’s regulatory purview. It is yet another aggressive action in the young tenure of Director Rohit Chopra—one that has been controversial and generally perceived as hostile to industry. The consequences for fintech and crypto firms could be significant. Although much will depend on the vigor with which the CFPB pursues its rediscovered supervisory authority, the CFPB stated that it intends to “conduct examinations” of fintech companies and to hold them to “the same standards that banks are held to.” Further, the CFPB’s new procedural rule allows the agency to publicize its findings about the risks that a fintech or crypto company poses to consumers before the agency completes an examination of the company, contrary to the confidentiality principles encouraging full and frank communications between an entity and its regulator, which principles lie at the heart of the supervisory process.

The CFPB’s new assertion of jurisdiction is in keeping with the surge of interest among federal regulators in the fintech and crypto industries over the past year. The SEC, CFTC, FinCEN, Treasury, and other agencies have been jockeying for position to regulate this fast-growing and innovative space. Absent legislation from Congress clearly defining regulatory roles within the industry, that jockeying is likely to continue. In March 2022, President Biden issued an executive order directing numerous agencies to evaluate the risks and benefits of digital assets. The reports resulting from that executive order may only heighten scrutiny of the crypto industry and increase the number of regulators asserting jurisdiction over it.

* * *

As the CFPB decides which entities it will seek to regulate under Dodd-Frank, companies can take steps now to begin assessing their compliance with the laws administered by the CFPB. Gibson Dunn represents many clients at the forefront of fintech, crypto, and blockchain innovation and stands ready to help guide industry players through this new era of CFPB regulation and the growing patchwork of federal regulation. The Gibson Dunn team has the expertise to provide guidance and develop innovative arguments challenging the CFPB’s authority. E.g., PHH Corp. v. CFPB, 839 F.3d 1 (D.C. Cir. 2016) (holding that the CFPB was unconstitutionally structured in violation of Article II and that the CFPB violated the APA), on reh’g en banc, 881 F.3d 75, 83 (D.C. Cir. 2018) (en banc) (vacating a $109 million penalty because the CFPB misinterpreted the statute and violated due process by retroactively applying its new interpretation); Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011) (defeat of SEC “proxy access” rule).

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 Gibson Dunn’s Crypto Taskforce (cryptotaskforce@gibsondunn.com), or any member of its Financial Institutions, Global Financial Regulatory, Privacy, Cybersecurity and Data Innovation, Public Policy, or Administrative Law teams, including the following authors:

Ryan T. Bergsieker – Partner, Privacy, Cybersecurity & Data Innovation Group, Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)

Ashlie Beringer – Co-Chair, Privacy, Cybersecurity & Data Innovation Group, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)

Matthew L. Biben – Co-Chair, Financial Institutions Group, New York (+1 212-351-6300, mbiben@gibsondunn.com)

Michael D. Bopp – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)

Stephanie L. Brooker – Co-Chair, Financial Institutions Group and White Collar Defense & Investigations Group, Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)

M. Kendall Day – Co-Chair, Financial Institutions Group, Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)

Eugene Scalia – Co-Chair, Administrative Law & Regulatory Practice Group, Washington, D.C. (+1 202-955-8543, escalia@gibsondunn.com)

Helgi C. Walker – Co-Chair, Administrative Law & Regulatory Practice Group, Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com)

Associates Nick Harper and Philip Hammersley also contributed to this client alert.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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According to recent statements of agency officials, the Federal Trade Commission (FTC) is looking to revise the Premerger Notification and Report Form (the “HSR Form”) “to conform to changing market realities and global standards.”[1] The FTC has not released details of the proposed changes, but recent statements from agency leadership provide some indication as to how the agency may expand the filing requirements. FTC Chair Lina Khan recently announced that the agency is exploring “ways to collect on the front end information that is more probative of whether parties are proposing an unlawful deal.”[2] And FTC Bureau of Competition Director Holly Vedova explained that the FTC wants, as part of the HSR filing, “overlap information, customers, things like that.”[3] The Bureau Director amplified that, under the proposed changes, the parties would “do that work ahead of time, and come in with that information, so that we don’t spend ten, twenty, thirty days trying to collect all that information.”[4]

Generally, M&A transactions are reportable under the HSR Act if, as a result of the transaction, (i) the buyer will hold stock, non-corporate interests, and/or assets of the seller valued at more than $101 million as a result of the deal (the “size-of-transaction” test) and, if the transaction is valued at $403.9 million or less, (ii) one party to the deal has assets or annual sales of $202 million or more, and the other party has assets or annual sales of $20.2 million or more (the “size-of-person” test). Certain exemptions and additional thresholds may apply.

While any changes to the HSR Form likely would not affect these filing thresholds or other rules relating to whether a transaction must be reported under the HSR Act, they would affect the information and documents that must be supplied to the FTC and DOJ in connection with those filings. To the extent that the changes require HSR forms to include the type of detailed information about the marketplace and industry participants that are often required in other jurisdictions, the changes would potentially impose substantial increased costs and potential delays in making HSR filings, including those that have no plausible competitive concerns.

The FTC has not yet expanded on Chair Khan and Bureau Director Vedova’s statements or floated, formally or informally, any specific proposed changes to the HSR Form. However, based on Bureau Director Vedova’s reference to “overlap information,” the new form might require additional information, including top customer lists and contact information for those customers, only where the filing parties report an “overlap” which, for purposes of the HSR Form, means that both parties produced revenues in the same 6-digit North American Industrial Classification System (NAICS) code in the most recent year. However, because the NAICS codes define broad industry sectors, parties that report an overlap are often not competitors. Beyond that, it is premature to speculate on the precise scope of the changes to the HSR Form or the magnitude of incremental cost, burden, and delays that such changes would impose on filing parties.

Such changes to the HSR Form are not likely to be adopted and implemented immediately. Although minor or administrative changes to the HSR Form have been made over the years without notice and comment, substantive changes would require the FTC to go through the notice and comment process under the Administrative Procedure Act (“APA”). The scope of changes previewed by the FTC would likely be considered “substantive,” as they were in 2011 when the concept of “associates” was added to the Rules and Items 4(d), 6(c)(ii) and 7(d) were added to the Form “in order to capture additional information that would significantly assist the Agencies in their initial review.”[5] The 2011 changes took just over a year from first publication to the final changes taking effect. While the changes contemplated by the FTC will likely not be as complex as the “associate” changes, the APA’s notice and comment period would still likely take many months. The HSR Act provides the FTC with discretion to determine the scope of the Form “as is necessary and appropriate” to enable the FTC and Department of Justice “to determine whether such acquisition may, if consummated, violate the antitrust laws.”[6] If the FTC makes changes that do not appear linked to the legality of the transaction under the antitrust laws, or otherwise appear to be “arbitrary and capricious”, then such changes might be subject to challenge. Although changes to the Form would not require new legislation, a three-Commissioner majority must vote in favor of the changes.

We will continue to keep you posted as developments on this front occur.

______________________

[1] David Hatch, FTC Wants More Upfront Merger Information, The Deal, April 12, 2022.

[2] 70th American Bar Association Antitrust Law Section Spring Meeting, Enforcers Roundtable, April 8, 2022.

[3] David Hatch, FTC Wants More Upfront Merger Information, The Deal, April 12, 2022.

[4] Id.

[5] 76 Fed. Reg. 42,471 (July 19, 2011). The “associate” changes were first published by the Commission on August 13, 2010, in a Notice of Proposed Rulemaking and Request for Public Comment available on its website. The final change to the Rules and Form and Instructions did not become effective until August 18, 2011.

[6] 15 U.S.C. § 18a(d)(1).

The following Gibson Dunn lawyers prepared this client alert: Andrew Cline, Rachel Brass, and Stephen Weissman.

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 or Mergers and Acquisitions practice groups, or the following:

Antitrust and Competition Group:
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@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)

Mergers and Acquisitions Group:
Eduardo Gallardo – Co-Chair, New York (+1 212-351-3847, egallardo@gibsondunn.com)
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)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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On April 28, 2022, the New York City Council amended the City’s pay transparency law, which was scheduled to go into effect on May 15. The amendments delay the effective date of the law until November 1, 2022. The amendments also make additional key changes that are noteworthy for employers.

Brief Summary of Law

The pay transparency law makes it an “unlawful discriminatory practice” under the New York City Human Rights Law for an employer to advertise a job, promotion, or transfer opportunity without stating the position’s minimum and maximum salary in the advertisement. The law applies to all employers with at least four employees in New York City, and independent contractors are counted towards that threshold. The law does not apply, however, to temporary positions advertised by temporary staffing agencies. The New York City Commission on Human Rights is authorized to take action to implement the law.

Recent Amendments

First, the new amendments clarify that only current employees may pursue a private right of action against their employers for an alleged violation of the law in relation to an advertisement for a job, promotion, or transfer opportunity. This important change eliminates the risk of applicants pursuing private claims against prospective employers.

Second, an employer will now have 30 days from receipt of an initial complaint of non-compliance to cure the employer’s “first time” violation of the law before facing a fine from the NYC Commission on Human Rights.

Third, the amendments clarify that either annual salary or hourly wage information must be disclosed in the required postings.

And finally, the new amendments expressly state that positions that cannot or will not be performed, at least in part, in New York City are exempt from the posting requirement.

Takeaways

The amendments were passed in response to concerns raised by the business community that the law was unclear, too burdensome, and could lead to an avalanche of litigation. All covered employers in New York City should ensure they are prepared to comply with the amended law effective November 1, 2022.

The following Gibson Dunn attorneys assisted in preparing this client update: Harris Mufson, Danielle Moss, Gabrielle Levin, and Hayley Fritchie.

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 the following:

Mylan Denerstein – New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com)

Danielle J. Moss – New York (+1 212-351-6338, dmoss@gibsondunn.com)

Harris M. Mufson – New York (+1 212-351-3805, hmufson@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)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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The Department of Justice’s Antitrust Division promised in a recent speech to increase enforcement of Section 8 of the Clayton Act, which prohibits competing corporations from sharing common directors or officers. The prevailing enforcement climate means that companies should have a compliance plan in place to discover potential director interlocks before they develop and monitor existing outside director positions to ensure they conform to existing Section 8 safe harbors.

Background

Jonathan Kanter, Assistant Attorney General for DOJ’s Antitrust Division, stated in a April 2022 speech that “[f]or too long, our Section 8 enforcement has essentially been limited to our merger review process.”[1] DOJ is “ramping up efforts to identify violations across the broader economy” and “will not hesitate to bring Section 8 cases to break up interlocking directorates.”[2]

The agencies have periodically issued warnings on Section 8 compliance. In 2019, the FTC published a blog post, Interlocking Mindfulness, reminding companies of the need to avoid director interlocks, particularly where mergers or spin-offs are involved.[3] This followed a 2017 post advising that companies “[h]ave a plan to comply with the bar on horizontal interlocks”.[4] Kanter’s statements are a marked evolution from the FTC’s 2017 guidance stating that the Commission “relie[s] on self-policing to prevent Section 8 violations,”[5] and indicate that DOJ may bring litigation to address potential interlocks.

Clayton Act, Section 8

Section 8 of the Clayton Act (15 U.S.C. § 19) prohibits one person from being an officer (defined as an “officer elected or chosen by the Board of Directors”) or director at two companies that are “by virtue of their business and location of operation, competitors.” “Person” has a broader meaning than a natural person, and includes a single firm.[6] Under this construction, a single firm could not appoint two different people as its agents to sit on the board or act as an officer of two competing corporations.

Section 8 broadly defines “competitors” to include any two corporations where “the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.” Section 8 is broad and potentially applies where two competing companies have an officer or director in common, subject to certain exceptions.

There are three potential safe harbors from Section 8 liability:

The competitive sales of either company are less than 2% of that company’s total sales;
The competitive sales of each company are less than 4% of that company’s total sales; or
The competitive sales of either company are less than $4,103,400 as of 2022.

While there are no penalties or fines imposed due to a Section 8 violation, the statute requires that the parties eliminate the interlock if a violation is found to have occurred. There is a one-year grace period to cure violations that develop after the interlock has occurred (e.g., competitive sales surpassing de minimis thresholds), provided the interlock did not violate Section 8 when it first occurred.

An antitrust investigation into a potential interlock may force the resignation of key officers or directors, delay the closing of a proposed transaction, or trigger consumer class actions alleging collusion.

Section 8 Compliance in the Current Regulatory Environment

As noted in a previous Client Alert, the DOJ has taken action against suspected interlocks even before Kanter’s April 2022 statements. Corporations should take proactive steps to detect interlocks before they occur and monitor existing ones to ensure they comply with current Section 8 safe harbors.

Corporations whose directors or officers are being considered for an outside position should first evaluate the position for potential Section 8 concerns. Where a corporation’s director or officer holds an outside position at another firm subject to a safe harbor due either to a lack of competition or a de minimis overlap, counsel should reevaluate the relationship periodically to ensure marketplace developments do not cause the position to run afoul of Section 8. This can occur because of growing sales in existing overlaps or entry into new lines of business. These checks can be incorporated as part of existing director/officer independence analyses.

Corporations engaged in financial transactions, such as spin-offs where the parent’s directors or officers may hold positions at the spin-off, should check whether the parent and the spin-off may compete in any line of business and evaluate potential Section 8 issues.

Private equity firms holding board seats or appointing leadership in multiple portfolio companies should evaluate carefully whether any could be considered “competitors” for Section 8 purposes.

Other antitrust statutes, particularly Section 1 of the Sherman Act (which prohibits agreements that unreasonably restrain trade), continue to apply even if the interlock is within Section 8 safe harbors. A sound compliance plan will therefore also establish procedures to prevent sharing of competitively sensitive information and avoid the appearance of potential competition concerns.

___________________________________

[1] Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at 2022 Spring Enforcers Summit, April 4, 2022, available at: https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-2022-spring-enforcers.

[2] Id.

[3] Michael E. Blaisdell, Interlocking Mindfulness, June 26, 2019, available at: https://www.ftc.gov/enforcement/competition-matters/2019/06/interlocking-mindfulness.

[4] Debbie Feinstein, Have a plan to comply with the bar on horizontal interlocks, Jan. 23, 2017, available at: https://www.ftc.gov/enforcement/competition-matters/2017/01/have-plan-comply-bar-horizontal-interlocks.

[5] Id.

[6] Interlocking Mindfulness (Section 8 “prohibits not only a person from acting as officer or director of two competitors, but also any one firm from appointing two different people to sit as its agents as officers or directors of competing companies”).

The following Gibson Dunn lawyers prepared this client alert: Daniel Swanson, Rachel Brass, Cynthia Richman, and Chris Wilson.

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, Private Equity, or Securities Regulation and Corporate Governance practice groups, or the following practice leaders:

Antitrust and Competition Group:
Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Stephen Weissman – Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Ali Nikpay – London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Brussels (+32 2 554 72 05, criis@gibsondunn.com)

Mergers and Acquisitions Group:
Eduardo Gallardo – New York (+1 212-351-3847, egallardo@gibsondunn.com)
Robert B. Little – Dallas (+1 214-698-3260, rlittle@gibsondunn.com)
Saee Muzumdar – New York (+1 212-351-3966, smuzumdar@gibsondunn.com)

Private Equity Group:
Richard J. Birns – New York (+1 212-351-4032, rbirns@gibsondunn.com)
Wim De Vlieger – London (+44 (0) 20 7071 4279, wdevlieger@gibsondunn.com)
Federico Fruhbeck – London (+44 (0) 20 7071 4230, ffruhbeck@gibsondunn.com)
Scott Jalowayski – Hong Kong (+852 2214 3727, sjalowayski@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310-552-8581, alanin@gibsondunn.com)
Michael Piazza – Houston (+1 346-718-6670, mpiazza@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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In our previous client alerts “US and Allies Announce Sanctions on Russia and Separatist Regions of Ukraine”, “United States Responds to the Crisis in Ukraine with Additional Sanctions and Export Controls” and “Russia’s Suppression of the Media Violates Its International Law Obligations”, as well as our “The World Reacts to the Crisis in Ukraine” webcast series offered on March 4, 2022, March 10, 2022 and March 22, 2022, we noted that Russia has imposed significant “countersanctions” against “unfriendly countries” and companies that are trying to comply with the U.S., UK, EU and other sanctions regimes against Russia and Belarus. These countersanctions can place companies that operate globally and that are committed to complying with all applicable laws in a very difficult position and may end up hastening the withdrawal of more companies from Russia.

This client alert discusses the most significant measures Russia has taken in order to counter international sanctions imposed against it.[1]

Measures against so-called “Unfriendly States”

Accurately described as countersanctions in the narrow sense, a significant category of the Russian measures is directly related to the sanctions against Russia imposed by other countries. The Russian Government adopted a list of such “unfriendly states”, which currently includes the United States, all EU member states, Albania, Andorra, Australia, Canada, Iceland, Japan, Liechtenstein, Micronesia, Monaco, Montenegro, New Zealand, North Macedonia, Norway, San Marino, Singapore, South Korea, Switzerland, Taiwan, Ukraine and the UK.[2]

As of April 29, 2022, the following measures have been adopted by Russia against so-called “unfriendly states”:

Russian debtors are allowed to pay off their large debts (i.e., debts exceeding 10 million rubles = approx. 140,000 USD in value) to non-Russian creditors based in “unfriendly states” in Russian rubles (instead of otherwise applicable currency) according to the official exchange rate of the Bank of Russia as of the first day of the respective month.[3]

Buyers of Russian natural gas based in “unfriendly states” (or in cases when gas is supplied to an “unfriendly state”) are obliged to pay for gas in Russian rubles:[4]
- Non-compliance with this requirement could lead to a halt to further supplies.
- The requirement is somewhat mitigated by the special payment procedure, according to which buyers of gas must open accounts in both Russian rubles and non-ruble currency at Gazprombank and initially pay for gas in non-ruble currency, which is then sold by Gazprombank on the Moscow Exchange against Russian rubles credited to the buyer’s ruble account and subsequently paid to the seller of gas.
Russian residents are prohibited, without a prior clearance by the Government Commission for Control over Foreign Investments, from conducting the following transactions with foreigners based in “unfriendly states” and persons controlled by such foreigners:
- Providing loans in rubles;
- Transferring ownership of securities; or
- Transferring ownership of real estate.[5]
The compensation to be paid to rightholders from “unfriendly states” for the use of an invention, utility model or industrial design in cases where such protected subject-matter may be used without their consent shall amount to 0 % of the actual proceeds from the production and sale of goods, performance of works or rendering of services for which the respective invention, utility model or industrial design has been used.[6]

Any money transfers from Russian accounts of nonresidents (companies or individuals) from “unfriendly states” to their accounts outside of Russia are suspended for six months.[7]

Companies from “unfriendly states” are prohibited from buying any non-ruble currency in Russia.[8]

Russian state companies subject to sanctions by “unfriendly states” are allowed to refrain from publishing information on their public procurement activities and their suppliers.[9]

Until December 31, 2022, Russian banks and financial institutions are allowed to refrain from publishing certain information in order to avoid sanctions of “unfriendly states,” in particular as regards their ownership and control structure, members of management bodies and other officers, as well as corporate restructuring.[10]

Until December 31, 2022, Russian insurance companies are prohibited from entering into contracts with insurance and reinsurance companies and insurance brokers from “unfriendly states”.[11]

Several top officials of the United States, EU, UK and other countries with “unfriendly state” status are banned from entering Russia.

Further Countermeasures

In addition to the countersanctions in the narrow sense as described above, Russia has taken numerous further measures which do not specifically target countries that have imposed sanctions against Russia. Such countersanctions in the broad sense include measures generally taken to mitigate the effects of international sanctions on the Russian economy as well as to stifle free expression and limit media coverage that is critical of the government (on the latter set of measures and their international law implications, see also our previous client alert “Russia’s Suppression of the Media Violates Its International Law Obligations”).

In particular, Russia has adopted the following measures that are designed to mitigate the effects of international sanctions:

Professional brokers in Russia are prohibited from selling securities on behalf of any non-Russian companies or individuals.[12]

Issuance and trading outside of Russia of depositary receipts representing shares of Russian companies is prohibited, with such Russian companies being obliged to terminate their respective agreements so that the depositary receipts are converted into underlying shares that can be traded only in Russia.[13]

Russian residents are prohibited from:
- Depositing non-ruble currency into their accounts in banks abroad;
- Transferring money using non-Russian electronic payment services without opening an account; and
- Transferring non-ruble currency to any nonresidents under loan agreements.[14]
Russian residents participating in foreign trade are obliged to sell 80% of non-ruble currency received through foreign trade contracts beginning February 28, 2022. Non-ruble currency must be sold within three working days of receiving each transfer. This obligation also retroactively applies to all funds received since January 1, 2022.[15]

Cash exports of non-ruble currency from Russia in an amount exceeding $10,000 in value are prohibited.[16]

Until September 9, 2022, individuals may withdraw no more than $10,000 in cash from their non-ruble accounts in Russian banks; cash withdrawals exceeding this threshold can be made only in rubles.[17] For resident companies and individual entrepreneurs, this threshold is set to $5,000 to be used only for business trips outside of Russia.[18] For nonresident companies and individual entrepreneurs, cash withdrawals in USD, EUR, JPY and GBP are completely banned.[19]

Until October 2022, individuals (as long as they are not associated with “unfriendly states”) may transfer no more than $10,000 in value per month from their bank accounts in Russian banks to their accounts or accounts of other individuals in banks abroad, and no more than $5,000 in value using payment services without opening an account.[20]

Until December 31, 2022, Russian residents are prohibited from paying shares in any nonresident companies or making payments to any nonresidents under joint venture agreements, unless they obtain a permit of the Bank of Russia.[21]

For certain types of contracts with any nonresidents, Russian residents are prohibited from making advance payments exceeding 30% of the sum of their obligations under the contract.[22]

Parallel imports of certain goods protected by certain IP rights (patents, trademarks, utility models and design patents) are legalized. Lists of such goods are yet to be designated by the Ministry of Industry and Trade.[23]

Additionally, Russia has adopted the following measures that are designed to suppress free expression:

Amendments to the Russian Criminal Code have been enacted, criminalizing the following activities:
- Public dissemination of “fake news” about the operations of Russian military or other state bodies abroad (Art. 207.3 of Russian Criminal Code);
- Public actions aimed at “discrediting” the use of Russian military or other state bodies abroad (Art. 280.3 of Russian Criminal Code);
- Calls for the introduction of sanctions against Russia or Russian nationals/companies (Art. 284.2).[24]
Russian media watchdog Roskomnadzor banned numerous independent Russian media outlets due to their reports on Russia’s war in Ukraine.

Roskomnadzor further banned several Russian-language media outlets associated with countries that have imposed sanctions against Russia, in particular Voice of America and Radio Free Europe/Radio Liberty (U.S.), BBC (UK) and Deutsche Welle (Germany).

Roskomnadzor further banned the most popular social networks in Russia.

Outlook

While numerous international companies are exiting the Russian market, we expect that further Russian countermeasures will be imposed.

In particular, the Russian Economic Ministry recently presented a draft bill on the “external administration” of companies closing their Russian businesses.[25]

Another draft bill stipulates that property of “unfriendly states” and of persons associated with such states located in Russia shall be subject to expropriation without compensation.[26]

A further draft bill proposes to introduce criminal liability for managers of companies and other entities for “abuse of office” committed in Russia for the purpose of compliance with international sanctions against Russia.[27]

According to another draft bill, which has already been passed by the Russian State Duma, Russian banks shall be prohibited from providing information on clients and their transactions upon request of any non-Russian authorities without prior consent of Russian authorities.[28]

The interaction between international sanctions and Russian countermeasures is creating and will continue to create difficult questions for companies with global operations, especially with touchpoints in Russia. We continue to closely track developments in this area.

________________________

[1] This alert cannot replace Russian local counsel advice on the continuously developing regulatory landscape.

[2] Russian Government’s Order No. 430-r of March 5, 2022.

[3] Russian President’s Decree No. 95 of March 5, 2022.

[4] Russian President’s Decree No. 172 of March 31, 2022.

[5] Russian President’s Decree No. 81 of March 1, 2022.

[6] Russian Government’s Regulation No. 299 of March 6, 2022.

[7] See Bank of Russia, Press Release of April 1, 2022 (Russian); see also Russian President’s Decree No. 126 of March 18, 2022.

[8] Decision of the Board of Directors of the Bank of Russia of April 1, 2022.

[9] See Meduza of March 8, 2022 (Russian).

[10] Federal Law No. 55-FZ of March 14, 2022.

[11] Federal Law No. 55-FZ of March 14, 2022.

[12] WSJ of February 28, 2022.

[13] Federal Law No. 114-FZ of April 16, 2022.

[14] Russian President’s Decree No. 79 of February 28, 2022.

[15] Russian President’s Decree No. 79 of February 28, 2022.

[16] Russian President’s Decree No. 81 of March 1, 2022.

[17] Bank of Russia, Press Release of March 9, 2022 (Russian); see also Bank of Russia, Press Release of April 8, 2022 (Russian).

[18] Bank of Russia, Press Release of March 10, 2022 (Russian); this restriction is applicable until September 10, 2022 and concerns only cash withdrawals in USD, EUR, JPY and GBP.

[19] Bank of Russia, Press Release of March 10, 2022 (Russian).

[20] Bank of Russia, Press Release of April 1, 2022 (Russian).

[21] Decision of the Board of Directors of the Bank of Russia of April 1, 2022; Russian President’s Decree No. 126 of March 18, 2022.

[22] Russian President’s Decree No. 126 of March 18, 2022.

[23] Russian Government’s Regulation of March 29, 2022 No. 506.

[24] The latter provision criminalizes only Russian citizens and only if the offence has been committed within a year after being subject to an administrative penalty for a similar offence.

[25] Draft bill No. 104796-8, registered at the Russian State Duma on April 12, 2022.

[26] Draft bill No. 103072-8, registered at the Russian State Duma on April 8, 2022.

[27] Draft bill No. 102053-8, registered at the Russian State Duma on April 8, 2022.

[28] Draft bill No. 1193544-7, passed by the Russian State Duma on April 20, 2022.

The following Gibson Dunn lawyers assisted in preparing this client update: Nikita Malevanny, Michael Walther, Richard Roeder, Claire Yi, Anna Helmer, Judith Alison Lee, and Adam M. Smith.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com)
Chris R. Mullen – Washington, D.C. (+1 202-955-8250, cmullen@gibsondunn.com)
Samantha Sewall – Washington, D.C. (+1 202-887-3509, ssewall@gibsondunn.com)
Audi K. Syarief – Washington, D.C. (+1 202-955-8266, asyarief@gibsondunn.com)
Scott R. Toussaint – Washington, D.C. (+1 202-887-3588, stoussaint@gibsondunn.com)
Shuo (Josh) Zhang – Washington, D.C. (+1 202-955-8270, szhang@gibsondunn.com)

Asia:
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
David A. Wolber – Hong Kong (+852 2214 3764, dwolber@gibsondunn.com)
Fang Xue – Beijing (+86 10 6502 8687, fxue@gibsondunn.com)
Qi Yue – Beijing – (+86 10 6502 8534, qyue@gibsondunn.com)

Europe:
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Nicolas Autet – Paris (+33 1 56 43 13 00, nautet@gibsondunn.com)
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Patrick Doris – London (+44 (0) 207 071 4276, pdoris@gibsondunn.com)
Sacha Harber-Kelly – London (+44 (0) 20 7071 4205, sharber-kelly@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Matt Aleksic – London (+44 (0) 20 7071 4042, maleksic@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33 180, mwalther@gibsondunn.com)
Richard W. Roeder – Munich (+49 89 189 33 115, rroeder@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Prospective joint venture partners frequently spend many hours discussing governance matters because they understand strong governance can be a key to venture success. In this recorded webcast, experts from Gibson Dunn and Ankura Consulting talk about designing an effective joint venture governance system. In particular, they discuss the following:

Why joint venture governance matters, and the relationship between governance and venture performance
How to make decisions regarding board structure and composition, including board size, quorum requirements, and the role of independent directors, observers, and committees
How to manage fiduciary duties and other conflicts of interest joint venture board directors face
What practical steps can be taken to ensure that governance processes continue to operate smoothly after the venture commences operation, and as the venture evolves over time

PANELISTS:

Stephen Glover is a partner in Gibson Dunn’s Washington, D.C. office and has served as Co-Chair of the firm’s Mergers and Acquisitions practice group. Mr. Glover has an extensive practice representing public and private companies in complex mergers and acquisitions, strategic alliances and joint ventures, as well as other corporate matters. Mr. Glover’s clients include large public corporations, emerging growth companies and middle market companies in a wide range of industries. He also advises private equity firms, individual investors and others.

Alisa Babitz is of counsel in Gibson Dunn’s Washington, D.C. office. She is a member of the firm’s Mergers and Acquisitions practice group. Ms. Babitz advises public and private companies on a wide range of general corporate, securities and M&A matters including acquisitions, dispositions and other business combinations; strategic alliances and joint ventures; public and private securities offerings; and venture capital investments.

James Bamford is a Senior Managing Director at Ankura and Head of the Joint Venture and Partnership Practice. He joined Ankura with the firm’s 2020 acquisition of Water Street Partners, which he co-founded in 2008. Mr. Bamford serves a global client base on joint venture transactions, governance, restructurings, and other partnership issues. He has advised clients on more than 200 venture transactions valued at more than $300 billion. He has served clients across multiple industries and in more than 50 countries. Mr. Bamford is author of two books and more than 100 articles on joint ventures and alliances.

Tracy Pyle is a Managing Director in Ankura’s Joint Venture and Partnership Practice. Ms. Pyle advises clients on joint ventures, partnerships, and alliances across the entire lifecycle of a partnership – from formation through launch, management, restructuring, and exit. She also advises companies on managing a portfolio of joint ventures. Ms. Pyle has written on the subject of joint ventures in numerous publications, including Sloan Management Review and the Harvard Law School Forum on Corporate Governance.

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 1.5 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.

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Decided April 28, 2022

Cummings v. Premier Rehab Keller, P.L.L.C., No. 20-219

Today, the Supreme Court held 6-3 that emotional-distress damages are not available in discrimination actions against recipients of federal financial assistance.

Background: In a string of statutes, including Title VI of the Civil Rights Act of 1964, the Rehabilitation Act of 1973, the Patient Protection and Affordable Care Act of 2010 (“ACA”), and Title IX of the Education Amendments of 1972, Congress has invoked its authority under the Spending Clause to prohibit recipients of federal funds from discriminating based on race, sex, or disability. Under Title VI, individuals may recover “compensatory damages” for intentional discrimination, and each of the other statutes listed above incorporates this remedial scheme.

The Fifth Circuit held that emotional-distress damages aimed at compensating for humiliation or other noneconomic injuries resulting from intentional discrimination are categorically unavailable under Title VI, the Rehabilitation Act, and the ACA. The Supreme Court has employed a “contract-law analogy” to assess remedies available under Title VI because the conditioning of federal funds on statutory compliance is similar to the formation of a contract: recipients of federal funds agree to take on certain liabilities in exchange for funding. Drawing on that contract-based analogy, the Fifth Circuit reasoned that funding recipients lack notice of their potential liability for emotional-distress damages because that remedy generally is not available for breach of contract actions.

Issue: Whether damages for emotional distress are available in discrimination actions brought against recipients of federal funds under Title VI and the statutes that incorporate its remedial scheme, including the Rehabilitation Act and the ACA.

Court’s Holding: Damages for emotional distress may not be recovered in such actions.

“Cummings would have us treat statutory silence as a license to freely supply remedies we cannot be sure Congress would have chosen to make available.”

Chief Justice Roberts, writing for the Court

What It Means:

The Court’s ruling protects funding recipients, including states, local governments, and businesses, from potential liability for emotional-distress damages, which can be significant and unpredictable.
The Court’s ruling also suggests federal funding recipients will only “be subject to the usual contract remedies in private suits,” not “more fine-grained” exceptions to general rules.
The Court’s decision underscores that where a right of action is implied, as is the case here, congressional silence as to the available remedies should not be taken as an endorsement of all possible remedies.

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

Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Thomas H. Dupree Jr. +1 202.955.8547 tdupree@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

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

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This update provides an overview of key class-action-related developments during the first quarter of 2022 (January through March).

Part I discusses cases from the Eleventh and Ninth Circuits regarding the diversity and amount-in-controversy requirements for federal court jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”).

Part II covers a recent decision from the Seventh Circuit analyzing when an intangible harm from a statutory violation is sufficient for Article III standing in putative class actions.

In addition, while not covered in this update, the Ninth Circuit recently issued a significant en banc opinion regarding class certification issues in Olean Wholesale Grocery v. Bumble Bee Foods, — F.4th —, 2022 WL 1053459 (9th Cir. Apr. 8, 2022) (en banc), including the evidentiary burden for a plaintiff seeking class certification, the assessment of expert testimony at the class certification stage, and the interplay between Rule 23 and injury and Article III standing. Olean is discussed in our separate client alert.

I. The Eleventh and Ninth Circuits Adopt Expansive Views of CAFA Jurisdiction

This past quarter, the Eleventh and Ninth Circuits issued noteworthy decisions relating to aspects of federal court jurisdiction under CAFA (minimal diversity and amount in controversy).

In Cavalieri v. Avior Airlines C.A., 25 F.4th 843 (11th Cir. 2022), the Eleventh Circuit addressed CAFA’s “minimal diversity” requirement, which provides for federal jurisdiction over a class action if there is more than $5 million in controversy and “any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.” 28 U.S.C. § 1332(d)(2)(C). The court held that this requirement can be met in a foreign-defendant case by plausible allegations that a nationwide class includes at least one U.S. citizen.

In Cavalieri, two Venezuelan citizens, one of whom is a legal permanent resident of the United States, filed a putative class action against a Venezuelan airline for breach of contract. 25 F.4th at 848. On appeal, the Eleventh Circuit sua sponte considered whether plaintiffs had sufficiently alleged diversity jurisdiction. Id.

The court first held that a foreign citizen who is a permanent resident does not qualify as a “citizen[] of a State” under the 2011 amendments to CAFA—which meant that the case did not satisfy the general diversity requirements because both the plaintiffs and the defendant were noncitizens. 25 F.4th at 848–49 (citing 28 U.S.C. § 1332(a)). Nonetheless, the Eleventh Circuit concluded that the allegations supported minimal diversity jurisdiction under CAFA because the plaintiffs had plausibly alleged that “‘at least one unnamed class member is a U.S. citizen and resident and, thus, is diverse from’” the Venezuelan airline. Id. at 849. The court added that it was for “a later stage in the litigation for the district court to make the factual determination on whether there is indeed jurisdiction.” Id. at 850 (citation omitted).

The Ninth Circuit addressed CAFA’s amount-in-controversy requirement in Jauregui v. Roadrunner Transportation Services, Inc., 28 F.4th 989 (9th Cir. 2022). In that case, the plaintiff filed a putative wage-and-hour class action on behalf of all current and former hourly workers of the defendant. Id. at 991. Although the defendant removed the case to federal court under CAFA and presented substantial evidence to establish the amount-in-controversy requirement, the district court nevertheless remanded the case to state court. Id.

The Ninth Circuit reversed. It held that by improperly discounting the defendant’s substantial evidence showing the amount in controversy was satisfied, the district court had impermissibly imposed a “heavy burden” on the defendant that “contravenes the text and understanding of CAFA and ignores precedent.” 28 F.4th at 992. In particular, the district court improperly “put a thumb on the scale against removal” by assigning a $0 value to most of the plaintiff’s claims simply because it disagreed with the assumptions underlying the defendant’s estimates. Id. at 992. But “merely preferring an alternative assumption is not an appropriate basis to zero-out a claim,” and “at most, it only justifies reducing the claim to the amount resulting from the alternative assumption.” Id. at 994. Thus, the district court’s approach “turn[ed] the CAFA removal process into an unrealistic all-or-nothing exercise of guess-the-precise-assumption-the-court-will-pick—even where . . . the defendant provided substantial evidence and analysis supporting its amount in controversy estimate.” Id. The Ninth Circuit also reaffirmed the “expansive understanding of CAFA” under circuit precedent, and encouraged district courts to give defendants “latitude” when analyzing removal “as long as the [defendant’s] reasoning and underlying assumptions are reasonable.” Id. at 993.

II. The Seventh Circuit Addresses When a Violation of Consumer Financial Protection Statutes Gives Rise to Article III Standing

As reported in our prior updates, the federal courts have continued to apply a mix of approaches in determining whether plaintiffs asserting statutory violations have alleged a concrete injury to satisfy Article III under TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021). The Seventh Circuit weighed in this quarter in a case analyzing standing under the Fair Debt Collection Protection Act (“FDCPA”).

In Ewing v. MED-1 Solutions, LLC, 24 F.4th 1146 (7th Cir. 2022), the Seventh Circuit held that debt collectors’ failure to report a customer’s dispute of a debt to credit agencies is a concrete injury sufficient to support standing under the FDCPA. Although the defendants argued the plaintiffs lacked standing under TransUnion because “there is no evidence that [the credit agencies] sent the [plaintiffs’] credit reports to potential creditors,” the court disagreed. 24 F.4th at 1150, 1152. “In the wake of TransUnion,” the Seventh Circuit framed the standing analysis as asking “whether the [plaintiffs] suffered a concrete injury when the [debt collectors] communicated false information (i.e., the reports of debts not being disputed) about them to a credit-reporting agency.” Id. at 1152. Because the FDCPA protects against “reputational harm”—which “is analogous to the harm caused by defamation, which has long common law roots”—the claim satisfied TransUnion’s requirement that the injury bear a close relationship to a traditionally recognized harm. Id. at 1153. Additionally, the fact the credit reporting agencies did not publish the credit reports to third parties was “a red herring,” because the debt collectors published false information to the credit agency, and plaintiffs did not need to show that the credit agency then “also shared that false information” to further third parties. Id. at 1152–53.

The following Gibson Dunn lawyers contributed to this client update: The following Gibson Dunn lawyers contributed to this client update: Jessica Pearigen, Gillian Miller, Yan Zhao, Wesley Sze, Lauren Blas, Bradley Hamburger, Kahn Scolnick, and Christopher Chorba.

Gibson Dunn attorneys are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions, Litigation, or Appellate and Constitutional Law practice groups, or any of the following lawyers:

Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com)
Theane Evangelis – Co-Chair, Litigation Practice Group, Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com)
Kahn A. Scolnick – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com)
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com)
Lauren M. Blas – Los Angeles (+1 213-229-7503, lblas@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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In this alert, we discuss the Federal Trade Commission’s recent reinstatement of a long dormant policy restricting certain future acquisitions by parties that hereafter enter into an FTC consent order.[1] Since announcing the return of the policy in October 2021, the Commission has included prior approval provisions in each of the seven consent orders issued in connection with conditional approval of mergers. Below, we provide details on these prior approval provisions and describe practical implications of the FTC’s prior approval policy change for companies considering transactions that may be subject to such requirements. Despite the policy reinstatement, FTC consent order terms—including prior approval provisions—remain subject to negotiation between the merging parties and the FTC.

Recent FTC Policy Changes Requiring Prior Approval in Merger Consent Orders

The FTC’s prior approval policy arises in the context of a Commission action to block or restructure a proposed merger. Prior to 1995, the FTC required all companies that entered into a consent decree to settle such an action with a divestiture to obtain prior approval from the FTC for any future transaction in at least the same product and geographic market for which a violation was alleged. The Commission’s 1995 Policy Statement on Prior Approval and Prior Notice Provisions (“1995 Policy Statement”) did away with that condition, requiring prior approval and prior notice only when there was a “credible risk” of an unlawful merger, without regard for market conditions or a company’s prior merger activity.[2]

In July 2021, the FTC voted 3-2 to rescind the 1995 Policy Statement, with Chair Khan, Commissioner Slaughter, and then-Commissioner Chopra voting in favor, and Commissioners Phillips and Wilson dissenting.[3] In support of her vote, Chair Khan cited the FTC’s “strapped resources.” She stated that since the FTC reduced its use of prior approval provisions following the 1995 Policy Statement, the agency had re-reviewed a number of the same or similar proposed transactions that the Commission had previously determined to be problematic. Similarly, she noted that companies in several cases had sought to buy back assets that the Commission had previously ordered those same companies to divest.[4] Commissioner Chopra made similar remarks in favor of the policy change, emphasizing that “Commission staff is stretched to the breaking point,” and arguing that this policy supports the Commission goal of “prevent[ing] egregious repeat offenses.”[5] In his dissenting opinion, Commissioner Phillips argued that this policy change will deter consent agreements, increase the number of merger challenges brought before a court, and result in less competition among companies by, for example, reducing competition in bidding processes as a potential bidder may be less attractive if it is subject to a prior approval provision.[6] And Commissioner Wilson argued in her dissent that the purported justification for the policy change is unsupported by empirical evidence and will result in wasted resources and less certainty.[7]

Subsequently, the FTC issued a Prior Approval Policy Statement in October 2021 (“2021 Policy Statement”), again by a 3-2 vote along party lines, that restored the Commission’s pre-1995 practice of restricting future acquisitions by parties subject to an FTC consent order.[8] Under the 2021 Policy Statement:

Parties settling a proposed transaction with a merger divestiture order will need to obtain prior approval from the Commission before closing any future transaction affecting each relevant market for which a violation was alleged, for a minimum of ten years.
The Commission may seek prior approval provisions that extend to broader markets than the product and geographic markets affected by the challenged merger, depending on the circumstances.
The Commission will weigh a number of factors in determining the scope of a prior approval provision, including: the nature of the transaction (i.e., whether the transaction includes some or all of the assets implicated in a prior transaction challenged by the Commission, or whether either party was subject to a merger enforcement action in the same relevant market); the level of market concentration and degree to which the transaction increases market concentration; the degree of pre-merger market power held by one of the parties; the parties’ history of acquisitions in the same relevant market, in upstream or downstream related markets, or in adjacent or complementary products or geographic areas; and evidence that market characteristics create an ability or incentive for anticompetitive market dynamics post-transaction.
The Commission will also require buyers of divested assets in FTC merger consent orders to agree to a prior approval for any future sale of the assets they acquire in divestiture orders, for a minimum of ten years.
The Commission is less likely to pursue a prior approval provision against merging parties that abandon their transaction prior to certifying substantial compliance with a Second Request (or in the case of a non-HSR reportable deal, with any applicable Civil Investigative Demand or Subpoena Duces Tecum). However, the Commission may seek an order incorporating a prior approval provision even in matters where the Commission issues a complaint to block a merger and the parties subsequently abandon the transaction.

In a dissenting statement, Commissioners Wilson and Phillips characterized the 2021 Policy Statement as a “broadside at the market for corporate control in the United States” and expressed concerns that “[d]espite its unassuming label, a prior approval requirement imposes significant obligations on merging parties and innocent divestiture buyers not with respect to currently pending mergers, but instead with respect to future deals.”[9] During panel discussions at the American Bar Association’s Antitrust Spring Meeting in April 2022, both dissenting Commissioners reiterated their concerns regarding the policy change. Commissioner Wilson suggested that prior approval requirements raise significant due process concerns and argued that this policy change disincentivizes potential divestiture buyers from assisting the FTC in resolving its competitive concerns.[10] Commissioner Phillips similarly stated that the requirements opposed on divestiture buyers are “like a penalty for helping.”[11]

Recent Consent Orders Containing Prior Approval Provisions

Since issuing the 2021 Policy Statement, the FTC has entered into consent agreements containing prior approval provisions to resolve competitive concerns in seven proposed transactions.

Dialysis Services Transaction. The FTC challenged a dialysis company’s proposed acquisition of a number of dialysis clinics from another provider in Utah in October 2021, alleging that the proposed acquisition would reduce competition and increase concentration in the provision of outpatient dialysis services in the greater Provo, Utah area. In the first consent agreement to contain a prior approval provision following the FTC’s announcement of its revised prior approval policy, the buyer agreed to divest four outpatient dialysis clinics to a third party. The consent agreement also required the buyer to seek prior approval from the FTC for a ten-year period before: (1) acquiring an ownership or leasehold interest in any facility that has operated as an outpatient dialysis clinic within six months prior to the date of the proposed acquisition, within the State of Utah; (2) acquiring an ownership interest in any individual or entity that owns any interest in or operates an outpatient dialysis clinic within the State of Utah (but only with respect to that individual or entity’s interest in clinics operated Utah); or (3) entering into any contract for the buyer to participate in the management or business of an outpatient dialysis clinic located within the State of Utah. Notably, the consent agreement did not contain a prior approval provision binding the divestiture buyer.

Generic Pharmaceuticals. In November 2021, the FTC’s challenged ANI Pharmaceuticals, Inc.’s (“ANI”) proposed acquisition of Novitium Pharma LLC (“Novitium”), alleging that the transaction likely would have harmed competition in the U.S. markets for generic sulfamethoxazole-trimethoprim (“SMX-TMP”) oral suspension, an antibiotic used to treat infections, and generic dexamethasone tablets, an oral steroid product used to treat inflammation. The FTC approved a final consent order settling those charges in January 2022, pursuant to which ANI and Novitium agreed to divest ANI’s rights and assets to generic SMX-TMP oral suspension and generic dexamethasone tablets to Prasco LLC (“Prasco”). The consent order imposed prior approval provisions on the merging parties as well as on the divestiture buyer. The order required ANI and Novitium to seek prior approval from the FTC before acquiring any rights or interests in the two relevant markets (generic SMX-TMP and generic dexamethasone), or the therapeutic equivalent or biosimilar of those products, as well as before acquiring any rights or interests in a third pipeline product, erythromycin/ethylsuccinate products, or the therapeutic equivalent or biosimilar of those products. Additionally, for three years, Prasco must seek prior approval before selling or licensing any FDA authorizations for the divested assets, and for an additional seven years thereafter Prasco must seek prior approval before selling or licensing any FDA authorizations for the divested assets to anyone who owns or is seeking approval for an FDA authorization to manufacture or sell a therapeutic equivalent of a divested product.[12]

More recently, in April 2022, the FTC challenged Hikma Pharmaceuticals’ (“Hikma”) proposed acquisition of Custopharm, Inc. (“Custopharm”), alleging that the transaction would likely substantially lessen competition in the U.S. market for generic injectable triamcinolone acetonide (“TCA”), a corticosteroid used for severe skin conditions, allergies, and inflammation. As part of the transaction, Custopharm’s parent company, Water Street Healthcare Partners, LLC (“Water Street”), agreed to retain and transfer Custopharm’s pipeline TCA product, assets, and business to another company Water Street owns, Long Grove Pharmaceuticals, LLC. Under the terms of the consent order entered to resolve the FTC’s allegations, for ten years, Hikma will not acquire any rights or interests in the divested TCA product, assets, and business, or the therapeutic equivalent or biosimilar thereof, without the prior approval of the Commission. The consent order further provides that Water Street shall not sell, transfer, or otherwise convey any interest in the divested TCA assets or business for four years without the prior approval of the Commission. The consent order also includes a novel requirement that the divestiture buyer and its parent company not terminate the operations of the divested TCA business and take all actions necessary to maintain the full economic viability, marketability, and competitiveness of the divested TCA assets and business.[13]

Grocery Stores. Two New York-based supermarket operators—The Golub Corp. (“Golub”), which owns the Price Chopper chain, and Tops Market Corp. (“Tops”)—sought to merge in a transaction that would have created a combined company with nearly 300 supermarkets across six states. In its November 2021 complaint challenging the transaction, the FTC alleged that the proposed merger would substantially lessen competition in the retail sale of food and other grocery products in supermarkets in nine counties in New York and one county in Vermont. To settle those charges, Golub and Tops entered into a final consent agreement with the FTC in January 2022 pursuant to which the merging parties agreed to divest 12 Tops stores and related assets to C&S Wholesale Grocers, Inc. (“C&S”). The consent agreement requires Golub and Tops to obtain prior approval from the FTC for a ten-year period before acquiring any facility that has operated as a supermarket, as well as before acquiring an interest in any entity that has owned or operated a supermarket, in the ten counties comprising the relevant geographic markets alleged in the complaint within six months prior to the date of such proposed acquisition. The consent agreement also requires C&S to seek prior approval for a three-year period before selling a divested supermarket, and for an additional seven-year period before selling a divested supermarket to any person that owned an interest in supermarket located in the same county as the divested supermarket within six months prior to the date of such proposed sale.[14]

Retail Fuel Assets. In December 2021, the FTC challenged Global Partners LP’s (“Global”) proposed acquisition of 27 retail gasoline and diesel outlets from Richard Wiehl (“Wiehl”). The FTC alleged that the transaction would harm competition for the retail sale of gasoline in five local Connecticut markets, as well as for the retail sale of diesel fuel in four of those markets. Pursuant the FTC’s consent order, Global and Wiehl were required to divest to Petroleum Marketing Investment Group (“PMG”) six Global retail fuel outlets and one Wheels retail fuel outlet. Under the order, Global must obtain FTC prior approval for a ten-year period before acquiring an interest in any retail fuel business within a two-mile driving distance from any of the seven divested fuel outlets. Additionally, PMG must not, without FTC prior approval, sell or otherwise convey any of the divested fuel outlets for a period of three years, or sell any of the divested fuel outlets for an additional seven-year period, to any person who owned an interest in any retail fuel business within a two-mile driving distance from any of the seven divested fuel outlets.[15]

Oil and Gas Production Assets. In March 2022, the FTC challenged a proposed transaction that would have combined two of four significant oil and gas development and production companies in northeast Utah’s Uinta Basin, alleging that it would harm competition in the relevant product market for the development, production, and sale of Uinta Basin waxy crude to Salt Lake City area refiners, as well as in a narrower relevant product market for the development, production, and sale of Uinta Basin yellow waxy crude to Salt Lake City area refiners. The complaint alleged harm in a relevant geographic market no broader than the Uinta Basin, as well as in an alternative relevant geographic market consisting of the Salt Lake City area. To resolve the FTC’s allegations, the merging parties entered into a consent agreement with the FTC pursuant to which they agreed to divest certain assets in Utah to a third party. The prior approval provision in the consent agreement required the buyer to receive FTC prior approval for a ten-year period before acquiring any ownership, leasehold, or other interest in any person that has produced or sold, on average over the six months prior to the acquisition, more than 2,000 barrels per day of waxy crude in seven Utah counties, as well as before acquiring any ownership or leasehold interest in lands located in those seven Utah counties where the transaction—or sum of transactions with the same counterparty during any 180-day period—results in an increase in the buyer’s land interests in those seven counties of more than 1,280 acres. The consent agreement also requires the divestiture buyer to obtain prior approval for a three-year period before selling the divested assets, as well as for an additional seven-year period before selling the divested assets to any person engaged in the development, production, or sale of Uinta Basin waxy crude in seven Utah counties.

Glass Enamel and Colorants. The FTC challenged Prince International Corp.’s (“Prince”) proposed acquisition of Ferro Corp. (“Ferro”) in April 2022, alleging that the proposed acquisition would substantially lessen competition in the North American market for porcelain enamel frit and in the worldwide markets for glass enamel and forehearth colorants. To resolve the FTC’s competitive concerns, the parties entered into a consent agreement requiring Prince and Ferro to divest three facilities to a third party: a porcelain enamel frit and forehearth colorants plant in Leesburg, Alabama; a porcelain enamel frit and forehearth colorants plant and research center in Bruges, Belgium; and a glass enamel plant in Cambiago, Italy. Under the terms of the consent order, the merged company must obtain prior approval from the Commission for ten years before buying assets to manufacture and sell porcelain enamel frit in North America, or before buying assets to manufacture and sell glass enamel or forehearth colorants anywhere in the world. The consent order also requires the divestiture buyer to obtain prior approval for three years before transferring any of the divested assets to any buyer, and for seven additional years before transferring any of the divested assets to a buyer that manufactures and sells porcelain enamel frit, glass enamel, or forehearth colorants.[16]

Key Takeaways for Parties Considering Transactions that May be Subject to FTC Consent Orders

Negotiation of Merger Agreements Should Anticipate Prior Approval Provisions in FTC Investigations that Result in Consent Orders. Merging parties should expect that the FTC will require a prior approval provision in any transaction in which potential competitive concerns can be resolved with a divestiture. There may be some flexibility, however, to negotiate the precise contours of a prior approval requirement with the FTC to fit the unique circumstances of a particular transaction. Buyers should therefore consider seeking flexible merger agreement language to avoid being obligated to accept a prior approval provision that would unreasonably impede their ability to pursue potential future transactions, particularly in an area broader than the specific competitive concerns the FTC is likely to have in the earlier transaction. Sellers, on the other hand, would benefit from seeking assurances obligating the buyer to agree to a reasonable prior approval provision to the extent the FTC requires a divestiture to resolve competitive concerns while, at the same time, appreciating a buyer’s reluctance to agree to take on risks associated with a broadly worded obligation.

Negotiation of Prior Approval Provisions with FTC Should Ensure They Do Not Result in Broader Consequences than Intended. A prior approval provision in certain circumstances could apply to any subsequent transaction involving assets that are covered by the prior approval, even if that transaction also includes assets that fall outside the prior approval’s scope. For this reason, parties should carefully negotiate the scope of prior approval provisions with potential future transactions in mind to avoid agreeing to overly broad terms that may impact the timing and risks in future transactions involving assets that include both in-scope and out-of-scope assets.

Product and Geographic Scope Generally Limited to Divestiture Markets. The 2021 Policy Statement suggests that prior approval provisions in FTC consent orders, under certain circumstances, may extend beyond the relevant product and geographic markets affected by the merger. So far, however, the prior approval provisions included in FTC consent orders since the 2021 Policy Statement have generally been narrowly drawn around the divestiture product and geographic areas, and any extensions beyond the relevant markets defined in the FTC’s complaints have been relatively limited. Merging parties should be in a position to comply with a Second Request and be prepared to litigate if needed to gain leverage to secure a settlement on reasonable terms if the FTC seeks to impose prior approval provisions broader than the markets in which the parties have agreed to divest assets.

Duration. Despite the 2021 Policy Statement’s proclamation that prior approval provisions will cover “a minimum of ten years,” none of the prior approval provisions included in the consent orders entered since the 2021 Policy Statement have extended beyond a ten-year period. Additionally, all but one of the consent orders issued include prior approval provisions applicable to buyers of divested assets. With the exception of the four-year period applied to the divestiture buyer in Hikma/Custopharm, the prior approval provisions for divestiture buyers generally cover a three-year period during which the divestiture buyer must obtain prior approval before conveying the divested assets to another buyer, followed by a seven-year period during which the divestiture buyer must seek prior approval before conveying the divested assets to a buyer that operates in a similar product and geographic market as the divested assets.

Transactions Abandoned Post-Complaint. The 2021 Policy Statement put merging parties on notice that even if they abandon a proposed merger after litigation commences, the Commission may subsequently pursue an order incorporating a prior approval provision. To obtain such an order the FTC would have to pursue an enforcement action in its administrative court seeking injunctive relief to prevent a potential recurrence of the alleged violation, which would likely require significant resources. Since the 2021 Policy Statement was issued, the FTC has yet to pursue such an order against merging parties who have abandoned post-complaint but before fully litigating the challenged transaction.[17] There have been indications, however, that the FTC is exploring the possibility of seeking an order against Hackensack Meridian Health and Englewood Healthcare—who abandoned their proposed merger after the Third Circuit upheld a preliminary injunction entered by the U.S. District Court for the District of New Jersey enjoining the merger—that would require the two hospital systems to provide prior notice should they attempt the same merger in the future.[18]

Lack of Convergence with DOJ Policy. The Antitrust Division currently does not have a similar policy requiring prior approval provisions in divestiture orders. Assistant Attorney General Jonathan Kanter’s recent statements about the inadequacy of divestiture remedies and proclamations that the Antitrust Division’s “duty is to litigate, not settle,”[19] suggest that the agency will enter into fewer consent decrees conditionally approving deals with divestitures than in prior administrations. It remains to be seen whether, for such decrees, the Antitrust Division will follow in the FTC’s footsteps with regard to prior approval provisions although, in the first consent decree issued since the new Assistant Attorney General took office, the decree did not include such a provision.

___________________________

[1] Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 25, 2021), here.

[2] Press Release, FTC Rescinds 1995 Policy Statement that Limited the Agency’s Ability to Deter Problematic Mergers (July 21, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/07/ftc-rescinds-1995-policy-statement-limited-agencys-ability-deter-problematic-mergers.

[3] Id.

[4] Remarks of Chair Lina M. Khan Regarding the Proposed Rescission of the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions (July 21, 2021), here.

[5] Prepared Remarks of Commissioner Rohit Chopra Regarding the Motion to Rescind the Commission’s 1995 Policy Statement on Prior Approval and Prior Notice (July 21, 2021), here.

[6] Dissenting Statement of Commissioner Noah Joshua Phillips Regarding the Commission’s Withdrawal of the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases (July 21, 2021), here.

[7] Oral Remarks of Commissioner Christine S. Wilson (July 21, 2021), here.

[8] Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 25, 2021), here.

[9] Dissenting Statement of Commissioners Christine S. Wilson and Noah Joshua Phillips Regarding the Statement of the Commission on Use of Prior Approval Provisions in Merger Orders (Oct. 29, 2021), here.

[10] Matthew Perlman, FTC’s Republicans Say Leaders Think Mergers are ‘Evil’, Law360, Apr. 6, 2022, here.

[11] Id.

[12] See Complaint, In the Matter of ANI Pharmaceuticals, Inc., Novitium Pharma LLC, and Esjay LLC (Nov. 10, 2021), here; Decision and Order, In the Matter of ANI Pharmaceuticals, Inc., Novitium Pharma LLC, and Esjay LLC (Jan. 12, 2022), here.

[13] See Complaint, In the Matter of Hikma Pharmaceuticals PLC, et al. (Apr. 18, 2022), here;
Decision and Order, In the Matter of Hikma Pharmaceuticals PLC, et al. (Apr. 18, 2022), here.

[14] See Complaint, In the Matter of The Golub Corporation, Tops Markets Corporation, and Project P Newco Holdings, Inc. (Nov. 8, 2021), here; Decision and Order, In the Matter of The Golub Corporation, Tops Markets Corporation, and Project P Newco Holdings, Inc. (Jan. 24, 2022), here.

[15] See Complaint, In the Matter of Global Partners LP and Richard Wiehl (Dec. 20, 2021),
https://www.ftc.gov/system/files/ftc_gov/pdf/final_global_wiehl_complaint_0.pdf;
Decision and Order, In the Matter of Global Partners LP and Richard Wiehl (Dec. 20, 2021),
https://www.ftc.gov/system/files/ftc_gov/pdf/final_global_wiehl_order_0.pdf.

[16] See Complaint, In the Matter of American Securities Partners VII, Prince International Corporation, and Ferro Corporation (Apr. 21, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2110131ASPFerroComplaint.pdf; Decision and Order, In the Matter of American Securities Partners VII, Prince International Corporation, and Ferro Corporation (Apr. 21, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2110131ASPFerroDecisionOrder.pdf.

[17] See, e.g., Statement Regarding Termination of Nvidia Corp.’s Attempted Acquisition of Arm Ltd. (Feb. 14, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/02/statement-regarding-termination-nvidia-corps-attempted-acquisition-arm-ltd; Statement Regarding Termination of Lockheed Martin Corporation’s Attempted Acquisition of Aerojet Rocketdyne Holdings Inc. (Feb. 15, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/02/statement-regarding-termination-lockheed-martin-corporations-attempted-acquisition-aerojet; Statement Regarding Termination of Attempted Merger of Rhode Island’s Two Largest Healthcare Providers (Mar. 2, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/03/statement-regarding-termination-attempted-merger-rhode-islands-two-largest-healthcare-providers.

[18] See, e.g., Respondents’ Reply in Support of Motion to Dismiss Complaint, In the Matter of Hackensack Meridian Health, Inc. and Englewood Healthcare Foundation, Dkt No. 9399 (Apr. 20, 2022), here.

[19] Prepared Remarks of Assistant Attorney General Jonathan Kanter, Antitrust Enforcement: The Road to Recovery (Apr. 21, 2022), ttps://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-keynote-university-chicago-stigler.

The following Gibson Dunn lawyers prepared this client alert: Jamie E. France and JeanAnn Tabbaa.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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On November 8, 2021 New York Governor Kathy Hochul signed an amendment to the New York Civil Rights Law which requires employers provide notice to employees of electronic monitoring of telephone, email, and internet access and usage. The law, as described briefly below, is scheduled to go into effect on May 7, 2022.

Once effective, the law requires all New York employers (regardless of size) to provide written notice, upon hire, to new employees if the employer does and/or plans to monitor or intercept their telephone or email communications or internet usage. The notice must be in writing (either hard copy or electronic), and it must be acknowledged by new employees. Although employers need not obtain acknowledgements from existing employees, they will be required to post a notice in a “conspicuous place which is readily available for viewing” by existing employees subject to electronic monitoring.

The notice should inform employees that “any and all telephone conversations or transmissions, electronic mail or transmissions, or internet access or usage by an employee by any electronic device or system,” including, but not limited to, “computer, telephone, wire, radio or electromagnetic, photoelectronic or photo-optical systems,” may be subject to monitoring “at any and all times by any lawful means.”

“Conspicuous place” is not defined in the statute. Therefore, employers who have safe harbor policies in their handbooks allowing electronic monitoring may consider posting a stand-alone notice of their electronic monitoring policy in a place in which employees can easily and readily access and review the policy.

Notably, the law does not apply to processes that:

are designed to manage the type or volume of incoming or outgoing electronic mail or telephone voice mail or internet usage;
are not targeted to monitor or intercept the activities of a particular individual; and
are performed solely for the purpose of computer system maintenance and/or protection.

Violations

There is no private right of action available for violations. The Office of the New York State Attorney General is tasked with enforcing the law. Employers who are determined to have violated the law will be subject to fines of up to $500 for the first offense, $1,000 for the second offense, and $3,000 for the third and each subsequent offense.

Takeaway

On or before the effective date (May 7), New York employers who currently and/or plan to conduct electronic monitoring of employees should prepare to provide: (1) an acknowledgement form to new employees upon hire; as well as (2) notice of the electronic monitoring policy to existing employees.

The following Gibson Dunn attorneys assisted in preparing this client update: Harris Mufson, Danielle Moss, and Lizzy Brilliant.

Mylan Denerstein – New York (+1 212-351-3850, mdenerstein@gibsondunn.com)

Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com)

Danielle J. Moss – New York (+1 212-351-6338, dmoss@gibsondunn.com)

Harris M. Mufson – New York (+1 212-351-3805, hmufson@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)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

In March 2022, the Securities and Exchange Commission approved a rule proposal for new climate change disclosure requirements for both U.S. public companies and foreign private issuers. In this webcast, a panel of Gibson Dunn lawyers provides an overview of the proposed requirements and discuss the key takeaways and the impact the proposal, if adopted, would have on public companies.

PANELISTS:

Aaron Briggs is a partner in Gibson Dunn’s San Francisco office and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Briggs’ practice focuses on advising technology, life sciences and other companies and their boards of directors on a wide range of securities and governance matters, including ESG, corporate governance, SEC disclosure and compliance, shareholder activism, executive compensation, investor communications, disclosure effectiveness and stakeholder engagement matters. Prior to re-joining the firm in 2018, Mr. Briggs served as Executive Counsel – Corporate, Securities & Finance at General Electric. In addition, Mr. Briggs was named Corporate Governance Professional of the Year by Corporate Secretary Magazine.

Anne Champion is a partner in Gibson Dunn’s New York office and a member of the firm’s Transnational Litigation, Environmental Litigation, Media Law, and Intellectual Property Practice Groups. Ms. Champion has played a lead role in a wide range of high-stakes litigation matters, including trials. Her practice focuses on complex international disputes, including RICO, fraud, and tort claims, and includes federal and state court litigation and international arbitration. She also has significant experience in First Amendment and intellectual property disputes.

Tom Kim is a partner in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Kim focuses his practice on a broad range of SEC disclosure and regulatory matters, including capital raising and tender offer transactions and shareholder activist situations, as well as corporate governance, environmental social governance and compliance issues. He also advises clients on SEC enforcement investigations involving disclosure, registration and auditor independence issues. Mr. Kim served at the SEC for six years as the Chief Counsel and Associate Director of the Division of Corporation Finance, and for one year as Counsel to the Chairman.

Lori Zyskowski is a partner in Gibson Dunn’s New York office and Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group. Ms. Zyskowski advises clients, including public companies and their boards of directors, on corporate governance and securities disclosure matters, with a focus on Securities and Exchange Commission reporting requirements, proxy statements, annual shareholders meetings, director independence issues, proxy advisory services, and executive compensation disclosure best practices. She also focuses on advising companies on environmental, social and governance, or ESG, disclosures. Ms. Zyskowski also advises on board succession planning and board evaluations and has considerable experience advising nonprofit organizations on governance matters.

Brian A. Richman is an associate in Gibson Dunn’s Washington, D.C. office and a member of the firm’s Appellate and Constitutional Law, and Administrative Law and Regulatory practice groups. Mr. Richman focuses his practice on high-stakes appellate, administrative law, and complex litigation matters. He regularly litigates constitutional and statutory issues in courts around the country and represents clients in challenging and defending regulatory action by administrative agencies, with an emphasis on securities and financial services matters.

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.

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Compared to 2021’s record level deal activity, the first quarter of 2022 has registered a dip in global M&A. Analysts report that for January through March of 2022, global M&A is down by approximately one-fifth relative to the same period last year when measured by both deal value and volume metrics. The total value of pending and completed deals announced in Q1 2022 is the lowest since the second quarter of 2020. Big deals are still being signed, including a range of high profile deals in the largest mega-deal bracket (i.e., deals valued at $10B or more), a category that includes, among others, Microsoft/Activision Blizzard ($68B) and TD Bank/First Horizon ($13.4B). Yet, during the early months of 2022, large and mid-market deals—those valued between $1B and $5B—declined 40% relative to last year.

A host of complex factors influence M&A activity at any given time, from inflation to global conflicts to liquidity factors to prevailing regulatory dynamics. To be sure, the current regulatory climate around antitrust issues presents a challenge for deal makers. Progressive leadership at the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ) (together, the Agencies) have articulated and begun to execute a broad anti-consolidation agenda, increasing uncertainty and heightening risk associated with the U.S. merger clearance process. Similar trends are playing out across the global antitrust enforcement community. This shift has implications for the costs, timeline, and business disruption associated with the merger clearance process, particularly in light of the Agencies’ movement towards disfavoring settlements. But unlike many of the factors that contribute to M&A trends, which are exogenous and uncontrollable by deal parties, concerns about antitrust risk can be assessed and managed.

Gibson Dunn is working actively with clients to ensure that unpredictability around the merger control process under the Biden administration does not create unnecessary barriers to lawful M&A transactions. In this climate, the clear and certain allocation of risk and articulation of regulatory obligations in transaction agreements is paramount. Where appropriate, merging parties should prepare to defend their transactions through federal court litigation in the event that the Agencies adopt theories of harm that depart from standing law or are inconsistent with business realities. Finally, parties should give broad consideration to the implications of Agency non-merger enforcement activity (i.e., investigative studies, conduct enforcement actions, and rulemakings) on potential transactions, and vice versa.

Heightened Uncertainty and Risk Associated With Merger Clearance in the U.S. and Beyond

Since coming to leadership, FTC Chair Lina Khan and Assistant Attorney General Jonathan Kanter of the DOJ have pursued a top to bottom reconsideration of the antitrust agenda. Through rulemaking, promises of tougher enforcement activity, and rescission and (eventual) replacement of key policy documents, the Agencies are seeking to broaden antitrust enforcement and, in so doing, discourage M&A activity. These policies stem, in part, from the Agencies’ belief that corporate consolidation has “harmed open markets and fair competition” under overly permissive enforcement regimes in the past decades.

Among the Agencies’ most significant departures from past merger review practice is their reconsideration of the Horizontal Merger Guidelines and withdrawal of the Vertical Merger Guidelines, which they deemed “narrow and outdated.” Historically, agency staff, as well as deal makers and advisors interpreting the merger laws, have relied heavily on the Horizontal Merger Guidelines and, to a lesser extent (due to their recent revision and the less developed state of vertical merger enforcement), the Vertical Merger Guidelines. Now, the relevancy of the past guidelines is in doubt, but the content and scope of new guidelines is also unknown. What is clear from Agency commentary is that new guidelines are likely to substantially expand the scope of merger enforcement and very well may embrace novel and untested theories of harm, including greater scrutiny of “non-horizontal” transactions (e.g., conglomerate mergers and cross market mergers), examination of the incentives created by the involvement of investment firms, and a newfound emphasis on harm to workers and small businesses.

The Agencies’ shifting policy around merger remedies is another source of unpredictability and increased deal risk. In recent remarks, AAG Kanter expressed concern that the Agencies’ historical approach to merger remedies has been ineffective. He went on to say that under his leadership the DOJ may be less willing to resolve competitive concerns through divestitures, particularly when a deal involves “innovative markets” or “evolving business models.” Instead, when enforcers “conclude[] that a merger is likely to lessen competition, in most situations” the Agency “should seek a simple injunction to block the transaction,” rather than trying to cure the harm through divestitures. Accordingly, relative to past practice, merging parties may find the Agencies unreceptive to settlement negotiations. At the least, parties will face more resistance and likely need to offer broader divestiture packages. And even where merger settlements are available, the Agencies have revived the practice of including in consent decrees prior notice and approval requirements in respect of future transactions, with the effect of complicating settlement negotiations and burdening future deals.

Outside of the merger context, the Agencies are taking action that is likely to have second-order effects for M&A. For example, the FTC is actively deploying its Section 6(b) authority, which enables the agency to conduct wide-ranging studies without a specific law enforcement objective. Section 6(b) scrutiny of particularly industries or issues (such as non-reportable technology transactions or particular healthcare sectors) is likely to create obstacles for mergers that coincide with the area of FTC scrutiny. For example, enforcers may be inclined to look more closely at a transaction that relates to an area of active study in order to further their study objectives. In addition, political or PR concerns may enter into the Agencies’ calculus about clearing mergers in an industry that is under active 6(b) scrutiny. The same is true for mergers in industries that are being investigated or prosecuted for anticompetitive practices; such mergers may face more intense and searching scrutiny.

Once the new merger guidelines are issued and AAG Kanter and Chair Khan’s new policies develop a track record of implementation, we will have a more precise understanding of the operative analytical framework and its implications for M&A transactions. But the practical consequences of Chair Khan and AAG’s Kanter’s antitrust rewrite are already playing out and the trajectory is unlikely to change: merging parties are bearing more second request risk, broader and longer investigations, less opportunity to resolve competitive concerns with settlements, and greater risk of enforcement action.

Practical Considerations for Dealmakers and Advisors

In light of antitrust’s gating function, it is fair to question whether the current antitrust climate has to some extent played a role in the Q1 M&A dip. Yet dealmakers have a range of tools to accommodate and manage the risk engendered by the current regulatory environment. Antitrust considerations should be raised in the earliest phases of deal negotiations. As transaction agreements are negotiated, clear articulation of regulatory obligations and risk allocation remains critical in the effort to keep merging parties aligned and ultimately hold deals together when Agency scrutiny comes to bear. Before agreeing to particular efforts standards in purchase agreements in respect of obtaining antitrust approvals, parties should appreciate the possibility that those efforts standards may ultimately require time-consuming and costly litigation.

In some transactions, merging parties are unwilling to carry on if a second request is issued and their agreement reflects that fact. The signal that such a contractual provision sends to the Agencies and the incentives that it creates should be weighed carefully.

Appreciating that merger reviews are likely to be more time consuming, onerous, and costly (whether because the Agencies require more engagement and advocacy during the first 30 days, require a pull-and-refile, or issue a broad second request), parties should consider building flexibility or extra time into transaction timetables. For cross-border deals that may be subject to scrutiny in jurisdictions that move slowly or, like the U.S., are broadening their approach to merger enforcement, a sophisticated multi-jurisdiction analysis should be conducted early on so that deal timing can be formulated accordingly. The likelihood of protracted reviews should also be contemplated during deal financing.

Transaction rationale and economics should take account of the Agencies’ heightened skepticism of merger remedies and the possibility of the FTC imposing a prior approval clause in those consents that are achievable. Transactions in which divestiture of a full business is feasible will have a better chance of resolving Agency concerns with a remedy, whereas transactions involving dynamic markets are expected to face more settlement resistance.

In light of the FTC’s new practice of warning merging parties that they may keep investigations open beyond the expiration of the HSR Act waiting period, contractual language formulating closing conditions based on the status of antitrust review should be worded precisely. Likewise, in the context of cross-border transactions that must be notified in ex-U.S. jurisdictions that do not have a statutory bar on closing before the review is complete, merging parties should agree as to whether they will close the deal during an ongoing review, with the buyer bearing the risk of future action by competition authorities.

Even deals that do not present any facial competitive issue may face an uncertain regulatory path if the parties do business in a sector that is the subject of Agency interest, as evinced by 6(b) studies, the Executive Order on Promoting Competition in the American Economy, conduct investigations or enforcement activity, or the Agencies’ political agenda. Parties doing deals in these industries should actively consider this layer of risk in consultation with antitrust counsel, so as to ensure that all possible risks are understood and mitigated.

Finally, where possible, merging parties should consider including commitments to litigate in their transaction agreement to signal to the Agencies that they are committed to closing and will not be backed off by onerous second requests or a protracted review. Ultimately, merger guidelines and other enforcement policy statements do not bind federal courts. In the event that the Agencies depart significantly from established law and economics, merging parties may have good prospects of vindicating their deals in federal court.

Antitrust and Competition Group:
Sophia A. Vandergrift – Washington, D.C. (+1 202-887-3625, svandergrift@gibsondunn.com)
Adam Di Vincenzo – Washington, D.C. (+1 202-887-3704, adivincenzo@gibsondunn.com)
Kristen C. Limarzi – Washington, D.C. (+1 202-887-3518, klimarzi@gibsondunn.com)
Joshua Lipton – Washington, D.C. (+1 202-955-8226, jlipton@gibsondunn.com)
Michael J. Perry – Washington, D.C. (+1 202-887-3558, mjperry@gibsondunn.com)
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@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)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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Decided April 21, 2022

City of Austin, Texas v. Reagan National Advertising of Austin, Inc., No. 20-1029

Today, the Supreme Court held that a regulation treating on-premises signs—those that contain advertisements for the place where the signs are located—differently from off-premises signs is content neutral and therefore not subject to strict scrutiny under the First Amendment.

Background: The Sign Code of Austin, Texas permits the new construction only of signs and billboards that advertise for the place where they are located, which are known as on-premises signs. The Code similarly permits only on-premises signs to be equipped with electronic controls that, for example, allow billboards to cycle through digital advertisements. Advertisers wishing to convert off-premises billboards to digitally changeable displays sued, claiming that the Code discriminates based on the content of their speech in violation of the First Amendment. The Fifth Circuit agreed, holding that because the on-premises/off-premises distinction could be applied only by a person who reads and interprets the sign’s message, the regulation was content-based and subject to strict scrutiny. Finding no compelling government justification, the Fifth Circuit found the Code’s distinction unconstitutional.

Issue: Whether the Sign Code’s distinction between on- and off-premises signs is a content-neutral regulation of speech.

Court’s Holding: The Sign Code’s distinction between on- and off-premises advertisements is facially content-neutral and subject to intermediate scrutiny under the First Amendment. The Court remanded the case to the Fifth Circuit to apply that test, rather than strict scrutiny.

“[H]old[ing] that a regulation cannot be content neutral if it requires reading the sign at issue[ ] is too extreme an interpretation of this Court’s precedent.”

Justice Sotomayor, writing for the Court

What It Means:

The Court’s decision clarifies that its 2015 case, Reed v. Town of Gilbert, does not hold that restrictions are content-based every time they require an official to read a sign to determine whether it complies with a regulation. According to the Court, Reed involved “a very different regulatory scheme” that placed stricter limitations on some types of signs compared to others—for instance, by placing more restrictions on advertisements for religious services than on political messages. In this case, by contrast, the “sign’s substantive message is irrelevant to the application of” the on-premises/off-premises distinction.
The Court noted that regulations like Austin’s Sign Code are common, including in provisions of the federal Highway Beautification Act. It expressed reluctance to question these rules where authorities claim they are necessary to combat distracted driving and reduce blight, and where an “unbroken tradition of on-/off-premises distinctions counsels against” invalidating the rule.
The decision subjects regulations like Austin’s to intermediate scrutiny, which requires the government to show that the rule does not excessively restrict speech and serves an important government interest. The Court reserved judgment on whether the Code would satisfy that test.
In a dissenting opinion joined by Justices Gorsuch and Barrett, Justice Thomas wrote that the Court had departed from Reed’s “clear and neutral rule” that regulation of signs is content-based whenever enforcing the rule requires determining whether a sign conveys a particular message. He predicted that the departure from Reed’s “bright-line rule” will lead to future confusion.

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

Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Thomas H. Dupree Jr. +1 202.955.8547 tdupree@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

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Decided April 21, 2022

Boechler, P.C. v. Commissioner of Internal Revenue, No. 20-1472

Today, the Supreme Court unanimously held that the Internal Revenue Code’s 30-day deadline for taxpayers to seek Tax Court review of “collection due process” determinations is a nonjurisdictional claims-processing rule that is subject to equitable tolling.

Background: When the IRS assesses a tax and the taxpayer doesn’t pay, the IRS can seize the taxpayer’s property to satisfy the outstanding amount. Since 1998, Congress has required the IRS to give advance notice to taxpayers before it levies their property to cover unpaid taxes. Taxpayers can challenge a proposed levy in an administrative hearing before the IRS’s Independent Office of Appeals, which issues the taxpayer a notice of determination stating its findings and decision. And the Internal Revenue Code provides that a taxpayer “may, within 30 days of a determination [from the Independent Office of Appeals], appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).” 26 U.S.C. § 6330(d)(1).

Boechler, P.C. received an unfavorable determination from the IRS’s Independent Office of Appeals on a proposed levy but petitioned the Tax Court for review one day after the thirty-day deadline. The Eighth Circuit held that § 6330(d)(1)’s 30-day deadline is jurisdictional, meaning it could not be subject to equitable tolling.

Issue: Is § 6330(d)(1)’s 30-day deadline a jurisdictional requirement or a nonjurisdictional claims-processing rule? If it is a claims-processing rule, is it mandatory or subject to equitable tolling?

Court’s Holding: Section 6330(d)(1) is a nonjurisdictional claims-processing rule and is subject to equitable tolling.

“[The] 30-day time limit to file a petition for review of a collection due process determination is an ordinary, nonjurisdictional deadline subject to equitable tolling.”

Justice Barrett, writing for the Court

What It Means:

The Court’s decision reinforces the principle that filing deadlines are generally not jurisdictional unless the statute’s text or structure provides a clear statement to the contrary. In rejecting the Commissioner’s arguments, the Court reasoned that ambiguity in the text left “multiple plausible interpretations” and thus no clear statement of jurisdictional intent.
The decision likewise confirms that nonjurisdictional filing deadlines are “presumptively subject to equitable tolling,” particularly where the statutory framework in question is likely to produce circumstances warranting exceptions to a statutory deadline—for instance, where the provision appears as part of a scheme in which unrepresented parties often initiate the process.
The Court’s holding provides taxpayers with a limited opportunity to seek judicial review of unfavorable collection due process determinations even when they fail to petition the Tax Court for review within 30 days of the determination. That holding is consistent with the statute’s underlying purpose, which was to give taxpayers a way to seek administrative and judicial review before the IRS took the serious step of levying their property to satisfy unpaid taxes.
The Court did not elaborate on the circumstances in which it would be appropriate for courts to toll § 6330(d)(1)’s 30-day deadline, leaving those arguments for further proceedings on remand. Lower courts are likely to encounter arguments for tolling featuring a wide variety of factual scenarios, including with respect to lower-income taxpayers, many of whom do not have counsel in collection due process proceedings.
While the Court’s holding is limited to the deadline under § 6330(d)(1) for filing a collection due process case, the decision specifically calls into question a long line of cases holding that the 90-day deadline for invoking the Tax Court’s general deficiency jurisdiction under 26 U.S.C. § 6213(a) is jurisdictional. Section 6213(a) applies broadly when a taxpayer seeks to challenge an IRS audit determination or other income tax adjustment in Tax Court. Of the more than 150 million income tax returns filed each year, the IRS has historically issued far more than one million such adjustments, typically resulting in around 25,000 cases filed in Tax Court. If, following the Court’s holding, § 6213(a) is also found to be nonjurisdictional, it could open the door for a large number of taxpayers to argue for equitable tolling when they miss the 90-day general filing deadline.

The Court’s opinion is available here.

Appellate and Constitutional Law Practice

Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com

Related Practice: Global Tax Controversy and Litigation

Michael J. Desmond +1 213.229.7531 mdesmond@gibsondunn.com	Saul Mezei +1 202.955.8693 smezei@gibsondunn.com	Sanford W. Stark +1 202.887.3650 sstark@gibsondunn.com
C. Terrell Ussing +1 202.887.3612 tussing@gibsondunn.com

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In March 2022, amidst an array of new proposals for sustainable products (including a proposed draft Regulation on Ecodesign for Sustainable Products) the European Commission announced an EU Strategy for Circular and Sustainable Textiles.

The Strategy envisages that “By 2030, textile products placed on the EU market are long-lived and recyclable, to a great extent made of recycled fibres, free of hazardous substances and produced in respect of social rights and the environment. Consumers benefit longer from high quality affordable textiles, fast fashion is out of fashion, and economically profitable re-use and repair services are widely available…..producers take responsibility for their products along the value chain, including when they become waste,…. incineration and landfilling of textiles is reduced to the minimum”.

The EC envisages numerous steps to achieve this strategy, including:

Binding product-specific ecodesign requirements to increase durability, reusability, repairability and recyclability, and to address the unintentional release of microplastics in the environment.
Development of criteria for safe and sustainable chemicals and materials- to reduce the presence of hazardous substances used in textile products.
Introduction of a transparency obligation requiring large companies to publicly disclose the number of products they discard and destroy, including textiles.
Introduction of a Digital Product Passport for textiles-based on mandatory information requirements on circularity and other key environmental aspects.
Increased information and transparency for consumers at the point of sale, regarding the sustainability credentials of products.
Extended producer responsibility requirements for textiles.

According to the EC’s Strategy Communication, the textiles and clothing sector comprises more than 160,000 companies and employs 1.5 million people, generating a turnover of EUR 162 billion in 2019. Global textile production has almost doubled between 2000 and 2015, with the consumption of clothing and footwear expected to increase by 63% by 2030, from 62 million tonnes now, to 102 million tonnes in 2030. The EC flags that in the EU, the consumption of textiles, most of which are imported, now accounts on average for the fourth highest negative impact on the environment and on climate change and third highest for water and land use from a global life cycle perspective. In circumstances where approximately 5.8 million tonnes of textiles are discarded every year in the EU, the impact of this Strategy could be significant.

This alert was prepared by Susy Bullock, Sophy Helgesen, and Freddie Batho*.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more, please contact Susy Bullock, the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Environmental, Social and Governance (ESG) or Fashion, Retail and Consumer Products practice groups:

Environmental, Social and Governance (ESG) Group:
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)
Selina S. Sagayam – London (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)

Fashion, Retail and Consumer Products Group:
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)

* Freddie Batho is a trainee solicitor working in the firm’s London office and not yet admitted to practice law.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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On 31 March 2022, the Hong Kong Securities and Futures Commission (“SFC”) released a new circular to licensed corporations (“LCs”) on the handling of client complaints,[1] alongside an Appendix setting out the SFC’s expected regulatory standards and suggested techniques and procedures for handling client complaints (collectively, the “Circular”).[2]

This client alert covers the key regulatory expectations imposed on LCs under the Circular and highlights suggested practices that LCs can adopt in order to meet these expectations. In particular, as discussed further below, the Circular continues the SFC’s increasing shift towards requiring LCs to allocate one or more of their Managers-in-Charge (“MIC”) with responsibility for a particular subject matter, by requiring the appointment of an MIC to oversee complaints handling. This follows the SFC’s October 2019 circular requiring LCs to appoint an MIC with specific responsibility for the use of external electronic data storage providers[3] and the June 2021 circular requiring LCs to appoint an MIC or responsible officer (“RO”) with specific responsibility for the operation of the LC’s bank accounts.[4] Further, by providing more granular and prescriptive guidance to LCs in relation to complaints handling, and in particular the expected timeframe for handling complaints, the Circular represents an important step towards alignment of regulatory standards in this area between LCs and authorized institutions which must comply with the HKMA’s Supervisory Policy Manual IC-4 (“SPM”).[5]

I. The SFC’s existing requirements for complaint handling

Paragraph 12.3 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code”)[6] sets out the standard of compliance expected of LCs with regards to complaint handling. In short, the Code requires LCs to handle complaints in a
“timely and appropriate manner”, to properly review the subject matter of the complaint, and to respond “promptly” to the complaints.

Similarly, Part V(5) of the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission (the “Internal Control Guidelines”)[7] requires the management of LCs to establish, maintain and enforce “policies and procedures to ensure the proper handling of complaints from clients and that appropriate remedial action is promptly taken.”

The SFC’s new Circular supplements both the Code and Internal Control Guidelines, and provides important guidance and detail as to the SFC’s expectations of how LCs should adhere to the requirements set out in the Code and Internal Control Guidelines. In other words, compliance with the Circular is now required in order to ensure compliance with the Code and Internal Control Guidelines. As such, we strongly encourage LCs to adopt the suggested techniques and procedures laid out under the Circular as soon as practicable.

The Circular covers six key areas in relation to handling client complaints: (i) management oversight and complaint handling policies and procedures; (ii) disclosure of complaint handling procedures; (iii) identification and escalation of complaints; (iv) investigating complaints; (v) communicating outcomes with clients; and (vi) record keeping.

II. Responsibilities of senior management

The Circular emphasizes that senior management of LCs bear “primary responsibility” for ensuring appropriate standards of conduct and adherence to proper policies and procedures. As such, the SFC has indicated that LCs should designate a MIC to oversee complaint handling, including the setup, implementation and monitoring of complaint handling policies and process. Further, the Circular encourages LCs to ensure that regular reports on the progress of complaints handling are made to senior management, with the SFC praising LCs which provided their senior management with reports on the types of complaints received, adherence to timelines, investigation results, remedial measures identified from investigations, and the implementation status thereof.

The SFC has also indicated that senior management should ensure that:

LCs with large retail client bases dedicate sufficient resources to ensure proper governance over complaint handling, including through, for example, complaints committees staffed by MICs and ROs;
at the conclusion of an investigation of a complaint, any remedial measures identified are promptly implemented so as to prevent the recurrence of similar issues; and
regular training is provided to staff in relation to complaint handling techniques.

III. Complaint handling policies and procedures

The Internal Control Guidelines require LCs to set out their complaint handling policies and procedures in writing. The Circular supplements this by noting that LCs should ensure that their complaints handling policies set out:

the expected timeframe for acknowledging the complaint upon receipt;
responding to the complainant’s enquiries in relation to the complaint;
providing a final response to the complaint.

Further, the Circular notes that while the timeframe required will vary depending on the nature of the complaint, as a rule of thumb, an acknowledgment of a complaint should be issued within seven days of receipt and a final response should be issued within two months. This is broadly consistent with the HKMA’s SPM which requires authorized institutions to provide an acknowledgment of receipt within seven days, and a final response within thirty days, or, if that is not possible, within a “reasonable period of time” (which the HKMA considers to be no longer than sixty days).

In order to preserve objectivity in investigations and to avoid potential conflict of interests, the SFC has also encouraged LCs to ensure that complaints are handled by compliance staff who are not directly involved in the subject matter of complaints.

IV. Disclosure of complaint handling procedures to clients in a clear, understandable manner

The Circular states that at a minimum, LCs should disclose key information about the different methods of lodging a complaint to the LC (for example, by email, telephone, letter, etc.); and the expected timeframe for processing the complaint under normal circumstances. However, the SFC has stopped short of mandating the manner in which this information must be conveyed, with the Circular noting that this standard of disclosure will be met as long as the required information is effectively conveyed to complainants. This may include, for example, posting the information in a prominent place on LC’s website, or to providing a leaflet with the necessary information to the client during account opening or upon receipt of their complaint.

V. Identification and escalation of complaints

The Code requires LCs to differentiate general enquiries from complaints for the purpose of ensuring compliance with the self-reporting requirements set out in para 12.5(a) of the Code. The Circular builds on this by:

requiring the escalation of any serious or high-impact cases to senior management for prompt handling, including self-reporting to the SFC under para 12.5(a) where appropriate. The Circular suggests that this category of serious or high impact cases includes those involving fraud, staff misconduct, mass complaints involving multiple clients complaining about the same or similar issues, as well as those involving significant financial losses to clients or which may cause significant financial, operational and reputational risks for the LC; and
recommending the provision of guidelines for staff to distinguish between the different nature and seriousness of complaints.

Further, the Circular also encourages LCs to regularly monitor feedback channels to ensure that all complaints are detected; for instance, by sample-checking tape recordings of telephone conversations between clients and customer service staff.

VI. Investigating complaints

The Circular notes that LCs should:

properly review the subject matter of each complaint;
maintain guidelines on when and how a complaint can be closed, including circumstances under which a complaint can be closed, and the approval procedures for different types of resolutions; and
offer appropriate, consistent and fair resolutions to complainants; for example, where issues complained thereof are recurring or systematic, LCs should dig into the root causes of the problem rather than investigating at surface-level.

VII. Communicating outcomes to clients

LCs are expected to communicate their investigation results to complainants promptly and in doing so provide a clear description of the outcome of the investigation (i.e. whether the complaint is accepted or rejected, and any redress offered), alongside with an explanation of the outcome. The Circular further requires LCs to advise clients of any further steps which may be available to them where a complaint is not remedied promptly, including the right to refer a dispute to the Financial Dispute Resolution Centre.

VIII. Record keeping

The Internal Control Guidelines require LCs to keep proper records of all complainants and their complaints. The Circular extends this requirement by demanding LCs to review such records on a regular basis and to make them available to the SFC upon request during its ad hoc and routine reviews. While the Circular does provide LCs with some degree of flexibility by noting that LCs may adopt a pragmatic approach in deciding the level of detail to be retained in record-keeping, the Circular does also note that:

complaint records will generally not be complete without details of the substance of the complaint and how it was resolved;
details of follow up actions should be kept for any complaints relating to client assets; and
a register of complaints should be made available to the SFC upon request.

IX. Conclusion

The Circular should be viewed as consistent with the SFC’s continued prioritization of senior management accountability as well as investor protection. As such LCs are encouraged to pay close attention to the SFC’s views and expectations as set out in the Circular and adopt appropriate implementation measures as soon as practicable.

________________________

[1] Circular to Licensed Corporations Handling of Client Complaints (31 March 2022), published by the Securities and Futures Commission, available at https://apps.sfc.hk/edistributionWeb/api/circular/openFile?lang=EN&refNo=22EC30.

[2] Expected Regulatory Standards and Suggested Techniques and Procedures for Handling Client Complaints (31 March 2022), published by the Securities and Futures Commission, available at https://apps.sfc.hk/edistributionWeb/api/circular/openAppendix?lang=EN&refNo=22EC30&appendix=0.

[3] Circular to Licensed Corporations – Use of external electronic data storage (31 Oct 2019), published by the Securities and Futures Commission, available at https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/supervision/doc?refNo=19EC59.

[4] Circular to licensed corporations Operation of bank accounts (28 June 2021), published by the Securities and Futures Commission, available at https://apps.sfc.hk/edistributionWeb/api/circular/openFile?lang=EN&refNo=21EC25.

[5] Supervisory Policy Manual IC-4 Complaints Handling Procedures (22 February 2002), published by the Hong Kong Monetary Authority, available at https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2002/IC-4.pdf.

[6] Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, 27th edition (December 2020), published by the Securities and Futures Commission, available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/codes/code-of-conduct-for-persons-licensed-by-or-registered-with-the-securities-and-futures-commission/Code_of_conduct-Dec-2020_Eng.pdf.

[7] Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission (April 2003), published by the Securities and Futures Commission, available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/guidelines/management-supervision-and-internal-control-gu/management-supervision-and-internal-control-guidelines-for-persons-licensed.pdf.

The following Gibson Dunn lawyers prepared this client alert: William Hallatt, Emily Rumble, and Jane Lu.

William R. Hallatt (+852 2214 3836, whallatt@gibsondunn.com)
Emily Rumble (+852 2214 3839, erumble@gibsondunn.com)
Arnold Pun (+852 2214 3838, apun@gibsondunn.com)
Becky Chung (+852 2214 3837, bchung@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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On March 30, 2022, the U.S. Securities and Exchange Commission (the “Commission”), by a three-to-one vote, issued a press release announcing proposed new rules (the “Proposal”) intended to enhance disclosure and investor protections in initial public offerings (“IPO”) by special purpose acquisition companies (“SPACs”) and in subsequent business combinations between SPACs and private operating companies (“de-SPAC transaction”).[1]

The Proposal provides a lengthy and comprehensive discussion that builds upon the Commission’s prior statements and actions regarding SPAC IPOs and de-SPAC transactions.[2] As noted by the Commission’s Chair, Gary Gensler, in the press release, the Proposal is intended to “help ensure” that “disclosure[,] standards for marketing practices[,] and gatekeeper and issuer obligations,” as applied in the traditional IPO context, also apply to SPACs.[3] Chair Gensler further noted that “[f]unctionally, the SPAC target IPO is being used as an alternative means to conduct an IPO.”[4]

Overview

There are four key components of the Proposed Rules:

Disclosure and Investor Protection. Proposes specific disclosure requirements with respect to, among other things, compensation paid to sponsors, potential conflicts of interest, dilution, and the fairness of the business combination, for both the SPAC IPOs and de‑SPAC transactions;
Business Combinations Involving Shell Companies. Deems a business combination transaction involving a reporting shell company and a private operating company as a “sale” of securities under the Securities Act of 1933, as amended (the “Securities Act”), amends the financial statement requirements applicable to transactions involving shell companies, and amends the current “blank check company” definition to make clear that SPACs cannot rely on the safe harbor provision under the Private Securities Litigation Reform Act of 1995, as amended (the “PSLRA”) when marketing a de-SPAC transaction;
Projections. Expands and updates the Commission’s guidance on the presentation of projections in filings with the Commission to address the reliability of such projections; and
New Safe Harbor under the Investment Company Act of 1940. Proposes a safe harbor that SPACs may rely on to avoid being subject to registration as investment companies under the Investment Company Act of 1940, as amended (the “Investment Company Act”). The safe harbor would (i) require SPACs to hold only assets comprising of cash, government securities, or certain money market funds; (ii) require the surviving entity to be engaged primarily in the business of the target company; and (iii) impose a time limit, from the SPAC IPO, of 18 months for the announcement (and 24 months for the completion) of the de-SPAC transaction.

We provide below our key takeaways, a summary of the Proposal, links to Commissioner statements regarding the Proposal, and a note regarding the comment period and process.

Key Takeaways

Below are the key takeaways from the Proposal:

Timing. Although the proposed rules will not be in effect unless and until the Commission approves final rules after the public comment period and the Commission’s review process, existing SPACs and their targets should expect to receive comments from the Commission staff along the broader lines of the Proposal. SPACs and their targets also should consider the extent to which they will want to comply voluntarily with some of the proposed rules, especially those focused on financial statement requirements and enhanced disclosures.
Conforming SPACs to Traditional IPOs. The Proposal goes to great lengths to contrast the current SPAC regulatory regime against the one applicable to traditional IPOs and to seek to “level” the playing field between the two. Closer alignment of the two regimes may reduce some potential benefits of a de-SPAC transaction (e.g., availability of alternative financing sources and expedited path to becoming a public company) while also exposing the SPAC, its target and their advisors to additional liability.
No PSLRA Protection. PSLRA safe harbor against a private right of action for forward-looking statements is not available in, among others, an offering by a blank check company or a “penny stock” issuer, or in an initial public offering. Some market participants believe the PSLRA safe harbor is otherwise available in de-SPAC transactions when a SPAC is not a blank check company under Rule 419. The Commission proposes to amend the current “blank check company” definition to remove the “penny stock” condition and make clear that SPACs may no longer rely on the safe harbor provision under the PSLRA as it relates to the use of projections and other forward-looking statements when marketing a de-SPAC transaction. If the Proposal is adopted, it is unclear whether the lack of the PSLRA safe harbor, especially if coupled with proposed changes to regulations relating to projections, will lead to changes in the presentation of projections and assumptions, or the abandonment of projections. If the latter, this could effectively eliminate the de-SPAC transaction as an alternative for target companies that do not have a lengthy operating history.
Co-Registrant Liability. The Proposal would include target companies and their officers and directors as co-registrants under Form S-4 and Form F-4 filings, thus imposing Section 11 liability on such persons. Liability will extend to both SPAC and target company disclosures contained in such filings.
Extension of Current Disclosure Guidance (Projections, Dilution, Sponsor, Conflicts). Much of the Proposal is simply an extension of current guidance and practice by the Commission. The Proposal does require additional information and specificity (in some cases, beyond current rules and guidance). Nonetheless, some of the prescriptive rulemakings around enhanced disclosures—including the required financial statements, disclosure of sources of dilution, sponsor control and relationships, and potential conflicts of interest—are based on existing rules and guidance, and should not be particularly novel for practitioners.
Fairness to Shareholders. The Proposal does not go as far as requiring a SPAC board to obtain a fairness opinion, although that seems the likely, practical outcome of the Proposal, since it requires more fulsome discussion of these matters and a determination by the board of directors of a SPAC regarding its reasonable belief as to the fairness of a de-SPAC transaction and related financings to the SPAC’s shareholders when approving a de-SPAC transaction. Studies have indicated that only 15% of de-SPAC transactions disclose that they were supported by fairness opinions (compared to 85% of traditional mergers and acquisitions, excluding de-SPAC transactions).[5] If the Proposal is adopted, a SPAC’s board of directors will need to consider obtaining a fairness opinion, and whether or not it obtains a fairness opinion, the bases for the SPAC’s reasonable belief as to the fairness of the transaction.
Underwriter Liability. The Commission seeks to extend underwriter status (and resulting potential liability) in the de-SPAC transaction to those underwriters to SPAC IPOs involved, directly or indirectly, in the de-SPAC transaction (e.g., advisory services, placement agent services, and other activities related to the de-SPAC transaction would all be considered direct and indirect activities). Underwriters to SPAC IPOs who participate in the de-SPAC transaction will need to consider whether to make changes to the typical de-SPAC transaction process, to ensure they have the benefit of their due diligence defense.
SPAC Time Limits. In order to rely on a proposed safe harbor for SPACs under the Investment Company Act, SPACs would have a limited time period of no later than 18 months to announce a de-SPAC transaction (and no later than 24 months to complete a de-SPAC transaction) following the effective date of the SPAC’s registration statement for its IPO. This would remove SPACs’ flexibility to seek extensions from its shareholders to their required liquidation date without running the risk of being considered to be an investment company subject to registration and regulation under the Investment Company Act.

Proposal Summary

New Subpart 1600 of Regulation S-K

The Proposal would create a new Subpart 1600 of Regulation S-K solely related to SPAC IPOs and de-SPAC transactions. Among other things, this new Subpart 1600 would prescribe specific disclosure about the sponsor, potential conflicts of interest, and dilution.

Sponsor, Affiliates, and Promoters

To provide investors with a more complete understanding of the role of SPAC sponsors, affiliates, and promoters,[6] the Commission is proposing a new Item 1603(a) of Regulation S-K, to require:

Experience. Description of the experience, material roles, and responsibilities of sponsors, affiliates, and promoters.
Arrangements. Discussion of any agreement, arrangement, or understanding (i) between the sponsor and the SPAC, its executive officers, directors, or affiliates, in determining whether to proceed with a de-SPAC transaction and (ii) regarding the redemption of outstanding securities.
Sponsor Control. Discussion of the controlling persons of the sponsor and any persons who have direct or indirect material interests in the sponsor, as well as an organizational chart that shows the relationship between the SPAC, the sponsor, and the sponsor’s affiliates.
Lock-Ups. A table describing the material terms of any lock-up agreements with the sponsor and its affiliates.
Compensation. Discussion of the nature and amounts of all compensation that has been or will be awarded to, earned by, or paid to the sponsor, its affiliates, and any promoters for all services rendered in all capacities to the SPAC and its affiliates, as well as the nature and amounts of any reimbursements to be paid to the sponsor, its affiliates, and any promoters upon the completion of a de-SPAC transaction.

Potential Conflicts of Interest

To provide investors with a more complete understanding of the potential conflicts of interest between (i) the sponsor or its affiliates or the SPAC’s officers, directors, or promoters, and (ii) unaffiliated security holders, the Commission is proposing a new Item 1603(b) of Regulation S-K. This would include a discussion of conflicts arising as a result of a determination to proceed with a de-SPAC transaction and from the manner in which a SPAC compensates the sponsor or the SPAC’s executive officers and directors, or the manner in which the sponsor compensates its own executive officers and directors.

Relatedly, proposed Item 1603(c) of Regulation S-K would require disclosure of the fiduciary duties that each officer and director of a SPAC owes to other companies.

Sources of Dilution

In an effort to conform and enhance disclosure relating to dilution in SPAC IPOs and de-SPAC transactions, the Commission is proposing proposed Items 1602 and 1604 of Regulation S-K, respectively.

IPO Dilution Disclosure. In providing disclosure pursuant to Item 506, SPACs currently provide prospective investors with estimates of dilution as a function of the difference between the initial public offering price and the pro forma net tangible book value per share after the offering, often including an assumption of the maximum number of shares eligible for redemption in a de-SPAC transaction. The Proposal would require additional granularity on the prospectus cover page, requiring SPACs to present redemption scenarios in quartiles up to the maximum redemption scenario. In addition to changes to the cover page, the Proposal would supplement Item 506 disclosure by requiring a description of material potential sources of future dilution following a SPAC’s initial public offering, as well as tabular disclosure of the amount of potential future dilution from the public offering price that will be absorbed by non-redeeming SPAC shareholders, to the extent quantifiable.
De-SPAC Dilution Disclosure. In addition to disclosure at the IPO stage of a SPAC’s lifecycle, the Proposal would require additional disclosure regarding material potential sources of dilution as a result of the de-SPAC transaction.[7] As seen in recent comment letters by the Commission, the Commission has requested additional granularity with respect to post-closing pro forma ownership disclosure, often requiring various redemption thresholds and the effects of potential sources of dilution. The Proposal would codify this practice by requiring SPACs to affirmatively provide a sensitivity analysis in a tabular format that expresses the amount of potential dilution under a range of reasonably likely redemption levels. The Proposal does not specify what are “reasonably likely” redemption levels, but looking at the proposed SPAC IPO dilution requirements (as discussed above), quartile disclosure up to the maximum redemption scenario may be acceptable.

Fairness of the De-SPAC Transaction and Related Financings

SPACs would be required to disclose whether their board of directors reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to the SPAC’s unaffiliated security holders, as well as a discussion of the bases for this statement. Proposed Item 1606 of Regulation S-K would require a discussion, “in reasonable detail,” of the material factors upon which a reasonable belief regarding the fairness of a de-SPAC transaction and any related financing transaction is based, and, to the extent practicable, the weight assigned to each factor. As noted by Commissioner Hester M. Peirce, “[w]hile this disclosure requirement technically does not require a SPAC board to hire third parties to conduct analyses and prepare a fairness opinion, the proposed rules clearly contemplate that this is the likely outcome of the new requirement. For example, [proposed Item 1606] would require disclosure of whether ‘an unaffiliated representative’ has been retained to either negotiate the de-SPAC transaction or prepare a fairness opinion and [proposed Item 1607] would elicit disclosures about ‘any report, opinion, or appraisal from an outside party relating to . . . the fairness of the de-SPAC transaction.’”[8]

Relatedly, if any director voted against, or abstained from voting on, approval of the de-SPAC transaction or any related financing transaction, SPACs would be required to identify the director, and indicate, if known, after making reasonable inquiry, the reasons for the vote against the transaction or abstention.

Aligning De-SPAC Transactions with IPOs

Target Company as Co-Registrant

Under the current rules, only the SPAC and its officers and directors are required to sign the registration statement and are liable for material misstatements or omissions. The Proposal would require the target company to be treated as a co-registrant with the SPAC when a Form S‑4 or Form F‑4 registration statement is filed by the SPAC in connection with a de-SPAC transaction.[9] Registrant status for a target company and its officers and directors would result in such parties being liable for material misstatements or omissions pursuant to Section 11 of the Securities Act. Under the Proposal, target companies and their officers and directors would be liable with respect to their own material misstatements or omissions, as well as any material misstatements or omissions made by the SPAC or its officers and directors. As a result, the Proposal seeks to further incentivize target companies and SPACs to be diligent in monitoring each other’s disclosure.

Smaller Reporting Company Status

Currently, de-SPAC companies are able to avail themselves – as almost all SPACs have done since 2016[10] – of the smaller reporting company rules for at least a year following the de-SPAC transaction (and most SPACs would still retain this status at the time of the de-SPAC transaction when the SPAC is the legal acquirer of the target company). The “smaller reporting company” status benefits the combined company after the de-SPAC transaction by availing it of scaled disclosure and other accommodations as it adjusts to being a public company.

Citing the disparate treatment between traditional IPO companies and de-SPAC companies (the former having to determine smaller reporting company status at the time it files its initial registration statement and the latter retaining the SPAC’s smaller reporting company status until the next annual determination date), the Proposal would require de-SPAC companies to determine compliance with the public float threshold (i.e., public float of (i) less than $250 million, or (ii) in addition to annual revenues less than $100 million, less than $700 million or no public float)[11] within four business days after the consummation of the de-SPAC transaction.

The revenue threshold would be determined by using the annual revenues of the target company as of the most recently completed fiscal year for which audited financial statements are available, and the de-SPAC company would then reflect this re-determination in its first periodic report following the closing of the de-SPAC transaction.

The Commission estimates that an average of 50 post-business combination companies following a de-SPAC transaction will no longer qualify as smaller reporting companies, when compared to current rules.[12] Studies have indicated that the average size of a de-SPAC company has consistently remained north of $1 billion in 2021.[13] Assuming this trend continues, there is an expectation that an increasing number of target companies will no longer qualify as smaller reporting companies after the de-SPAC transaction, and will need to adapt toward the enhanced public disclosure requirements. This would include faster additional board and management training to prepare the post-de-SPAC company for additional disclosure requirements.

PSLRA Safe Harbor

The PSLRA provides a safe harbor for forward-looking statements under the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under which a company is protected from liability for forward-looking statements in any private right of action under the Securities Act or Exchange Act when, among other things, the forward-looking statement is identified as such and is accompanied by meaningful cautionary statements.

The safe harbor, however, is not available when the forward looking statement is made in connection with an offering by a “blank check company,” a company that is (i) a development stage company with no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person, and (ii) is issuing “penny stock.”[14]

Because of the penny stock requirement, many practitioners have considered SPACs to be excluded from the definition of blank check company for purposes of the PSLRA safe harbor. The Proposal seeks to amend the current definition of “blank check company” to remove the penny stock requirement, thus effectively removing a SPAC’s ability to qualify for the PSLRA safe harbor provision for the de-SPAC transaction.

This inability to rely on the PSLRA is coupled with the Proposal’s addition of new and modified projections disclosure requirements (as further discussed below). If the Proposal is adopted, it remains unclear whether that will lead to changes in projections and assumptions (especially considering the current environment where market participants, investors, and financiers have come to expect detailed projections disclosure, similar to what is used in public merger and acquisitions (“M&A”) transactions), or the abandonment of projections. The latter could effectively eliminate the de-SPAC transaction as an alternative for target companies that do not have a lengthy operating history.

Underwriter Status and Liability

Historically, Section 11 and Section 12(a)(2) of the Securities Act[15] have imposed underwriter liability on underwriters of a SPAC’s IPO. The Proposal takes a novel approach in arriving at the conclusion that a de-SPAC transaction would constitute a “distribution” under applicable underwriter regulations and seeks to extend such underwriter liability to a de-SPAC transaction. Proposed Rule 140a would deem a SPAC IPO underwriter to be an underwriter in the de-SPAC transaction, provided that such party is engaged in certain de-SPAC activities or compensation arrangements.

Specifically, an underwriter in a SPAC’s IPO would be deemed an underwriter for purposes of a de-SPAC transaction if such person “takes steps to facilitate the de-SPAC transaction, or any related financing transaction, or otherwise participates (directly or indirectly) in the de-SPAC transaction,” including if such entities are (i) serving as financial advisor, (ii) identifying potential target companies, (iii) negotiating merger terms, or (iv) serving as a placement agent in private investments in public equity (“PIPE”) or other alternative financing transactions.

While Proposed Rule 140a only addresses “underwriter” status in de-SPAC transactions with respect to those serving as underwriters to the SPAC’s IPO, the Commission leaves open the door for subsequent determinations for finding additional “statutory underwriters” in a de-SPAC transaction, suggesting that “financial advisors, PIPE investors, or other advisors, depending on the circumstances, may be deemed statutory underwriters in connection with a de-SPAC transaction if they are purchasing from an issuer ‘with a view to’ distribution, are selling ‘for an issuer,’ and/or are ‘participating’ in a distribution.”[16]

In addition to the potential chilling effect that underwriter status may have on financial institutions’ participation in a de-SPAC transaction, the Commission’s statement that other “statutory underwriters” may be designated in the future, coupled with the traditional “due diligence” defenses of underwriters,[17] suggests that SPACs and target companies should expect extensive diligence requests from financial institutions, advisors, and their counsel in connection with a de-SPAC transaction and other related changes to the de-SPAC transaction process that add complexity, time, and cost.

Business Combinations Involving Shell Companies

The Commission’s concern related to private companies becoming U.S. public companies via de-SPAC transactions is substantially related to the opportunity for such private companies “to avoid the disclosure, liability, and other provisions applicable to traditional registered offerings.”[18]

Proposed Rule 145a

Based on the structure of certain de-SPAC transactions, the Commission expressed concern that, unlike investors in transaction structures in which the Securities Act applies (and a registration statement would be filed, absent an exemption), investors in reporting shell companies may not always receive the disclosures and other protection afforded by the Securities Act at the time the change in the nature of their investment occurs, due to the business combination involving another entity that is not a shell company.

Proposed Rule 145a intends to address the issue by deeming any direct or indirect business combination of a reporting shell company involving another entity that is not a shell company to involve “an offer, offer to sell, offer for sale, or sale within the meaning of section 2(a)(2) of the [Securities] Act.”[19] By deeming such transaction to be a “sale” of securities for the purposes of the Securities Act, the Proposal is intended to address potential disparities in the disclosure and liability protections available to shareholders of reporting shell companies, depending on the transaction structure deployed.

Proposed Rule 145a defines a reporting shell company as a company (other than an asset-backed issuer as defined in Item 1101(b) of Regulation AB) that has:

no or nominal operations;
either:
1. no or nominal assets;
2. assets consisting solely of cash and cash equivalents; or
3. assets consisting of any amount of cash and cash equivalents and nominal other assets; and
an obligation to file reports under Section 13 or Section 15(d) of the Exchange Act.

The Proposal notes that the sales covered by Proposed Rule 145a would not be covered by the exemption provided under Section 3(a)(9) of the Securities Act, because the exchange of securities would not be exclusively with the reporting shell company’s existing security holders, but also would include the private company’s existing security holders.

Financial Statement Requirements in Business Combination Transactions Involving Shell Companies

The Proposal amends the financial statements required to be provided in a business combination with an intention to bridge the gap between such financial statements and the financial statements required to be provided in an IPO. The Commission views such Proposal as simply codifying “current staff guidance for transactions involving shell companies.”[20]

Number of Years of Financial Statements

Proposed Rule 15-01(b) would require a registration statement for a de-SPAC transaction where the target business will be a predecessor to the SPAC registrant to include the same financial statements for that business as would be required in a Securities Act registration statement for an IPO of that business.

Audit Requirements of Predecessor

Proposed Rule 15-01(a) would require the examination of the financial statements of a business that will be a predecessor to a shell company to be audited by an independent accountant in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”) for the purpose of expressing an opinion, to the same extent as a registrant would be audited for an IPO, effectively codifying the staff’s existing guidance.[21]

Age of Financial Statements of the Predecessor

Proposed Rule 15-01(c) would provide for the age of the financial statements of a private operating company as predecessor to be based on whether such private company would qualify as a smaller reporting company in a traditional IPO process, ultimately aligning with the financial statement requirements in a traditional IPO.

Acquisitions of Businesses by a Shell Company Registrant or Its Predecessor That Are Not or Will Not Be the Predecessor

The Commission is proposing a series of rules intended to clarify when companies should disclose financial statements of businesses acquired by SPAC targets or where such business are probable of being acquired by SPAC targets. Proposed Rule 15-01(d) would address situations where financial statements of other businesses (other than the predecessor) that have been acquired or are probable to be acquired should be included in a registration statement or proxy/information statement for a de-SPAC transaction. The Proposal would require application of Rule 3-05, Rule 8-04 or Rule 3-14 (with respect to real estate operation) of Regulation S-X to acquisitions by the private target in the context of a de-SPAC transaction, which the staff views as codifying its existing guidance.

Proposed amendments to the significance tests in Rule 1-02(w) of Regulation S-X will require the significance of the acquisition target of the private target in a de-SPAC transaction to be calculated using the SPAC’s target’s financial information, rather than the SPAC’s financial information.

In addition, Proposed Rule 15-01(d)(2) would require the de-SPAC company to file the financial statements of a recently acquired business, that is not or will not be its predecessor pursuant to Rule 3-05(b)(4)(i) in an Item 2.01(f) of Form 8-K filed in connection with the closing of the de-SPAC transaction where such financial statements were omitted from the registration statement for the de-SPAC transaction, to the extent the significance of the acquisition is greater than 20% but less than 50%.

Financial Statements of a Shell Company Registrant after the Combination with Predecessor

Proposed Rule 15-01(e) allows a registrant to exclude the financial statements of a SPAC for the period prior to the de-SPAC transaction if (i) all financial statements of the SPAC have been filed for all required periods through the de-SPAC transaction, and (ii) the financial statements of the registrant include the period on which the de-SPAC transaction was consummated. The Proposal eliminates any distinction between a de-SPAC structured as a forward acquisition or a reverse recapitalization.

Other Amendments

In addition, the Proposal is also addressing the following related amendments:

amendment of Rule 11-01(d) of Regulation S-X to expressly state that a SPAC is a business for purposes of the rule, effectively requiring an issuer that is not a SPAC to file financial statements of the SPAC in a resale registration statement on Form S-1;
amendment of Item 2.01(f) of Form 8-K to refer to “acquired business,” rather than “registrant,” to clarify that the information required to be provided “relates to the acquired business and for periods prior to consummation of the acquisition”;[22] and
amendment of Rules 3-01, 8-02, and 10-01(a)(1) of Regulation S-X to expressly refer to the balance sheet of the predecessors, consistent with the provision regarding income statements.

Enhanced Projections Disclosure

Disclosure of financial projections is not expressly required by the U.S. federal securities laws; however, it has been common practice for SPACs to use projections of the target company and post-de-SPAC company in its assessment of a proposed de-SPAC transaction, its investor presentations, and soliciting material once a definitive agreement is executed. The Proposal seeks to amend existing regulations regarding the use of projections as well as add new, supplemental disclosure requirements.

Amended Item 10(b) of Regulation S-K

Under Item 10(b) of Regulation S-K, management may present projections regarding a registrant’s future performance, provided that (i) there is a reasonable and good faith basis for such projections, and (ii) they include disclosure of the assumptions underlying the projections and the limitations of such projections, and the presentation and format of such projections. Citing concerns of instances where target companies have disclosed projections that lack a reasonable basis,[23] the Proposal seeks to amend Item 10(b) of Regulation S-K as follows:

Clarification of Applicability to Target Company. Item 10(b) of Regulation S-K currently refers to projections regarding the “registrant.” Proposed amendments would modify the language to clarify that the guidance therein applies to any projections of “future economic performance of persons other than the registrant, such as the target company in a business combination transaction, that are included in the registrant’s Commission filings.” Application of the term “persons other than the registrant” suggests that it is likely that the proposed amended guidance also would apply to the use of projections in non-SPAC transactions.
Historical Results. Disclosure of projected measures that are not based on historical financial results or operational history should be clearly distinguished from projected measures that are based on historical financial results or operational history.
Prominence of Historical Results. Similar to non-GAAP presentation, the Commission would consider it misleading to present projections that are based on historical financial results or operational history without presenting such historical measure or operational history with equal or greater prominence.
Non-GAAP Measures. Presentation of projections that include a non-GAAP financial measure should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it is most closely related, and an explanation why the non-GAAP financial measure was used instead of a GAAP measure. The Proposal notes that the reference to the nearest GAAP measure called for by amended Item 10(b) would not require a reconciliation to that GAAP measure; however, the need to provide a GAAP reconciliation for any non-GAAP financial measures would continue to be governed by Regulation G and Item 10(e) of Regulation S-K.

Proposed Item 1609 of Regulation S-K

In light of the traditional SPAC sponsor compensation structure (i.e., compensation in the form of post-closing equity) and the potential incentives and overall dynamics of a de-SPAC transaction, the Commission has proposed a new rule specific to SPACs that would supplement the proposed amendments to Item 10(b) of Regulation S-K (as discussed above). Specifically, the Commission is proposing a new Item 1609 of Regulation S-K that would require SPACs to provide the accompanying disclosures to financial projections:

Purpose of Projections. Any projection disclosed by the registrant must include disclosure regarding (i) the purpose for which the projection was prepared, and (ii) the party that prepared the projection.
Bases and Assumptions. Disclosure would include all material bases of the disclosed projections and all material assumptions underlying the projections, and any factors that may materially impact such assumptions. This would include a discussion of any factors that may cause the assumptions to be no longer reasonable, material growth rates or discount multiples used in preparing the projections, and the reasons for selecting such growth rates or discount multiples.
Views of Management and the Board. Disclosure must discuss whether the projections disclosed continue to reflect the views of the board and/or management of the SPAC or target company, as applicable, as of the date of the filing. If the projections do not continue to reflect the views of the board and/or management, the SPAC should include a discussion of the purpose of disclosing the projections and the reasons for any continued reliance by the management or board on the projections.

Like the proposed amendments to Item 10(b), the first two requirements summarized above should not come as a particular surprise to existing SPACs and their counsel as projections disclosure has been a significant area of scrutiny by the Commission in the registration statement and proxy statement review process.

We note, however, that the requirement under Item 1609 to add disclosure as to management’s and/or the board’s current views may obligate additional disclosure beyond what has been typical market practice. In particular, projections disclosure in a registration statement or proxy statement is often made in the context of a historical lookback to the projections in place at the time the board of directors of the SPAC assessed whether to enter into a de-SPAC transaction with the target company. These projections typically are not updated with newer data during the pendency of the transaction since the purpose of such disclosure is to inform investors of the board’s rationale for approving the transaction. Proposed Item 1609 does not explicitly require the updating of projections, but it does require the parties to disclose whether the included projections reflect the view of the SPAC and the target company as of the date of filing. Moreover, the potential to provide revised projections, coupled with obligations to disclose management’s and board’s continuing views, may prove challenging disclosure to be made between the signing of a business combination agreement and the filing of a registration statement or proxy statement and during the review period for such registration statement or proxy statement.

Status of SPACs under the Investment Company Act of 1940

Section 3(a)(1)(A) of the Investment Company Act defines an “investment company” as any issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities. Given that SPACs, prior to a de-SPAC transaction, are not engaged in any meaningful business other than investing its IPO proceeds held in trust, there is a potential for SPACs to be treated as an “investment company.”

In recognition of the fact that SPACs are generally formed to identify, acquire, and operate a target company through a business combination and not with a stated purpose of being an investment company, the Proposal seeks to clarify SPAC status by providing a safe harbor under Section 3(a)(1)(A) of the Investment Company Act (the “Subjective Test Safe Harbor”).[24] To qualify under the Subjective Test Safe Harbor:

SPAC Assets. The assets held by a SPAC must consist solely of government securities, government money market funds, and cash items prior to the completion of the de-SPAC transaction. The Proposal further notes that (i) all proceeds obtained by the SPAC, including those from any SPAC offering, cash infusion from the sponsor, or any interest, dividend, distribution, or other such return derived from the SPAC’s underlying assets, would need to be held in these asset classes, and (ii) SPACs may not acquire interests in an operating company prior to a de-SPAC transaction.
SPAC Asset Management. Assets listed above may not at any time be acquired or disposed of for the primary purpose of recognizing gains or decreasing losses resulting from market value changes. The Proposal notes that this is not intended to prohibit SPACs the flexibility to hold their assets consistent with cash management practices.
De-SPAC Transaction. The SPAC must seek to complete a single de-SPAC transaction[25] where the surviving public company, either directly or through a primarily controlled company,[26] will be primarily engaged in the business of the target company or companies, which is not that of an investment company.
Board Action. The board of directors of the SPAC would need to adopt a resolution evidencing that the company is primarily engaged in the business of seeking to complete a single de-SPAC transaction.
Primary Engagement. Activities of the SPAC’s officers, directors, and employees, its public representations of policies, and its historical development must evidence that the SPAC is primarily engaged in completing a de-SPAC transaction. Other than a requirement that the board of directors of the SPAC adopt a resolution, the Proposal does not provide examples of other definitive actions as to how SPACs may properly evidence compliance, instead noting that a SPAC may not hold itself out as being primarily engaged in the business of investing, reinvesting, or trading in securities.
Exchange Listing. The SPAC must have at least one class of securities listed for trading on a national securities exchange “by meeting initial listing standards just as any company seeking an exchange listing would have to do.”
De-SPAC Transaction Time Limits. The SPAC would have 18 months from its IPO to enter into a de-SPAC transaction and no more than 24 months from its IPO to complete its de-SPAC transaction.

While most SPACs should not have an issue with qualifying for the Subjective Test Safe Harbor, the proposed time limits may prove problematic for existing SPACs seeking amendments to their governing documents to extend the time necessary to complete a de-SPAC transaction. Typically, these amendments are either sought when (i) a SPAC has a definitive transaction agreement entered into and needs some time to consummate the transaction, and/or (ii) a sponsor is willing to compensate existing securities holders by contributing additional amounts into a trust that is disbursable to shareholders upon lapse of the extension. Moreover, stock exchange rules require a SPAC to complete a de-SPAC transaction within 36 months from its IPO, and with its truncated time periods, the Proposal would significantly constrain some of this timing flexibility for SPACs that would like to comply with the Subjective Test Safe Harbor.

Admittedly, a SPAC does not need to comply with the Subjective Test Safe Harbor, but the alternative would be to make an assessment that the SPAC does not qualify as an investment company, notwithstanding its non-compliance with the time limits in the Subjective Test Safe Harbor, or to register as an “investment company,” and with it, comply with the regulatory regime of the Investment Company Act on top of seeking the consummation of a de-SPAC transaction.

Conclusions

As noted by Chair Gensler, much of the Proposal seeks to impose traditional IPO concepts and regulations on the SPAC IPO and de-SPAC transaction process, as well as codify existing Commission guidance and practice.

That said, there are some notable deviations and provisions in the Proposal that, if implemented, could significantly impact the SPAC marketplace. We note that certain provisions in the Proposal may have consequences for the future of SPACs as an alternative vehicle to traditional IPOs.

In particular, proposals regarding underwriter liability in the de-SPAC transaction context, unavailability of the PSLRA, and liquidation timeframes contemplated by the proposed new Investment Company Act safe harbor, all would curtail SPAC flexibility and/or increase the complexity and cost of completing a de-SPAC transaction.

We continue to monitor further developments and will keep you apprised of the latest news regarding this Proposal.

Commissioner Statements

For the published statements of the Commissioners, please see the following links:

Chair Gary Gensler

Commissioner Allison Herren Lee

Commissioner Caroline A. Crenshaw

Commissioner Hester M. Peirce (Dissent)

Comment Period

The comment period ends on the later of 30 days after publication in the Federal Register or May 31, 2022 (which is 60 days from the date of the Proposal). Comments may be submitted: (1) using the Commission’s comment form at https://www.sec.gov/rules/submitcomments.htm; (2) via e-mail to rule-comments@sec.gov (with “File Number S7‑13‑22” on the subject line); or (3) via mail to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7‑13‑22.

____________________________

[1] U.S. Securities and Exchange Commission, Proposed Rule (RIN 3235-AM90), Special Purpose Acquisition Companies, Shell Companies, and Projections (March 30, 2022), available at https://www.sec.gov/rules/proposed/2022/33-11048.pdf (hereinafter, the “Proposed Rule”).

[2] See Gibson, Dunn & Crutcher LLP, SEC Staff Issues Cautionary Guidance Related to Business Combinations with SPACs (April 7, 2021), available at https://www.gibsondunn.com/sec-staff-issues-cautionary-guidance-related-to-business-combinations-with-spacs/ (addressing the statement of the staff of the Commission’s Division of Corporation Finance about certain accounting, financial reporting, and governance issues related to SPACs and the combined company following a de-SPAC transaction (see Division of Corporation Finance, Announcement: Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies (March 31, 2021), available at https://www.sec.gov/corpfin/announcement/staff-statement-spac-2021-03-31), see also Gibson, Dunn & Crutcher LLP, Back to the Future: SEC Chair Announces Spring 2021 Reg Flex Agenda (June 21, 2021), available at https://www.gibsondunn.com/back-to-the-future-sec-chair-announces-spring-2021-reg-flex-agenda/ (discussing the inclusion of SPACs in Chair Gensler’s Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions announced on June 11, 2021 (see U.S. Securities and Exchange Commission, Press Release (2021-99), SEC Announces Annual Regulatory Agenda (June 11, 2021), available at https://www.sec.gov/news/press-release/2021-99), and Gibson, Dunn & Crutcher LLP, SEC Fires Shot Across the Bow of SPACs (July 14, 2021), available at https://www.gibsondunn.com/sec-fires-shot-across-the-bow-of-spacs/ (discussing a partially settled Commission enforcement action against a SPAC related to purported misstatements on the registration statement concerning the target’s technology and business risks).

[3] U.S. Securities and Exchange Commission, Press Release (2022-56), SEC Proposes Rules to Enhance Disclosure and Investor Protection Relating to Special Purpose Acquisition Companies, Shell Companies, and Projections (March 30, 2022), available at https://www.sec.gov/news/press-release/2022-56.

[4] Id.

[5] Proposed Rule, p. 195 (citing on fn. 432 Michael Levitt, Valerie Jacob, Sebastian Fain, Pamela Marcogliese, Paul Tiger, & Andrea Basham, 2021 De-SPAC Debrief, FRESHFIELDS (Jan. 24, 2022), available at https://blog.freshfields.us/post/102hgzy/2021-de-spacdebrief, and on fn. 433 Tingting Liu, The Wealth Effects of Fairness Opinions in Takeovers, 53 FIN. REV. 533 (2018)).

[6] The term “promoter” is defined in Securities Act Rule 405 and Exchange Act Rule 12b-2.

[7] Proposed Item 1604(c)(1) suggests the following potential sources: “the amount of compensation paid or to be paid to the SPAC sponsor, the terms of outstanding warrants and convertible securities, and underwriting and other fees.” Proposed Rule, p. 336.

[8] Commission Hester M. Peirce, Statement: Damning and Deeming: Dissenting Statement on Shell Companies, Projections, and SPACs Proposal (March 30, 2022), available at https://www.sec.gov/news/statement/peirce-statement-spac-proposal-033022.

[9] Under Section 6(a) of the Securities Act, each “issuer” must sign a Securities Act registration statement. The Securities Act broadly defines the term “issuer” to include every person who issues or proposes to issue any securities.

[10] Proposed Rule, p. 195.

[11] 17 CFR 229.10(f)(1).

[12] Proposed Rule, p. 302 and fn. 575 (explaining that the “estimate is based, in part, on [the Commission’s] estimate of the number of de-SPAC transactions in which the SPAC is the legal acquirer”).

[13] See Jamie Payne, Market Trends: De-SPAC Transactions, LexisNexis (March 5, 2022), available at https://www.lexisnexis.com/community/insights/legal/practical-guidance-journal/b/pa/posts/market-trends-de-spac-transactions (“The average size of de-SPAC transactions remained consistent between $2.2 billion and $2.8 billion in 2021 until a significant decline to $1.4 billion in the fourth quarter. The largest SPAC merger announced and closed in 2021, between Altimeter Growth Corp. and Grab Holdings Inc., was valued at $39.6 billion.”).

[14] The term “penny stock” is defined in 17 CFR 240.3a51-1.

[15] Section 11 of the Securities Act imposes on underwriters, among other parties identified in Section 11(a), civil liability for any part of the registration statement, at effectiveness, which contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, to any person acquiring such security. Further, Section 12(a)(2) imposes liability upon anyone, including underwriters, who offers or sells a security, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, to any person purchasing such security from them.

[16] The Proposal further notes that “Federal courts and the Commission may find that other parties involved in securities distributions, including other parties that perform activities necessary to the successful completion of de-SPAC transactions, are ‘statutory underwriters’ within the definition of underwriter in Section 2(a)(11).” Proposed Rule, p. 98.

[17] Although the Securities Act does not expressly require an underwriter to conduct a due diligence investigation, the Proposal reiterates the Commission’s long-standing view that underwriters nonetheless have an affirmative obligation to conduct reasonable due diligence. Proposed Rule, fn. 184 (citing In re Charles E. Bailey & Co., 35 S.E.C. 33, at 41 (Mar. 25, 1953) (“[An underwriter] owe[s] a duty to the investing public to exercise a degree of care reasonable under the circumstances of th[e] offering to assure the substantial accuracy of representations made in the prospectus and other sales literature.”); In re Brown, Barton & Engel, 41 SEC 59, at 64 (June 8, 1962) (“[I]n undertaking a distribution . . . [the underwriter] had a responsibility to make a reasonable investigation to assure [itself] that there was a basis for the representations they made and that a fair picture, including adverse as well as favorable factors, was presented to investors.”); In the Matter of the Richmond Corp., infra note 185 (“It is a well-established practice, and a standard of the business, for underwriters to exercise diligence and care in examining into an issuer’s business and the accuracy and adequacy of the information contained in the registration statement . . . The underwriter who does not make a reasonable investigation is derelict in his responsibilities to deal fairly with the investing public.”)).

[18] Proposed Rule, p. 104, citing SEC v. M & A W., Inc., 538 F.3d 1043, 1053 (9th Cir. 2008) (“[W]e are informed by the purpose of registration, which is ‘to protect investors by promoting full disclosure of information thought necessary to informed investment decisions.’ The express purpose of the reverse mergers at issue in this case was to transform a private corporation into a corporation selling stock shares to the public, without making the extensive public disclosures required in an initial offering. Thus, the investing public had relatively little information about the former private corporation. In such transactions, the investor protections provided by registration requirements are especially important.”).

[19] Id., p. 343.

[20] Id., p. 112 (citing the staff guidance under the Division of Corporation Finance’s Financial Reporting Manual).

[21] Id., p. 112 (citing the staff guidance under the Division of Corporation Finance’s Financial Reporting Manual at Section 4110.5).

[22] Id., p. 124.

[23] For example, the Commission cites to recent enforcement actions against SPACs, alleging the use of baseless or unsupported projections about future revenues and the use of materially misleading underlying financial projections. See, e.g., In the Matter of Momentus, Inc., et al., Exch. Act Rel. No. 34-92391 (July 13, 2021); SEC vs. Hurgin, et al., Case No. 1:19-cv05705 (S.D.N.Y., filed June 18, 2019); In the Matter of Benjamin H. Gordon, Exch. Act Rel. No. 34-86164 (June 20, 2019); and SEC vs. Milton, Case No. 1:21-cv-6445 (S.D.N.Y., filed July 29, 2021).

[24] Proposed Rule 3a-10. The Proposal does not provide a safe harbor under Section 3(a)(1)(C) of the Investment Company Act, with respect to issuers engaged or proposing to engage in certain securities activities.

[25] The de-SPAC transaction may involve the combination of multiple target companies, so long as intentions of the SPAC are disclosed and so long as closing with respect to all target companies occurs contemporaneously and within the required time limits (as described below). Proposed Rule, p. 145.

[26] “Primary Control Company” means an issuer that (i) “[i]s controlled within the meaning of Section 2(a)(9) of the Investment Company Act by the surviving company following a de-SPAC transaction with a degree of control that is greater than that of any other person” and (ii) “is not an investment company.” Proposed Rule 3a-10(b)(2).

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Capital Markets, Mergers and Acquisitions, Securities Enforcement, or Securities Regulation and Corporate Governance practice groups, or the following authors:

Evan M. D’Amico – Washington, D.C. (+1 202-887-3613, edamico@gibsondunn.com)
Gerry Spedale – Houston (+1 346-718-6888, gspedale@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)
Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com)
Gregory Merz – Washington, D.C. (+1 202-887-3637, gmerz@gibsondunn.com)
Rodrigo Surcan – New York (+1 212-351-5329, rsurcan@gibsondunn.com)
James O. Springer – Washington, D.C. (+1 202-887-3516, jspringer@gibsondunn.com)

Please also feel free to contact the following practice group leaders:

Capital Markets Group:
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Securities Regulation and Corporate Governance Group:
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The UK’s competition watchdog has prohibited a proposed merger that the European Commission had cleared little more than one month ago. On the same day, the US Department of Justice announced that it considered the deal problematic. These developments highlight the growing uncertainties that companies now face in getting global deals through and underline the need for careful, strategic planning to manage competition law risks.

Divergence is real and it can hurt

The assumption that UK competition laws and policies would largely continue to match those of the EU has been a key underpinning of the advice most practitioners have given since Brexit. Whilst still valid in most areas as a matter of law, the approach adopted by the UK Competition and Markets Authority (CMA) has, in fact, been diverging from that of the European Commission (EC) for some time in the field of merger control.

This spilt out when the CMA publicly expressed skepticism of the EC’s Google/Fitbit clearance in early 2021. However, many commentators argued that this divergence was limited to digital markets and would not affect more traditional industries. The CMA would, it was asserted, do everything it could to coordinate and adopt an approach consistent with the EC particularly in deals in which neither party was a UK company.

That assumption can no longer be made.

Earlier this week, parties to a proposed merger abandoned their deal, which was already cleared by the EC, following a prohibition by the CMA. The CMA concluded that that the divestiture package that had been accepted by the EC was not clear-cut enough to be effective.

The blocked Cargotec/Konecranes merger serves as a stark reminder to companies that following the UK’s exit from the EU’s one stop shop merger regime, divergence in approach between the two authorities is real, and may lead to deals literally falling apart.

In this note, we consider the implications for parties facing parallel merger review before the EU and UK authorities and offer some practical tips to achieve the best outcome. It is clear that parties to transactions facing dual review in the EU and the UK need to pay close attention to the practice of both authorities, particularly in relation to remedies. Timing and cooperative engagement are paramount.

A brief look at the present case

Cargotec and Konecranes are Finnish companies offering container handling equipment and services to port terminals and industrial customers worldwide. The companies announced their proposed US$5 billion merger in October 2020. The deal was notified in a number of jurisdictions, including the UK, EU, U.S., Australia, New Zealand, Singapore and Israel.

When the deal ran into trouble, the parties proposed a divestment remedy which involved carving out asset packages from within each of their existing businesses to be sold as a new combined business.

In February, the EC announced its approval of the deal subject to the divestiture remedy. The EC’s Executive Vice-President Margrethe Vestager said “[f]ollowing the remedies offered by the two companies, customers in Europe will continue to have sufficient choice of port equipment and will continue benefitting from competitive prices and a great choice of technology”.

Vestager doubled down on the justification for the EC’s clearance of the deal in a speech on 25 March 2022. She asserted that the EC had made sure that the remedies addressed the EC’s concerns through the divestiture of “viable standalone businesses”.

Four days later the CMA announced that it would block the merger. The CMA was not satisfied with the parties’ proposed remedies, stating that the asset packages “would not enable whoever bought them to compete as strongly as the merging businesses do at present” and that the process of carving out the assets and knitting them together “would be complex and risky”.

Two days from then, Vestager returned to the fray, reiterating her message that the EC had made sure that the proposed remedies addressed its concerns and that the market had given positive feedback on them.

A sign of things to come

We should be cautious in drawing too firm a conclusion from one case. The US, EU and UK authorities regularly communicate with one another and have a strong record of coordinating their actions.

But the CMA’s prohibition of the Cargotec/Konecranes merger – and the EC’s very public support for the stand it took – suggests greater challenges lie ahead for parallel track cases, in particular when it comes to remedies: what is “clear-cut” for one authority appears no longer to be clear-cut for another. The CMA’s public criticism of the EC’s Google/Fitbit remedies provides support for the latter.

On the other hand, in September last year the CMA unconditionally cleared the Meta/Kustomer merger in Phase I, whilst the deal went to Phase II in Europe (it was ultimately cleared with remedies in January 2022 by the EC).

Global considerations

There was a broader global dimension to Cargotec/Konecranes, beyond the UK-EU divergence. In particular, on the same day as the CMA’s prohibition, the U.S. Department of Justice announced that the deal would have led to an “illegal consolidation” and that it had informed the parties that the proposed remedy was insufficient.

The ACCC has discontinued its review following the abandonment of the transaction, but it noted in its press release that Australian customers had expressed strong concerns on the proposed remedy.

These elements underline the need for merging parties to factor in potentially different approaches across multiple jurisdictions, and the possibility that a tougher approach by one or several authorities may jeopardise the approval prospects of a deal that is cleared in other jurisdictions.

How do you get your deal through unscathed?

There are four main things that companies need to bear in mind:

Should the UK be a condition precedent: the UK merger regime is voluntary and is non-suspensory. As a result many companies opt not to have UK clearance as a condition precedent. Whilst this often makes sense, much greater thought than in the past needs to go into the question. Cargotec/Konecranes not only underlines that the CMA is now one of the toughest regulators in the world but also that it is willing to go its own way on remedies, even in deals between two non-UK companies.
Timing: Having a robust, well thought out strategy on the timing of deal announcement and engagement with the authorities is critical. The merger review timetables of the EC and CMA do not line up – the CMA’s review period is longer than that of the EC. Parties may want to stagger their submissions so that the CMA and EC are reviewing remedy packages at the same time. There is also a disconnect between the stage at which each authority may be willing to accept large, upfront remedy packages. The EC does, in certain circumstances, accept these in Phase 1, whereas the CMA typically requires an in-depth investigation to get comfortable. On the face of it, it appears that Cargotec and Konecranes may have simply run out of time to get the CMA comfortable with a revised divestiture package.
Defining the right remedy package: In cases where remedies are on the cards, plan them early, discuss them early with the authority and make them as clear-cut as commercially possible. Cargotec/Konecranes confirms that it is difficult to persuade authorities to accept mix-and-match remedies. Parties should avoid remedies that could be difficult to implement and must take into account the remedy preference of each authority (a one-size-fits-all remedy package is no longer always an option).
Facilitate cooperation between agencies: It is clear that cooperation between the EC and the CMA is not at its strongest. That means that the parties and their advisors will need to work much more closely and proactively with both authorities; “leave it to the authorities to sort things out between themselves” is no longer a viable strategy (if it ever was!).

The following Gibson Dunn lawyers prepared this client alert: Ali Nikpay and Mairi McMartin.

Gibson Dunn’s lawyers are available to assist in addressing any questions that you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition practice group, or the following:

Ali Nikpay – Co-Chair, Antitrust & Competition Group, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)

Attila Borsos – Partner, Antitrust & Competition Group, Brussels (+32 2 554 72 11, aborsos@gibsondunn.com)

Deirdre Taylor – Partner, Antitrust & Competition Group, London (+44 20 7071 4274, dtaylor2@gibsondunn.com)

Christian Riis-Madsen – Co-Chair, Antitrust & Competition Group, Brussels (+32 2 554 72 05, criis@gibsondunn.com)

Nicholas Banasevic – Managing Director, Antitrust & Competition Group, Brussels (+32 2 554 72 40, nbanasevic@gibsondunn.com)

Jessica Staples – Of Counsel, Antitrust & Competition Group, London (+44 (0) 20 7071 4155, jstaples@gibsondunn.com)

Mairi McMartin – Associate, Antitrust & Competition Group, Brussels (+32 2 554 72 29, mmcMartin@gibsondunn.com)

Rachel S. Brass – Co-Chair, Antitrust & Competition Group, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)

Stephen Weissman – Co-Chair, Antitrust & Competition Group, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)

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