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From October 11 to 15, 2021, the most significant global biodiversity summit in over a decade convenes in Kunming, China.  The Kunming conference marks the 15th meeting of the Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity (CBD), and aspires to do for biodiversity what the Paris Agreement did for climate change—namely, producing a landmark multinational accord to address one of the most pressing ecological and economic issues of our time.

COP15 is anticipated to finalize a Post-2020 Global Biodiversity Framework, outlining what countries need to do going forward, individually and collectively, to align humanity’s trajectory with CBD’s overall vision of “living in harmony with nature” by 2050.  The world has continued veering off-course to date, failing to meet any of the 20 Aichi biodiversity targets[i] which CBD set in 2010.

However, optimists will observe that the goals proposed in the draft Post-2020 Framework[ii] are more outcome-oriented than CBD’s previous goals, buttressed by targeted, time-bound measures to address the drivers of biodiversity loss.  The draft goals are as ambitious as they are potentially far-reaching, including proposals to conserve 30% of the world’s oceans and land by 2030, reduce pollution from pesticides, plastic waste, and nutrient excess by 50% by 2030, support integration of biodiversity-related information into business reporting, and promote the sustainable harvest of wild species.

Addressing biodiversity loss is by no means viewed solely as a responsibility of nation-states and governments.  Corporations are increasingly under pressure from investors, the communities in which they operate, and other stakeholders to address biodiversity loss and account for their biodiversity impacts.  In this alert, we discuss the significance of global action on biodiversity, and also provide a landscape overview of the modern regulatory developments (with our initial focus on Europe and the United States) and voluntary disclosure frameworks, reporting standards, initiatives, and performance assessment tools that are reshaping how the business community views, discloses, and addresses biodiversity risk.

1. The Import of COP15 and Biodiversity

Biodiversity – Why it is so important – A quick recap:  Encompassing the variety of life, ecosystems, and species on Earth and the natural patterns they form,[iii] biodiversity is critical to the quality and function of the ecosystem services that society derives from nature.  The World Economic Forum estimated that more than half the world’s GDP (around US$44 trillion) is moderately or highly dependent on these services, and accordingly found that biodiversity loss is among the existential threats facing society today, in terms of both impact and likelihood.[iv]

Scientists have warned that human activity is currently driving a sixth mass extinction of life on Earth.[v]  Such biodiversity loss and consequent damage to ecosystems could drain nearly US$10 trillion from the global economy by 2050[vi], with the deterioration of crop yields, buffers against the physical effects of climate change, soil and water quality, and other biodiversity-related forms of natural capital depreciation translating into lower productivity, supply chain disruptions, higher raw material costs, social instability, and other negative ramifications for many businesses.

The IPCCC Report:  The recently published[vii] Sixth Assessment Report by the Intergovernmental Panel on Climate Change (IPCCC) stresses that climate change, disaster risk, economic development, biodiversity conservation, and human well-being are tightly interconnected.  Biodiversity loss has nevertheless been overshadowed, somewhat understandably, by the threat of climate change.  But as data collection methods, metrics, and technologies used to identify and evaluate both biodiversity degradation and the value of natural capital have advanced, so too has the business community—investors, businesses, lenders, credit agencies, and ESG raters alike—awakened to the reality that biodiversity loss is a serious systemic economic risk in its own right.[viii]

Perhaps more significantly, biodiversity risk is also climbing up the agenda of global regulators and supervisors.

2. Modern Regulatory Action on Biodiversity

Should COP15 produce a Paris Agreement analogue for biodiversity, we expect an increase in momentum behind the introduction of next generation regulations requiring businesses to disclose, diligence, and/or mitigate their risks relating to and impacts on biodiversity, paralleled by an increase in shareholder/stakeholder pressure of equal measure.

Global Finance:  The Network for Greening the Financial System (NGFS), a group of central banks and financial supervisors, published an interim report[ix] jointly with INSPIRE (the International Network for Sustainable Financial Policy Insights, Research and Exchange) on Biodiversity and Financial Stability on October 8, 2021.  The report highlights growing evidence that biodiversity loss could have significant economic and financial implications and recommends that central banks and financial supervisors undertake a series of measures to upskill in the area, develop methodologies to capture the risks of impacts, and importantly, start to take actions in relation to the financial institutions they supervise, including encouraging institutions to seek information from borrowers on biodiversity plans, exposures, and performance.  Whilst it may take time for some of the specific recommended actions of the NGFS to filter through to financial institutions, other more immediately applicable regulations impacting the investment management industry and larger corporations have already surfaced.

European Union:  The biodiversity ball has been rolling at some pace in Europe.  This past summer, the European Union (EU) approved a report concluding that a new EU biodiversity governance framework is needed to set enforceable biodiversity protection targets and support the formation of Europe-specific biodiversity reporting rules (EU Biodiversity Strategy for 2030).[x]  In addition, the EU is set to propose and adopt further technical screening criteria[xi] for environmental objectives, including biodiversity, under its Taxonomy Regulation (EU Taxonomy) by December 2021 and the first half of 2022, respectively.

This “Green Taxonomy” is, in part, designed to enable the designation of company activities as either sustainable or unsustainable based on whether a company’s activities meet to-be-determined “substantial contribution” and “do no significant harm” criteria with respect to biodiversity.  Consequently, companies required to report sustainability information under the EU’s existing Non-Financial Reporting Directive (NFRD) or the proposed Corporate Sustainability Reporting Directive—which would expand upon the NFRD’s biodiversity disclosure mandates and scope of applicability—will also have to disclose the share of their activities that are aligned with the EU Taxonomy’s biodiversity protection criteria.  Similarly, in connection with the EU’s recently enacted Sustainable Finance Disclosure Regulation (SFDR), “financial market participants” will need to determine and disclose whether their economic activities, if linked to financial products offered as sustainable, qualify as taxonomy-aligned with respect to biodiversity.

European countries (including the UK):  Further, on an individual basis, France[xii] and the Netherlands[xiii] have promulgated non-financial reporting laws for businesses and/or investors which require the consideration and/or disclosure of biodiversity impacts, with the United Kingdom (UK) appearing poised to follow suit.  Biodiversity-related funds and initiatives[xiv], as well as legislation for the adoption of biodiversity net-gain principles for new significant infrastructure[xv], have gained considerable traction since the publication of the findings of the watershed “Dasgupta Review” of the economics of biodiversity.[xvi]  In particular, the Dasgupta Review argues that institutional change is required (particularly in finance) such that (i) financial institutions and businesses are required to report on their dependencies and impacts on nature, and (ii) investors are provided with credible, decision-grade data based on measurement and disclosure of both climate- and nature-related financial risks.

Separately, the UK has announced plans to mandate the adoption of the Taskforce on Climate-related Financial Disclosures (TCFD) across the major segments of the UK economy by 2025.  Changes have already been implemented to the UK Listing Rules introducing a requirement for all UK premium listed companies to comply with the TCFD recommendations and disclose how they are considering the impacts of climate change, and on a comply or explain basis report against the TCFD framework.  Consultations also recently closed on extending these requirements to issuers of standard listed equity shares, certain regulated firms, and certain large UK registered companies and LLPs, with rules expected to come into force in 2022.[xvii]  Whilst the efforts to mandate the TCFD across the UK are to be lauded, the TCFD in and of itself touches but does not adequately cover biodiversity loss.  Certain aspects of the TCFD, including categories of physical and transition risk, are relevant to biodiversity loss, but there is a clear need for a distinct framework designed to focus on nature-related financial risks and incorporate the concept of natural capital (see ‎3 below for recent developments involving the Taskforce on Nature-related Financial Disclosures).

United States:  The United States Securities Exchange Commission (SEC) is expected to propose similar climate disclosure rules, or updated disclosure guidance, this month, and its request for public comment on its potential rulemaking has elicited calls for separate mandatory biodiversity risk disclosures.[xviii]  The advent of such disclosures cannot be ruled out during the Biden Administration, which signaled its interest in preserving biodiversity when setting a target to conserve 30% of the nation’s land and water by 2030.

In the meantime, voluntary disclosure frameworks, reporting standards, initiatives, and performance assessment tools addressing biodiversity risk are proliferating, providing inspiration and bases for nascent biodiversity regulations, supporting compliance with existing rules, and gradually equipping investors with much needed data to facilitate effective engagement and stewardship on biodiversity loss issues.

3. Voluntary Biodiversity Disclosure Frameworks, Reporting Standards, Initiatives, and Performance Assessment Tools

Disclosure Frameworks and Reporting Standards

Existing Standards & Frameworks – How Biodiversity Loss is Incorporated:  A number of voluntary disclosure frameworks and reporting standards addressing businesses’ biodiversity risks and impacts have been developed to date.  Sustainability reporting standard No. 304 of the Global Reporting Initiative, for example, directs companies to report on their significant biodiversity impacts, how they manage such impacts, and the habitats they have protected and restored.[xix]  CDP (formerly the Carbon Disclosure Project) has also begun incorporating biodiversity-focused questions into its business questionnaires, to date adding questions on biodiversity impacts, risks and/or opportunities to its forests questionnaires for the metals and mining and coal sectors.  More recently, the Climate Disclosure Standards Board (CDSB) closed public consultation on its nascent biodiversity application guidance,[xx] which will support companies in reporting material land use and biodiversity-related information through the CDSB disclosure framework.  The new guidance will focus on the first six reporting elements of the CDSB framework, including the topics of governance, management’s environmental policies, strategies and targets, risks and opportunities, and sources of impact.

New Initiative – Taskforce on Nature-related Financial Disclosures: The disclosure framework that has received the most attention from observers, however, is not expected to be finalized until 2023.  The recently-formed Taskforce on Nature-related Financial Disclosures (TNFD) is developing a framework specifically for nature-related disclosures, modelled on its climate-focused cousin, the TCFD.  On October 6, 2021, in the run-up to COP15, the TNFD officially kicked-off their work on developing the TNFD framework.[xxi]  Accordingly, the TNFD’s recommendations are expected to focus on company disclosures around certain biodiversity impact metrics and targets as well as governance around the strategic impact of, and the assessment and management of, biodiversity risks and opportunities.  More broadly, the TNFD aims to align with CBD’s target of no net biodiversity loss by 2030 and net gain by 2050.  Given the broad endorsement the TCFD has received from the business community, and the extent to which governments crafting climate risk disclosure regulations have referred to the TCFD as a model, it is widely expected that the TNFD (which already has the backing of the G7) will become an equally influential model for biodiversity disclosures.

Initiatives – Coalitions & Networks

Corporations seeking to elevate biodiversity loss on their ESG agendas and to meaningfully commit to actions in this area should actively consider participation in and support of one or more of the initiatives, charters, and coalitions noted below.

Among the growing chorus of initiatives calling for science-based biodiversity protection targets, the Science Based Targets Network[xxii] and U.N. Principles for Responsible Banking[xxiii] have each recently developed guidance for companies setting such objectives.  Financial institutions in particular are coming under pressure to set targets, and the Finance for Biodiversity Pledge, for its part, has sought to commit its signatories to commit to science-based targets by 2024 (in addition to suggesting that financial institutions become legally liable for their impacts on ecosystems).

Members of the broader business and investor community are also uniting behind the biodiversity agenda through initiatives such as Act4Nature, One Planet Business for Biodiversity, and Business for Nature.  Representing more than 900 companies with a cumulative revenue exceeding US$4 trillion, the Business for Nature Coalition, for example, has called on governments to adopt policies to reverse nature loss in this decade.  Hundreds of coalition members have already made commitments to support three biodiversity-related U.N. Sustainable Development Goals (SDGs)[xxiv], and investor-oriented initiatives such as the U.N. Principles of Responsible Investment (which has been adopted by leading global asset owners and investment managers) have similarly recognized the business case for preserving biodiversity and the importance of biodiversity to achieving the SDGs generally.[xxv]

Other common initiatives focus more narrowly on the biodiversity effects of the cultivation of high-impact soft commodities such as palm oil, beef, and soy.  Companies with ties to these industries have increasingly adopted “No Deforestation, No Peat, No Exploitation” (NDPE) procurement or lending policies, creating stranded asset risk for certain industry members.  We expect NPDE policies to continue gaining traction going forward and other sector-specific biodiversity initiatives to rise to similar prominence.

Performance Assessment Tools for Organizations & Asset Managers – Nascent Stages of Development

As with all ESG factors—as asset owners and managers are acutely aware—you cannot manage what you do not measure.  Hence, the growing importance of performance assessment tools and measures in the biodiversity loss and impact space.

Historically, biodiversity value and/or business impacts on diversity have been measured on a location-by-location basis or on a nation-by-nation basis (based on national biodiversity indicators, for example).  Important improvements in satellite imagery and other technologies used to measure localized impacts, and advancements toward a common lexicon to discuss impacts (e.g., coalescence around metrics such as Mean Species Abundance), are currently being made with greater urgency.  But perhaps more significantly, tools designed to measure organization-level biodiversity impact have recently multiplied.

In 2020, the Mission Économie de la Biodiversité presented its Global Biodiversity Score, a tool designed to assess the biodiversity footprint of business and financial assets.  The U.N. Environment Programme Finance Initiative and Center for Sustainable Organizations then made their own contributions to the assessment cause in 2021 in launching the “ENCORE”[xxvi] module and Biodiversity Performance Index (BPI) prototype, respectively.  Focused on the mining and agricultural sectors, the ENCORE module aims to allow banks and investors to explore the extent to which their financial portfolios indirectly drive species extinction risk and impact on ecological integrity.  Over 30 financial institutions are currently testing the module.  The BPI prototype, meanwhile, holds itself out as the world’s first context-based biodiversity metric designed for companies and investors, using a composite of 10 biodiversity-related indicators to weigh organization-level performance in relation to ecological thresholds.

Continuing on the Road to Biodiversity

Understandably governments around the world are focused on achieving net zero deadlines, pushing ahead with decarbonization projects, and low-carbon strategies, and the intense “buzz” around COP26  will continue for weeks to come.  These steps are not only critical to the reduction of greenhouse gas emissions, but also create local jobs, assist in retraining (and retaining) the existing workforce and help grow economies.

However, much like climate change, the loss of biodiversity is irreversible and immediate action is necessary. Let’s see if natural capital receives the attention it requires this week and Kunming brings about global alignment for urgent action on biodiversity loss.

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[i] 20 Aichi biodiversity targets available at: https://www.cbd.int/sp/targets/.

[ii] The first detailed draft of the new Post-2020 Global Biodiversity Framework is available at: https://www.cbd.int/conferences/post2020.

[iii] The United Nations Environment Programme defines biological diversity or biodiversity as the variety of life on Earth and the natural patterns it forms. See:  https://www.unep.org/unep-and-biodiversity.

[iv] The World Economic Forum’s 2021 Global Risks Report is available at: https://www.weforum.org/reports/the-global-risks-report-2021.

[v] The World Wide Fund for Nature’s (WWF) 2020 Living Planet Report, for example, shows a 68% decline in animal population size and 84% decline in freshwater wildlife in the past few decades.  The report is available at: https://livingplanet.panda.org/en-us/.

[vi] As detailed in WWF’s 2020 Global Futures report, available at https://wwf.panda.org/?359334.

[vii] The IPCC Sixth Assessment Report was published on August 7, 2021 and is available at https://www.ipcc.ch/assessment-report/ar6/.

[viii] See, for example, the opening statement of the U.N. Principles for Responsible Investment Association’s (UNPRI) “Investor Action on Biodiversity” discussion paper, available here.

[ix] https://www.ngfs.net/sites/default/files/medias/documents/ngfs-press-release_2021-10-08_interim-report.pdf

[x] The report is available here.

[xi] Technical screening criteria have already been adopted for climate change.

[xii] France passed its Law on Climate and Energy in 2019, which includes an update to the 2015 Energy Transition Law’s requirements on non-financial reporting by investors.  Only climate issues are covered under the 2015 law, but the 2019 law takes into account the preservation of the biodiversity of the ecosystems.

[xiii] The Netherlands passed legislation on the mandatory disclosure of non-financial information in 1997 and, in 2003, produced a reporting guide stating that sustainability reporting should disclose information on the effects of business operations on biodiversity and the measures taken to mitigate these effects.

[xiv] Initiatives and funds include the England Trees Action Plan, Peat Action Plan, Benyon Review on Highly Protected Marine Areas (and the response to it), development of a Nature for Climate Impact Fund (£640 million announced at Budget 2020), Blue Planet Fund (£500 million), International Biodiversity Fund (£220 million), Green Recovery Challenge Fund (proposed to increase to £80 million) to deliver up to 100 nature projects in two years, and 25 Year Environment Plan.

[xv] Amendments to the Environment Bill to legislate (among other matters) for the introduction of: (i) biodiversity net gain for new nationally significant infrastructure are currently pending (requiring all new developments to demonstrate a 10% net gain in biodiversity at or near their sites); (ii) biodiversity credits allowing developers to purchase credits from the UK Government to be used to fund the creation of conservation sites; and (iii) prohibition on the use by large businesses of illegally produced commodities, due diligence requirements in relation to forest-risk commodities, and reporting on compliance.  The Environment Bill still remains in the House of Lords and has not yet progressed to the final stages of receiving Royal Assent.

[xvi] The final report of the independent review (commissioned in 2019 by Her Majesty’s Treasury (HMT)) on the Economics of Biodiversity led by Professor Sir Partha Dasgupta (Dasgupta Review) was published in February 2021. The report restarted the conversation on biodiversity in the UK, with HMT publishing the UK Government’s response to the Dasgupta Review in July 2021 and emphasizing its commitment to (among other matters) delivering a nature positive future and to reverse biodiversity loss by 2030.

[xvii] From January 1, 2021, the UK Financial Conduct Authority (FCA) implemented changes to the Listing Rules (Listing Rule 9.8.6) introducing a requirement for all UK premium listed companies to comply with the TCFD recommendations and disclose how they are considering the impacts of climate change, and on a comply or explain basis report against the TCFD framework.  The FCA also recently consulted on extending these requirements to issuers of standard listed equity shares and certain regulated firms.  The UK Government’s Department for Business, Energy & Industrial Strategy also recently concluded a consultation relating to mandatory climate-related financial disclosures by publicly quoted and large private companies and LLPs and the TCFD.  The Government response is still pending.  The proposals apply to UK companies currently required to produce a non-financial information statement, those being UK companies with more than 500 employees and transferable securities admitted to trading on a UK regulated market, and relevant public interest entities; UK registered companies with securities admitted to AIM with more than 500 employees; UK registered companies which are not included in the categories above with more than 500 employees and a turnover of more than £500 million; and LLPs with more than 500 employees and a turnover of more than £500 million.  These rules are expected to come into force for accounting periods on or after April 6, 2022.

[xviii] From the Commonwealth Climate and Law Imitative, for example.  Comments submitted to the SEC are available at: https://www.sec.gov/comments/climate-disclosure/cll12.htm.

[xix] The Global Reporting Initiative (GRI) provides the most widely used sustainability reporting standards in the world.  The GRI standards are available at: https://www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-english-language/.

[xx]  The CDSB’s draft Biodiversity Guidance and further information on the consultation is available at: https://www.cdsb.net/biodiversity.

[xxi] The Agence Française de Développement (AFD) launched the TNFD Development Finance Hub at the first plenary meeting, which will sit under the umbrella of the TNFD’s broader Knowledge Hub.  Further information is available at: https://tnfd.global/news/first-plenary-launch-of-development-finance-hub/.

[xxii] The Science Based Targets Network’s initial guidance on science-based targets for nature is available at: https://sciencebasedtargetsnetwork.org/wp-content/uploads/2020/09/SBTN-initial-guidance-for-business.pdf.

[xxiii] The Principles for Responsible Banking’s Guidance on Biodiversity Target-setting is available at: https://www.unepfi.org/publications/guidance-on-biodiversity-target-setting/.

[xxiv] The three SDGs are: SDG6 (Clean water and sanitation), SDG 14 (Life below Water) and SDG 15 (Life on Land). The commitments of Business for Nature Coalition members involve acting and advocating for more ambitious nature policies and work on protecting and restoring nature. Before making commitments, companies are encouraged to understand their dependencies and impacts on biodiversity as they relate to their direct operations or supply chain.

[xxv] As reflected in UNPRI’s “Investor Action on Biodiversity” discussion paper.

[xxvi] ENCORE stands for Exploring Natural Capital Opportunities, Risks and Exposure.

In Horror Inc. v. Miller, the Second Circuit affirmed that Victor Miller had successfully reclaimed his rights in the screenplay for Friday the 13th by invoking the Copyright Act’s termination provisions, notwithstanding his assignment of those rights to a film production company in 1980. The Court reached that conclusion after finding that Miller’s assignment was made as an independent contractor, rather than as an employee.[1]

In certain situations, an author of a copyrighted work that has been transferred to another can terminate the transfer and reclaim the copyright. A transfer of a copyrighted work created as a work-for-hire, however, cannot be terminated. For purposes of determining if a work is a work-for-hire under the Copyright Act, Horror Inc. held that copyright law—not labor law—determines whether the creator and a hiring party are in an employer-employee relationship. The court further held that, because Miller wrote the screenplay as an independent contractor under copyright law, the screenplay was not a work-for-hire and Miller was entitled to terminate his decades-earlier transfer of the screenplay’s copyright.

Statutory Background

The Copyright Act of 1976[2] provides that copyright ownership “vests initially in the author or authors of the work.”[3] Under well-established case law, the person who “actually creates the work, that is, the person who translates an idea into a fixed, tangible expression entitled to copyright protection,” is generally considered to be the work’s “author.”[4] But the Copyright Act creates an exception for “a work made for hire,” which is defined as one “prepared by an employee within the scope of his or employment,” or, in certain instances, “a work specially ordered or commissioned for use as contribution to a collective work.”[5]  In the case of a work-for-hire, “the employer or other person for whom the work was prepared is considered the author.”[6]

Authors can transfer ownership of any or all of the exclusive rights comprised in a copyright,[7] but Section 203 of the Copyright Act permits an author (or his or her successors) in certain circumstances to terminate prior transfers of copyrights during a specified window of time.[8] Congress added this termination right to the Copyright Act to address “the unequal bargaining position of authors” in negotiations over conveyance of their ownership rights “resulting . . . from the impossibility of determining the work’s value until the value has been exploited.”[9]   A creator of a work-for-hire cannot take advantage of this provision, however, because the termination right expressly does not apply to works-for-hire.[10]

Factual Background

Victor Miller, a professional screenplay writer, has long been a member of the Writers Guild of America (“WGA”), a labor union representing writers in the film and television industries. In 1979, Miller agreed to write the screenplay for a horror film, which would eventually be titled Friday the 13th and introduce the iconic character of Jason Voorhees.[11] Friday the 13th opened on May 9, 1980 and enjoyed “unprecedented box office success for a horror film,” leading to eleven sequels to-date and a host of other derivative products.[12] But before that took place, in exchange for only $9,000, Miller assigned his rights in the screenplay to a film production and distribution company.

In 2016, Miller sought to reclaim copyright ownership of the screenplay by serving notices of termination pursuant to Section 203(a) of the Copyright Act. The companies to whom the copyrights had been transferred then sued Miller in the United States District Court for the District of Connecticut, seeking a declaration that Miller wrote the screenplay as an employee and that the screenplay therefore was a work-for-hire, which would prevent Miller from terminating the companies’ rights. On cross-motions for summary judgment asserting largely undisputed facts, the District Court concluded that Miller did not create the screenplay as a work-for-hire. Because he was the “author” of the screenplay, his termination notices were valid and served to restore his ownership of the copyright for the Friday the 13th screenplay.  After the companies appealed, the Second Circuit affirmed the District Court’s ruling in Miller’s favor.

The Second Circuit’s Decision

Because the Copyright Act’s termination provision is not applicable to works-for-hire, the courts had to resolve whether Miller was an employee or independent contractor of the film production company to which he assigned his rights at the time that he wrote the screenplay for Friday the 13th. This required the Second Circuit to decide as a matter of first impression what body of federal law governed Miller’s employment status under the Copyright Act.

The production companies first argued that “Miller’s WGA membership ‘inherently’ created an employer-employee relationship” pursuant to the National Labor Relations Act (the “NLRA”), under which screenwriters are permitted to unionize because they are classified as production companies’ employees.[13] The Second Circuit rejected that argument because “the definition of ‘employee’ under copyright law is grounded in the common law of agency” and “serves different purposes than do the labor law concepts regarding employment relationships,” such that there was “no sound basis for using labor law to override copyright law goals.”[14]

In reaching this conclusion, the Court provided a thorough overview of the Supreme Court’s decision in Community for Creative Non-Violence v. Reid, which set forth a thirteen-factor test for determining in the copyright context whether the creator of a work did so as an employee or as an independent contractor.[15]  As explained in Reid, the Copyright Act provides a “restrictive definition of employment, one aimed at limiting the contours of the work-for-hire determination and protecting authors.”[16]  In the labor and employment law context, on the other hand, “the concept of employment is broader, adopting a more sweeping approach suitable to serve workers and their collective bargaining interests and establishing rights” related to their compensation and safety, among other issues.[17]  Stated otherwise, “[t]hat labor law was determined to offer labor protections to independent writers does not have to reduce the protections provided to authors under the Copyright Act.”[18] The Court of Appeals thus found that in analyzing whether the Friday the 13th screenplay was a work-for-hire, “[t]he District Court correctly set aside NLRA-based doctrine in favor of common law principles and the Reid factors” “regardless of Miller’s employment status under the NLRA and his membership in the WGA.”[19]

Having failed to persuade the Second Circuit to follow principles of labor law to find that Miller was an employee when he wrote the script, the production companies next argued that Miller’s WGA membership should have been considered as an additional factor in applying the Reid multi-factor work-for-hire test. The Second Circuit deemed this argument “simply another attempt to shift Reid’s analytic focus from agency law to labor law and convince us the labor law framework governs here.”[20] Because Reid “instructs [courts] to look at the overall context of the parties’ relationship based on . . . specific factors,” Miller’s WGA membership did “not alter or control [the Second Circuit’s] analysis of the Reid factors for copyright purposes.”[21] Rather, it was “relevant only insofar as it informs [the] analysis of other factors, namely whether Miller received benefits commonly associated with an employment relationship.”[22]

Applying the Reid factors, the Second Circuit proceeded to analyze whether Miller created the screenplay as an employee or as an independent contractor. In doing so, it found that only three of Reid’s thirteen factors—that the hiring party exercised some control over Miller’s writing, that the hiring party was a business entity, and that soliciting the screenplay was part of its regular business—supported the production companies’ arguments for classifying the screenplay as a work-for-hire under the Copyright Act. On balance, however, the Second Circuit found that the factors “weigh[ed] decisively in Miller’s favor,” leading the Court of Appeals to affirm the District Court’s finding that Miller had created the screenplay as an independent contractor.[23]  Accordingly, under the Copyright Act, Miller had the right to terminate his decades-earlier transfer of the copyright to the screenplay for Friday the 13th.

Conclusion

For purposes of applying the Copyright Act’s termination provisions, Horror Inc. held that whether a work was “made for hire”—which in this case turned on the creator’s status as an employee or independent contractor—is strictly governed by copyright law principles, rather than labor and employment law. Accordingly, it further held that to the extent the creator of a work is a union member, that fact has no independent weight in determining whether the creator was in an employment relationship with the entity for whom the work was created. These determinations may have significant implications for a broad array of copyrighted works, the ownership of which may be similarly subject to the Copyright Act’s termination provisions.

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[1]       Horror Inc. v. Miller, No. 18-3123-cv, 2021 WL 4468980 (2d Cir. Sept. 30, 2021).

[2]      17 U.S.C. §§ 101 et seq.

[3]      17 U.S.C. § 201(a).

[4]      Community for Creative Non-Violence v. Reid, 490 U.S. 730, 737 (1989).

[5]      17 U.S.C. § 101.

[6]      17 U.S.C. § 201(b).

[7]      17 U.S.C. § 201(d).

[8]      17 U.S.C. § 203.

[9]      H.R. Rep. No. 94-1476, 24^th Cong. 2d Sess. at 124 (1976)

[10]    17 U.S.C. § 203(a) (termination right applies “[i]n the case of any work other than a work made for hire”).

[11]     Horror Inc., 2021 WL 4468980, at *1-2.

[12]     Id. at *3.

[13]     Id. at *6.

[14]     Id.

[15]     490 U.S. at 737.

[16]     Horror Inc., 2021 WL 4468980, at *8.

[17]     Id. at *8.

[18]    Id. at *10.

[19]     Id.

[20]     Id. at *11.

[21]     Id. at *12.

[22]     Id.

[23]    Id. at *19.

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Brian Ascher, Ilissa Samplin, Michael Nadler, and Doran Satanove.

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

Media, Entertainment and Technology Group:
Scott A. Edelman – Co-Chair, Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com)
Kevin Masuda – Co-Chair, Los Angeles (+1 213-229-7872, kmasuda@gibsondunn.com)
Benyamin S. Ross – Co-Chair, Los Angeles (+1 213-229-7048, bross@gibsondunn.com)
Orin Snyder – New York (+1 212-351-2400, osnyder@gibsondunn.com)
Brian C. Ascher – New York (+1 212-351-3989, bascher@gibsondunn.com)
Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com)
Michael H. Dore – Los Angeles (+1 213-229-7652, mdore@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Ilissa Samplin – Los Angeles (+1 213-229-7354, isamplin@gibsondunn.com)
Nathaniel L. Bach – Los Angeles (+1 213-229-7241,nbach@gibsondunn.com)

Please also feel free to contact the following practice leaders:

Intellectual Property Group:
Kate Dominguez – New York (+1 212-351-2338, kdominguez@gibsondunn.com)
Y. Ernest Hsin – San Francisco (+1 415-393-8224, ehsin@gibsondunn.com)
Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com)
Jane M. Love, Ph.D. – New York (+1 212-351-3922, jlove@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

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​To continue assisting US companies with planning for SEC reporting and capital markets transactions into 2022, we offer our annual SEC Desktop Calendar. This calendar provides both the filing deadlines for key SEC reports and the dates on which financial statements in prospectuses and proxy statements must be updated before use (a/k/a financial staleness deadlines).

You can download a PDF of Gibson Dunn’s SEC Desktop Calendar for 2022 at the link below.

https://www.gibsondunn.com/wp-content/uploads/2021/09/SEC-Filing-Deadline-Calendar-2022.pdf

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© 2021 Gibson, Dunn & Crutcher LLP

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

Join us to listen to this interactive discussion with an exceptional panel comprising some of the key people at the Loan Market Association (LMA), Asia Pacific Loan Market Association (APLMA) and Loan Syndications and Trading Association (LSTA) who were responsible for developing their 2021 Revised Sustainability-Linked Loan Principles together with three finance practitioners from Gibson Dunn’s US, U.K. and Asian finance and ESG practices.

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PANELISTS:

Ben Myers – Panelist
London, Partner, Gibson Dunn
Ben Myers is a partner in Gibson Dunn’s global finance and business restructuring teams. His practice focuses on advising funds, sponsors, corporates and financial institutions with a particular focus on leveraged finance, special situations and restructuring transactions. Mr. Myers is one of the leaders of the firm’s UK ESG practice and a member of the firm’s global ESG practice.

Patricia Tan Openshaw – Panelist
Hong Kong, Partner, Gibson Dunn
Patricia is a partner in Gibson Dunn’s energy, infrastructure and  global finance teams. Her practice focuses on project development and finance, mergers and acquisitions, and banking and finance transactions in the energy and infrastructure sector. She has substantial experience representing developers, sponsors, contractors, lenders, government agencies and offtakers in connection with the development, financing, and restructuring of power, rail, toll road, water, casinos and other infrastructure projects. She also advises on financings involving commercial banks, export credit agencies, multilateral agencies, private equity funds and Rule 144A/Regulation S offerings and private placements. She has handled transactions in Africa, Australia, China, Fiji, India, Indonesia, Korea, Myanmar, Pakistan, Philippines, Singapore, Thailand, Vietnam and the United States. Ms. Openshaw is a member of the firm’s global ESG practice.

Yair Galil – Panelist
New York, Of Counsel, Gibson Dunn
Yair is of counsel in Gibson Dunn’s global finance team. His experience includes representation of sponsors, corporate issuers, financial institutions and investment funds in a variety of complex financing transactions. The business contexts for these transactions have ranged from corporate finance (including sustainability‐linked credit facilities), to leveraged acquisitions and dividend recaps, to debt buybacks and other out‐of‐court capital restructuring transactions, to debtor‐in‐ possession and bankruptcy exit financings. Mr. Galil is a member of the firm’s global ESG practice.

Hannah Vanstone – Panelist
London, Legal Associate, Loan Market Association
Hannah joined the LMA’s legal team in November 2018 and assists with the Association’s documentation projects, education and training events and regulatory and lobbying matters. Hannah leads the LMA’s real estate finance work and is also involved in all the LMA’s ESG initiatives. Prior to joining the LMA, Hannah was a banking and finance solicitor at Osborne Clarke LLP where she acted for numerous domestic and international corporate banks and UK and international borrowers on a variety of syndicated finance transactions, with a particular focus on real estate finance.

Rosamund Barker – Panelist
Hong Kong, Head of Legal, Asia Pacific Loan Market Association
Rosamund is currently Head of Legal at the Asia Pacific Loan Market Association based in Hong Kong. She has spent much of her career working in the Banking and Finance and Capital Markets teams at Linklaters in London and Hong Kong, most recently as Counsel. She was also Director of Knowledge for Asia Pacific at Baker McKenzie. She is responsible for green and sustainable lending initiatives at the APLMA and has been active in raising awareness of the Green Loan Principles, Sustainability Linked Loan Principles and Social Loan Principles to Borrowers and Lenders alike. Rosamund read law at Churchill College, Cambridge University and is a qualified solicitor both in Hong Kong and England and Wales.

Tess Virmani – Panelist
New York, Associate General Counsel, Executive Vice President, Public Policy of the Loan Syndications and Trading Association (LSTA)
Tess has a broad range of responsibilities at the LSTA. She leads the LSTA’s sustainable finance and ESG initiatives which seek to foster the development of sustainable lending as well as promote greater ESG disclosure in the loan markets. In addition, Tess engages in the LSTA’s policy initiatives, including market advocacy and spearheading industry solutions to market developments, such as the transition to replacement benchmarks. Tess focuses on maintaining and augmenting the LSTA’s extensive suite of documentation, which includes templates, market standards, and market and regulatory guidance. Finally, she is involved in the development and presentation of the LSTA’s robust education programs. Prior to joining the LSTA, Tess practiced as a finance attorney at Skadden, Arps, Slate, Meagher & Flom LLP in New York. She received a B.S. in International Politics from the Walsh School of Foreign Service at Georgetown University and a J.D. from Fordham University School of Law. She is admitted as an attorney in New York. Tess is an FSA Level II Candidate.

Recently, the SEC’s Division of Corporation Finance has issued a number of comment letters relating exclusively to climate-change disclosure issues. The letters we have seen to date comment on companies’ most recent Form 10-K filings, including those of calendar year companies who filed their Form 10-K more than 6 months ago, and have been issued by a variety of the Division’s industry review groups, including to companies that are not in particularly carbon-intensive industries. Many of the climate change comments appear to be drawn from the topics and considerations raised in the SEC’s 2010 guidance on climate change disclosure, as reflected in the sample comments that we have attached in the annex to this alert. We expect this is part of a larger Division initiative because the letters are similar (although not identical), contain relatively generic comments, and have been issued in close proximity to one another. Accordingly, it is reasonable to expect that additional comment letters will be issued in the coming weeks and months.

The issuance of these comments and their focus comes as no surprise given the SEC’s Chair and several commissioners have indicated that climate change disclosures are a priority. As detailed in Gibson Dunn’s client alert of June 21, 2021, the SEC also recently announced its anticipated rulemaking agenda, which includes a near-term focus on rules that would prescribe climate change disclosures.

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The following Gibson Dunn attorneys assisted in preparing this update: Andrew Fabens, Brian Lane, Courtney Haseley, Elizabeth Ising, James Moloney, Lori Zyskowski, Michael Titera, Thomas Kim, and Ronald Mueller.

© 2021 Gibson, Dunn & Crutcher LLP

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

The California Court of Appeal last week issued the first published California appellate decision to expressly confirm that trial courts have the authority to strike an unmanageable Private Attorneys General Act (“PAGA”) claim. In Wesson v. Staples the Office Superstore, LLC, No. B302988, — Cal.App.5th — (Sept. 9, 2021), the Court of Appeal held that trial courts have the inherent authority to manage complex litigation, and under this authority can evaluate whether PAGA claims can be manageably adjudicated at trial; if a PAGA claim cannot be manageably tried, the court may strike the claim. This is a critical ruling for California employers who are litigating PAGA actions in California state courts.

Wesson involved a PAGA claim on behalf of over 300 store managers who contended that Staples had misclassified them as exempt executive employees. After defeating class certification, Staples moved to strike the PAGA claim on the ground that individual variations in evidence relevant to each manager’s proper classification also rendered the PAGA claim unmanageable. The trial court granted Staples’s motion, and the Court of Appeal affirmed.

The Court of Appeal’s opinion emphasized that courts have “inherent authority to fashion procedures and remedies as necessary to protect litigants’ rights and the fairness of trial.” Slip op. at 25.  Representative claims under PAGA pose challenges for efficient and fair case management, particularly where adjudicating the claims would require “minitrials . . . with respect to each” represented person.  Id. at 28–29. The Court of Appeal further explained that “PAGA claims may well present more significant manageability concerns than those involved in class actions,” because PAGA lacks many of the protections associated with class litigation. Id. at 30 (emphasis added). The court also made clear that trial courts faced with those issues are not “powerless to address the challenges presented by large and complex PAGA actions” or “bound to hold dozens, hundreds, or thousands of minitrials involving diverse questions.” Id. at 31. Instead, if a trial court determines that a PAGA claim would be unmanageable at trial, it “may preclude the use of th[at] procedural device.”  Id. at 32.

The California Supreme Court in Williams v. Superior Court, 3 Cal. 5th 531 (2017), had previously suggested in discussing the scope of discovery under PAGA that the “trial of the action” needed to be “manageable.” Id. at 559. And a number of federal district court decisions have recognized that courts have the inherent authority to strike PAGA claims as unmanageable, often based on Williams; Wesson, however, is the first published California appellate decision expressly recognizing that authority. After Wesson, employers who have active PAGA litigation may consider whether to move to strike the PAGA claim on manageability grounds.

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Gibson Dunn lawyers are available to assist in addressing any questions you may have about these matters. 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 authors:

Katherine V.A. Smith – Co-Chair, Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com)
Megan Cooney – Orange County (+1 949-451-4087, mcooney@gibsondunn.com)
Matt Aidan Getz – Los Angeles (+1 213-229-7754, mgetz@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

Yesterday, September 9, President Biden announced several initiatives regarding COVID-19 vaccine requirements for U.S. employers. This alert provides a brief overview of the content and timing of the principal initiatives, and previews certain objections likely to be raised in legal challenges that some governors and others have said they will file.

1. OSHA rule requiring all employers with 100+ employees to ensure their workers are vaccinated or tested weekly, and to pay for vaccination time.

The President announced that the Department of Labor’s Occupational Safety and Health Administration (OSHA) is developing an Emergency Temporary Standard (ETS) that will require all employers with 100 or more employees to ensure that their workforce is fully vaccinated or to require any workers who remain unvaccinated to produce a negative test result at least weekly before coming to work. The rule—which is expected to issue within weeks—will require employers with more than 100 employees to provide paid time off for the time it takes for workers to get vaccinated and to recuperate if they experience serious side effects from the vaccination.

OSHA ETS’s are authorized by statute, which permits the Secretary of Labor to promulgate an ETS when he determines (1) “that employees are exposed to grave danger from exposure to substances or agents determined to be toxic or physically harmful or from new hazards,” and (2) “that such emergency standard is necessary to protect employees from such danger.”[1] An ETS may be in place for up to six months, at which point OSHA must issue a permanent standard that has been adopted through ordinary rulemaking processes.[2] This would be OSHA’s second COVID ETS, following an ETS adopted in June that was limited to the health care sector.[3]

OSHA likely does not plan a notice-and-comment process for the forthcoming rule, which is not required for an ETS. As a consequence, the standard’s specific requirements likely will become known the day of publication, with an effective date shortly thereafter. Uncertainties that issuance of the rule should resolve include how it would apply to employees working at home, or to workers at remote locations without contact with other employees.

The decision to adopt the rule as an “emergency” and “temporary” standard, without notice and comment, could be one focus of a legal challenge. A challenge may also target the rule’s wage-payment requirement; wages are not a subject that OSHA ordinarily regulates, and the requirement arguably contrasts with Congress’s decision to let the COVID-related paid leave programs established by the Families First Coronavirus Response Act expire after December 31, 2020. If the ETS requires vaccination for workers who recently had and recovered from COVID-19, that could be targeted also.

2. Executive Orders requiring vaccinations for employees of federal contractors, and for all federal workers.

In announcing the OSHA ETS, the President also issued separate Executive Orders regarding vaccination of employees of federal contractors, and regarding vaccination of federal workers.

The federal contractor Order imposes no immediate workplace requirements. Rather, the requirements—which the White House has said will include a vaccine mandate—are to be delineated by September 24 by the White House’s “Safer Federal Workforce Task Force” (Task Force), established by the President in January. Under the Order, by September 24, the Task Force is to provide “definitions of relevant terms for contractors and subcontractors, explanations of protocols required of contractors and subcontractors to comply with workplace safety guidance, and any exceptions to Task Force Guidance that apply to contractor and subcontractor workplace locations and individuals in those locations working on or in connection with a Federal Government contract.”[4] The Task Force Guidance is to be accompanied by a determination, issued by the Director of the Office of Management and Budget (OMB), that the Guidance “will promote economy and efficiency in Federal contracting, if adhered to by Government contractors and subcontractors.”[5]  The Order cites the Federal Property and Administrative Services Act (the Procurement Act), as authority for the new federal contractor mandate.[6]

The Order is effectuated by requiring federal agencies to include a clause in contracts requiring “the contractor and any subcontractors (at any tier)” to “comply with all guidance for contractor or subcontractor workplace locations published by the Safer Federal Workforce Task Force,” “for the duration of the contract.”[7] This clause is to be included in new contracts and extensions and renewals of existing contracts, and “shall apply to any workplace locations . . . in which an individual is working on or in connection with a Federal Government contract.”[8]

A legal challenge to the Order is likely to focus on the President’s authority under the Procurement Act to use a White House Task Force to develop workplace safety rules for federal contractors. As discussed in a prior alert, presidents of both parties increasingly use the Procurement Act to regulate terms and conditions of employment at federal contractors, including most recently a $15 minimum wage requirement.[9] A challenge to this COVID Executive Order could produce an important legal precedent on presidential authority in this area.

Separate from the Order regarding contractors, President Biden also signed an Executive Order requiring that all federal executive branch workers be vaccinated, with minimal exceptions.[10] The Order requires federal agencies to “implement, to the extent consistent with applicable law, a program to require COVID-19 vaccination for all of [their] Federal employees.”[11] The Order does not allow employees to avoid vaccination through frequent testing. Instead, “only” those “exceptions . . . required by law” will be permitted.[12] Those exceptions are likely to concern disabilities and religious objections.[13] The President directed the Task Force to “issue guidance within 7 days . . . on agency implementation of” the Order’s requirements for federal employees.[14]

3. COVID-19 vaccinations for health care workers at Medicare and Medicaid participating hospitals, and at other health care settings.

The President announced that the Centers for Medicare & Medicaid Services (CMS) will require COVID-19 vaccinations for workers in most health care settings that receive Medicare or Medicaid reimbursement, including but not limited to hospitals, dialysis facilities, ambulatory surgical settings, and home health agencies. This action is an extension of a vaccination requirement for nursing facilities recently announced by CMS, and will apply to nursing home staff as well as staff in hospitals and other CMS-regulated settings, including clinical staff, individuals providing services under arrangements, volunteers, and staff who are not involved in direct patient, resident, or client care.[15]

* * *

We anticipate providing further updates later this month, as actions on the President’s directives proceed.

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   [1]   29 U.S.C. § 655(c)(1).

   [2]   Id. § 655(c)(3).

   [3]   See OSHA National News Release, US Department of Labor’s OSHA issues emergency temporary standard

to protect health care workers from the coronavirus (June 10, 2021), https://www.osha.gov/news/newsreleases/national/06102021.

   [4]   Executive Order on Ensuring Adequate COVID Safety Protocols for Federal Contractors (Sept. 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/09/09/executive-order-on-ensuring-adequate-covid-safety-protocols-for-federal-contractors/.

   [5]   Id. § 2.

   [6]   Id. (citing 40 U.S.C. 101 et seq).

   [7]   Id.

   [8]   Id.

   [9]   Gibson Dunn, Department of Labor Initiates Rulemaking to Raise the Minimum Wage to $15 Per Hour For Federal Contractors (July 29, 2021), https://www.gibsondunn.com/wp-content/uploads/2021/07/department-of-labor-initiates-rulemaking-to-raise-the-minimum-wage-to-15-dollars-per-hour-for-federal-contractors.pdf.

  [10]   Executive Order on Requiring Coronavirus Disease 2019 Vaccination for Federal Employees (Sept. 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/09/09/executive-order-on-requiring-coronavirus-disease-2019-vaccination-for-federal-employees/.

  [11]   Id. § 2.

  [12]   Id.

  [13]   Press Briefing by Press Secretary Jen Psaki (September 9, 2021), https://www.whitehouse.gov/briefing-room/press-briefings/2021/09/09/press-briefing-by-press-secretary-jen-psaki-september-9-2021/ (stating that there would be exceptions for “legally recognized reasons, such as disability or religious objections”).

  [14]   Executive Order on Requiring Coronavirus Disease 2019 Vaccination for Federal Employees (Sept. 9, 2021) at § 2; see also Safer Federal Workforce, https://www.saferfederalworkforce.gov/.

  [15]   See also CMS, Press Release, Biden-Harris Administration Takes Additional Action to Protect America’s Nursing Home Residents From COVID-19 (Aug. 18, 2021), https://www.cms.gov/newsroom/press-releases/biden-harris-administration-takes-additional-action-protect-americas-nursing-home-residents-covid-19.

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The following Gibson Dunn attorneys assisted in preparing this client update: Eugene Scalia, Helgi C. Walker, Katherine V.A. Smith, Jason C. Schwartz, Jessica Brown, Karl G. Nelson, Amanda C. Machin, Lindsay M. Paulin, Zoë Klein, Chad C. Squitieri, and Marie Zoglo.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following in the firm’s Administrative Law and Regulatory, Labor and Employment or Government Contracts practice groups.

Administrative Law and Regulatory Group:
Eugene Scalia – Washington, D.C. (+1 202-955-8543,escalia@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com)

Labor and Employment Group:
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

Government Contracts Group:
Dhananjay S. Manthripragada – Los Angeles (+1 213-229-7366, dmanthripragada@gibsondunn.com)
Joseph D. West – Washington, D.C. (+1 202-955-8658, jwest@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

On August 20, 2021, the Standing Committee of China’s National People’s Congress passed the Personal Information Protection Law (“PIPL”), which will take effect on November 1, 2021. We previously reported on this development here, when the law was in draft form. An unofficial translation of the newly enacted PIPL is available here and the Mandarin version of the PIPL is available here.[1]

The PIPL applies to “personal information processing entities (“PIPEs”),” defined as “an organisation or individual that independently determines the purposes and means for processing of personal information.” (Article 73). The PIPL defines “personal information” broadly as “various types of electronic or otherwise recorded information relating to an identified or identifiable natural person,” excluding anonymized information, and defines “processing” as “the collection, storage, use, refining, transmission, provision, public disclosure or deletion of personal information.” (Article 4).

The PIPL shares many similarities with the EU’s General Data Protection Regulation (the “GDPR”), including its extraterritorial reach, restrictions on data transfer, compliance obligations and sanctions for non-compliance, amongst others. The PIPL raises some concerns for companies that conduct business in China, even where such companies’ data processing activities take place outside of China, and the consequences for failing to comply could potentially include monetary penalties and companies being placed on a government blacklist.

Below, we describe the companies subject to the PIPL, key features of the PIPL, and highlight critical issues for companies operating in China in light of this important legislative development.

I. Which Companies are Subject to PIPL?

• The PIPL applies to cross-border transmission of personal information and applies extraterritorially. Where PIPEs transmit personal information to entities outside China, they must inform the data subjects of the transfer, obtain their specific consent to the transfer, and ensure that the data recipients satisfy standards of personal information protection similar to those in the PIPL.The PIPL applies to organisations operating in China, as well as to foreign organisations and individuals processing personal information outside China in any one of the following circumstances: (1) the organisation collects and processes personal data for the purpose of providing products or services to natural persons in China; (2) the data will be used in analysing and evaluating the behaviour of natural persons in China; or (3) under other unspecified “circumstances stipulated by laws and administrative regulations” (Article 3). This is an important similarity between the PIPL and GDPR, as the GDPR’s data protection obligations apply to non-EU data controllers and processors that track, analyze and handle data from visitors within the EU. Similarly, under the PIPL, a foreign receiving party must comply with the PIPL’s standard of personal information protection if it handles personal information from natural persons located in China.
• The PIPL gives the Chinese government broad authority in processing personal information. State organisations may process personal information to fulfil statutory duties, but may not process the data in a way that exceeds the scope necessary to fulfil these statutory duties (Article 34). Personal information processed by state organisations must be stored within China (Article 36).

II. Key Features of PIPL

• The PIPL establishes guiding principles on protection of personal information. According to the PIPL, processing of personal information should have a “clear and reasonable purpose” and should be directly related to that purpose (Article 6). The PIPL requires that the collection of personal information be minimized and not excessive (Article 6), and requires PIPEs to ensure the security of personal information (Articles 8-9). To that end, the PIPL imposes a number of compliance obligations on PIPEs, including requiring PIPEs to establish policies and procedures on personal information protection, implement technological solutions to ensure data security, and carry out risk assessments prior to engaging in certain processing activities (Articles 51 – 59).
• The PIPL adopts a risk-based approach, imposing heightened compliance obligations in specified high-risk scenarios. For instance, PIPEs whose processing volume exceeds a yet-to-be-specified threshold must designate a personal information protection officer responsible for supervising the processing of personal data (Article 52). PIPEs operating “internet platforms” that have a “very large” number of users must engage an external, independent entity to monitor compliance with personal information protection obligations, and regularly publish “social responsibility reports” on the status of their personal information protection efforts (Article 58).The law mandates additional protections for “sensitive personal information,” broadly defined as personal information that, once disclosed or used in an illegal manner, could infringe on the personal dignity of natural persons or harm persons or property (Article 28). “Sensitive personal information” includes biometrics, religious information, special status, medical information, financial account, location information, and personal information of minors under the age of 14 (Article 28). When processing “sensitive personal information,” according to the PIPL, PIPEs must only use information necessary to achieve the specified purpose of the collection, adopt strict protective measures, and obtain the data subjects’ specific consent (Article 28-29).
• The PIPL creates legal rights for data subjects. According to the new law, PIPEs may process personal information only after obtaining fully informed consent in a voluntary and explicit statement, although the law does not provide additional details regarding the required format of this consent. The law also sets forth certain situations where obtaining consent is unnecessary, including where necessary to fulfil statutory duties and responsibilities or statutory obligations, or when handling personal information within a reasonable scope to implement news reporting, public opinion supervision and other such activities for the public interest (Articles 13-14, 17). Where consent is required, PIPEs should obtain a new consent where it changes the purpose or method of personal information processing after the initial collection (Article 14). The law also requires PIPEs to provide a convenient way for individuals to withdraw their consent (Article 15), and mandates that PIPEs keep the personal information only for the shortest period of time necessary to achieve the original purpose of the collection (Article 19).If PIPEs use computer algorithms to engage in “automated decision making” based on individuals’ data, the PIPEs are required to be transparent and fair in the decision making, and are prohibited from using automated decision making to engaging in “unreasonably discriminatory” pricing practices (Article 24, 73). “Automated decision-making” is defined as the activity of using computer programs to automatically analyze or assess personal behaviours, habits, interests, or hobbies, or financial, health, credit, or other status, and make decisions based thereupon (Article 73(2)).When individuals’ rights are significantly impacted by PIPEs’ automated decision making, individuals can demand PIPEs to explain the decision making and decline automated decision making (Article 24).

III. Potential Issues for Companies Operating in China

The passage of the PIPL and the uncertainty surrounding many aspects of the law creates a number of potential issues and concerns for companies operating in China.  These include the following:

• Foreign organisations may be subject to the PIPL’s regulatory requirements. The PIPL applies to data processing activities, even where those activities take place outside of China, provided they are carried out for the purpose of conducting business in China or evaluating individuals’ behavior in the country. The law is currently silent on how close the nexus must be between the data processing and Chinese business activities. The law also mandates that data processing activities taking place outside of China are subject to the PIPL under “other circumstances stipulated by laws and administrative regulations.” At present there is no guidance as to what these circumstances will be.Foreign organisations subject to the PIPL will need to comply with requirements including security assessments, assigning local representatives to oversee data processing, and reporting to supervisory agencies in China, though the exact parameters of these requirements remain unclear (Articles 51–58).
• The PIPL creates penalties for organisations that fail to fulfil their obligations to protect personal information (Article 66). These penalties include disgorgement of profits and provisional suspension or termination of electronic applications used by PIPEs to conduct the unlawful collection or processing. Companies and individuals may be subject to a fine of not more than 1 million RMB (approximately $154,378.20) where they fail to remediate conduct found to be in violation of the PIPL, with responsible individuals subject to fines of 10,000 to 100,000 RMB (approximately $1,543.81 to $15,438.05).Companies and responsible individuals face particularly stringent penalties where the violations are “grave,” a term left undefined in the statute. In these cases, the PIPL allows for fines of up to 50 million RMB (approximately $7,719,027.00) or 5% of annual revenue, although the PIPL does not specify which parameter serves as the upper limit for the fines. Authorities may also suspend the offending business activities, stop all business activities entirely, or cancel all administrative or business licenses. Individuals responsible for “grave” violations may be fined between 100,000 and 1 million RMB (approximately $15,438.29 to $154,382.93), and may also be prohibited from holding certain job titles, including Director, Supervisor, high-level Manager or Personal Information Protection Officer, for a period of time. In contrast, fines for severe violations of the GDPR can be up to €20 million (approximately $23,486,300.00) or up to 4% of the undertaking’s total global turnover of the preceding fiscal year (whichever is higher).
• Foreign organisations may also be subject to consequences under the PIPL for violating Chinese citizens’ personal information rights or harming China’s national security or public interest. The state cybersecurity and informatization department may place offending organisations on a blacklist, resulting in restrictions on receiving personal information for blacklisted entities (Article 42). The PIPL does not provide clarity on what constitutes a violation of Chinese citizens’ personal information rights or what qualifies as harming China’s national security or public interest.

Companies operating in China should pay particular attention to the cross-border data transfer issues raised by the PIPL:

• Foreign organisations will need to disclose certain information when transferring personal information outside of China’s borders. Under the PIPL, PIPEs must obtain the data subject’s consent prior to transfer, although the required form and method of that consent is not clear (Article 39). Entities seeking to transfer data must also provide the data subject with information about the foreign recipient, including its name, contact details, purpose and method of the data processing, the categories of personal information provided and a description of the data subject’s rights under the PIPL (Article 39).
• Certain companies may need to undergo a government security assessment prior to cross-border data transfers. In addition to the consent and disclose requirements under Article 39, “critical information infrastructure operators” and PIPEs processing personal information in quantities exceeding government limits must pass a government security assessment prior to transferring data outside of China (Article 40). The term “critical information infrastructure operator” is not further defined within the PIPL, the term is, however, broadly defined within the newly passed Regulations on the Security and Protection of Critical Information Infrastructure (the “Regulations on Critical Information Infrastructure”), which come into effect on September 1, 2021 (the Mandarin version is available here). Under Article 2 of the Regulations on Critical Information Infrastructure, a “critical information infrastructure operator” is a company engaged in important industries or fields, including public communication and information services, energy, transport, water, finance, public services, e-government services, national defense and any other important network facilities or information systems that may seriously harm national security, the national economy and people’s livelihoods, or public interest in the event of incapacitation, damage or data leaks.The PIPL also does not specify the data thresholds beyond the quantities provided by the state cybersecurity and information department or the nature of the security assessment, nor does it reference any specific legislation issued by the state cybersecurity and informatization department for purposes of determining such data thresholds (Article 40).
• PIPEs outside China that conduct personal data processing activities for the purpose of conducting business in China or evaluating individuals’ behaviour in the country must establish an entity or appoint an individual within China to be responsible for personal information issues. Such foreign organisations must report the name of the relevant entity or the representative’s name and contact method to the departments fulfilling personal information protection duties, although the PIPL does not specify or name to which departments foreign organisations must report in such instances (Article 53).
• Companies and individuals may not provide personal information stored within China to foreign judicial or enforcement agencies, without prior approval of the Chinese government. As summarized in our prior client alert, the PIPL adds to a growing list of laws that restrict the provision of data to foreign judiciaries and government agencies, which could have a far-reaching impact on cross-border litigation and investigations. Chinese authorities will process requests from foreign judicial or enforcement agencies for personal information stored within China in accordance with applicable international treaties or the principle of equality and reciprocity (Article 41). The PIPL does not provide any guidance on how a company should seek approval if it wishes to export personal data in response to a request from a foreign government agency or a foreign court.

IV. Next Steps

The passage of the PIPL comes during a time where China has increased its regulatory scrutiny on technology companies and other entities with large troves of sensitive public information, and their data usage. Given the broad scope of the PIPL and its extraterritorial reach, organisations inside and outside of China will need to review their data protection and transfer strategies to ensure they do not run afoul of this network of legislation.

Even for companies that currently have GDPR compliance programs in place, the PIPL introduces new requirements not currently required under the GDPR. Examples of such requirements unique to the PIPL include, amongst others, establishing a legal entity within China and passing a security review prior to exporting personal data that reaches a certain undisclosed threshold. How the government enforces the statute and interprets its provisions remain to be seen, and a PIPL compliance program will likely require a nuanced understanding of Chinese cultural and business practices.

Companies operating in China should pay close attention to regulations, guidance documents and enforcement actions related to the PIPL as the Chinese government continues to bolster its data protection legal infrastructure, and seek guidance from knowledgeable counsel.

___________________________

   [1]   Please note that the discussion of Chinese law in this publication is advisory only.

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This alert was prepared by Connell O’Neill, Kelly Austin, Oliver Welch, Ning Ning, Felicia Chen, and Jocelyn Shih.

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

Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Oliver D. Welch – Hong Kong (+852 2214 3716, owelch@gibsondunn.com)

Privacy, Cybersecurity and Data Innovation Group:

Asia
Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com)
Connell O’Neill – Hong Kong (+852 2214 3812, coneill@gibsondunn.com)
Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com)

Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com)
James A. Cox – London (+44 (0) 20 7071 4250, jacox@gibsondunn.com)
Patrick Doris – London (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com)
Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com)
Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com)
Alejandro Guerrero – Brussels (+32 2 554 7218, aguerrero@gibsondunn.com)
Vera Lukic – Paris (+33 (0)1 56 43 13 00, vlukic@gibsondunn.com)
Sarah Wazen – London (+44 (0) 20 7071 4203, swazen@gibsondunn.com)

United States
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@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)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Robert K. Hur – Washington, D.C. (+1 202-887-3674, rhur@gibsondunn.com)
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Deborah L. Stein – Los Angeles (+1 213-229-7164, dstein@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

This edition of Gibson Dunn’s Federal Circuit Update summarizes new petitions for certiorari in cases originating in the Federal Circuit concerning the Patent Trial and Appeal Board’s NHK-Fintiv Rule. This Update also discusses recent Federal Circuit decisions. Notably, starting with the September 2021 court sitting, the court has now resumed in-person arguments.

Federal Circuit News

Supreme Court:

The Court did not add any new cases originating at the Federal Circuit.

Noteworthy Petitions for a Writ of Certiorari:

There are two new certiorari petitions currently before the Supreme Court concerning the Patent Trial and Appeal Board’s NHK-Fintiv Rule, under which the Board may deny institution of inter partes review proceedings when the challenged patent is subject to pending district court litigation.

• Apple Inc. v. Optis Cellular Technology, LLC (U.S. No. 21-118): “Whether the U.S. Court of Appeals for the Federal Circuit may review, by appeal or mandamus, a decision of the U.S. Patent & Trademark Office denying a petition for inter partes review of a patent, where review is sought on the grounds that the denial rested on an agency rule that exceeds the PTO’s authority under the Leahy-Smith America Invents Act, is arbitrary or capricious, or was adopted without required notice-and-comment rulemaking.”
• Mylan Laboratories Ltd. v. Janssen Pharmaceuticals, N.V. (U.S. No. 21-202): “Does 35 U.S.C. § 314(d) categorically preclude appeal of all decisions not to institute inter partes review?” 2. “Is the NHK-Fintiv Rule substantively and procedurally unlawful?”

The following petitions are still pending:

• Biogen MA Inc. v. EMD Serono, Inc. (U.S. No. 20-1604) concerning anticipation of method-of-treatment patent claims. Gibson Dunn partner Mark A. Perry is counsel for the respondent.
• American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20-891) concerning patent eligibility under 35 U.S.C. § 101, in which the Court has invited the Solicitor General to file a brief expressing the views of the United States.
• PersonalWeb Technologies, LLC v. Patreon, Inc. (U.S. No. 20-1394) concerning the Kessler doctrine.

Upcoming Oral Argument Calendar

The court has now resumed in-person arguments for the September 2021 court sitting.

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

Live streaming audio is available on the Federal Circuit’s new YouTube channel. Connection information is posted on the court’s website.

Key Case Summaries (August 2021)

Qualcomm Incorporated v. Intel Corporation (Fed. Cir. No. 20-1589): Intel petitioned for six inter partes reviews (IPRs) challenging the validity of a patent owned by Qualcomm.  During the IPRs, neither party disputed that the challenged claims required signals that increased user bandwidth. The PTAB, however, construed the claims in a way that omitted any requirement that the signals increase bandwidth. Qualcomm appealed the PTAB’s decision and argued that it was not afforded notice and an opportunity to respond to the PTAB’s construction.

The Federal Circuit (Moore, C.J., joined by Reyna, J. and Stoll, J.) vacated and remanded the PTAB’s decisions. Although the PTAB may adopt a different construction from a disputed, proposed construction, the court held that the Board may not adopt a claim construction that diverges from an agreed-upon requirement for a term. Because neither party could have anticipated the PTAB’s deviation, especially where the International Trade Commission had adopted the increased bandwidth requirement, the court held that the Board needed to provide notice and an adequate opportunity to respond. Because all briefing included the increased bandwidth requirement, the court rejected Intel’s argument that Qualcomm was not prejudiced. The court also found that a single question relating to the bandwidth requirement at the PTAB hearing did not provide adequate notice. Finally, the court found that the ability to seek rehearing from the PTAB’s decision was not a substitute for notice and an adequate opportunity to respond.

Personal Web Technologies LLC v. Google LLC (Fed. Cir. No. 20-1543): PersonalWeb sued Google and YouTube (collectively, “Google”) in the Eastern District of Texas, asserting three related patents directed to data-processing systems. After the cases were transferred to the Northern District of California, that district court granted Google’s motion for judgment on the pleadings that the asserted claims were ineligible under 35 U.S.C. § 101.

The panel (Prost, J., joined by Lourie and Reyna, J.J.) affirmed. At step one, the panel agreed with the district court that the asserted claims are directed to a three-step process: “(1) using a content-based identifier generated from a ‘hash or message digest function,’ (2) comparing that content-based identifier against something else, [that is,] another content-based identifier or a request for data; and (3) providing access to, denying access to, or deleting data.” The panel held that this claimed process amounted to the abstract idea of using “an algorithm-generated content-based identifier to perform the claimed data-management functions.” The panel explained that these functions are ineligible mental processes. Pointing to its prior cases, the panel explained that each of the three functions—generating, comparing, and using content-based identifiers to manage data—are concepts the Federal Circuit previously described as abstract. At step two, the Court concluded that the alleged inventive concept—“making inventive use of cryptographic hashes”—is simply a restatement of the abstract idea itself. The panel agreed with the district court that “using a generic hash function, a server system, or a computer does not render these claims non-abstract,” and explained that each of the supposed improvement disclosed in the specification was likewise abstract.

GlaxoSmithKlein LLC v. Teva Pharmaceuticals USA, Inc. (Fed. Cir. No. 18-1976): GlaxoSmithKline (“GSK”) sued Teva in the District of Delaware. After a jury returned a verdict of induced infringement against Teva, the district court granted Teva’s renewed JMOL, holding that Teva could not induce infringement with its “skinny label” because that label carved out the patented use of carvedilol. The district court also held that GSK had failed to prove that Teva caused inducement because it did not show that it was Teva’s actions that actually caused doctors to directly infringe by prescribing generic carvedilol to treat CHF.

The panel majority (Moore, C.J., and Newman, J.) vacated the grant of the JMOL and reinstated the jury’s verdict of induced infringement, with Judge Prost dissenting. Teva petitioned for rehearing, which the panel granted. The panel issued a new decision, in which the same majority once more reinstated the jury’s verdict of induced infringement against Teva. The majority held that whether a carve-out indication instructs a patented use is a question of fact. Considering the evidence in the record, the majority concluded that substantial evidence supported the jury’s determination that Teva induced infringement by not effecting a section viii carve-out because Teva advertised its drug as a generic equivalent and thereby actively encouraged a patented therapeutic use. The majority warned that this was a decision based on a “narrow, case-specific review of substantial evidence,” and agreed with amici that a “generics could not be held liable for merely marketing and selling under a ‘skinny’ label omitting all patented indications, or for merely noting (without mentioning any infringing uses) that FDA had rated a product as therapeutically equivalent to a brand-name drug.”

Judge Prost dissented again, arguing that the majority’s decision weakens the section viii carve-out by creating confusion for generic companies as to when they may face liability.  Judge Prost pointed out that GSK expressly told the FDA that only one use was patented, and so Teva carved out that use. Judge Prost also argued that the majority’s decision changes the law of inducement by blurring the line between merely describing an infringing use and actually encouraging, recommending, or promoting an infringing use. Judge Prost explained that unlike direct infringement, induced infringement requires a showing of intent, and argued that no such intent by Teva could be shown because by carving out the patented use, it was actually taking steps to avoid infringement.

Andra Group, LP v. Victoria’s Secret Stores, LLC (Fed. Cir. No. 20-2009): Andra Group sued several related Victoria’s Secret entities in the Eastern District of Texas. Three entities (“Non-Store Defendants”)—corporate parent L Brands, Inc., Victoria’s Secret Direct Brand Management, LLC, and Victoria’s Secret Stores Brand Management, Inc.—do not have any employees, stores, or any other physical presence in the Eastern District of Texas. The fourth entity (“Store Defendant”) operates retail stores in the Eastern District of Texas. The Non-Store Defendants moved to dismiss the infringement suit for improper venue, and the district court granted the motion. Andra Group appealed.

The Federal Circuit (Hughes, J., joined by Reyna, J. and Mayer, J.) affirmed. The court held that the Store Defendant’s retail stores were not a regular and established place of business of the Non-Store Defendants. The court noted that the evidence showed that the Non-Store Defendants did not have the right to direct or control the Store Defendant’s employees. The court also found that the Store Defendant’s acceptance of returns for merchandise purchased on the website (which was run by a Non-Store Defendant) was a discrete task insufficient to establish an agency relationship. The court also rejected Andra’s argument that the Non-Store Defendants ratified the Store Defendant’s retail stores as their own place of business.  The court held that a defendant must actually engage in business from that location and simply advertising a place of business is not sufficient to make it a place of business.

Omni MedSci, Inc. v. Apple Inc. (Fed. Cir. No. 20-1715): In a patent infringement suit brought by Omni against Apple, Apple filed a motion to dismiss for lack of standing. Apple contended that the asserted patents were not owned by Omni, but by University of Michigan (“UM”). Dr. Islam, the named inventor, was employed by UM and had signed an employment agreement that stated, inter alia, that intellectual property developed using university resources “shall be the property of the University.” Dr. Islam took a leave of absence during which he filed multiple provisional patent applications, which ultimately issued as the asserted patents. Dr. Islam then assigned these patents to Omni. The district court determined that the provision in Dr. Islam’s employment agreement “was not a present automatic assignment of title, but, at most, a statement of a future intention to assign.” Apple requested the district court grant certification of the standing question to the Federal Circuit, which was granted.

The majority (Linn, J., joined by Chen, J.) affirmed, and agreed that Dr. Islam’s employment agreement did not constitute a present automatic assignment or a promise to assign in the future. The majority found that the agreement did not include language such as “will assign” or “agrees to grant and does hereby grant,” which have been previously held to constitute a present automatic assignment of a future interest. At most, UM’s agreement with phrases such as “shall be the property of the University” and “shall be owned as agreed upon in writing,” was a promise of a potential future assignment, not as a present automatic transfer. The majority also found a lack of present tense words of execution, such as “hereby grants and assigns,” supported its interpretation.

Judge Newman dissented. She reasoned that because the employment agreement necessarily applies only to future inventions, in which future tense is used, the future tense “shall be the property of the University” is appropriate, and should have vested ownership of the patents in the University. Thus, she concluded that Omni did not have standing to bring the infringement suit.

Campbell Soup Company v. Gamon Plus, Inc. (Fed. Cir. No. 20-2344): Gamon sued Campbell Soup and Trinity Manufacturing (together, “Campbell”) for infringing two design patents, the commercial embodiment of which was called the iQ Maximizer. Campbell petitioned for inter partes review on the grounds that Gamon’s patents would have been obvious over another design patent (“Linz”). The Patent Trial and Appeal Board concluded that Campbell failed to prove unpatentability based on Linz, reasoning that although Linz had the same overall visual appearance as the claimed designs, it was outweighed by objective indicia of nonobviousness. The Board presumed a nexus between those objective indicia and the claimed designs because it found that the iQ Maximizer was coextensive with the claims.

Campbell appealed, and the Federal Circuit (Moore, C.J., Prost and Stoll, JJ.) reversed. The Court held that substantial evidence supported the Board’s finding that Linz creates “the same overall visual appearance as the claimed design[s].” However, under the next step of the design patent obviousness analysis, the Court held that the Board failed to answer the question of “whether unclaimed features are ‘insignificant,’” and that “[u]nder the correct legal standard, substantial evidence does not support the Board’s finding of coextensiveness.”  The Court wrote, “We do not go so far as to hold that the presumption of nexus can never apply in design patent cases. It is, however, hard to envision a commercial product that lacks any significant functional features such that it could be coextensive with a design patent claim.” Finally, the Court held that Gamon failed to show that the objective indicia are the “direct result of the unique characteristics of the claimed invention,” because, for example, characteristics of the iQ Maximizer that led to commercial success “were not new.”

Venue in the Western District of Texas:

In re: Hulu, LLC (Fed. Cir. No. 21-142): The panel (Taranto, Hughes, and Stoll, JJ.) granted Hulu’s petition, holding that Judge Albright clearly abused his discretion in evaluating Hulu’s transfer motion and denying transfer. In particular, the panel held that the district court at least erred in its analysis for each factor that it found weighed against transfer: (1) the availability of compulsory process to secure the attendance of witnesses; (2) the cost of attendance for willing witnesses; and (3) the administrative difficulties flowing from court congestion.

In re: Google LLC (Fed. Cir. No. 21-144): The panel (O’Malley, Reyna, and Chen, JJ.) denied Google’s petition because it did not “ma[k]e a clear and indisputable showing that transfer was required.” The district court had found that one or more Google employees in Austin, Texas were potential witnesses, and the panel was “not prepared on mandamus to disturb those factual findings.”

In re: Apple Inc. (Fed. Cir. No. 21-147): The panel (Reyna, Chen, and Stoll, JJ.) denied Apple’s petition because Apple did not show entitlement to the “extraordinary relief.”  The panel did not, however, find that the district court’s analysis was free of error. For example, the panel explained, the district court “improperly diminished the importance of the convenience of witnesses merely because they were employees of the parties.”

In re: Dish Network L.L.C. (Fed. Cir. No. 21-148): The panel (O’Malley, Reyna, and Chen, JJ.) denied Dish’s petition but held that it “do[es] not view issuance of mandamus as needed here because” the panel was “confident the district court will reconsider its determination in light of the appropriate legal standard and precedent on its own.” The panel explained that, in light of In re Apple Inc., 979 F.3d 1332 (Fed. Cir. 2020), the district court erred in relying on Dish’s general presence in Western Texas without tying that presence to the events underlying the suit. The panel also explained that “[t]he need for reconsideration here” is additionally confirmed by In re Samsung Electronics Co., 2 F.4th 1371 (Fed. Cir. 2021), because the district court here improperly diminished the convenience of witnesses in the transferee venue because of their party status and by presuming they were unlikely to testify despite the lack of relevant witnesses in the transferor venue.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:

Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com)
Jessica A. Hudak – Orange County (+1 949-451-3837, jhudak@gibsondunn.com)

Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:

Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, aho@gibsondunn.com)
Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com)

Intellectual Property Group:
Kate Dominguez – New York (+1 212-351-2338, kdominguez@gibsondunn.com)
Y. Ernest Hsin – San Francisco (+1 415-393-8224, ehsin@gibsondunn.com)
Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com)
Jane M. Love, Ph.D. – New York (+1 212-351-3922, jlove@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

This week the UK Government published yet more updates on the application of the new National Security and Investment Act 2021 (NSI Act), which will come into effect on 4 January 2022.

Now seemed like a good time to take stock of all of the developments and guidance to date and to provide a helpful overview of the new regime, with all of the draft legislation and guidance in one place.

The big question is, what do companies need to take into account right now?

1.  Background

In November last year, we reported on the UK Government’s announcement to overhaul the UK’s approach to foreign investment review and the introduction of its National Security and Investment Bill. The Bill received Royal Assent in April to become the NSI Act.

The NSI Act will introduce a new standalone hybrid regime of mandatory and voluntary notifications for certain acquisitions that could harm the UK’s national security. The regime also includes a Government power to call in any deal which raises a “national security risk”.

In late July 2021, the UK Government confirmed that the NSI Act will take effect from 4 January 2022 and also published four new pieces of guidance[1] as well as an updated draft of sector definitions for the mandatory notification regime under the NSI Act and a statement on how it proposes to exercise its new call-in powers.

This week the UK Government published a further updated draft of sector definitions for the mandatory notification regime and an explanatory note. Other than an amendment to state they will come into force on 4 January 2022, the draft definitions are in substantially the same form as the July draft. The Government also published draft regulations on monetary penalties under the NSI Act, together with an explanatory memorandum. These regulations are broadly in line with the rules for calculating penalties under the Enterprise Act 2002 (EA2002), but there are some differences.

2.  Impact for companies

The introduction of the NSI Act forms part of a trend towards stricter control of foreign direct investment seen elsewhere in the world, including in the U.S. and in Europe. As far as foreign investment in the UK is concerned, the NSI Act will afford the UK Government one of the highest levels of scrutiny of any regime globally.

Although it is expected to be rare that a deal will be blocked (or require remedies) under the NSI Act, the impact for investors will be significant in terms of deal certainty and timeline.

The Government initially estimated that there will be 1,000–1,800 transactions notified each year, and 70 – 95 of those transactions are expected to be called in for a full national security assessment. This compares to a total of less than 25 transactions which have been reviewed by the Government since 2003 under the EA2002 public interest regime.[2] Since these estimates were made, the Government has increased the threshold for mandatory notification from the acquisition of 15% of shares or voting rights to 25%. Nonetheless, given the broad nature of the regime and the current uncertainty around its application, we would anticipate that a high number of notifications will be made, at least initially.

Faced with mandatory notification obligations in many cases, as well as severe criminal and civil consequences for non-compliance, companies must pay close attention to national security risks when investing in the UK.

3.  What do companies need to consider right now?

Consider the existing public interest regime

Over the next four months, transactions which raise national security concerns are still subject to the existing public interest intervention regime under the EA2002 and, accordingly, parties should ensure their transaction documents adequately cater for both regimes. For example, in relation to conditions and the process and approach to preparing and securing relevant regulatory approvals.

The risk of intervention under the current regime is not theoretical. In the last few years, the numbers and the nature of intervention in UK transactions on public interest grounds has increased. In December 2019, the CMA issued a Public Interest Intervention Notice (PIIN) in relation to the proposed acquisition of Mettis Aerospace by Aerostar following which the parties decided not to proceed with the acquisition. In that same month the CMA issued a PIIN in relation to Gardener Aerospace’s proposed acquisition of Impcross Limited which was subsequently blocked.

More recently, in April of this year, Digital Secretary Oliver Dowden issued instructions in relation to the proposed acquisition of ARM Limited by NVIDIA Corporation. The Secretary of State for Business, Energy and Industrial Strategy (BEIS) is reported as taking an active interest in Parker-Hannafin’s proposed acquisition of British defence technology firm, Meggitt. In August of this year, Director of National Security & International, Jacqui Ward, issued a PIIN in relation to Cobham’s proposed acquisition of the defence aerospace and security solutions provider, Ultra Electronics plc.

Once the NSI Act enters into force, the existing national security ground under the EA2002 will be repealed. However, the public health, media plurality and financial stability heads of intervention will remain in place and apply in parallel after commencement of the new NSI Act regime.

Make a jurisdictional assessment

Parties who are currently contemplating a deal that will complete after the commencement date (4 January 2022) need to assess whether their deal falls within the new mandatory notification regime. If so, the deal will need to be notified to the Investment Security Unit (ISU) of the Secretary of State for BEIS before closing.

An acquisition which is subject to the mandatory notification regime will be void if is completed without notifying and gaining approval from the Government. In such cases, parties need to ensure that their transaction documents contain appropriate conditions and that the long stop date is sufficient. Parties will need to take account of the time-frames that the ISU has to (i) determine whether to accept or reject a notification, (ii) assess whether they wish to issue a call-in notice and (iii) make its substantive assessment of the transaction, if it decides to call-in or screen the transaction.

Assess the risk of retrospective call-in for deals between 12 November 2020 and 4 January 2022

The NSI Act affords BEIS the power to retrospectively call-in deals and carry out a full national security assessment. These retroactive call-in powers apply to deals closed between 12 November 2020 and commencement of the NSI Act on 4 January 2022 (the interim period). They do not apply to deals closed before 12 November 2020.

This means that for deals contemplated now, even if they will close before 4 January 2022, parties have to carry out a risk assessment of the likelihood that BEIS will use its call-in powers post 4 January.

The call-in powers may be exercised where the Government reasonably suspects that a “trigger event” (see below) has occurred and that the trigger event has given rise or may give rise to a national security risk. If a transaction that closed in the interim period would have fallen within the mandatory regime had the NSI Act been in force at the time, it could be a prime candidate for call-in by BEIS once the NSI Act commences.[3]

For deals which closed in the interim period but would not have been caught by the mandatory regime, parties will still need to consider whether their deal may reasonably be considered to raise national security concerns within the meaning of the NSI Act. And, as such, whether the deal is a likely candidate for call-in by BEIS.

The period during which the Government can call-in a deal is five years from completion. This period is reduced to six months from the date at which the BEIS becomes aware of the transaction. For deals closing during the interim period, the call-in power will be available for a five year period from the date of closing, or six months from 4 January, if the parties informed BEIS of the transaction during the transitional period.

This is important because parties to a transaction which closes during the interim period and which could reasonably be considered to give rise to a national security, should consider whether to discuss the transaction informally with the ISU. Making BEIS aware through consultation with the ISU would have the effect of shortening the window for call-in to six months from commencement of the Act. It may also help parties decide whether a voluntary notification would be prudent once the Act commences. Such an approach may be advantageous from a deal certainty view point, in particular in terms of mitigating buy-side transactional risk.

4.  A quick recap on the rules

4.1  What type of transactions does the NSI Act apply to?

The NSI Act applies to acquisitions of control over qualifying entities or assets – this is called a “trigger event” – where BEIS reasonably suspects that there is a risk to national security as a result of the acquisition.

The definition of control under the NSI Act is broad and applies to the acquisition of more than 25%, 50% and 75% of votes or shares in a qualifying entity (or the acquisition of voting rights that allow the acquirer to pass or block resolutions governing the affairs of the entity). In addition, outside of the mandatory regime, BEIS will also be able to call-in or accept voluntary notifications in relation to transactions falling below this 25% threshold where there is “material influence”. This can mean acquisitions of shareholdings as low as 10-5%.[4]

A qualifying entity must be a legal person, that is not an individual. It must have a tie to the UK, either because it is registered in the UK or because it carries on activities in the UK or supplies goods or services to persons in the UK.

Acquisitions of qualifying assets such as land and IP may be subject to call-in or the voluntary regime (but not the mandatory regime).[5]

4.2  Mandatory notifications

Notifications will be mandatory for acquisitions of control over a qualifying entity active in 17 defined sectors designated as particularly sensitive for national security. These are wide-ranging: from energy, defence and transport to AI, quantum technologies, and satellite and space technologies.[6] In these sectors, such transactions must receive Government approval before completion and so the NSI Act has a suspensory effect.

Failure to notify under the mandatory regime will render completion of the acquisition void. There are also civil and criminal penalties for completing a notifiable acquisition without approval. Civil penalties can be up to 5% of the organization’s global turnover or £10 million (whichever is greater).[7]

The Government has engaged extensively with stakeholders on the mandatory sector definitions, since the publication of the first draft in November 2020. Throughout this process, the Government has refined and developed the proposed definitions. The latest set of definitions were published on 6 September and are set out in the draft notifiable acquisition regulation. These are broadly in line with what the Government has published previously. The Government has indicated that it will continue to refine its definitions, even after commencement of the NSI Act in January.

One important point in the guidance issued in July[8] is that a qualifying entity falls within a description of the 17 mandatory sectors only if it carries on the activity specified in the UK or supplies relevant goods or services in the UK.[9]

4.3  Call-in and voluntary notifications

Acquisitions of control over qualifying entities outside of the 17 mandatory regime sectors do not need to be notified. But, if the Government reasonably suspects that an acquisition has given rise to, or may give rise to, a risk to national security, it can be scrutinized by the Government using its call-in powers.

Given these expansive call-in powers, parties may decide to voluntarily notify their transactions where there is a perceived risk of call-in and a desire for deal certainty. A voluntary notification forces BEIS to decide within 30 business days whether to proceed with a review.

As noted above, the voluntary regime may also apply to asset acquisitions and to transactions falling below this 25% threshold where there is “material influence”.[10]

5.  How to assess the call-in risk

The Government published a new draft statement in July, setting out how it expects to exercise the power to give a call-in notice. This is referred to as the draft statement for the purposes of section 3. The Government again consulted on this statement, with the consultation closing on 30 August.

Whilst qualifying acquisitions across the whole economy are technically in scope, the call-in power will be focussed on acquisitions in the 17 areas of the economy subject to mandatory notification and areas of the economy which are closely linked to these 17 areas. Acquisitions which occur outside of these areas are unlikely to be called in because national security risks are expected to occur less frequently in those areas. This is new compared to the previous statement of intent of policy, which split areas of the economy into three risk levels (core areas, core activities and the wider economy), and is a welcome clarification.

The risk factors have stayed largely the same as in previous iterations, with some tweaks. Essentially, to assess the likelihood of a risk to national security, the Secretary of State will consider three risk factors:

• Target risk: whether the target is being used, or could be used, in a way that poses a risk to national security. BEIS will consider what the target does, is used for, or could be used for, and whether that could give rise to a risk to national security. BEIS will also consider any national security risks arising from the target’s proximity to sensitive sites.
• Acquirer risk: whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from the acquirer having control of the target. Characteristics include sector(s) of activity, technological capabilities and links to entities which may seek to undermine or threaten the interests of the UK. Threats to the interests of the UK include the integrity of democracy, public safety, military advantage and reputation or economic prosperity. Some characteristics, such as a history of passive or longer-term investments, may indicate low or no acquirer risk.
• Control risk: whether the amount of control that has been, or will be, acquired poses a risk to national security. A higher level of control may increase the level of national security risk.

The risk factors will be considered together, but an acquisition may be called in if any one risk factor raises the possibility of a risk to national security.

The same risk factors will be applied to qualifying acquisitions of assets as to qualifying acquisitions of entities.

At present there are no turnover or market share safe-harbours for investors (below which transactions would fall outside the scope of the NSI Act). The Government has, to date, firmly rejected calls from industry professionals and practitioners to introduce such a safe-harbour or exemption.

6.  What’s next?

We expect the Government to publish final regulations and guidance as the year draws to an end. We do not expect the scope of the 17 sensitive sectors to change now, before the NSI Act comes into effect.

In the meantime, parties should consider the possible impact of the new regime on any proposed divestments or acquisitions which are in the mandatory sectors or which are not in one of these designated sectors but which may nonetheless give rise to national security concerns. The ISU has encouraged parties to contact them to discuss possible acquisitions and how the NSI Act may impact their transaction or their responsibilities.

More generally, the Government has emphasised that the UK remains open for investment and that the new regime aims to proportionately mitigate national security risks. It is keen to stress its ambition that the new regime will enable the fastest, most proportionate foreign investment screening in the world, while not undermining predictability and certainty.

_______________________

   [1]   (i) How to Prepare for the New NSIA Rules on Acquisitions; (ii) Application of the NSIA to People or Acquisitions Outside the UK; (iii) Guidance for the Higher Education & Research Intensive Sectors; and (iv) NSIA and Interaction with Other UK Regulatory Regimes.

   [2]   The Government’s powers to review transactions on public interest grounds are currently set out in the Enterprise Act 2002. The Government can issue a Public Interest Intervention Notice (PIIN) on certain strictly defined public interest considerations. It can only do so where a transaction meets the jurisdictional thresholds under the UK merger control rules (with limited exceptions).

   [3]   For such transactions, which were legitimately closed before commencement, the suspension obligation does not apply and there can be no fines for failing to notify.

   [4]   The Government has stated that any assessment of an acquisition of material influence under the NSI Act will follow the CMA’s guidance on material influence in a merger control context.

   [5]   The Government has indicated that investigations of asset acquisitions that are not linked to the 17 mandatory sectors are expected to be rare and, generally, the Secretary of State expects to call-in acquisitions of assets rarely and significantly less frequently than acquisitions of entities.

   [6]   The full list is: Advanced Materials, Advanced Robotics, Artificial Intelligence, Civil nuclear, Communications, Computing hardware, Critical suppliers to Government, Critical suppliers to the emergency services, Cryptographic Authentication, Data Infrastructure, Defence, Energy, Military and Dual-use, Quantum technologies, Satellite and space technologies, Synthetic biology, Transport.

   [7]   See draft regulations on monetary penalties and the accompanying explanatory memorandum published on 6 September 2021.

   [8]   See guidance referred to in item (i) in footnote 1.

   [9]   The guidance also the proposed Section 3 statement (see section 4 of this alert below) provides helpful examples and case studies of the types of entities and assets both in and outside of the UK which may fall within scope of the new regime.

  [10]   See footnote 4.

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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, Mergers and Acquisitions, or International Trade practice groups, or the authors:

Ali Nikpay – Antitrust and Competition (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Deirdre Taylor – Antitrust and Competition (+44 (0) 20 7071 4274, dtaylor2@gibsondunn.com)
Selina S. Sagayam – International Corporate (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)
Attila Borsos – Competition and Trade (+32 2 554 72 11, aborsos@gibsondunn.com)
Mairi McMartin – Antitrust and Competition (+32 2 554 72 29, mmcMartin@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

On 2 September 2021, the Court of Justice of the European Union (the “CJEU”) issued its ruling in Republic of Moldova v Komstroy[1] (the “Decision” or “Komstroy”) concluding that, as a matter of EU law, Article 26 of the Energy Charter Treaty (the “ECT”) is not applicable to “intra-EU” disputes (that is, disputes between an investor of an EU Member State on the one hand, and an EU Member State on the other).

The CJEU’s Decision largely follows the CJEU’s controversial reasoning in Achmea BV v Slovak Republic[2] (“Achmea”) (2018), which concerned a bilateral investment treaty (“BIT”) between two EU Member States (as opposed to a multilateral treaty such as the ECT). Achmea was addressed in a previous client alert here.[3]

Background

In October 2019, the Paris Court of Appeal (cour d’appel de Paris) made a request to the CJEU for a preliminary ruling addressing three questions.[4] These pertained to set-aside proceedings brought by Moldova in respect of an UNCITRAL arbitral award rendered against it for certain breaches of obligations under the ECT.  Paris was the seat of the underlying arbitration.

The CJEU’s Decision

Only one of the three questions referred by the Paris Court of Appeal ultimately was addressed by the CJEU. That question asked the CJEU to determine whether the definition of “investment” in Article 1(6) of the ECT requires any economic contribution on the part of the investor in the host State. The Decision found, in essence, that an economic contribution was required in its view.

The CJEU also set out its views on whether Article 26 of the ECT is compatible with EU law insofar as it provides for arbitration between EU based investors and EU Member States.[5]  This question was not referred by the Paris Court of Appeal, nor was it directly relevant to the questions before the CJEU (which concerned investments in a non-EU Member State (Moldova)). This separate question had been raised by the European Commission, together with certain EU Member States,[6] acting as interveners in the CJEU proceedings. The Decision indicates that intra-EU arbitration under the ECT is incompatible with EU law. The CJEU’s reasoning is summarised below.

First, following its reasoning in Achmea, the CJEU explained that in order to preserve the autonomy of EU law, as well as its effectiveness, national courts of EU Member States may make a preliminary reference to the CJEU pursuant to Article 267 of the Treaty on the Functioning of the European Union (the “TFEU”). This referral procedure was described as the “keystone” of the EU judicial system with the “objective of securing the uniform interpretation of EU law, thereby ensuring its consistency, its full effect and its autonomy”.[7]

Second, the CJEU reasoned that because the EU is a Contracting Party to the ECT, the ECT itself is a so-called “act of EU law”.[8] Having reached this conclusion, the CJEU then determined that because the ECT is an “act of EU law”, an ECT tribunal would necessarily be required to interpret, and even apply, EU law when deciding a dispute under Article 26.[9] This reasoning appears to be directly at odds with the CJEU’s Opinion 1/17, in which it accepted that CETA tribunals[10]– though standing outside the judicial system of the EU – could nonetheless interpret and apply the CETA itself without running afoul of EU law.[11] The Decision does not explain how CETA, to which the EU is also a party and must likewise be considered an “act of the EU” by the CJEU, can be compatible with EU law, but the ECT cannot. Likewise, the CJEU did not explain how its finding that the ECT is an “act of EU law” would not apply equally in the extra-EU context (i.e., where a dispute involves an EU Member State and an investor from a third State), leaving these questions unanswered.

Third, having found that an ECT tribunal would need to apply EU law on the basis that the ECT is an “act of EU law”, the CJEU then ascertained whether an ECT tribunal is situated within the judicial system of the EU such that a preliminary reference could be made to the CJEU to ensure the effectiveness of EU law.[12]  In the CJEU’s view – in “precisely the same way” as in Achmea – ECT tribunals are outside the EU legal system, thus preventing effective control over EU law.[13] The CJEU found that the judicial review that arises in the context of EU-seated investor-state arbitration is limited since the referring court can only perform a review insofar as its domestic law permits.[14] In other words, according to the CJEU, the full effectiveness of EU law cannot be guaranteed.

Finally, given that commercial arbitration tribunals routinely interpret and apply EU law outside of the EU legal system (which could mean that any arbitration would be incompatible with EU law), the Decision attempts to distinguish investor-state arbitration from commercial arbitration. The distinction, according to the CJEU, is that commercial arbitration is different because it “originate[s] in the freely expressed wishes of the parties concerned”, whereas investor-state arbitration apparently is not based on the parties’ “freely expressed wishes”.[15]  Unfortunately, however, the CJEU did not elaborate on its conclusion in this regard. That conclusion appears to be inconsistent with well-established principles of public international law, which confirm that States can (and must) enter into treaties such as the ECT of their own free will.

In light of the foregoing, the CJEU concluded that Article 26 of the ECT is incompatible with EU law insofar as it provides for arbitration between EU investors and EU Member States.[16]

Implications of the CJEU’s Decision

The ECT remains in force between all Contracting Parties, which includes all EU Member States, as well as the EU. Indeed, a modification of the ECT to remove its application as between EU Member States would require the participation not just of the EU and its Member States, but of all 53 Contracting Parties to the ECT. The CJEU’s Decision does not (and cannot) modify the express terms of the ECT itself.

To date, all ECT tribunals that have considered jurisdictional objections based on the intra-EU nature of the dispute have rejected the suggestion that the ECT does not apply on an intra-EU basis. That is unlikely to change in light of the Decision. Indeed, the CJEU did not offer any analysis under the Vienna Convention on the Law of Treaties (the “VCLT”), which governs the interpretation of the ECT. Nor did the CJEU address the substantial body of case law under the ECT on the interpretation of Article 26 of the ECT, all of which reaches the opposite conclusion to the CJEU. Those cases set forth what is now a well-established principle that EU law is not relevant to the question of jurisdiction under the ECT.  Thus, the Decision (which is limited to an analysis under EU law) should have no bearing on an ECT tribunal’s jurisdiction.

Another implication of the Decision is that EU-based investors considering energy investments in EU Member States may now view these investments as more risky. First, the applicability of Article 26 to intra-EU disputes was not a question that was before the CJEU and it had no impact on the Komstroy case, which (paradoxically) did not involve an intra-EU dispute. The Decision provides scant and inconsistent reasoning and may therefore be considered to be based on political considerations rather than a sound and reasoned interpretation of the law. The Decision thus has the potential to undermine investor confidence in the EU judicial system and the rule of law within the EU.

Second, the CJEU’s Decision may create uncertainty regarding the extent of investor protection within the EU for energy investments as EU Member States may believe that they can (or must) disapply the ECT to investors from other EU Member States. This, of course, would make investments by EU investors into EU Member States both less attractive and more expensive (as it will drive up risk premiums). The CJEU’s decision may, therefore, undermine investor confidence at a time when the EU is seeking substantial private investment in its energy sector as part of its efforts to de-carbonise. In other words, the Decision ultimately could be an “own goal” for the EU and its Member States.

____________________________

   [1]   Judgment of the Court (Grand Chamber), Case C‑741/19, Republic of Moldova v Komstroy, a company the successor in law to the company Energoalians, ECLI:EU:C:2021:655, 2 September 2021 (the “Decision”), available here.

   [2]   Judgment of the Court (Grand Chamber), Case C‑284/16, Slowakische Republik (Slovak Republic) v Achmea BV, ECLI:EU:C:2018:158, 6 March 2018, available here.

   [3]   In short, in Achmea, the CJEU determined that arbitration provisions such as the one found in the intra-EU BIT at issue in that case (which, in contrast to the ECT, explicitly required a tribunal to consider EU law) are not compatible with EU law.

   [4]   Request for a preliminary ruling from the Cour d’appel de Paris, Case C-741/19, Republic of Moldova v Komstroy, a company the successor in law to the company Energoalians, 8 October 2019, available here.

   [5]   Decision, ¶ 40.

   [6]   France, Germany, Spain, Italy, The Netherlands and Poland.

   [7]   Decision, ¶ 46.

   [8]   Decision, ¶ 49.

   [9]   Decision, ¶¶ 49-50.

  [10]   I.e., tribunals established to hear disputes arising under the under the EU-Canada Comprehensive Economic and Trade Agreement (“CETA”).

  [11]   Opinion 1/17 of the Full Court (CETA), ECLI:EU:C:2019:341, 20 April 2019, ¶¶ 116-118, available here.

  [12]   See Article 267 TFEU (the preliminary reference procedure).

  [13]   Decision, ¶ 52.

  [14]   Decision, ¶ 57.

  [15]   Decision, ¶ 59.

  [16]   Decision, ¶ 66.

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Jeff Sullivan QC, Ceyda Knoebel, Stephanie Collins and Theo Tyrrell.

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

Cyrus Benson  (+44 (0) 20 7071 4239, CBenson@gibsondunn.com)
Penny Madden QC  (+44 (0) 20 7071 4226, PMadden@gibsondunn.com)
Jeff Sullivan QC  (+44 (0) 20 7071 4231, Jeffrey.Sullivan@gibsondunn.com)
Ceyda Knoebel (+44 (0) 20 7071 4243, CKnoebel@gibsondunn.com)
Stephanie Collins (+44 (0) 20 7071 4216, SCollins@gibsondunn.com)
Theo Tyrrell (+44 (0) 20 7071 4016, TTyrrell@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

1.	INTRODUCTION
1.1	Singapore has become an increasingly popular destination for trust listings in the recent years. Real estate investment trusts (“REITs”), business trusts (“BTs”) and stapled trusts are some of the more popular vehicles that property players opt for to tap capital on Singapore Exchange Securities Trading Limited (the “SGX-ST”).
1.2	This primer provides an overview of the structure of such vehicles, the main regulations regulating them, the process to getting listed on the SGX-ST as well as the various ways of acquiring control of these vehicles post-listing. This primer also explores the lessons to be learnt from the controversy surrounding Eagle Hospitality Trust (“EHT”) and the failed merger between ESR REIT and Sabana REIT.

2.	STRUCTURE
2.1	REIT

	2.1.1	A REIT may generally be described as a trust that invests primarily in real estate and real estate-related assets with the view to generating income for its unitholders.
	2.1.2	It is constituted pursuant to a trust deed entered into between the REIT manager and the REIT trustee.
	2.1.3	The REIT manager manages the assets of the REIT while the REIT trustee holds the assets on behalf of the unitholders and generally helps to safeguard the interests of the unitholders.
	2.1.4	REITs are popular with investors as the income from the assets (after deducting trust expenses) is distributed to the unitholders at regular intervals. A REIT which distributes at least 90% of its taxable income to its unitholders in the same year in which the income is derived can enjoy tax transparency treatment under the Income Tax Act, Chapter 134 of Singapore. It is also not uncommon for REITs to pledge to distribute the entire of its annual distributable income in the initial period post-listing.
	2.1.5	The typical roles in a REIT structure are as follows:
		(a) REIT Manager: The REIT manager manages the assets of the REIT and is responsible for the overall strategic direction of the REIT, including asset acquisitions and divestments as well as capital management. In return, the REIT manager charges a management fee which typically comprises a base fee and a performance fee. The REIT manager would typically also be entitled to an acquisition fee, divestment fee and development management fee; (b) Property Manager: The property manager manages and maintains the properties of the REIT in return for a property management fee; (c) REIT Trustee: The REIT trustee holds the assets of the REIT on behalf of the unitholders and generally ensures that the REIT complies with applicable rules and regulations. In return, the REIT trustee is paid a trustee’s fee; and (d) Sponsor: The sponsor is the party that injects the initial portfolio of assets into the REIT and will continue to provide the REIT with a pipeline of assets moving forward. Typically, the sponsor also holds a substantial stake in the REIT and/or the REIT manager.

	Typical REIT Structure

2.1.6

SGX-ST-listed REITs typically adopt an external management model where the REIT manager is owned by the sponsor of the REIT. This is in contrast to an internal management model (adopted by a majority of REITs in the United States of America) where the REIT manager is instead owned by the REIT itself. Proponents of an internal management model in Singapore argue that an internal management model avoids conflicts of interest and lowers the fees payable to the REIT manager (which ultimately translates to better returns for unitholders). The success of the Hong Kong-listed internally managed Link REIT, Asia’s largest REIT in terms of market capitalization, may bear testament to this. However, whether an internal management model takes off in Singapore remains to be seen. Singapore investors could well prefer sponsor participation due to the various advantages that a sponsor can bring, such as marketability, expertise, support and pipeline of assets.

2.2

BT

	2.2.1	A BT is a trust that can generally engage in any type of business activity, including the management of real estate assets or the management or operation of a business.
	2.2.2	It is constituted pursuant to a trust deed entered into by the trustee-manager, a single entity that has the dual responsibility of safeguarding the interests of the unitholders of the BT and managing the business conducted by the BT.
	2.2.3	BTs, unlike companies, can make distributions out of operating cash flows (instead of profits). They suit businesses which involve high initial capital expenditures with stable operating cash flows, such as real estate assets.
	2.2.4	Compared to REITs, BTs are also more lightly regulated and may therefore be preferred for their flexibility. Property BTs often also pledge to provide REIT-like distributions to the unitholders.
	2.2.5	The typical roles in a BT structure are as follows:
		(a) Trustee-Manager: The trustee-manager is both the trustee and the manager of the BT. As trustee, it holds the assets of the BT on behalf of the unitholders and helps to safeguard the interests of the unitholders. As manager, it manages the business and strategic direction of the BT. In return, the trustee-manager is paid a trustee’s fee as well as a management fee, which typically comprises a base fee and a performance fee. The trustee-manager would typically also be entitled to an acquisition fee, divestment fee and development management fee; (b) Property Manager: In the case of a property BT, a property manager is typically engaged to manage and maintain the properties of the BT in return for a property management fee; and (c) Sponsor: The sponsor is the party that injects the initial portfolio of assets into the BT and will continue to provide the BT with a pipeline of assets moving forward. Typically, the sponsor also holds a substantial stake in the BT and/or the trustee-manager.

	Typical Property BT Structure

2.3	Stapled Trust

	2.3.1	A stapled trust on the SGX-ST typically comprises a REIT and a BT. Pursuant to a stapling deed, units of the REIT and units of the BT are stapled together and cannot be traded separately. The REIT and the BT would continue to exist as separate structures, but the stapled securities would trade as one counter and share the same investor base.
	2.3.2	A stapled trust structure may be preferred when an issuer wishes to bundle two distinct (but related) businesses into a single tradeable counter. Such stapled trust structure is commonly adopted for hospitality assets which provide both a passive (through the receipt of rental income from the lease of such assets) and an active (through the management and operation of such assets) income stream.
	2.3.3	In such cases, the REIT will be constituted to hold the income-producing real estate assets and the BT will be constituted to either (a) be the master lessee of the real estate assets who will manage and operate these assets or (b) remain dormant and only step in as a “master lessee of last resort” to manage and operate these assets when there are no other suitable master lessees to be found. The presence of a BT also offers flexibility for the stapled trust to undertake certain hospitality and hospitality-related development projects, acquisitions and investments which may not be suitable for the REIT.
	2.3.4	Investors who value the business and income diversification may therefore find such a model attractive.
	2.3.5	The typical roles in a REIT and a BT have been discussed above.

	Typical Stapled Trust Structure

3.	REGULATIONS
3.1	REIT
	3.1.1 A REIT is regulated as a collective investment scheme under the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”). 3.1.2 The REIT, the REIT manager and the REIT trustee must comply with the Code on Collective Investment Schemes issued by the Monetary Authority of Singapore (the “MAS”, and such Code on Collective Investment Schemes issued by the MAS, the “CIS Code”), which prescribes the many distinctive characteristics of a REIT. 3.1.3 For example, Appendix 6 of the CIS Code requires a REIT to, among others:   (a) enshrine certain provisions in the trust deed constituting the REIT (such as the right of unitholders to remove the REIT manager by way of a resolution passed by a simple majority of unitholders present and voting at a general meeting, with no participant being disenfranchised); (b) generally have at least 75% of its deposited property invested in income-producing real estate; (c) not derive more than 10% of its revenue from sources other than (i) rental payments from the tenants of the real estate held by the REIT or (ii) interest, dividends and other similar payments from special purpose vehicles and other permissible investments of the REIT; and (d) not have a gearing ratio exceeding 50% (before 1 January 2022) and 45% (on or after 1 January 2022, except that such gearing ratio may exceed 45% (up to a maximum of 50%) if the REIT has a minimum adjusted interest coverage ratio of 2.5 times after taking into account the interest payment obligations arising from the new borrowings). 3.1.4 A REIT manager is required to hold a capital markets services licence (“CMS Licence”) for REIT management before it can engage in the regulated activity of REIT management. 3.1.5 The Guidelines to All Holders of a Capital Markets Services Licence for Real Estate Investment Trust Management (Guideline No. SFA04-G07) set out further guidance relating to, among others, minimum licensing criteria and corporate governance arrangements. 3.1.6 CMS Licence holders would also need to abide by the Securities and Futures (Licensing and Conduct of Business) Regulations, which set out, among others, requirements relating to licensing, representative notification and key appointments. 3.1.7 A REIT trustee must be an approved trustee under the SFA. Further requirements of an approved trustee are set out under the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 (the “SF(OI)(CIS)R”).

3.2

BT

3.2.1 Pursuant to the SFA, a Singapore-constituted BT must be registered by the MAS before its units can be offered to the public. The Business Trusts Act, Chapter 31A of Singapore (the “BTA”), and the Business Trusts Regulations (the “BTR”) are the chief regulations governing registered BTs. 3.2.2 Among others, the BTA and the BTR contain provisions regulating:   (a) the responsibilities, powers and liabilities of a trustee-manager (including corporate governance arrangements); (b) the contents of the trust deed constituting a registered BT; (c) the rights of unitholders (such as the right to remove the trustee-manager by way of a resolution passed by unitholders holding in the aggregate not less than three-fourths of the voting rights of all the unitholders who, being entitled to do so, vote in person or where proxies are allowed, by proxy present at a meeting of the unitholders); and (d) the winding up of a registered BT. 3.2.3 The BTA stipulates certain requirements of a trustee-manager. For example, only a company (not being an exempt private company) shall act as trustee-manager of a registered BT. The trustee-manager of a registered BT shall also not carry on any business other than the management and operation of the registered BT as its trustee-manager. 3.2.4 The regulations governing a collective investment scheme do not apply to a collective investment scheme that is also a registered BT. 3.2.5 Accordingly, BTs can offer issuers with considerably more flexibility as compared to REITs since BTs have no statutory gearing limit and can engage in a wider scope of business activity.

3.3

Stapled Trust

3.3.1 A stapled trust that comprises a REIT and a BT would be subject to the respective rules and regulations set out above. 3.3.2 Under Appendix 6 of the CIS Code, a REIT may only staple its units with the securities of an entity with active operations only if that entity (a) has business operations that are in the same industry segment as the REIT or (b) is operating a business or providing a service that is ancillary to the assets held by the REIT.

4.	LISTING
4.1	Due Diligence
	4.1.1 Due diligence is conducted to evaluate an issuer’s suitability for listing on the SGX-ST. Under the listing manual of the SGX-ST (the “Listing Manual”), the issue manager (who will manage the issuer’s listing application) is tasked with the responsibility to “conduct adequate due diligence on the applicant”. 4.1.2 Through the due diligence process, the issue manager (with the assistance of its advisers and other experts) identifies the necessary information for the preparation of a prospectus. Notably, the SFA imposes on certain persons criminal and civil liabilities for any false or misleading statement in or omission of material information from a prospectus. 4.1.3 The issue manager is guided by the due diligence guidelines issued by The Association of Banks in Singapore (the “ABS Listings Due Diligence Guidelines”), which the SGX-ST will have regard to when assessing the adequacy of due diligence conducted. 4.1.4 Among others, the ABS Listings Due Diligence Guidelines recommend that an issue manager should:   (a) review the educational and professional qualifications, experience and expertise of the proposed directors and executive officers of the issuer to assess their suitability; (b) achieve a thorough understanding of the issuer and its business through reasonable due diligence and with the assistance of advisers, carry out reasonable checks and make enquiries as are reasonable in the circumstances to satisfy itself that the information contained in the prospectus (subject to reasonable reliance on experts) is compliant with law; and (c) where there is reliance on the reports and opinions of experts, take measures to satisfy itself that such reliance is reasonable in the circumstances and there are no reasonable grounds to believe that the information in such reports and opinions is untrue or misleading in any material respect or contains any material omission. 4.1.5 In the context of a REIT, property BT or stapled trust listing, due diligence on the initial portfolio of properties is of utmost importance. In this regard, due diligence will generally involve:   (a) on-site visits to the properties; (b) the engagement of independent property valuer(s) to conduct a valuation of the properties as well as provide a thorough analysis of the properties; (c) the engagement of legal advisers to conduct legal due diligence to, among others:   (i) confirm that good title to the properties will be obtained; (ii) identify key approvals; (iii) confirm that material contracts (such as leases) are legal, binding and enforceable; (iv) identify ongoing and past litigations and investigations; (v) identify scope of insurance coverage; (vi) identify caveats, security interests, easements, covenants and licenses; (vii) assess compliance with zoning and planning permissions; and (viii) obtain information on road line plans, survey plans and property boundaries; (d) the engagement of technical consultants to assess the structural integrity of the properties and identify material defects; and (e) the engagement of environmental consultants to assess the environmental conditions of the properties in order to identify actual and potential environmental liabilities. 4.1.6 Financial due diligence should be conducted with the assistance of reporting accountants to analyze the financial health of the issuer and to prepare the pro forma financial information as well as the profit forecast and profit projection sections, which are to be included in the prospectus. 4.1.7 Taxation experts should also be engaged to identify and assess the taxation issues in connection with a listing. To the extent necessary, favorable tax rulings may need to be obtained from the relevant authorities.

4.2

Listing Process

4.2.1 There are quantitative requirements (such as minimum profit, minimum operating track record, operating revenue and minimum market capitalization), among others, which must be met before an issuer can list on the Mainboard of the SGX-ST. 4.2.2 As it is not uncommon for REITs and BTs to only be constituted shortly prior to listing, the Listing Manual allows REITs and BTs who have a market capitalization of not less than S$300 million based on the issue price and post-invitation issued unit capital to apply for listing even if they do not have historical financial information, provided they are able to demonstrate that they will generate operating revenue immediately upon listing. 4.2.3 To list on the Mainboard of the SGX-ST, the issue manager, on behalf of the issuer, submits the listing application (including Section (A) of the listing admissions pack of the SGX-ST (the “LAP”), which sets out the general information of the issuer and key issues for listing) to the SGX-ST for review. 4.2.4 Upon completion of such review, the issuer then submits Section (B) of the LAP (which includes the draft prospectus) to the SGX-ST for review. 4.2.5 To shorten time-to-market, Sections (A) and (B) of the LAP may also be submitted together. A pre-lodgment submission to the MAS for the concurrent review of the draft prospectus is typically also made during the submission of Section (B) of the LAP. 4.2.6 Prospective cornerstone investors are then approached at this juncture. A typical cornerstone process involves having the prospective investors execute non-disclosure agreements before they are provided with copies of the draft prospectus. Prospective cornerstone investors may also be given the opportunity to meet with the management team. 4.2.7 During the review process, the regulators may raise queries which the issuer will need to resolve to the regulators’ satisfaction. Upon completion of such review (which generally takes at least four weeks from the submission of Section (B) of the LAP ), the SGX-ST will issue an eligibility-to-list letter (containing certain conditions) (the “ETL Letter”). The MAS will also inform the issuer to proceed with the lodgment of its preliminary prospectus once it has completed its review. 4.2.8 The issuer will thereafter lodge its preliminary prospectus (along with the accompanying documents, such as the product highlights sheet) with the MAS, upon which the preliminary prospectus will be subject to public exposure. Institutional book-building commences at this juncture. 4.2.9 The public offer commences only upon the registration of the prospectus by the MAS, which takes place between the seventh and 21st day (both days inclusive) from the date of lodgment of the preliminary prospectus. This may also be extended to a maximum of 28 days if the MAS gives notice of such extension. Pursuant to the Listing Manual, a public offer is required to be open for at least two market days. 4.2.10 Upon the close of the public offer and provided the SGX-ST is satisfied that the conditions set out in the ETL Letter have been met, the units or stapled securities will be allotted and listing and quotation of the units or stapled securities may commence. 4.2.11 In the case of a REIT, a Singapore-constituted REIT must be authorized by the MAS prior to an initial public offering of units to investors in Singapore. Further, a REIT manager is required to hold a CMS Licence for REIT management before it can engage in REIT management. 4.2.12 In the case of a BT, a Singapore-constituted BT would also need to be registered by the MAS prior to an initial public offering of units to investors in Singapore. 4.2.13 These applications are made concurrently during the listing process.

4.3

Prospectus

4.3.1 The prospectus is the primary offering document on which investors base their investment decisions. It should generally include all the information that investors and their professional advisers would reasonably require to make an informed assessment of the matters specified under the SFA and the matters prescribed by the MAS. 4.3.2 The contents of the prospectus of a REIT, BT and stapled trust are prescribed by, among others, the SFA, the Securities and Futures (Offers of Investments) (Securities and Securities-based Derivatives Contracts) Regulations 2018, the SF(OI)(CIS)R, the CIS Code and the Listing Manual (such rules and regulations regulating the contents of such prospectus, the “Prospectus Regulations”). 4.3.3 The prospectus of a REIT, property BT or stapled trust will generally include, among others, the following information:   (a) overview of the issuer’s business and organizational structure; (b) risk factors; (c) use of proceeds; (d) ownership of the units; (e) capitalization and indebtedness; (f) unaudited pro forma financial information; (g) management’s discussion and analysis of financial condition and results of operations; (h) profit forecast and profit projection; (i) business and properties; (j) formation and structure of the issuer; (k) overview of the material agreements relating to the issuer and its properties; (l) overview of relevant laws and regulations; and (m) expert reports (such as the reporting accountants’ reports on the unaudited pro forma financial information and the profit forecast and profit projection, the independent taxation report(s), the independent property valuation summary report(s) and the independent market research report). 4.3.4 With respect to risk factors, the Prospectus Regulations generally require risks specific to the issuer to be disclosed. Risk factors which are typically included in the prospectus of a REIT, property BT or stapled trust include:   (a) risks relating to the properties (such as certain properties being subject to restrictions, concentration risk and risk that due diligence on the properties may not have uncovered all material defects); (b) risks relating to the issuer’s operations (such as risk of failure in implementing investment strategy, the lack of an operating track record of the REIT manager and/or the trustee-manager and risk of breach of obligations by the lessees); (c) risks relating to the jurisdiction(s) in which the issuer operates; (d) risks relating to investing in real estate (such as the relative illiquidity of real estate investments and risk that the rate of increase in rentals of the properties may be less than the inflation rate); and (e) risks relating to an investment in the units or stapled securities (such as the risk that substantial unitholders or substantial stapled securityholders could sell a substantial number of units or stapled securities and risk of change in taxation laws).

4.4	Continuing Listing Obligations
	Post-listing, REITs, BTs and stapled trusts are subject to continuing listing obligations under the Listing Manual, such as the requirement to announce specific and material information, requirements relating to secondary offerings, interested person transactions and significant transactions, as well as requirements relating to circulars and annual reports.
4.5	Case Study of EHT
	4.5.1 Despite the safeguards in the listing framework put in place by the SGX-ST, the case of EHT has illustrated that the continued success of a REIT, property BT or stapled trust which adopts a master lease arrangement will ultimately depend on the commitment and financial strength of the master lessees (who will typically be affiliates of the sponsor). 4.5.2 EHT is a stapled trust, comprising Eagle Hospitality Real Estate Investment Trust (“EHREIT”) and Eagle Hospitality Business Trust (“EHBT”), which made its debut on the Mainboard of the SGX-ST in May 2019 with an initial portfolio of 18 hotel properties. EHREIT was established with the principal investment strategy of investing in income-producing real estate used primarily for hospitality and/or hospitality-related purposes while EHBT will initially remain dormant. 4.5.3 EHT adopted a master lease arrangement under which affiliates of its sponsor (collectively, the “Master Lessees”), Urban Commons, would lease the hotels from EHREIT. The Master Lessees would in turn enter into (a) franchise agreements with various hotel franchisors to operate under their brands and (b) hotel management agreements with third-party hotel management companies to manage the day-to-day operations of each hotel. 4.5.4 Indications that things may be less than perfect surfaced shortly post-listing in October 2019 when an article appeared in the press that EHT had been served with a notice of default by the City of Long Beach in respect of one of its properties, The Queen Mary (a hotel operated aboard a historic British ocean liner which had been leased from the City of Long Beach), as a result of failure to make repairs. The same article also quoted a marine survey conducted in 2017 (the “2017 Marine Survey”) which alleged that The Queen Mary was in deteriorating condition and in need of substantial repairs (collectively, the “Queen Mary Allegations”). 4.5.5 The Queen Mary Allegations were swiftly disputed by EHT, which clarified that there was no default and that the supposed notice of default was merely a “formal request for information by the City”. EHT also called the 2017 Marine Survey’s estimate of the scope of work and costs “grossly inaccurate”. To substantiate its claims, EHT further relied on an independent structural engineer’s report by John A. Martin & Associates, Inc. (which was commissioned by Urban Commons prior to EHT’s listing) which concluded that The Queen Mary “remains in excellent structural condition”. Despite the assurances from EHT, the price of its stapled securities reportedly fell 14%. 4.5.6 In late 2019 to early 2020, EHT’s financial resources started to deplete due to the impact of Coronavirus Disease 2019 and various delinquencies by the Master Lessees. Among others, the Master Lessees (a) breached the master lease agreements by failing to pay rent on time, (b) received notice of default from various hotel managers due to, among others, failure to provide and/or maintain sufficient working capital for the hotels’ operations and failure to pay management fees and (c) received notice of termination from various hotel managers due to failure to cure the default of maintaining sufficient working capital for the hotels’ operations. During this period, EHT received a notice of default and acceleration in respect of a US$341 million loan it had taken out in connection with its listing. 4.5.7 In March 2020, EHT called for a voluntary suspension of trading. In April 2020, EHT established a special committee to safeguard value and conduct a strategic review. EHT subsequently appointed a financial adviser and implemented caretaker arrangements at the hotels which were the subject of the notice of termination by the relevant hotel managers. 4.5.8 In May 2020, the strategic review uncovered that the founders of Urban Commons (in their capacity as directors of various subsidiaries of EHREIT) had, on behalf of these subsidiaries, entered into certain interested person transactions which were prejudicial to the interests of EHT and its minority stapled securityholders. This discovery prompted their resignations from the board of directors of the manager of EHREIT (the “EHREIT Manager”) and the trustee-manager of EHBT (the “EHBT Trustee-Manager”). 4.5.9 In June 2020, EHT announced that an initial request for proposal (“RFP”) process conducted by its financial adviser was interrupted by Urban Commons’ entry into a letter of intent with Far East Consortium International Limited (“FECIL”) in relation to FECIL’s proposed acquisition of a 70% interest in each of the EHREIT Manager and the EHBT Trustee-Manager. Against this, the MAS and the Commercial Affairs Department of the Singapore Police Force commenced a joint investigation into current and former directors and officers responsible for managing in EHT in connection with suspected breach of disclosure requirements under the SFA. 4.5.10 Discussions with FECIL, however, collapsed and the trustee of EHREIT (the “EHREIT Trustee”) restarted the RFP process in late 2020, which culminated in the selection of SCCPRE Hospitality REIT Management Pte. Ltd. as the replacement manager of EHREIT (the “SCCPRE Proposal”). The SCCPRE Proposal was contingent on a number of resolutions being passed at an extraordinary general meeting (“EGM”) to be held on 30 December 2020. On or around the same period, EHT terminated the master lease agreements and the EHREIT Trustee also received a directive from the MAS to remove the EHREIT Manager. 4.5.11 On 30 December 2020, the EHREIT Manager was removed. However, not all the requisite resolutions for the SCCPRE Proposal were passed at the EGM held on the same day. In view of the absence of a replacement manager and inability to continue as a going concern because of the depletion of funds, EHT filed for insolvency protection under Chapter 11 of the United States Bankruptcy Code. 4.5.12 As at the time of writing of this primer, EHT has disposed 15 of its 18 hotel properties and also surrendered The Queen Mary back to the City of Long Beach. Stapled securityholders are, however, not expected to receive the sale proceeds as the cash is insufficient to repay all the claims on EHT. 4.5.13 The case of EHT has shown that the continued success of a REIT, property BT or stapled trust which adopts a master lease arrangement will ultimately depend on the commitment and financial strength of the master lessees. Where a master lease arrangement is adopted, concentration risk is at its highest (given the lack of diversity in lessees) and the ability of the master lessees to keep up with timely rental payments becomes even more important. Rental income is ultimately the chief source of income for a REIT, property BT or stapled trust. As seen in the case of EHT, in certain cases, rental defaults could even result in the REIT, property BT or stapled trust defaulting on its debt obligations and ultimately wind up. 4.5.14 The case of EHT has also resulted in the public calling for the authorities to review the current disclosure regime. In particular, it has been questioned if the rules should also require disclosure of the financials of a sponsor (especially if a master lease arrangement with the sponsor is adopted). Where a master lease arrangement is adopted, valuations of the properties and financials presented in the prospectus would be based on the rental income received under such master lease arrangement. For these figures to remain accurate, the master lessees need to be able to perform their end of the bargain. Requiring such disclosures would allow investors to better assess a sponsor’s financial strength. 4.5.15 Short of any amendment to the disclosure regime, issuers will do well to treat the required disclosures as the minimum standard and aim to go above and beyond in the interests of investors.
5.	Acquiring Control of a REIT, BT or Stapled Trust
5.1	An acquisition of all the units of a REIT or BT or all the stapled securities of a stapled trust listed on the SGX-ST (“Target Entity”) may be effected in various ways, such as a take-over offer, a trust scheme of arrangement (“Trust Scheme”) and a reverse take-over (“RTO”).
5.2	Any merger or acquisition involving a Target Entity would be subject to the Listing Manual, the CIS Code (in the case of a REIT) and the Singapore Code on Take-overs and Mergers (the “Take-over Code”). The Take-over Code is enforced by the Securities Industries Council (the “SIC”), which is part of the MAS.
5.3	Take-over Offer
	5.3.1 Take-over offers of a Target Entity generally take three forms under the Take-over Code – a mandatory offer, a voluntary offer and a partial offer. A mandatory offer is triggered by an acquiror’s holdings in a Target Entity. A voluntary offer occurs where the acquiror makes an offer for all the units or stapled securities of a Target Entity and this offer does not trigger the mandatory offer rules in the Take-over Code. A partial offer is a voluntary offer for less than 100% of the outstanding units or stapled securities in a Target Entity. 5.3.2 The acquiror can stipulate objective conditions for a voluntary offer such as a particular level of acceptances, unitholders’ or stapled securityholders’ approval and certain regulatory approvals. However, no conditions should be imposed in a mandatory offer other than the mandatory offer being conditional upon the acquiror obtaining acceptances which, together with the units or stapled securities carrying voting rights acquired or agreed to be acquired before or during the offer, will result in the acquiror and parties acting in concert with it holding units or stapled securities carrying more than 50% of the voting rights of the Target Entity. 5.3.3 The acquiror can also seek irrevocable undertakings from the unitholders or stapled securityholders of a Target Entity to accept its offer. Such undertakings must be publicly disclosed. 5.3.4 The consideration for a mandatory offer should be in cash or accompanied by a cash alternative, while the consideration for a voluntary offer may be in cash or securities or a combination thereof. 5.3.5 Steps The principal steps of a take-over offer are as follows:   (a) Due Diligence: The acquiror may request that it be allowed to conduct due diligence on the Target Entity by notifying the board of directors of the REIT manager or trustee-manager or their advisers; (b) Offer: The acquiror announces that it wishes to make an offer for the Target Entity, the consideration and any conditions for the offer; (c) Offer Document: The acquiror issues an offer document in compliance with the Take-over Code to all the unitholders or stapled securityholders of the Target Entity; (d) Target Entity Circular: The Target Entity issues a circular to the unitholders or stapled securityholders containing the advice of the independent financial adviser to the independent directors of the REIT manager or the trustee-manager on the offer and the recommendation of such directors whether or not to accept the offer; and (e) Close of the Offer: At the close of the offer, if the conditions of the offer are met, the offer is declared unconditional in all respects, and payment for the units or stapled securities must be made. 5.3.6 Examples of Take-over Offers   (a) Take-over of Forterra Trust   (i) In 2015, New Precise Holdings Limited (“New Precise Holdings”), an indirect wholly owned subsidiary of Nan Fung International Holdings Limited, triggered the requirement to make a mandatory offer under the Take-over Code to acquire all the units (other than the units that were already owned, controlled or agreed to be acquired by New Precise Holdings and the parties acting in concert with it) in Forterra Trust, a SGX-ST-listed BT, at an offer price of S$2.25 per unit. (ii) Prior to the announcement of the offer, New Precise Holdings had exercised 3,050,000 options in respect of 3,050,000 units in Forterra Trust (the “Options Exercise”). After the issuance of the units to New Precise Holdings pursuant to the Options Exercise, the total number of issued units in Forterra Trust was 257,019,717, and New Precise Holdings and the parties acting in concert with it held units that represented approximately 30.79% of the total number of issued units in Forterra Trust. Accordingly, New Precise Holdings was required under the Take-over Code to make a mandatory offer. (iii) At the close of the offer, New Precise Holdings and the parties acting in concert with it owned units representing approximately 97.11% of the total number of issued units in Forterra Trust. New Precise Holdings thereafter exercised its right to acquire the remaining units pursuant to the BTA. Forterra Trust was subsequently delisted from the SGX-ST. (b) Take-over of Perennial China Retail Trust (“PCRT”)   (i) In 2015, Perennial Real Estate Holdings Limited (“PREH”) proposed to acquire all the units (other than the units that were already owned, controlled or agreed to be acquired by PREH and the parties acting in concert with it) in PCRT, a SGX-ST-listed BT, by a voluntary offer at a consideration per unit of (A) S$0.70 and (B) 0.52423 ordinary shares in the capital of PREH. (ii) At the close of the offer, PREH and the parties acting in concert with it owned units representing approximately 96.32% of the total number of issued units in PCRT. PREH thereafter exercised its right to acquire the remaining units pursuant to the BTA. PCRT was subsequently delisted from the SGX-ST.

5.4	Trust Scheme
	5.4.1 In a Trust Scheme, the acquiror typically acquires all the units or stapled securities of a Target Entity in consideration for cash and/or the issuance of new securities of the acquiror to the existing unitholders or stapled securityholders of the Target Entity. A Trust Scheme will typically be adopted in a situation where the acquiror wishes to acquire all the units or stapled securities of a Target Entity. 5.4.2 A Trust Scheme will typically require:   (a) the approval by the unitholders or stapled securityholders of the Target Entity to amend the trust deed constituting the Target Entity to include provisions that will facilitate the implementation of the Trust Scheme; (b) the approval by a majority in number of the unitholders or stapled securityholders of the Target Entity representing at least three-fourths in value of the units or stapled securities held by the unitholders or stapled securityholders present and voting either in person or by proxy at the meeting of the unitholders or stapled securityholders to be convened to approve the Trust Scheme; and (c) the grant of the order of the High Court of the Republic of Singapore (the “High Court”) sanctioning the Trust Scheme. 5.4.3 All Trust Schemes are subject to compliance with the Take-over Code although the SIC may, subject to conditions, exempt a Trust Scheme from selected provisions of the Take-over Code, such as those relating to the timetable of the offer. 5.4.4 Steps The principal steps of a Trust Scheme are as follows:   (a) Implementation Agreement: The acquiror and the Target Entity will typically enter into an implementation agreement setting out the terms and conditions on which the Trust Scheme will be implemented; (b) Trust Scheme Announcement: The Target Entity announces that it wishes to propose the Trust Scheme to its unitholders or stapled securityholders; (c) Court Application to Convene Meeting: The Target Entity files with the High Court an application for an order to convene a meeting for its unitholders or stapled securityholders to approve the Trust Scheme (the “Trust Scheme Meeting”); (d) Trust Scheme Document: The Target Entity issues a scheme document to its unitholders or stapled securityholders which typically sets out the terms and conditions of the Trust Scheme, its rationale and gives notice of (i) the EGM to approve amendments to the trust deed constituting the Target Entity to include provisions that will facilitate the implementation of the Trust Scheme and (ii) the Trust Scheme Meeting. The EGM and the Trust Scheme Meeting are typically convened on the same day; (e) EGM and the Trust Scheme Meeting: The unitholders or stapled securityholders approve (i) the amendments to the trust deed constituting the Target Entity at the EGM and (ii) the Trust Scheme at the Trust Scheme Meeting; (f) Court Application to Sanction the Trust Scheme: The Target Entity files with the High Court the results of the Trust Scheme Meeting and an application for the High Court to sanction the Trust Scheme; and (g) Court Order Sanctioning the Trust Scheme: The High Court grants an order sanctioning the Trust Scheme. 5.4.5 Examples of Trust Schemes   (a) Merger of CapitaLand Mall Trust (“CMT”) and CapitaLand Commercial Trust (“CCT”)   (i) In 2020, CMT merged with CCT by a Trust Scheme (the “CMT-CCT Trust Scheme”) where CMT acquired all of the units of CCT at a consideration per unit of (A) S$0.259 and (B) 0.72 units in CMT. (ii) At CCT’s Trust Scheme Meeting, the CMT-CCT Trust Scheme was approved by approximately 90.31% of the CCT unitholders who were present and voting either in person or by proxy, which represented approximately 98.23% in value of the total number of units held by the CCT unitholders who voted. (iii) The High Court sanctioned the CMT-CCT Trust Scheme and CCT was subsequently delisted. Following CCT’s delisting, the enlarged trust was renamed CapitaLand Integrated Commercial Trust and had a market capitalization of approximately S$11.4 billion and a total portfolio property value of approximately S$22.4 billion. (b) Merger of OUE Commercial REIT (“OUE C-REIT”) and OUE Hospitality Trust (“OUE HT”)     (i) In 2020, OUE C-REIT merged with OUE HT by a Trust Scheme (the “OUE C-REIT-OUE HT Trust Scheme”) where OUE C-REIT acquired all of the stapled securities in OUE HT at a consideration per stapled security of (A) S$0.04075 and (B) 1.3583 units in OUE C-REIT. (ii) At OUE HT’s Trust Scheme Meeting, the OUE C-REIT-OUE HT Trust Scheme was approved by approximately 89.47% of the OUE HT stapled securityholders who were present and voting either in person or by proxy, which represented approximately 96.19% in value of the total number of stapled securities held by the OUE HT stapled securityholders who voted. (iii) The High Court sanctioned the OUE C-REIT-OUE HT Trust Scheme and OUE HT was subsequently delisted. This was the first merger in Singapore between a SGX-ST-listed BT and a SGX-ST-listed REIT, and the enlarged trust had a market capitalization of approximately S$2.9 billion and a total portfolio property value of approximately S$6.9 billion.
5.5	RTO
	5.5.1 In a RTO, the acquiror transfers to a Target Entity certain assets in consideration for new units or stapled securities in the Target Entity, following which the acquiror may be required to make, or may decide to make, a take-over offer for all the remaining units or stapled securities of the Target Entity that it does not hold. The acquiror will thereafter hold all the units or stapled securities of the Target Entity. 5.5.2 A RTO will typically require the approval of the SGX-ST and the unitholders or stapled securityholders for (a) the acquisition of the assets from the acquiror and (b) the issuance of new units or stapled securities in the Target Entity to the acquiror and listing of such units or stapled securities on the SGX-ST. 5.5.3 The principal steps of a RTO are the same as a take-over offer (as set out in paragraph 5.3.5 above) with a preliminary step of the Target Entity (a) acquiring the assets from the acquiror and (b) issuing new units or stapled securityholders in the Target Entity to the acquiror. 5.5.4 As at the time of writing of this primer, there has only been one instance of an acquiror attempting to carry out a RTO of a Target Entity, which was eventually aborted. 5.5.5 In 2016, following a Lone Star Funds’ affiliate’s acquisition of all the real estate assets in Saizen REIT’s portfolio in Japan, Saizen REIT announced that it had entered into an implementation agreement with Sime Darby Property Singapore Limited (“SDPSL”), Sime Darby Eastern Investments Private Limited and Perpetual Corporate Trust Limited (in its capacity as trustee of Sime REIT Australia) in respect of Saizen REIT’s proposed acquisition of some of SDPSL’s industrial properties in Australia (the “Properties Acquisition”). The Properties Acquisition was part of a proposed RTO of Saizen REIT by SDPSL. 5.5.6 However, this transaction was eventually aborted as Saizen REIT, without delving into the specifics, announced that “it [was] not possible to complete the [Properties Acquisition and the RTO] by the long-stop date of the implementation agreement”.
5.6	Which method to adopt?
	5.6.1 Whether a take-over offer, a Trust Scheme or a RTO should be adopted ultimately depends on the commercial objective of the acquiror. If the acquiror wishes to acquire all of the units or stapled securities of a Target Entity, a Trust Scheme may be preferable, evident in how almost all the mergers involving REITs or BTs in Singapore till date were implemented by a Trust Scheme. 5.6.2 However, if the acquiror wishes to acquire only some of the units or stapled securities of a Target Entity, a partial offer would be preferable. A RTO is generally not adopted as the acquiror will have to provide certain assets prior to the take-over. 5.6.3 The composition of unitholders or stapled securityholders of the Target Entity would also be a relevant consideration, such as whether there are any minority unitholders or stapled securityholders which could potentially reject the take-over offer or vote against the Trust Scheme at the Trust Scheme Meeting. If so, it would be prudent for the REIT manager or the trustee-manager to engage with these minority unitholders or stapled securityholders and require them to sign irrevocable undertakings to accept the offer or vote in favor of all resolutions relating to the Trust Scheme prior to the announcement of the take-over offer or the Trust Scheme. If there is any resistance, the REIT manager or the trustee-manager should also work together with the potential acquiror to sweeten the deal. 5.6.4 An example of minority unitholders derailing the implementation of a Trust Scheme could be seen in the failed merger between ESR REIT and Sabana REIT.     (a) In 2020, ESR REIT and Sabana REIT issued a joint announcement of ESR REIT’s intention to merge with Sabana REIT by a Trust Scheme (the “ESR-Sabana Trust Scheme”) with ESR REIT acquiring all the units in Sabana REIT for a consideration per unit of 0.94 units in ESR REIT (the “ESR Consideration”). The ESR-Sabana Trust Scheme required the approval by, among others:   (i) the unitholders of Sabana REIT holding in aggregate 75% or more of the total number of votes cast for and against the resolution to approve the amendments to the trust deed constituting Sabana REIT to include provisions that will facilitate the implementation of the ESR-Sabana Trust Scheme (the “Sabana REIT Trust Deed Amendments Resolution”); and (ii) a majority in number of the unitholders of Sabana REIT representing at least three-fourths in value of the units held by the unitholders of Sabana REIT present and voting either in person or by proxy at the Trust Scheme Meeting (the “Sabana REIT Trust Scheme Resolution”).   The Sabana REIT Trust Scheme Resolution was contingent upon the approval of the Sabana REIT Trust Deed Amendments Resolution. This meant that in the event that the Sabana REIT Trust Deed Amendments Resolution was not passed, Sabana REIT would not proceed with the Trust Scheme Meeting. (b) At the EGM convened by Sabana REIT to pass the Sabana REIT Trust Deed Amendments Resolution (the “Sabana REIT EGM”), approximately 66.67% of the total number of votes for and against the resolution voted for the Sabana REIT Trust Deed Amendments Resolution. As less than 75% of the votes were cast in favor of the Sabana REIT Trust Deed Amendments Resolution, the Sabana REIT Trust Deed Amendments Resolution was not passed and, accordingly, Sabana REIT did not proceed with the Trust Scheme Meeting and the ESR-Sabana Trust Scheme was not implemented. (c) The failure of the Trust Scheme however did not come as a surprise. Prior to the Sabana REIT EGM, Black Crane Investment Management Limited (“Black Crane”) and Quartz Capital Management Ltd (“Quartz Capital”), who collectively hold approximately 10% of the issued units in Sabana REIT, were vocal of their objections to the merger and embarked on a bruising campaign against the merger, which included:   (i) Black Crane and Quartz Capital issuing a letter to the manager of Sabana REIT (the “Sabana REIT Manager”) on 7 August 2020 which stated that:   (A) both Black Crane and Quartz Capital intend to vote against the merger of ESR REIT and Sabana REIT as, among others:   (I) the ESR Consideration was at a substantial discount to the book value of Sabana REIT and “in the 18-year history of the Singapore REIT market with multiple takeovers/mergers, there has never been a single takeover/merger of a REIT target at such a substantial discount to book value”; and (II) the merger was a “bold attempt by ESR to potentially solve [a] conflict of interest issue at the expense of Sabana [REIT] unitholders”; (B) a conflict of interest existed as (I) ESR Cayman Limited was the ultimate controlling shareholder of the manager of ESR REIT (the “ESR REIT Manager”) and the Sabana REIT Manager and (II) ESR Cayman Limited, together with the parties acting in concert with it, were “top unitholders of both REITs with overlapping investment mandates”; and (C) the “substantial undervaluation” of the ESR Consideration “raises concerns on whether the fiduciary duty of [the Sabana REIT Manager’s] board and management to act and protect all unitholders’ interest has been potentially compromised”; (ii) Black Crane and Quartz Capital issuing a letter to the MAS and the SGX-ST on 17 August 2020 highlighting, among others, the “significant conflict of interest and corporate governance issues resulting from ESR Cayman Limited controlling [the ESR REIT Manager and the Sabana REIT Manager]”; (iii) Black Crane and Quartz Capital issuing a letter to the trustee of Sabana REIT on 3 September 2020 highlighting, among others, the “corporate governance and potential conflicts of interests of the [Sabana REIT Manager] due to: (A) the controlling ownership of ESR [Cayman Limited] in both [the ESR REIT Manager and the Sabana REIT Manager]; (B) the overlapping investment mandate of Sabana REIT and ESR REIT; and (C) ESR [Cayman Limited] together with its concert parties being substantial unitholders of both Sabana REIT and ESR REIT”; (iv) Black Crane and Quartz Capital requisitioning an EGM under the CIS Code relating to (A) the appointment of Ms. Ng Shin Ein as an independent director despite Ms. Ng Shin Ein having had “substantial business relationships with ESR Cayman [Limited] and its affiliates” and (B) the employment of three ex-ESR employees to senior management roles at the Sabana REIT Manager; (v) Black Crane and Quartz Capital requisitioning an EGM under the CIS Code relating to (A) the proposed removal of the Sabana REIT Manager and (B) the appointment of an “internal REIT manager owned by and for all unitholders”; (vi) Black Crane and Quartz Capital hosting a zoom webinar on 25 November 2020 relating to their vote against the merger; (vii) Black Crane and Quartz Capital issuing a letter to the Sabana REIT Manager on 15 December 2020 stating, among others, that the Sabana REIT Manager “is fully responsible for the failure of the disastrous and value destructive proposed merger between Sabana and ESR REITs”; and (viii) Black Crane and Quartz Capital creating the website, <www.savesabanareit.com> “to enable visitors to carefully monitor how sincerely the board and management of Sabana REIT address unitholders’ proposals, listen to unitholders’ views and endeavour to increase the value of the Sabana REIT units in the best interest of all unitholders”. (d) Both the ESR REIT Manager and the Sabana REIT Manager attempted to put out the fire created by Black Crane and Quartz Capital through a series of announcements which in summary:   (i) acknowledged that there was a discount to the net asset value (“NAV”) of Sabana REIT, but the merger of ESR REIT and Sabana REIT would create an enlarged REIT, which “offer[ed] the best opportunity for re-rating and for reducing the NAV discount in the long term as part of a larger, more liquid and scalable REIT”; (ii) stated that (A) there were “strict internal controls” in both ESR REIT and Sabana REIT, (B) ESR Cayman Limited’s stake in the Sabana REIT Manager is held through an independent third party trustee licensed in Singapore, (C) there are no overlaps in the management teams of both the ESR REIT Manager and the Sabana REIT Manager and (D) there is no sharing of information between both the ESR REIT Manager and the Sabana REIT Manager; and (iii) stated that Black Crane’s and Quartz Capital’s claims were unsubstantiated and they “owe it to unitholders to act responsibly and justify their statements”. (e) Suffice to say both the ESR REIT Manager’s and the Sabana REIT Manager’s efforts were not successful against Black Crane’s and Quartz Capital’s onslaughts on the merger. (f) If the Sabana REIT Manager had engaged with Black Crane and Quartz Capital prior to the announcement of the Trust Scheme, perhaps this debacle would not have occurred, with no ink spilled and no sharp exchanges between both sides. Even if the Sabana REIT Manager was not able to engage with Black Crane and Quartz Capital prior to the announcement of the Trust Scheme due to perhaps confidentiality reasons, it should have done so the moment the first signs of resistance surfaced. Instead of going on the defensive, the Sabana REIT Manager could have engaged with Black Crane and Quartz Capital, while simultaneously working with the ESR REIT Manager to sweeten the deal. It is crucial to note that Quartz Capital had on 14 November 2019 proposed that ESR REIT merge with Sabana REIT “in a cash and unit transaction where 0.92 units of ESR REIT and S$0.067 of cash will be exchanged for one unit of Sabana REIT” so as to “solve the critical issue of overlapping investment mandates between the two trusts”. This may suggest that the minority unitholders’ principal objection lay in the offer price and if there were any sweeteners to the deal, such as revising the offer price, the minority unitholders’ could likely be struck by cupid’s arrow and agree to the merger. After all, no one is entirely immune from cupid’s arrow. Introducing deal sweeteners is not uncommon. In the merger of CMT and CCT, the respective REIT managers worked together and sweetened the deal by ensuring a higher accretion to their respective distribution per unit and the manager of CMT also waived the acquisition fees due from CMT that amounted to approximately S$111.2 million. In the take-over of Forterra Trust, New Precise Holdings raised its cash offer from S$1.85 to S$2.25 per unit. If the foregoing actions were taken, the merger could perhaps have succeeded. More importantly, the Sabana REIT Manager would not be caught in the situation it is in after the failed merger – dealing with the reputational fallout arising from the failed merger and the adversarial stance of Black Crane and Quartz Capital, as well as the increased public scrutiny on its management of Sabana REIT. Black Crane and Quartz Capital, perhaps emboldened by the failed merger, have repeatedly opposed certain management decisions of the Sabana REIT Manager since the failed merger. Recently, after Mr. Chan Wai Kheong was appointed as an independent non-executive director of the Sabana REIT Manager, Black Crane and Quartz Capital requisitioned an EGM on 2 August 2021 to pass a resolution that the appointment of Mr. Chan Wai Kheong “be endorsed by the independent unitholders”. Black Crane and Quartz Capital highlighted that Mr. Chan Wai Kheong was arguably not independent and there exists a “real and significant risk” of a conflict of interest as he “had received a substantial premium of approximately S$22 million over market price from ESR Cayman [Limited] and is also a substantial unitholder of AIMS APAC, a major competitor to Sabana REIT”. The Sabana REIT Manager rejected convening the EGM stating, among others, that (i) the unitholders have “the opportunity to vote in relation to the endorsement of Mr. Chan Wai Kheong as an independent director by the next annual general meeting” and (ii) “it would be in the best interest of unitholders for the [Sabana REIT Manager] to be allowed to focus on improving Sabana REIT’s performance and results instead of convening [the EGM]”. (g) Whether the failed merger is a victory or pyrrhic victory for the unitholders of Sabana REIT remains to be seen. It is nevertheless a cautionary tale of the importance of considering the composition of the unitholders or stapled securityholders and engaging any minority unitholders or stapled securityholders prior to announcing any take-over offer or Trust Scheme. Where necessary, deal sweeteners should be introduced. 5.6.5 If the acquiror wishes to gain control of the management of a Target Entity, a more cost effective alternative to acquiring the units or stapled securities in the Target Entity would be to acquire the shares of the REIT manager and/or trustee-manager of the Target Entity. As a REIT manager manages the business of a REIT and a trustee-manager manages the business of a BT, such an acquisition allows the acquiror to effectively control the Target Entity. Additional approvals (such as approval from the MAS in relation to an acquisition of shares of a REIT manager) may however be required.

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the authors of this primer in the firm’s Singapore office:

Robson Lee (+65.6507.3684, RLee@gibsondunn.com)
Kai Wen Chua (+65.6507.3658, KChua@gibsondunn.com)
Zan Wong (+65.6507.3657, ZWong@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

The UK’s Competition Appeal Tribunal (the CAT) has certified the first application for a collective proceedings order (CPO) on an opt-out basis in Walter Hugh Merricks CBE v Mastercard Incorporated & Ors.

In the UK, a CPO is pre-requisite for opt-out collective actions seeking damages for breaches of competition law. Opt-out means that an action can be pursued on behalf of a class of unnamed claimants who are deemed included in the action unless they have specifically opted out. Opt-out ‘US style’ class actions have the potential to be far more complex, expensive and burdensome than traditional named party litigation.

Opt-out class actions were introduced for the first time in the UK in 2015 (see our previous alert here). Almost six years on, last week’s judgment by the CAT is therefore an important procedural step towards the first opt-out class action damages award in the UK.

As had been expected, following the Supreme Court’s judgment in December 2020 (see our previous alert here) Mastercard did not resist certification outright. As a result, the CAT’s most recent judgment provides little further clarity on how the test set out in the Supreme Court’s judgment will be applied to future applications for a CPO. However, the CAT’s recent judgment did address certain interesting questions concerning suitability to act as a class representative, whether deceased persons could be included in the proposed class and the suitability of claims for compound interest. These are discussed in more detail below.

Background

In 2017, the CAT had originally refused to grant Mr. Merricks a CPO. However, in December 2020, in Merricks v Mastercard, the UK’s Supreme Court dismissed Mastercard’s appeal against the Court of Appeal’s judgment regarding the correct certification test and remitted the case back to the CAT for reconsideration. The judgment of the Supreme Court was of seminal importance because it provided much needed clarification as to the correct approach for the CAT to take when considering whether claims are suitable for collective proceedings (see our previous alert here).

Following the Supreme Court’s clarification, Mastercard no longer challenged eligibility for collective proceedings in the remitted proceedings before the CAT. However, the CAT was still required to consider: (i) the authorisation of Mr. Merricks as the class representative in light of developments since the CAT’s original judgment in 2017; (ii) whether Mr. Merricks was entitled to include deceased persons in the proposed class; and (iii) whether Mr. Merricks’ claim for compound interest was suitable to be brought in collective proceedings.

Although the CAT reaffirmed that Mr. Merricks was suitable to act as a class representative, it held that deceased persons could not be included in the proposed class and that the claim for compound interest was not suitable to brought in collective proceedings. Whilst this will significantly reduce the damages Mastercard will be required to pay should Mr. Merricks ultimately succeed at the substantive trial, the CAT’s judgment has still paved the way for what could be the largest award of damages in English legal history.

CAT Judgment (Walter Hugh Merricks CBE v MasterCard Incorporated & Ors [2021] CAT 28)

(i)        Authorisation of the Class Representative

In relation to the suitability of Mr. Merricks to act as the class representative, two issues arose. The first related to written submissions filed by a proposed class member contending that it was not just and reasonable for Mr. Merricks to act as class representative as a result of Mr. Merricks’ handling of a historic complaint related to a property transaction involving the proposed class member. However, the CAT did not consider that this gave rise to any issue in terms of Mr. Merricks’ suitability to act as class representative.

The second related to the terms of a new litigation funding agreement (LFA) put in place by Mr. Merricks in order to document the replacement of the original funder following the CAT’s 2017 judgment. Here, the CAT made it clear that, even if no objections were raised about the terms of a LFA by a proposed defendant (i.e., Mastercard) “the Tribunal has responsibility to protect the interests of the members of the proposed class, and their interests are of course not necessarily aligned with the interests of Mastercard”.

The CAT therefore independently scrutinised the new LFA with particular focus on the provisions permitting the funder to terminate the new LFA where it ceases to be satisfied about the merits of the claims or believes that the proceedings are no longer commercially viable. The CAT was concerned that this gave the funder too broad a discretion to terminate and, during the course of the remitted hearing, it was agreed that the termination provisions would be amended to include a requirement that the funder’s views had to be based on independent legal and expert advice.

Mastercard’s only objection to the terms of the new LFA was that it had no rights to enforce the new LFA and, as such, Mastercard sought an undertaking from the funder to the CAT that it would discharge any adverse costs award that might be made against Mr. Merricks. The CAT agreed that such an undertaking should be given and directed the parties to agree the wording.

(ii)       The Deceased Persons Issue

On remittal, Mr. Merricks wanted to include deceased persons within the proposed class definition and sought to amend the definition to include “persons who have since died”.

Whilst the CAT accepted that a class definition could include the representatives of the estates of deceased persons, section 47B of the Competition Act 1998 did not permit claims to be brought by deceased persons in their own right (as Mr. Merricks’ proposed amendment was seeking to do). In any event, the Tribunal held that Mr. Merricks’ application to amend the proposed class definition was not permissible as the limitation period had already expired.

(iii)      The Compound Interest Issue

A claim for compound interest had been included in the Claim Form from the outset. It was alleged by Mr. Merricks that all class members will either have incurred borrowings or financing costs to fund the overcharge they suffered or have lost interest that they would otherwise have earned through deposit or investment of the overcharge, or some combination of the two.

The CAT held that the Canadian jurisprudence in relation to certification had been explicitly recognised by the Supreme Court in the context of the UK regime. As such, a “plausible or credible” methodology for calculating loss had to be put forward at the certification stage in order for a claim to be suitable for collective proceedings. In the case of Mr. Merricks’ claim for compound interest, the CAT held that no credible or plausible methodology had been put forward by Mr. Merricks to arrive at any estimate of the extent of the overcharge that would have been saved or used to reduce borrowings rather than spent, which is the essential basis for a claim to compound interest.

Comment

The CAT’s judgment in Merricks is significant because it is the first class action to be certified on an opt-out basis since the current regime was introduced in 2015.

The CAT’s approach to Mr. Merricks’ claim for compound interest and the requirement for a “plausible or credible” methodology is of particular interest in circumstances where the Supreme Court made it clear that there is only a very limited role for the application of a merits test at the certification stage.

The UK was comparatively slow to introduce a regime for opt-out proceedings in relation to competition law infringements and, since its introduction in 2015, the regime itself has taken some time to find its feet. But momentum has been building and there are now a large number of high value opt-out CPO applications awaiting determination by the CAT covering both follow-on claims and standalone claims. In the next few months, a number of judgments are expected in relation to applications that had been stayed pending the Supreme Court’s judgment in Merricks. These will not only provide greater clarity on the application of the Supreme Court’s judgment but also answer questions that, to date, have not been considered by the CAT. These include, for example, how a carriage dispute between two competing proposed class representatives should be resolved. There will also be significant attention paid to the procedures adopted by the CAT as Mr. Merricks’ claim progresses now that it moves beyond the certification stage.

It is increasingly clear that companies operating in the UK are now at greater risk of facing ‘US style’ class actions for breaches of competition law. In addition, for non-competition claims that fall outside the regime introduced in 2015, parallel developments in the courts raise the possibility of complex group actions. For example, in relation to alleged breaches of data protection laws, the highly anticipated Supreme Court judgment in Lloyd v Google LLC (expected in Autumn) will provide guidance on the potential for representative actions to proceed in England and Wales.

Gibson Dunn is currently instructed on a number of the largest CPO applications currently being heard by the CAT and is deeply familiar with navigating this developing regime.

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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, any member of the firm’s Antitrust and Competition practice group, or the following authors in London and Brussels:

Ali Nikpay (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Doug Watson (+44 (0) 20 7071 4217, dwatson@gibsondunn.com)
Mairi McMartin (+32 2 554 72 29, MMcMartin@gibsondunn.com)
Dan Warner (+44 (0) 20 7071 4213, dwarner@gibsondunn.com)

UK Competition Litigation Group:
Philip Rocher (+44 (0) 20 7071 4202, procher@gibsondunn.com)
Allan Neil (+44 (0) 20 7071 4296, aneil@gibsondunn.com)
Patrick Doris (+44 (0) 20 7071 4276, pdoris@gibsondunn.com)
Susy Bullock (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Deirdre Taylor (+44 (0) 20 7071 4274, dtaylor2@gibsondunn.com)
Gail Elman (+44 (0) 20 7071 4293, gelman@gibsondunn.com)
Camilla Hopkins (+44 (0) 20 7071 4076, chopkins@gibsondunn.com)
Kirsty Everley (+44 (0) 20 7071 4043, keverley@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

On August 16, 2021, the U.S. Securities and Exchange Commission announced a settled enforcement action against Pearson plc, a U.K. educational publisher, for inadequate disclosure of a cyber intrusion. According to the settlement, following a cyberattack, which the SEC deemed to be material, Pearson failed to revise its periodic cybersecurity risk disclosure to reflect that it had experienced a material data breach. In addition, in a subsequent media statement, Pearson misstated the significance of the breach by minimizing its scope and overstating the strength of the company’s security measures. The settlement, in which Pearson agreed to pay a $1 million penalty, is the latest indication of the SEC’s continuing focus on cyber disclosures as an enforcement priority and an important signal to public companies that, particularly in the face of an environment of increasing cyberattacks, accurate public disclosure about cyber events and data privacy is critical. The SEC action also underscores the importance, as part of an overall cyber-incident response, of carefully making materiality judgments.

According to the SEC Order,[1] Pearson learned in March 2019 that a sophisticated attacker took advantage of a vulnerability in software that Pearson provided to 13,000 school, district, and university accounts to access and download user names and passwords that were protected with an outdated algorithm as well as more than 11 million rows of student data that included names, dates of birth, and email addresses. The software manufacturer had publicized the existence of the vulnerability in September 2018 and made a patch available at that time; however, Pearson did not install the patch until after learning about the breach in March 2019. Also, at that time, Pearson conducted an internal investigation and began notifying impacted customers in July 2019.

According to the SEC Order, Pearson determined that it was not necessary to issue a public disclosure of the incident. The company’s next report on Form 6-K contained the same data security risk disclosure that it had used in previous reports, stating that there was a “[r]isk” that “a data privacy incident or other failure to comply with data privacy regulations and standards and/or a weakness in information security, including a failure to prevent or detect a malicious attack on our systems, could result in a major data privacy or confidentiality breach causing damage to the customer experience and our reputational damage, a breach of regulations and financial loss” (emphasis added). Consistent with its past position that companies should not discuss risks as hypothetical if they have already materialized or are materializing,[2] the SEC viewed this statement as implying that no “major data privacy or confidentiality breach” had occurred, and determined it was therefore misleading.

A few days after it filed this Form 6-K, a journalist asked Pearson about the data breach. In response, Pearson provided a statement, which it later posted on its website, that the SEC also described as misleading. According to the SEC Order, the statement had been prepared months earlier and failed to disclose that the attacker had extracted data, not just accessed it; understated what types of data were taken; suggested that it was uncertain whether data had been taken, whereas Pearson by that time allegedly knew exactly what data had been extracted; did not state how many rows of data were involved; and stated that Pearson had “strict data protections” and had patched the vulnerability, even though Pearson had waited months to install the patch and had relied upon outdated software to encrypt passwords.

As a result of the foregoing statements, the SEC Order states that Pearson violated Sections 17(a)(2) and (a)(3) of the Securities Act, provisions which prohibit misleading statements or omissions in the context of a securities offering,[3] as well Section 13(a) of the Exchange Act. The SEC Order also finds that the conduct demonstrated that Pearson failed to maintain adequate disclosure controls and procedures in violation of Exchange Act Rule 13a-15(a).

The Pearson settlement reflects a number of instructive points. First, this settlement demonstrates the importance of carefully assessing the materiality of a cyberattack. Here, the SEC determined that the data breach was material based on, among other things, the company’s business and its user base, the nature and volume of the data exfiltrated, and the importance of data security to the company’s reputation, as reflected in the company’s existing risk disclosures. However, the order does not assert that there was any adverse impact on Pearson’s business as a result of the incident. In fact, Pearson’s subsequent filings on Form 20-F expressly stated that prior attacks “have not resulted in any material damage” to the business. Consulting with counsel in making materiality assessments can help mitigate the risk of the government second-guessing materiality judgments in hindsight. Second, this is the third recent enforcement case that the SEC has brought based on disclosures contained in reports that are “furnished,” not “filed” with the SEC and in media statements.[4] Third, this is the second enforcement case in which the SEC has found that a company’s disclosures regarding a cybersecurity incident reflected inadequate disclosure controls and procedures.[5] Collectively, these cases reiterate that the SEC is intensely focused on cybersecurity disclosure issues, that public companies should be mindful of SEC disclosure considerations when responding to or publicly commenting on a cybersecurity issue, and that companies should ensure that their disclosure controls and procedures appropriately support their cybersecurity response plans.

The Pearson settlement is the latest — and likely not the last — SEC cyber disclosure enforcement action. The SEC Enforcement Division has also taken an expansive look into cyber disclosures with a sweep related to how companies responded to the widely reported SolarWinds breach, where foreign hackers believed to be tied to Russia used SolarWinds’ software to breach numerous companies and government agencies.[6] The agency asked companies it believed were impacted to voluntarily furnish information about the attack, and offered immunity, under certain conditions, for potential disclosure failings.[7]

In addition, although SEC interpretive guidance on cybersecurity disclosures was issued in 2018,[8] additional disclosure rulemaking appears likely. According to the Unified Agenda of Regulatory and Deregulatory Actions (“Reg Flex Agenda”) made available in June 2021, the first reflecting Chair Gary Gensler’s agenda,[9] the SEC is considering whether to propose new rules to enhance issuer disclosure on “cybersecurity risk governance.”[10]

The possible new proposed rulemaking project and the increasing enforcement efforts are a clear signal of the SEC’s continuing focus on accurate cybersecurity disclosures and robust disclosure controls and procedures around cybersecurity. The recent increase in cyberattacks contributes to the focus, as does the apparent perception of a risk that companies may under-report data security incidents. The Pearson enforcement action makes plain that a company’s disclosure about the possible risk of a data breach will likely be insufficient — and even be viewed as misleading — if the company has in fact suffered a cyber breach that the SEC deems to be material. Moreover, the SEC’s actions reinforce the importance of having strong disclosure controls and procedures so that full information about data breaches and vulnerabilities are communicated to those making decisions about disclosures.

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   [1]   In re Pearson plc, Release No. 33-10963 (Aug. 16, 2021), https://www.sec.gov/litigation/admin/2021/33-10963.pdf.

   [2]   See Gibson, Dunn & Crutcher, “Considerations For Preparing Your 2019 Form 10-K” (Jan. 13, 2020), https://www.gibsondunn.com/considerations-for-preparing-your-2019-form-10-k; Gibson, Dunn & Crutcher, “Considerations For Preparing Your 2020 Form 10-K” (Feb. 3, 2021), https://www.gibsondunn.com/considerations-for-preparing-your-2020-form-10-k.

   [3]   These violations, which the SEC Order notes do not require a showing of intent, appear to be premised on the fact that Pearson had employee benefit plan equity offerings on-going that were registered on a Form S-8.

   [4]   See also In re First American Financial Corp., Release No. 34-92176 (June 14, 2021), https://www.sec.gov/litigation/admin/2021/34-92176.pdf; The Cheesecake Factory Incorporated, Release No. 34-90565 (Dec. 4, 2020), https://www.sec.gov/litigation/admin/2020/34-90565.pdf (disclosure involved two “furnished” Form 8-Ks).

   [5]   In re First American Financial Corp., Release No. 34-92176 (June 14, 2021), https://www.sec.gov/litigation/admin/2021/34-92176.pdf.  In the First American Financial Corp. case, the SEC Order alleged that company executives did not have full information about a cybersecurity vulnerability when the company issued a statement to a reporter and furnished a voluntary Form 8-K addressing the situation.  Id.

   [6]   Katanga Johnson, “U.S. SEC probing SolarWinds clients over cyber breach disclosures -sources,” Reuters (June 22, 2021), https://www.reuters.com/technology/us-sec-official-says-agency-has-begun-probe-cyber-breach-by-solarwinds-2021-06-21.

   [7]   In the Matter of Certain Cybersecurity-Related Events (HO-14225) FAQs, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/enforce/certain-cybersecurity-related-events-faqs (last modified June 25, 2021).

   [8]   Commission Statement and Guidance on Public Company Cybersecurity Disclosures, 83 Fed. Reg. 8166 (Feb. 26, 2018), https://www.govinfo.gov/content/pkg/FR-2018-02-26/pdf/2018-03858.pdf.

   [9]   Press Release, U.S. Sec. & Exch. Comm’n, SEC Announces Annual Regulatory Agenda (June 11, 2021), https://www.sec.gov/news/press-release/2021-99.

  [10]   See Gibson, Dunn & Crutcher, “Back to the Future: SEC Chair Announces Spring 2021 Reg Flex Agenda” (June 21, 2021), https://www.gibsondunn.com/back-to-the-future-sec-chair-announces-spring-2021-reg-flex-agenda.

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This alert was prepared by Alexander H. Southwell, Mark K. Schonfeld, Lori Zyskowski, Thomas J. Kim, Ron Mueller, Eric M. Hornbeck, and Terry Wong.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Privacy, Cybersecurity and Data Innovation, Securities Regulation and Corporate Governance, and Securities Enforcement practice groups, or the following authors:

Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Mark K. Schonfeld – New York (+1 212-351-2433, mschonfeld@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Eric M. Hornbeck – New York (+1 212-351-5279, ehornbeck@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

On August 18, 2021, EPA released a final rule revoking tolerances for chlorpyrifos residues on food.[1] EPA took this action to “stop the use of the pesticide chlorpyrifos on all food to better protect human health, particularly that of children and farmworkers.”[2] The agency will also issue a Notice of Intent to Cancel under the Federal Insecticide, Fungicide, and Rodenticide Act to cancel registered food uses of the chemical associated with the revoked tolerances.

Chlorpyrifos is an “insecticide, acaricide and miticide used primarily to control foliage and soil-borne pests,” in a large variety of agricultural crops, including soybeans, fruit and nut trees, and other row crops.[3]  EPA sets “tolerances,” which represent “the maximum amount of a pesticide allowed to remain in or on a food.”[4]  Under the Federal Food, Drug, and Cosmetic Act (FFDCA), EPA “shall modify or revoke a tolerance if the Administrator determines it is not safe.”[5]

Yesterday’s revocation follows a recent order from the U.S. Court of Appeals for the Ninth Circuit instructing EPA to issue a final rule in response to a 2007 petition filed by the Pesticide Action Network North America and Natural Resources Defense Council requesting that EPA revoke all chlorpyrifos tolerances on the grounds that they were unsafe.[6] EPA previously responded to and denied the original petition and subsequent objections to its denial. A coalition of farmworker, environmental, health, and other interest groups then challenged the denials in court.[7] In April 2021, a split panel of the Ninth Circuit ruled that EPA’s failure either to make the requisite safety findings under the FFDCA or issue a final rule revoking chlorpyrifos tolerances was “in derogation of the statutory mandate to ban pesticides that have not been proven safe,” and ordered the agency to grant the 2007 petition, issue a final rule either revoking the tolerances or modifying them with a supporting safety determination, and cancel or modify the associated food-use registrations of chlorpyrifos.[8]

In response, EPA has granted the 2007 petition and issued a final rule that revokes all chlorpyrifos tolerances listed in 40 CFR 180.342.[9]  In issuing this rule, EPA noted that, based on currently available information, it “cannot make a safety finding to support leaving the current tolerances” in place.[10] The final rule becomes effective 60 days after publication in the Federal Register, and the revocation of tolerances becomes effective six months thereafter.

EPA indicated it followed the Ninth Circuit’s instruction by issuing the rule under section 408(d)(4)(A)(i) of the FFDCA, which allows issuance of a final rule “without further notice and without further period for public comment.”[11] EPA indicated its intent to review comments on the previously issued proposed interim decision, draft revised human health risk assessment, and draft ecological risk assessment for chlorpyrifos.[12] The Agency also intends to review registrations for the remaining non-food uses of the chemical.[13]

Prior to EPA’s action, certain states including Hawaii, New York, and Oregon had restricted the sale or use of the pesticide.[14] California prohibited the sale, possession, and use of chlorpyrifos for nearly all uses by the end of 2020.[15]

_______________________

[1]   U.S. EPA, Pre-Publication Notice of Final Rule re Chlorpyrifos (Aug. 18, 2021), https://www.epa.gov/system/files/documents/2021-08/pre-pub-5993-04-ocspp-fr_2021-08-18.pdf.

[2]   U.S. EPA, News Releases from Headquarters,  EPA Takes Action to Address Risk from Chlorpyrifos and Protect Children’s Health (Aug. 18, 2021), https://www.epa.gov/newsreleases/epa-takes-action-address-risk-chlorpyrifos-and-protect-childrens-health.

[3]  https://www.epa.gov/ingredients-used-pesticide-products/chlorpyrifos.

[4]  U.S. EPA, Regulation of Pesticide Residues on Food, https://www.epa.gov/pesticide-tolerances.

[5]  See 21 U.S.C. § 346a(b)(2)(a)(i) (EPA “may establish or leave in effect a tolerance for a pesticide chemical residue in or on a food only if the Administrator determines that the tolerances is safe.”).

[6]  Pre-Publication Notice of Final Rule re Chlorpyrifos at 6–7; League of United Latin Am. Citizens v. Regan, 996 F.3d 673 (9th Cir. 2021).

[7]  Pre-Publication Notice of Final Rule re Chlorpyrifos at 7.

[8]  League of United Latin Am. Citizens, 996 F.3d at 667, 703–04.

[9]  Pre-Publication Notice of Final Rule re Chlorpyrifos at 8.

[10]  Id.

[11]  League of United Latin Am. Citizens, 996 F.3d at 702; 21 U.S.C. § 346a(d)(4)(A)(1).

[12]  U.S. EPA, EPA Takes Action to Address Risk from Chlorpyrifos and Protect Children’s Health.

[13]  Id.

[14]  See Haw. S.B.3095 (Relating to Environmental Protection) (2018); N.Y. Dep’t of Environ. Conservation, Chlorpyrifos Pesticide Registration Cancellations and Adopted Regulation, https://www.dec.ny.gov/chemical/122311.html; O.A.R. 603-057-0545 (Permanent Chlorpyrifos Rule) (Dec. 15, 2020), available here.

[15]   Cal. Dep’t of Pesticide Regulation, Chlorpyrifos Cancelation https://www.cdpr.ca.gov/docs/chlorpyrifos/index.htm.

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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 Environmental Litigation and Mass Tort practice group, or the following authors:

Abbey Hudson – Los Angeles (+1 213-229-7954, ahudson@gibsondunn.com)
David Fotouhi – Washington, D.C. (+1 202-955-8502, dfotouhi@gibsondunn.com)
Joseph D. Edmonds – Orange County (+1 949-451-4053, jedmonds@gibsondunn.com)
Jessica M. Pearigen – Orange County (+1 949-451-3819, jpearigen@gibsondunn.com)

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

Environmental Litigation and Mass Tort Group:
Stacie B. Fletcher – Washington, D.C. (+1 202-887-3627, sfletcher@gibsondunn.com)
Daniel W. Nelson – Washington, D.C. (+1 202-887-3687, dnelson@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

This client alert provides an overview of shareholder proposals submitted to public companies during the 2021 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.

I. Top Shareholder Proposal Takeaways from the 2021 Proxy Season

As discussed in further detail below, based on the results of the 2021 proxy season, there are several key takeaways to consider for the coming year:

• Shareholder proposal submissions rose significantly. After trending downwards since 2016, the number of proposals submitted increased significantly by 11% from 2020 to 802.
• The number of social and environmental proposals also significantly increased, collectively overtaking governance proposals as the most common. Social and environmental proposals increased notably, up 37% and 13%, respectively, from 2020. In contrast, governance proposals remained steady in 2021 compared to 2020 and represented 36% of proposals submitted in 2021. Executive compensation proposal submissions also declined in 2021, down 13% from the number of such proposals submitted in 2020. The five most popular proposal topics in 2021, representing 46% of all shareholder proposal submissions, were (i) anti-discrimination and diversity, (ii) climate change, (iii) written consent, (iv) independent chair, and (v) special meetings.
• Overall no-action request success rates held steady, but the number of Staff response letters declined significantly. The number of no-action requests submitted to the Staff during the 2021 proxy season increased significantly, up 18% from 2020 and 19% from 2019. The overall success rate for no-action requests held steady at 71%, driven primarily by procedural, ordinary business, and substantial implementation arguments. However, the ongoing shift in the Staff’s practice away from providing written response letters to companies, preferring instead to note the Staff’s response to no-action requests in a brief chart format, resulted in significantly fewer written explanations, with the Staff providing response letters only 5% of the time, compared to 18% in 2020.
• Company success rates using a board analysis during this proxy season rose modestly, while inclusion of a board analysis generally remained infrequent. Fewer companies included a board analysis during this proxy season (down from 19 and 25 in 2020 and 2019, respectively, to 16 in 2021), representing only 18% of all ordinary business and economic relevance arguments in 2021. However, those that included a board analysis had greater success in 2021 compared to 2020, with the Staff concurring with the exclusion of five proposals this year where the company provided a board analysis, compared to four proposals in 2020 and just one proposal in 2019.
• Withdrawals increased significantly. The overall percentage of proposals withdrawn increased significantly to the highest level in recent years. Over 29% of shareholder proposals were withdrawn this season, compared to less than 15% in 2020. This increase is largely attributable to the withdrawal rates of both social and environmental proposals, which rose markedly in 2021 compared to 2020 (increasing to 46% and 62%, respectively).
• Overall voting support increased, including average support for social and environmental proposals. Average support for all shareholder proposals voted on was 36.2% in 2021, up from the 31.3% average in 2020 and 32.8% average in 2019. In 2021, environmental proposals overtook governance proposals to receive the highest average support at 42.3%, up from 29.2% in 2020. Support for social (non-environmental) proposals also increased significantly to 30.6%, up from 21.5% in 2020—driven primarily by a greater number of diversity-related proposals voted on with increased average levels of support. Governance proposals received 40.2% support in 2021, up from 35.3% in 2020. This year also saw a double-digit increase in the number of shareholder proposals that received majority support (74 in total, up from 50 in 2020), with an increasing number of such proposals focused on issues other than traditional governance topics.
• Fewer proponents submitted proposals despite the increase in the number of proposals. The number of shareholders submitting proposals declined this year, with approximately 276 proponents submitting proposals (compared to more than 300 in both 2020 and 2019).  Approximately 41% of proposals were submitted by individuals and 21% were submitted by the most active socially responsible investor proponents. As in prior years, John Chevedden and his associates were the most frequent proponents (filing 31% of all proposals in 2021 and accounting for 75% of proposals submitted by individuals). This year also saw the continued downward trend in five or more co-filers submitting proposals—down to 35 in 2021, from 54 in 2020 and 58 in 2019.
• Proponents continued to use exempt solicitations. Exempt solicitation filings continued to proliferate, with the number of filings reaching a record high again this year and increasing 30% over the last three years.
• Amended Rule 14a-8 in Effect. With the amendments to Rule 14a-8 now in effect for meetings held after January 1, 2022, companies should revise their procedural reviews and update their deficiency notices accordingly. However, it remains to be seen whether the new rules will lead to a decrease in proponent eligibility or result in an increase in proposals eligible for procedural or substantive exclusion, based on the new ownership and resubmission thresholds. The SEC’s recently announced Reg Flex Agenda indicates that the SEC intends to revisit Rule 14a-8 as a new rulemaking item in the near term, putting into question the future of the September 2020 amendments.

Read More

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Gibson Dunn’s lawyers are available to assist with 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, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group:

Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com)
Lori Zyskowski – New York, NY (+1 212-351-2309, lzyskowski@gibsondunn.com)
Aaron Briggs – San Francisco, CA (+1 415-393-8297, abriggs@gibsondunn.com)
Courtney Haseley – Washington, D.C. (+1 202-955-8213, chaseley@gibsondunn.com)
Julia Lapitskaya – New York, NY (+1 212-351-2354, jlapitskaya@gibsondunn.com)
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, ctillinghast@gibsondunn.com)
Geoffrey E. Walter – Washington, D.C. (+1 202-887-3749, gwalter@gibsondunn.com)
David Korvin – Washington, D.C. (+1 202-887-3679, dkorvin@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

On August 5, 2021, U.S. Senate Finance Committee Chairman Ron Wyden (D-Oregon) and U.S. Senate Finance Committee member Sheldon Whitehouse (D-Rhode Island) introduced legislation entitled the “Ending the Carried Interest Loophole Act.”[1] According to a summary released by the Finance Committee, the legislation is intended to close “the entire carried interest loophole.” While this legislation is very similar to a previous proposal introduced by Chairman Wyden[2], this legislation appears to have a greater likelihood of passage given the Democratic party’s control of both chambers of Congress and the election of President Biden. The legislation may have an even greater chance of passage if it secures the support of moderate Democratic Senators who will be key to its passage through reconciliation, which is a technical procedure that would permit Democrats to pass the bill through a majority vote in the Senate.

The “Ending the Carried Interest Loophole Act” would require partners who hold carried interests in exchange for providing services to investment partnerships to recognize a specified amount of deemed compensation income each year regardless of whether the investment partnership recognizes income or gain and regardless of whether and when the service providers receive distributions in respect of their carried interests. This deemed compensation income would be subject to income tax at ordinary income rates and self-employment taxes.

This legislation goes well beyond many previously proposed bills that attempted to recharacterize certain future income from investment partnerships as ordinary income instead of capital gain. In addition, it would replace section 1061 of the Internal Revenue Code of 1986, as amended (the “Code”), which was enacted as part of the 2017 tax act,[3] and lengthened the required holding period from one year to three years for service providers to recognize long-term capital gain in respect of carried interests.

Current Treatment of “Carried Interest” Allocations

Under current law, a partnership generally can issue a partnership “profits interest” to a service provider without current tax. The service provider holds the interest as a capital asset, with both the timing of recognition and character of the partner’s share of profits from the partnership determined by reference to the timing of recognition and character of profits made by the partnership. Thus, if the partnership recognizes capital gain, the service provider’s allocable share of the gain generally would be capital gain and recognized in the same year as the partnership’s recognition of the capital gain. These partnership “profits interests” are referred to as “carried interests” in the private equity context, “incentive allocations” in the hedge fund context, or “promotes” in the real estate context. As noted above, Code section 1061 generally treats gain recognized with respect to certain partnership interests held for less than three years as short-term capital gain.

“Ending the Carried Interest Loophole Act”

The legislation introduced by Chairman Wyden and Senator Whitehouse generally would require a taxpayer who receives or acquires a partnership interest in connection with the performance of services in a trade or business that involves raising or returning capital and investing in or developing securities, commodities, real estate and certain other assets to recognize annually, on a current basis – (1) a “deemed compensation amount” as ordinary income and (2) an equivalent amount as a long-term capital loss.

The “deemed compensation amount” generally would equal the product of (a) an interest charge, referred to as the “specified rate,”[4] (b) the service provider’s maximum share of partnership profits, and (c) the partnership’s invested capital as of certain measurement dates.[5]  Conceptually, the partnership is viewed as investing a portion of its capital on behalf of the service provider via an interest free loan to the service provider. The service provider is deemed to recognize ordinary self-employment income in an amount equal to the foregone interest, calculated at the “specified rate.” Although not clear, the “specified rate” appears designed to approximate the economics of the typical preferred return rate often paid to limited partners on their contributed capital before the service provider receives any distributions from the partnership.

The offsetting long-term capital loss appears to be a proxy for tax basis that is designed to avoid a “double-counting” of income when the service provider ultimately receives allocations of income from the partnership attributable to the sale or disposition of partnership assets (or income or gain attributable to the sale or disposition of the partnership interest itself).[6] The long-term capital loss generally would only be usable in the tax year of deemed recognition if the individual taxpayer recognizes other capital gain that is available to be offset (otherwise, the long-term capital loss would be available to be carried forward to subsequent tax years).

For example, if a service provider is entitled to receive up to 20 percent of an investment fund’s profits, the investment fund receives $1 billion in capital contributions, and the “specified return” for the tax year is 12 percent, the service provider’s “deemed compensation amount” for that tax year would be $24,000,000, and the service provider would recognize an offsetting long-term capital loss of $24,000,000. Assuming relevant income thresholds are already met and that the service provider has sufficient long-term capital gain in the year of inclusion against which the long-term capital loss may be offset, based on maximum individual rates under current law, the service provider would expect to incur an incremental U.S. federal income tax rate of 17% on the “deemed compensation amount” (that is, 37 percent ordinary income tax rate less the 20 percent long-term capital gain tax rate).[7] Any long-term capital gain recognized by the service provider in excess of the “deemed compensation amount” that is attributable to the sale or disposition of partnership assets (or income or gain attributable to the sale or disposition of the partnership interest itself) would be taxed at 20 percent (or 23.8 percent if the net investment income tax is applicable).

To prevent a work-around, the legislation also would apply to any service provider who has received a loan from the partnership, from any other partner of the partnership, or from any person related to the partnership or another partner, unless the loan is fully recourse or fully secured and requires payments of interest at a stated rate not less than the “specified return.”

Other Proposed Changes and Contrast with Recent Biden Proposal

Besides the current inclusion of “deemed compensation amounts” at ordinary income rates, the legislation would alter existing law in several ways. As background, current Code section 1061 generally requires a partnership to hold capital assets for three years in order for the related capital gain to be taxed at preferential long-term capital gain rates. Earlier this year, the Administration released its fiscal year 2022 Budget, including a Greenbook with detailed proposals for changes to the federal tax law.[8] Among other things, the Greenbook proposal would eliminate the ability for partners whose taxable income (from all sources) exceed $400,000 to recognize long-term capital gain with respect to these partnership “profits interests,” but partners whose taxable income do not exceed $400,000 would continue to be subject to Code section 1061.

Under the bill, Code section 1061 would be repealed. In other words, ordinary income treatment would apply regardless of holding period and regardless of the service provider’s level of taxable income. Second, like the Greenbook proposal, under this legislation – (1) the recharacterized amount would be treated as ordinary income rather than short-term capital gain (there is currently no rate differential, but there could be sourcing and other differences), and (2) the “deemed compensation amount” would be subject to self-employment tax.

In addition, this bill also would provide for a deemed election under Code section 83(b) in the event of a transfer of a partnership interest in connection with the performance of services, unless the taxpayer makes a timely election to not have the deemed election apply. Unless a service provider elects out of the deemed election, the service provider would be required to recognize taxable income at the time of the transfer of a partnership interest in connection with the performance of services in an amount equal to the partnership interest’s fair market value. Importantly, fair market value for this purpose would equal the distributions that the service provider would receive in the event of a hypothetical liquidation of the partnership’s assets for cash (after satisfying applicable liabilities) at the time of transfer. This valuation methodology is broadly consistent with current law.

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   [1]   Ending the Carried Interest Loophole Act, S. 2617, 117th Cong. (2021).

   [2]   Ending the Carried Interest Loophole Act, S. 1639, 116th Cong. (2019).

   [3]   The 2017 tax act, commonly known as the Tax Cuts and Jobs Act, is formally titled “An act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” Pub. L. No. 115-97, 131 Stat. 2045.

   [4]   The “specified rate” for a calendar year means the par yield for “5-year High Quality Market corporate bonds” for the first month of the calendar year (currently 1.21%), plus 9 percentage points.

   [5]   According to a summary prepared by the Senate Finance Committee, the legislation is not intended to treat an applicable percentage as higher in a given taxable year due to the application of a “catch-up” provision in the partnership agreement. In addition, a partner’s “invested capital” is intended to equal the partner’s book capital account maintained under the regulations under Code section 704(b) with certain modifications, including that invested capital is to be calculated without regard to untaxed gain and loss resulting from the revaluation of partnership property.

   [6]   Even though the long-term capital loss may be used to offset other capital gain income of the service provider, the legislation would still fulfill its intended purpose of ensuring that the “deemed compensation amount” is subject to tax at ordinary income rates.

   [7]   For simplicity, we have omitted self-employment tax from the computation of the “deemed compensation amount” and omitted net investment income tax from the offsetting capital loss benefit on the assumption that these will generally offset.

   [8]   The proposed changes are described here: https://www.gibsondunn.com/biden-administration-releases-fiscal-year-2022-budget-with-greenbook-and-descriptions-of-proposed-changes-to-federal-tax-law/.

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

Evan M. Gusler – New York (+1 212-351-2445, egusler@gibsondunn.com)
Jennifer L. Sabin – New York (+1 212-351-5208, jsabin@gibsondunn.com)
Michael J. Desmond – Los Angeles/Washington, D.C. (+1 213-229-7531, mdesmond@gibsondunn.com)
Pamela Lawrence Endreny – New York (+1 212-351-2474, pendreny@gibsondunn.com)
Eric B. Sloan – Co-Chair, New York (+1 212-351-2340, esloan@gibsondunn.com)
Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224 /+1 212-351-2344), jtrinklein@gibsondunn.com)
Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, dzygielbaum@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

On July 28, 2021, the proxy advisory firm Institutional Shareholder Services (“ISS”) opened its Annual Benchmark Policy Survey (available here), covering a broad range of topics relating to non-financial environmental, social and governance (“ESG”) performance metrics, racial equity, special purpose acquisition corporations (“SPACs”) and more. In addition, noting that climate change “has emerged as one of the highest priority ESG issues” and that “many investors now identify it as a top area of focus for their stewardship activities,” this year ISS also launched a separate Climate Policy Survey (available here) focused exclusively on climate-related governance issues.

The Annual Benchmark Policy Survey includes questions regarding the following topics for companies in the U.S. and will inform changes to ISS’s benchmark policy for 2022:

• Non-financial ESG performance metrics. Citing an “upward trend” of inclusion of non-financial ESG-related metrics in executive compensation programs, a practice ISS notes “appears to have been fortified by the recent pandemic and social unrest,” the survey asks whether incorporating such metrics into executive compensation programs is an appropriate way to incentivize executives. The survey then asks which compensation components (long-term incentives, short-term incentives, both, or other) are most appropriate for inclusion of non-financial ESG-related performance metrics.
• Racial equity audits. Noting increased shareholder engagement on diversity and racial equity issues in the wake of social unrest following the death of George Floyd and others, the survey asks whether and when companies would benefit from independent racial equity audits (under any set of circumstances, only depending on certain company-specific factors, or not at all). The survey then asks respondents who indicated that a company would benefit depending on company-specific factors which factors would be relevant, including, for example, whether the company has been involved in significant racial and/or ethnic diversity–related controversies or does not provide detailed workforce diversity statistics, such as EEO-1 type data.
• Virtual-only shareholder meetings. This year’s survey seeks information on the types of practices that should be considered problematic in a virtual-only meeting setting. This question follows a “vast majority” of investor respondents indicating last year that they prefer a hybrid meeting approach absent COVID-19-related health and social restrictions. Among the potentially problematic practices ISS identifies in the survey are: the inability to ask live questions at the meeting; muting of participants during the meeting; the inability of shareholders to change votes at the meeting; advance registration requirements or other unreasonable barriers to registration; preventing shareholder proponents from presenting and explaining a shareholder proposal considered at the meeting; and management unreasonably “curating” questions to avoid addressing difficult topics. The survey also asks what would be an appropriate way for shareholders to voice concerns regarding any such problematic practices, including casting votes “against” the chair of the board or all directors or engaging with the company and/or communicating concerns.
• CEO pay quantum and mid-cycle changes to long-term incentive programs. For companies in the U.S. and Canada, ISS’s quantitative pay-for-performance screen currently includes a measure that evaluates one-year CEO pay quantum as a multiple of the median of CEO peers. The survey asks whether this screen should include a longer-term perspective (e.g., three years). The survey also seeks respondents’ views on mid-cycle changes to long-term incentive programs for companies incurring long-term negative impacts from the pandemic. ISS noted that such changes were generally viewed by ISS and investors as problematic given the view that long-term incentives should not be adjusted based on short-term market disruptions (i.e., less than one year), but it acknowledged that some industries continue to experience significant negative impacts from the pandemic.
• Companies with pre-2015 poor governance provisions – multi-class stock, classified board, supermajority vote requirements. ISS’s policy since 2015 has been to recommend votes “against” directors of newly public companies with certain poor governance provisions, including multiple classes of stock with unequal voting rights and without a reasonable sunset, classified board structure, and supermajority vote requirements for amendments to governing documents. Companies that were publicly traded before the 2015 policy change, however, were grandfathered and so are not subject to this policy. The survey asks whether ISS should consider issuing negative voting recommendations on directors at companies maintaining these provisions regardless of when the company went public, and if so, which provisions ISS should revisit and no longer grandfather.
• Recurring adverse director vote recommendations – supermajority vote requirements. For newly public companies, ISS currently recommends votes on a case-by-case basis on director nominees where certain adverse governance provisions – including supermajority voting requirements to amend governing documents – are maintained in the years subsequent to the first shareholder meeting. The survey asks whether, if a company has sought shareholder approval to eliminate supermajority vote requirements, but the company’s proposal does not receive the requisite level of shareholder support, ISS should continue making recurring adverse director vote recommendations for maintaining the supermajority vote requirements, or whether a single or multiple attempts by the company to remove the supermajority requirement would be sufficient (and if multiple attempts are sufficient, how many).
• SPAC deal votes. ISS currently evaluates SPAC transactions on a case-by-case basis, with a main driver being the market price relative to redemption value. ISS notes that the redemption feature of SPACs may be used so long as the SPAC transaction is approved; however, if the transaction is not approved, the public warrants issued in connection with the SPAC will not be exercisable and will be worthless unless sold prior to the termination date. Acknowledging that investors may redeem shares (or sell them on the open market) if they do not like the transaction prospects, and noting that these mechanics may result in little reason for an investor not to support a SPAC transaction, the survey asks whether it makes sense for investors to generally vote in favor of SPAC transactions, irrespective of the merits of the target company combination or any governance concerns. The survey also asks what issues, “dealbreakers,” or areas of concern might be reasons for an investor to vote against a SPAC transaction.
• Proposals with conditional poor governance provisions. ISS notes that one way companies impose poor governance or structural features on shareholders is by bundling or conditioning the closing of a transaction on the passing of other voting items. This practice is particularly common in the SPAC setting where shareholders are asked to approve a new governing charter (which may include features such as classified board, unequal voting structures, etc.) as a condition to consummation of the transaction. In light of these practices, the survey asks about the best course of action for a shareholder who supports an underlying transaction where closing the transaction is conditioned on approval of other ballot items containing poor governance.

The Climate Policy Survey includes questions regarding the following topics and will inform changes to both ISS’s benchmark policy as well as its specialty climate policy for 2022:

• Defining climate-related “material governance failures.” The survey seeks input on what climate-related actions (or lack thereof) demonstrate such poor climate change risk management as to constitute a “material governance failure.” Specifically, the survey asks what actions at a minimum should be expected of a company whose operations, products or services strongly contribute to climate change. Among the “minimum actions” identified by ISS are: providing clear and appropriately detailed disclosure of climate change emissions governance, strategy, risk mitigation efforts, and metrics and targets, such as that set forth by the Task Force on Climate-Related Financial Disclosure (“TCFD”); declaring a long-term ambition to be in line with Paris Agreement goals for its operations and supply chain emissions (Scopes 1, 2 & 3 targets); setting and disclosing absolute medium-term (through 2035) greenhouse gas (“GHG”) emissions reductions targets in line with Paris Agreement goals; and reporting that demonstrates that the company’s corporate and trade association lobbying activities align with (or do not contradict) Paris Agreement goals. The survey also asks whether similar minimum expectations are reasonable for companies that are viewed as not contributing as strongly to climate change.
• Say on Climate. In 2021, some companies put forward their climate transition plans for a shareholder advisory vote (referred to as “Say on Climate”) or committed to doing so in the future. The survey asks whether any of the “minimum actions” (referred to above) could be “dealbreakers” for shareholder support for approval of a management-proposed Say on Climate vote. The survey then asks whether voting on a Say on Climate proposal is the appropriate place to express investor sentiment about the adequacy of a company’s climate risk mitigation, or whether votes cast “against” directors would be appropriate in lieu of, or in addition to, Say on Climate votes. Finally, the survey asks when a shareholder proposal requesting a regular Say on Climate vote would warrant support: never (because the company should decide); never (because shareholders should instead vote against directors); case-specific (only if there are gaps in the current climate risk mitigation plan or reporting); or always (even if the board is managing risk effectively, the vote is a way to test efficacy of the company’s approach and promote positive dialogue between the company and its shareholders).
• High-impact companies. Noting that Climate Action 100+ has identified 167 companies that it views as disproportionately responsible for GHG emissions, the survey asks whether under ISS’s specialty climate policy these companies (or a similar list of such companies) should be subject to a more stringent evaluation of indicators compared to other companies that are viewed as having less of an impact on climate change.
• Net Zero initiatives. Citing increased investor interest in companies setting a goal of net zero emissions by 2050 consistent with a 1.5°C scenario (“Net Zero”), the survey asks whether the specialty climate policy should assess a company’s alignment with Net Zero goals. The survey also asks respondents to rank the importance of a number of elements in indicating a company’s alignment with Net Zero goals, including: announcement of a long-term ambition of Net Zero GHG emissions by 2050; long-term targets for reducing its GHG emissions by 2050 on a clearly defined scope of emissions; medium-term targets for reducing its GHG emissions by between 2026 and 2035 on a clearly defined scope of emissions; short-term targets for reducing its emissions up to 2025 on a clearly defined scope of emissions; a disclosed strategy and capital expenditure program in line with GHG reduction targets in line with Paris Agreement goals; commitment and disclosure showing its corporate and trade association lobbying activities align with Paris Agreement goals; clear board oversight of climate change; disclosure showing the company considers impacts from transitioning to a lower-carbon business model on its workers and communities; and a commitment to clear and appropriately detailed disclosure of its climate change emissions governance, strategy, risk mitigation efforts, and metrics and targets, such as that set forth by the TCFD framework.

While the two surveys cover a broad range of topics, they do not necessarily address every change that ISS will make in its 2022 proxy voting policies. That said, the surveys are an indication of changes ISS is considering and provide an opportunity for interested parties to express their views. Public companies and others are urged to submit their responses, as ISS considers feedback from the surveys in developing its policies.

Both surveys will close on Friday, August 20, at 5:00 p.m. ET. ISS will also solicit more input in the fall through regionally based, topic-specific roundtable discussions. Finally, as in prior years, ISS will open a public comment period on the major final proposed policy changes before releasing its final 2022 policy updates later in the year. Additional information on ISS’s policy development process is available at the ISS policy gateway (available here).

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The following Gibson Dunn lawyers assisted in the preparation of this client update: Elizabeth Ising, Lori Zyskowski, and Cassandra Tillinghast.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups, or any of the following practice leaders and members:

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com)
Lori Zyskowski – New York, NY (+1 212-351-2309, lzyskowski@gibsondunn.com)
Aaron Briggs – San Francisco, CA (+1 415-393-8297, abriggs@gibsondunn.com)
Courtney Haseley – Washington, D.C. (+1 202-955-8213, chaseley@gibsondunn.com)
Julia Lapitskaya – New York, NY (+1 212-351-2354, jlapitskaya@gibsondunn.com)
Cassandra Tillinghast – Washington, D.C. (+1 202-887-3524, ctillinghast@gibsondunn.com)

Executive Compensation and Employee Benefits Group:
Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com)
Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com)
Krista Hanvey – Dallas (+ 214-698-3425, khanvey@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

Colorado Department of Labor and Employment (“CDLE”) has released new guidance on the Equal Pay for Equal Work Act (“EPEW”), taking a much harder line on Colorado employers whose remote job postings exclude Colorado applicants. Previously, some employers tried to avoid the most challenging aspects of the EPEW’s compensation-and-benefits posting requirements by stating that remote positions could be performed from anywhere but Colorado.

On July 21, 2021, the CDLE issued new guidance clarifying that all Colorado employers’ postings for remote jobs must comply with the EPEW’s compensation-and-benefits posting requirements, even if the postings state that the position cannot be performed in or from Colorado. See CDLE Interpretive Notice & Formal Opinion #9 (“INFO #9”). The CDLE also announced that it was sending “Compliance Assistance Letters” to all Colorado employers with remote job postings that exclude Colorado applicants and that do not include the compensation-and-benefits information required by the EPEW. See CDLE Compliance Assistance Letter (the “Letter”). The Letter gives such employers until August 10, 2021, to advise the CDLE by what date their covered job postings will include the compensation-and-benefits information the EPEW requires.

Finally, the CDLE also provided minor updates to its guidance about the compensation-and-benefits information the EPEW requires. The CDLE clarified that covered job postings need only provide a brief general description of the position’s benefits, but cannot use “open-ended” phrases such as “etc.” or “and more” to describe the position’s benefits. The CDLE also explained that, while employers can post a good-faith compensation range, the range’s bottom and top limits cannot be left unclear or open-ended. Additionally, the CDLE noted that the compensation posting requirements do not apply to “Help Wanted” signs or similar communications that do not refer to any specific positions for which the employer is hiring. Finally, the CDLE noted that job postings need not include the employer’s name to comply with the compensation posting requirements, if the employer wants to be discrete in its external job posting process.

This guidance indicates the CDLE’s “officially approved opinions and notices to employers … as to how [the CDLE] applies and interprets various statutes and rules.” INFO #9. It is not binding, for example, on a court of law. Moreover, although the prior lawsuit challenging the EPEW’s posting requirements and other “transparency rules” was voluntarily dismissed after the Colorado federal district court denied the plaintiff’s motion for a preliminary injunction, it is possible that the CDLE’s tough new stance on postings for remote jobs will lead to new challenges to these requirements.

This Client Alert expands on these issues, first addressing the CDLE’s new guidance regarding job posting requirements for remote jobs, then discussing the Compliance Assistance Letters the CDLE sent employers excluding Colorado applicants from remote jobs, and finally providing further detail on INFO #9’s updates regarding the compensation-and-benefits information the EPEW requires.

The EPEW’s Posting Requirements

The EPEW covers all public and private employers that employ at least one person in Colorado. Under the EPEW’s compensation-and-benefits posting requirements, employers are required to “disclose in each posting for each job the hourly or salary compensation, or a range of the hourly or salary compensation, and a general description of all of the benefits and other compensation to be offered to the hired applicant.” C.R.S. § 8-5-201(2). This requirement does not reach postings for “jobs to be performed entirely outside Colorado.” 7 CCR 1103-13 (4.3)(B).

Additionally, the EPEW also requires employers to “make reasonable efforts to announce, post, or otherwise make known all opportunities for promotion to all current employees on the same calendar day and prior to making a promotion decision.” C.R.S. § 8-5-201(1). This requirement applies broadly and includes only a few, very narrow exceptions.

The EPEW Posting Requirements Apply to Remote Jobs, Even If the Job Posting Excludes Colorado Applicants

The CDLE’s newly revised guidance states that the EPEW applies to “any posting by a covered employer for either (1) work tied to Colorado locations or (2) remote work performable anywhere, but not (3) work performable only at non-Colorado worksites.” INFO #9. The posting requirements’ “out-of-state exception … applies to only jobs tied to non-Colorado worksites (e.g., waitstaff at restaurant locations in other states), but not to remote work performable in Colorado or elsewhere.”  Id. (emphasis added). Thus, a “remote job posting, even if it states that the employer will not accept Colorado applicants, remains covered by the [EPEW’s] transparency requirements.” Id.

The CDLE Sent “Compliance Assistance Letters” to Employers Excluding Coloradans from Remote Jobs

Consistent with INFO #9’s guidance regarding remote jobs, the CDLE announced it was sending a “Compliance Assistance Letter” to “all covered employers with remote job postings lacking pay disclosure and excluding Coloradans.” Compliance Assistance Letter. The Letter explained that, for “any employer with any Colorado staff,” “[r]emote jobs are clearly covered by the [EPEW’s] pay disclosure requirement, regardless of an employer’s expressed intent not to hire Coloradans.” Thus, “when employers covered by the [EPEW] post remote jobs covered by the Act, declaring a preference not to hire Coloradans does not eliminate the Act’s pay disclosure duty.”

The Letter goes on to provide general, high-level guidance on how to comply with the EPEW’s compensation-and-benefits posting requirements, including the following:

1. “The required pay information can be brief,” such as just saying “$50,000 – $55,000, health insurance, and IRA.”
2. “No special form, or format” of posting “is required — as long as the posting includes the required pay and benefits information.”
3. “Pay information can be included or linked in a posting, if the employer prefers.”
4. A “flexible” compensation range “from the lowest to the highest the employer genuinely may offer for that particular position can be posted.”
5. An “out-of-range offer is allowed if the range was a good-faith expectation, but then unanticipated factors required higher or lower pay.”
6. “The employer’s name need not be included [in the posting], if it wants discretion and is posting in a third-party site or publication.”

This guidance largely conforms to the CDLE’s prior guidance on these issues.

The CDLE Has Not Imposed Any Penalties … Yet

Consistent with its prior public stances, the CDLE indicated that it is currently focused on compliance through education, rather than fines. The Letter notes that, thus far, all of the employers that the CDLE has contacted about EPEW violations have agreed to fix their postings “promptly,” and the CDLE “happily exercised its discretion to waive all potential fines in each case, believing each employer to have acted in good faith.”

In addition, the CDLE stated that it is first sending the Compliance Assistance Letter to each employer excluding Colorado applicants from remote jobs, “rather than immediately launching investigations of each” employer. The Letter also offers these employers “individualized advice” from the CDLE by phone or email about how to comply with the EPEW posting requirements. Finally, the CDLE gives each employer who receives the Letter until “Tuesday, August 10, 2021, to indicate by what date all covered job postings will include the required pay and benefits disclosures.”

Additional CDLE Guidance Regarding the Required Contents of Job Postings

In addition to explaining the posting requirements for remote jobs, the CDLE provided a few other clarifications of its prior EPEW guidance:

1. In providing the required “general description of all of the benefits the employer is offering for the position,” employers “cannot use an open-ended phrase such as ‘etc.,’ or ‘and more.’” INFO #9. However, consistent with its prior guidance, employers can simply say something brief like “$50,000 – $55,000, health insurance, and IRA.” Compliance Assistance Letter.
2. Employers continue to be allowed to post a good-faith compensation range (which employers may ultimately depart from, in limited circumstances). INFO #9. But the compensation range’s “bottom and top cannot be left unclear with open-ended phrases such as ‘[$]30,000 and up’ (with no top of the range), or ‘up to $60,000’ (with no bottom of the range).”
3. The compensation posting requirements do not apply to “Help Wanted” signs or “similar communication indicating only generally, without reference to any particular positions, that an employer is accepting applications or hiring.” INFO #9. In contrast, a job posting that must comply with the compensation-and-benefits posting requirements is “any written or printed communication (whether electronic or hard copy) that the employer has a specific job or jobs available or is accepting job applications for a particular position or positions.”  
4. Job postings need not include the employer’s name, if the employer “wants discretion and is posting in a third-party site or publication — as long as the posting includes the required pay and benefits information.” Compliance Assistance Letter. The Letter does not clarify whether a no-name posting would also comply with the EPEW’s promotion posting requirements, or just the compensation posting requirements.

Key Takeaways

This new guidance indicates that the CDLE is focused on foreclosing the methods that some employers were using to try to avoid the more challenging aspects of the EPEW’s compensation-and-benefits posting requirements. In contrast, little of the new CDLE guidance relates to the EPEW’s internal, promotion posting requirements (which in some ways may be even more challenging for Colorado employers).

Finally, the CDLE continues to indicate that it is focused on encouraging EPEW compliance through education, rather than fines, at least for now. Nonetheless, given the CDLE’s (and the public’s) continued scrutiny of compliance with this law, employers with any Colorado employees should ensure that their job postings are compliant as soon as possible. In particular, whether or not they have yet received a Compliance Assistance Letter from the CDLE, employers that had been relying on excluding Colorado applicants from remote jobs should revise their job postings to bring them into compliance with the EPEW, as interpreted by the CDLE.

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

Jessica Brown – Denver (+1 303-298-5944, jbrown@gibsondunn.com)
Marie Zoglo – Denver (+1 303-298-5735, mzoglo@gibsondunn.com)

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

Labor and Employment Group:
Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)
Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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

This edition of Gibson Dunn’s Federal Circuit Update discusses recent Federal Circuit decisions concerning pleading requirements, obviousness, and more Western District of Texas venue issues. Also this month, the U.S. Senate voted to confirm Tiffany P. Cunningham to be United States Circuit Judge for the Federal Circuit and Federal Circuit Judge Kathleen O’Malley announced her retirement.

Federal Circuit News

Supreme Court:

The Court did not add any new cases originating at the Federal Circuit.

The following petitions are still pending:

• Biogen MA Inc. v. EMD Serono, Inc. (U.S. No. 20-1604) concerning anticipation of method-of-treatment patent claims. Gibson Dunn partner Mark A. Perry is counsel for the respondent.
• American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20‑891) concerning patent eligibility under 35 U.S.C. § 101, in which the Court has invited the Solicitor General to file a brief expressing the views of the United States.
• PersonalWeb Technologies, LLC v. Patreon, Inc. (U.S. No. 20-1394) concerning the Kessler

Other Federal Circuit News:

On July 19, 2021, the U.S. Senate voted to confirm Tiffany P. Cunningham as United States Circuit Judge for the Federal Circuit by a vote of 63-33.  Judge Cunningham was a partner at Perkins Coie LLP and was previously a partner at Kirkland & Ellis LLP. Ms. Cunningham is a graduate of Harvard Law School and she earned a Bachelor of Science in chemical engineering from the Massachusetts Institute of Technology. Ms. Cunningham clerked for Judge Dyk of the Federal Circuit.

Federal Circuit Judge Kathleen O’Malley announced her plans to retire from the bench on March 11, 2022. Judge O’Malley was appointed to the Federal Circuit by President Obama in 2010. Prior to her elevation to the Federal Circuit, Judge O’Malley was appointed to the U.S. District Court for the Northern District of Ohio by President Clinton in 1994.

Upcoming Oral Argument Calendar

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

Live streaming audio is available on the Federal Circuit’s new YouTube channel. Connection information is posted on the court’s website.

The court will resume in-person arguments starting with the September 2021 court sitting.

Key Case Summaries (July 2021)

Bot M8 LLC v. Sony Corporation of America (Fed. Cir. No. 20-2218): Bot M8 LLC (“Bot M8”) sued Sony Corporation of America (“Sony”) for infringement of various patents. The district court sua sponte directed Bot M8 to file an amended complaint requiring Bot M8 to specify how every element of every claim is infringed and to reverse engineer the PS4 (the accused product) if it was able to. Bot M8 agreed to do so. After Bot M8 filed its First Amended Complaint (“FAC”), Sony filed a motion to dismiss, which the court granted. In a discovery hearing two days later, Bot M8 raised for the first time that in order to reverse engineer the PS4 and view the underlying code, it would have to “jailbreak” the system, which is a violation of the Digital Millennium Copyright Act (“DMCA”) and other anti-hacking statutes. In response, Sony gave Bot M8 permission to jailbreak the system. Bot M8 then sought leave of the court to file its Second Amended Complaint (“SAC”). The court denied Bot M8’s request citing lack of diligence. Bot M8 appealed the district court’s dismissal.

The panel (O’Malley, J., joined by Linn and Dyk, J.J.) affirmed-in-part, reversed-in-part, and remanded, holding that the district court was correct in dismissing two of the patents, but that it required “too much” with respect to the other two patents. The panel reaffirmed that “[a] plaintiff is not required to plead infringement on an element-by-element basis.”

For the first two patents, the panel affirmed the district court finding it did not err in dismissing the claims for insufficiently pleading a plausible claim because (1) the factual allegations were inconsistent and contradicted infringement, and (2) the allegations were conclusory. With respect to the second two patents, the panel reversed the district court determining that Bot M8 had supported its “assertions with specific factual allegations” and that the district court “demand[ed] too much” by dismissing these claims. The panel also affirmed the district court’s decision to deny Bot M8’s motion for leave to amend for lack of diligence. The panel noted that although it may have granted Bot M8’s motion if deciding it in the first instance, it found no abuse of discretion. While the district court should not have required reverse engineering of Sony’s products, Bot M8 waived its objections by telling the court it was happy to undertake the exercise. Moreover, Bot M8 failed to raise any concerns regarding its ability to reverse engineer the PS4 under the DMCA until after the court had issued its decision on Sony’s motion to dismiss.

Chemours Company v. Daikin Industries (Fed. Cir. No. 20-1289): The case involved two IPR final written decisions of the PTAB, which determined that claims directed to a polymer with a high melt flow rate are obvious. The Board relied on a prior art patent (“Kaulbach”) that disclosed a lower melt flow rate and a “very narrow molecular weight distribution.” The Board concluded that a POSA would be motivated to increase Kaulbach’s melt flow rate to the claimed range, even though doing so would broaden molecular weight distribution.

A majority of the panel (Reyna, J., joined by Newman, J.) reversed, holding that Kaulbach taught away from broadening molecular weight distribution and that, therefore, the Board’s proposed modification would necessarily alter Kaulbach’s inventive concept. Judge Dyk dissented in part on this issue, arguing that Kaulbach did not teach away from broadening molecular weight distribution, but only offered better alternatives. According to Judge Dyk, the Court’s precedent makes clear that an inferior combination may still be used for obviousness purposes. Judge Dyk also noted that increasing Kaulbach’s melt flow rate to the claimed range would not have necessarily broadened the molecular weight distribution beyond levels Kaulbach taught were acceptable.

In the unanimous part of the opinion, the panel also rejected the Board’s commercial success analysis, holding that the Board made three errors. First, the panel held that the Board erred by concluding that there could be no nexus between the claimed invention and the alleged commercial success because all elements of the challenged claims were present in Kaulbach or other prior art. The Court explained that where an invention is a unique combination of known elements, “separate disclosure of individual limitations . . . does not negate a nexus.” Next, the Court disagreed with the Board’s decision to require market share data, holding that sales data alone may be sufficient to show commercial success. Lastly, the Court rejected the Board’s finding that the proffered commercial success evidence was weak because the patents at issue were “blocking patents.” The Court held that “the challenged patent, which covers the claimed invention at issue, cannot act as a blocking patent.”

In re: Uber Technologies, Inc. (Fed Cir. No. 21-150) (nonprecedential): Uber sought a writ of mandamus ordering the United States District Court for the Western District of Texas to transfer the underlying actions to the United States District Court for the Northern District of California. The panel (Dyk, J., joined by Lourie and Reyna, J.J.) granted the petition. Gibson Dunn is counsel for Uber.

The panel explained that it had recently granted mandamus to direct the district court to transfer in two other actions filed by the plaintiffs asserting infringement of two of the same patents against different defendants, in In re Samsung Electronics Co., Nos. 2021-139, -140 (see our June 2021 update). In that case, the Federal Circuit rejected the district court’s determination that the plaintiffs’ actions could not have been brought in the transferee venue because the presence of the Texas plaintiff “is plainly recent, ephemeral, and artificial—just the sort of maneuver in anticipation of litigation that has been routinely rejected.” Noting that the district court itself recognized that the issues presented here are identical to those in plaintiffs’ other cases, the panel held that, as in Samsung, the district court erred in concluding that Uber had failed to satisfy the threshold question for venue.

With respect to the district court’s analysis of the traditional public and private factors, the court explained that this case involved very similar facts to those in Samsung, where the Court found that the district court erred by 1) “giving little weight to the presence of identified party witnesses in the Northern District of California despite no witness being identified in or near the Western District of Texas”; 2) “simply presuming that few, if any, party and non-party identified witnesses will likely testify at trial despite the defendants’ submitting evidence and argument to the contrary”; and 3) finding that “there was a strong public interest in retaining the case in the district based on Ikorongo’s other pending infringement action against Bumble Trading, LLC.” The court concluded that there was no basis for a disposition different from the one reached in Samsung. It noted that the reasons for not finding that judicial economy to override the clear convenience of the transferee venue apply with even more force here, given that the court had already directed the Samsung and LG actions to be transferred to Northern California in In re Samsung. The panel also found that the district court clearly erred in negating the transferee venue’s strong local interest by relying merely on the fact that the plaintiffs alleged infringement in the Western District of Texas.

In re: TCO AS (Fed. Cir. No. 21-158) (nonprecedential): NCS Multistage, Inc., a Canadian corporation, and NCS Multistage LLC, its Houston, Texas based subsidiary, sued TCO AS, a Norwegian company, for patent infringement in the Western District of Texas. TCO moved to transfer the case to the Southern District of Texas pursuant to 28 U.S.C. § 1404(a). The district court denied the motion, finding that TCO had failed to show the transferee venue was clearly more convenient.

TCO petitioned for a writ of mandamus, which the Federal Circuit (Taranto, Hughes, Stoll, JJ.) denied. Stressing the “highly deferential standard” for resolving a mandamus petition, the Federal Circuit could not “say that TCO has a clear and indisputable right to relief, particularly in light of the fact that several potential witnesses are located out-side of the proposed transferee venue, including some in the Western District of Texas, and the fact that the only party headquartered in the proposed transferee venue elected to litigate this case in the Western District of Texas.”

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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:

Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com)
Jessica A. Hudak – Orange County (+1 949-451-3837, jhudak@gibsondunn.com)

Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:

Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, aho@gibsondunn.com)
Mark A. Perry – Washington, D.C. (+1 202-887-3667, mperry@gibsondunn.com)

Intellectual Property Group:
Kate Dominguez – New York (+1 212-351-2338, kdominguez@gibsondunn.com)
Y. Ernest Hsin – San Francisco (+1 415-393-8224, ehsin@gibsondunn.com)
Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com)
Jane M. Love, Ph.D. – New York (+1 212-351-3922, jlove@gibsondunn.com)

© 2021 Gibson, Dunn & Crutcher LLP

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