Gibson Dunn strongly condemns acts of violence, hatred and bigotry of any kind. In recent weeks, we have seen a disturbing rise of anti-Jewish hate erupt in communities around the world. These attacks rooted in anti-Semitism have no place in society, and we denounce anti-Semitism in any form, and in any context.

It has been a difficult year for many, and we know that many of our colleagues, friends and family members have been impacted by the recent attacks on the Jewish community and are struggling on a very personal level with these heinous acts of bigotry and prejudice. These horrific acts of physical violence in our communities and explicit anti-Semitic messages are deeply disturbing.

If we have learned anything from this past year, it is that we must not be afraid to condemn acts of hatred and violence wherever, and whenever, we see them in our communities. As Elie Wiesel said, “I swore never to be silent whenever human beings endure suffering and humiliation.” Silence is complicity and Gibson Dunn has never been silent. At Gibson Dunn, we have always and will always defend the rule of law, civil liberties, and equal justice for all. Our lawyers have been encouraged to take up that mantle, through pro bono efforts, charitable giving, or otherwise. The firm is proud of our longstanding partnerships with organizations committed to fighting anti-Semitism, including the Anti-Defamation League and the American Jewish Committee, which recently issued a groundbreaking survey on anti-Semitism in America. We are proud of the pro bono work that we have done in collaboration with organizations like Bet Tzedek and so many others, and we commit ourselves to further engaging in these important efforts.

Indeed, we have always prided ourselves on being on the frontlines of all major social justice and human rights issues of the day. Whether fighting for marriage equality; protecting those impacted most directly by the Travel Ban; fighting to reunite families separated at the southern border; standing up for the Dreamers and ultimately saving the DACA program; tackling police reform and criminal justice reform; defending the rights of peaceful protestors demanding racial justice in the wake of the murder of George Floyd; or advocating for victims of anti-Asian hate, we have actively taken a leadership role in righting such inequities. And this has never been more true than over the past year – Gibson Dunn has repeatedly reaffirmed our commitment to fighting hatred, injustice and inequity in our communities – particularly when these acts of hatred are rooted in discrimination against race, religion, color, sexual orientation, or national origin. We continue to stand with our colleagues and will fight prejudice and bigotry as we continue to advocate for tolerance, inclusion and understanding.

Gibson Dunn is committed to doing our part to combat anti-Semitism and hate in all of its forms. We encourage you to read this OpEd published in The American Lawyer from law firm leaders that we are proud to co-sign.

Mass arbitration is a recent phenomenon in which thousands of plaintiffs—often consumers, employees, or independent contractors—bring arbitration demands against a company at the same time. Many mass arbitrations are the product of sophisticated advertising campaigns in which a plaintiffs’ firm uses social media to generate a list of thousands of individual “clients.” Other mass arbitrations arise after a court has enforced a class-action waiver in an arbitration agreement—instead of filing a single arbitration on behalf of the named plaintiff only, the plaintiffs’ firm tries to replicate the failed class action by bringing thousands of arbitrations on behalf of would-be class members.

Mass arbitrations can impose significant, even crippling, costs on companies, particularly in light of the hefty filing fees that many arbitration providers charge. For example, if a company’s filing-fee obligation is $2,000 per arbitration, a mass arbitration of 5,000 individuals could result in the arbitration provider invoicing the company for $10 million in nonrefundable filing fees. Equally large invoices—for case management fees and arbitrators’ fees—can quickly follow.

Because mass-arbitration plaintiffs are often recruited on social media, with little-to-no vetting, a mass arbitration might include hundreds of plaintiffs who never had any relationship or dealings with the company. Nonetheless, it is often difficult to identify and eliminate those frivolous claims before the arbitrations commence, and many arbitration providers insist on the company paying nonrefundable filing fees regardless of whether the claims have merits. A recent California law (SB 707) raises the stakes even further by requiring companies to pay arbitration fees within 30 days, and failure to do so can lead to default judgments and liability for the plaintiffs’ attorneys’ fees.

Many companies, however, have deployed successful strategies for deterring and defending against mass arbitrations, primarily through the careful drafting of their arbitration agreements. Below, we identify a few of the strategies that have been deployed. This list is not exhaustive, not all strategies are right for each company, and mass arbitration tactics are evolving and changing rapidly.

Informal dispute resolution clauses. Companies can often reduce mass-arbitration costs by requiring the parties to engage in a mediation or informal dispute resolution conference before either side serves an arbitration demand. Those conferences can often result in the settlement or dismissal of many claims, and also deter the filing of frivolous claims, saving the company costly arbitration filing fees.
Require individualized arbitration demands. Plaintiffs’ firms often try to initiate mass arbitrations by sending the company a single arbitration demand and appending a list of their purported clients. This tactic often fails to give companies sufficient information about the claimants bringing the arbitration demands, and also increases companies’ nonrefundable filing fees. To deter this tactic, some companies have required claimants to serve individualized arbitration demands, each of which must clearly identify the claimant, their legal claims, the requested relief, and an express authorization by the claimant to bring the arbitration demand.
Cost-splitting provisions. Courts generally permit companies to require consumers, employees or independent contractors to bear some of the costs of arbitration, including the amount it would cost a claimant to file a lawsuit in a local court. Requiring claimants to pay for some arbitration fees can reduce the cost of a mass arbitration and deter the filing of frivolous claims.
Fee-shifting for frivolous claims. Companies may also consider inserting clauses in their arbitration agreements that allow the arbitrator to award fees and costs to the prevailing party if the arbitrator finds that the losing party filed a frivolous claim. This can be another useful tool for deterring frivolous mass arbitrations and, at a minimum, it incentivizes plaintiffs’ counsel to vet claimants before bringing claims on their behalf.
Offers of judgment. In many jurisdictions, an offer of judgment shifts costs to the plaintiff if they recover less money at trial than the settlement offer. A company may be able to reduce its costs and exposure by making offers of judgment at the outset of a mass arbitration. While most jurisdictions automatically enforce offers of judgment in arbitration, companies may consider including provisions in their arbitration agreements that expressly permit offers of judgment, with cost-shifting.
Selecting the arbitration provider. Arbitration providers charge filing fees and other fees that vary widely. Some arbitration providers have dedicated fee schedules and other protocols for mass arbitrations. Companies should research and compare providers’ fee schedules and mass-arbitration protocols before selecting a provider for their arbitration agreement. It is also advisable to include a provision in the arbitration agreement that allows either side to negotiate lower fees with the provider—without such a provision, the provider may be unwilling to enter into such negotiations.
Reserve the right to settle claims on a class-wide basis. A company facing a mass arbitration may wish to obtain global peace by entering into a class settlement that extinguishes all claims. No clause in an arbitration agreement should be necessary to allow a company to settle a class action. Indeed, for years, companies have settled class actions despite having arbitration agreements with class-action waivers. However, some plaintiffs’ lawyers have argued that class-action waivers preclude companies from settling a class action. Therefore, in an abundance of caution, companies might consider adding a clause to their arbitration agreements that allows any party to settle claims on a class-wide basis.
Establish a protocol for adjudicating a mass arbitration. Some companies have inserted specific protocols in their arbitration agreements to help reduce the cost of a potential mass arbitration. For example, some arbitration agreements state that, in the event more than 100 similar arbitrations are filed at the same time, they will be “batched” into groups of 100, with each batch assigned to a single arbitrator and triggering a single filing fee. In this particular example, the batching protocol could potentially cut the company’s arbitration costs by up to 99%. However, having arbitrators assigned to multiple arbitrations could create additional risk for the company. In addition to batching, there are other mass-arbitration protocols that offer different risk/cost profiles.

Conclusion

Mass arbitrations can create significant cost and risk for a company. Being proactive and drafting an arbitration agreement with an eye toward mass arbitration can help reduce that cost and risk.

We will continue to monitor closely and develop new strategies and approaches to mass arbitration. If you have any questions or would like additional information about these or other developments, please reach out to any of your contacts at Gibson Dunn, any member of the firm’s Class Actions practice group, or the author of this alert:

Michael Holecek – Los Angeles (+1 213-220-6285, mholecek@gibsondunn.com)

The following Gibson Dunn attorneys also are available to assist in addressing any questions you may have regarding this alert:

Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com)
Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com)
Joshua S. Lipshutz – Washington, D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com)
Dhananjay S. Manthripragada – Los Angeles (+1 213-229-7366, dmanthripragada@gibsondunn.com)

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

In May 2021, Gibson Dunn attorneys won a landmark case before the General Court of the European Union (case T-561/18, ITD and Danske Fragtmænd v European Commission).

Gibson Dunn represented ITD (a Danish trade association of international companies operating parcel and logistics services) and Danske Fragtmænd (a company operating in this sector in Denmark) in a case concerning state subsidies in the Danish post and courier market. The EU General Court partially annulled a European Commission decision of 28 May 2018 authorising certain aid measures granted by the Danish and Swedish States to Post Danmark, the Danish postal incumbent and former monopolist owned by PostNord AB, a holding company in turn owned by the Danish and Swedish States. In its decision the Commission had rejected claims that a capital injection from Post Danmark’s parent company and a tax exemption in favour of Post Danmark involved unlawful State aid, but the General Court overturned this decision.

With the rapid decline in letter volumes across the EU, ex monopolists in the postal sector have been struggling to remain viable and have become more actively engaged in the booming parcel freight transport market based on e-commerce transactions. The problem is that ex monopolists still receive funding from their owners, i.e., the State, and while that funding may lawfully be granted for providing a universal letter service in remote areas, it is not justified to use it to gain a competitive advantage in markets such as parcel transport. The EU courts have therefore intensified its scrutiny of Member States which transfer funding to their State owned ex monopolists in various sectors, including in the postal sector. While Member States are allowed to invest in their own companies, capital contributions to loss making entities with no prospect of a reasonable return constitute prohibited State aid. Similarly tax exemptions granted selectively to State owned companies are illegal.

Post Danmark, the ex monopolist for letter services in Denmark, has experienced a 80% decline in letter volumes and has been unable to generate a profit even in the parcel transport market. The company has been incurring catastrophic losses for a decade (or more).

On 5 May 2021, the General Court of the European Union annulled the Commission’s finding that a capital injection to Post Danmark of EUR 135 million in 2017 did not involve State aid as well as a finding that a VAT exemption (with an annual value of approx. EUR 37 million) benefitting Post Danmark for at least 10 years did not constitute State aid. The Danish State and PostNord AB (the Danish-Swedish owned parent company of Post Danmark) intervened in the case to support the European Commission while two freight transport companies, Jørgen Jensen Distribution and Dansk Distribution, intervened in support of ITD and Danske Fragtmænd.

This judgment is the latest in a series by EU Courts setting out requirements regarding Member States’ capital injections in loss making State owned companies in the EU. Specifically, the General Court makes clear that State aid granted in the form of capital injections must be capable of producing a reasonable rate of return in order to avoid being classified as prohibited State aid.

Indeed, while the European Commission had concluded that the capital injection of EUR 135 million granted to loss making Post Danmark would make it possible to restore Post Danmark’s viability, the General Court found that the Commission had no basis for coming to this conclusion. There was no evidence that the company could be brought back to profitability nor that it would have prospects of generating a reasonable return. In the same vein, while the Commission had accepted their arguments that Denmark and Sweden were not involved in the capital injection (as it had been contributed by the parent company to Post Danmark) and were merely ‘passive spectators’ to this payment, the General Court held that the Commission cannot just rely on States’ own arguments whilst ignoring conflicting information submitted by the complainants. Instead the Commission must diligently investigate the matter especially in view of the Commission’s obligation to conduct an impartial examination of the complaint.

The judgment also finds that the VAT exemption (with an annual value of approx. EUR 37 million) benefiting Post Danmark, which allowed e-commerce companies not to charge their customers VAT if they used Post Danmark as their freight company, also benefits Post Danmark and thus involves illegal State aid. The General Court specifically pointed out that this VAT exemption is not covered by the existing permissible VAT exemption covering the provision of Universal Service Obligations based on the VAT Directive 2006/112/EC of 28 November 2006.

As a result of the judgment, the Commission must now reopen the case and will probably be forced to consider that the capital injection of EUR 135 million and the VAT exemption involve incompatible, and therefore unlawful, State aid that must be recovered from Post Danmark. In view of its catastrophic financial situation, this may mean that Post Danmark will unable to survive, at least in its current form.

The following Gibson Dunn lawyers assisted in preparing this client update: Lena Sandberg, Yannis Ioannidis and Pilar Pérez-D’Ocon.

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

Antitrust and Competition Group:

Brussels
Attila Borsos (+32 2 554 72 11, aborsos@gibsondunn.com)
Christian Riis-Madsen (+32 2 554 72 05, criis@gibsondunn.com)
Lena Sandberg (+32 2 554 72 60, lsandberg@gibsondunn.com)
David Wood (+32 2 554 7210, dwood@gibsondunn.com)
Alejandro Guerrero (+32 2 554 7218, aguerrero@gibsondunn.com)

London
Ali Nikpay (+44 20 7071 4273, anikpay@gibsondunn.com)
Deirdre Taylor (+44 20 7071 4274, dtaylor2@gibsondunn.com)
Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com)
Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com)
Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com)

Frankfurt
Georg Weidenbach (+49 69 247 411 550, gweidenbach@gibsondunn.com)

Munich
Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com)
Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com)

Hong Kong
Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com)
Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)

Washington, D.C.
Adam Di Vincenzo (+1 202-887-3704, adivincenzo@gibsondunn.com)
Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com)
Joseph Kattan (+1 202-955-8239, jkattan@gibsondunn.com)
Kristen C. Limarzi (+1 202-887-3518, klimarzi@gibsondunn.com)
Joshua Lipton (+1 202-955-8226, jlipton@gibsondunn.com)
Richard G. Parker (+1 202-955-8503, rparker@gibsondunn.com)
Michael J. Perry (+1 202-887-3558, mjperry@gibsondunn.com)
Cynthia Richman (+1 202-955-8234, crichman@gibsondunn.com)
Jeremy Robison (+1 202-955-8518, wrobison@gibsondunn.com)
Stephen Weissman (+1 202-955-8678, sweissman@gibsondunn.com)
Andrew Cline (+1 202-887-3698, acline@gibsondunn.com)
Chris Wilson (+1 202-955-8520, cwilson@gibsondunn.com)

New York
Eric J. Stock (+1 212-351-2301, estock@gibsondunn.com)
Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com)

Los Angeles
Daniel G. Swanson (+1 213-229-7430, dswanson@gibsondunn.com)
Christopher D. Dusseault (+1 213-229-7855, cdusseault@gibsondunn.com)
Samuel G. Liversidge (+1 213-229-7420, sliversidge@gibsondunn.com)
Jay P. Srinivasan (+1 213-229-7296, jsrinivasan@gibsondunn.com)
Rod J. Stone (+1 213-229-7256, rstone@gibsondunn.com)

San Francisco
Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com)
Caeli A. Higney (+1 415-393-8248, chigney@gibsondunn.com)

Dallas
Veronica S. Lewis (+1 214-698-3320, vlewis@gibsondunn.com)
Mike Raiff (+1 214-698-3350, mraiff@gibsondunn.com)
Brian Robison (+1 214-698-3370, brobison@gibsondunn.com)
Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com)

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

On May 18, 2021, the New York Privacy Act (“NYPA”) passed out of the New York Senate Consumer Protection Committee.[1] Senator Kevin Thomas previously introduced a version of this bill in the 2019-2020 legislative session, but this is the first time that the bill—or any comprehensive privacy bill in New York—has made it out of committee. In addition to needing the approval of the majority of the full senate, the bill must progress in the New York Assembly before it is enacted. If the NYPA is enacted, it would be the third comprehensive state privacy law in the United States following the California Consumer Privacy Act (as amended by the California Privacy Rights Act) (“CCPA”) and the Virginia Consumer Data Protection Act (“VCDPA”), the latter of which was signed into law earlier this year and goes into effect in January 2023. While the New York Privacy Act shares similarities with its counterparts in California and Virginia, such as prohibiting discrimination against consumers that exercise their rights under the laws, the NYPA is substantially broader.[2] If the NYPA is signed into law, many companies doing business in New York will need to assess their compliance and may need to modify their compliance efforts and collection and use of consumer personal information.

The NYPA’s broad jurisdictional mandate applies to any entity that “conduct[s] business in New York or produce[s] products or services that are targeted to residents of New York,” and that (1) has annual gross revenue of $25 million or more, (2) controls or processes the personal data of at least 100,000 New York consumers, (3) controls or processes the personal data of at least 500,000 individuals nationwide and 10,000 New York consumers, or (4) derives over 50% of gross revenue from the sale of personal data and controls or processes the personal data of at least 25,000 New York consumers.[3] Just like the CCPA and VCDPA do not define “doing” or “conduct[ing]” business in California or Virginia, the NYPA does not define “conduct[ing] business in New York.” It seems likely that the NYPA will apply to for-profit and business-to-business companies that interact with New York residents, or process personal data of New York residents on a relatively large scale. Like the CCPA, the NYPA would exempt a list of enumerated data types, including data already subject to certain laws and regulations, like the Gramm-Leach-Bliley Act (“GLBA”).[4]

The cornerstone of the NYPA is the creation of an expansive consumer “bill of rights,” which contains similar rights as enacted in California and Virginia, but also goes further to give unprecedented rights to consumers. Similar to the California and Virginia laws, consumer rights under the NYPA include the right to know the categories of personal data collected, and purposes of such categories; the right to access, correct, and delete their personal information; the right to data portability; and anti-discrimination rights.[5] Unlike the California and Virginia laws, which provide consumers with the right to opt out of certain data selling, sharing, and/or processing, under the NYPA data controllers must obtain opt-in consent before processing personal data or “mak[ing] any changes in the processing or processing purpose,” such as using “less protective” methods of collection.[6]

The NYPA would also go further in codifying the concept of a “data fiduciary.” This concept would prevent controllers from using consumers’ personal information in a way that would harm them—that is, in a manner against a consumer’s physical, financial, psychological, or reputational interests. As a data fiduciary, a controller would be required pursuant the NYPA’s duty of loyalty to notify consumers about data processing foreseeably adverse to their interests and prohibit controllers from engaging in “unfair, deceptive, or abusive…practices with respect to obtaining consumer consent.”[7] Complying with the NYPA’s duty of care would require implementing certain practices, such as annual risk assessments and reasonable safeguards to protect personal data.[8] The bill’s consumer focus also extends to authorizing a broad private right of action for violations of any of these consumer rights—unlike the California laws, which provide for a narrow private right of action, and the Virginia law, which provides for no private right of action at all.[9] The Attorney General also has authority to enforce the law. Finally, the Virginia and California laws provide the opportunity to cure violations before enforcement, which is not explicitly provided for in the NYPA.[10]

The NYPA would create an even broader comprehensive privacy regime than its counterparts in Virginia and California. If the NYPA is enacted, it would mandate yet another privacy regime in the United States and pose additional challenges as businesses attempt to navigate this already complex environment. Gibson Dunn is tracking this bill through the end of the legislative session, and will continue to monitor developments in New York and nationwide.

______________________

[1] Senate Bill No. 6701.

[2] Compare id. § 1103(1)(C) with Cal. Civ. Code § 1798.125 (as amended by California Consumer Privacy Rights and Enforcement Act on November 3, 2020) and Virginia Consumer Data Protection Act, S.B. 1392 § 59.1-574(A)(4).

[3] Senate Bill No. 6701 § 1101.

[4] Id. § 1101(2).

[5] Id. § 1102–1103.

[6] Id. § 1102(2).

[7] Id. § 1103(1)(A).

[8] Id. § 1103(1)(B).

[9] Compare id. § 1106 with Cal. Civ. Code § 1798.150 and S.B. 1392 § 59.1-579(C).

[10] See, e.g., Cal. Civ. Code § 1798.199.45; S.B. 1392 § 59.1-579(B).

This alert was prepared by Alexander H. Southwell, Mylan L. Denerstein, Amanda M. Aycock, Jennifer Katz and Lisa V. Zivkovic.

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:

Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Mylan L. Denerstein – Co-Chair, Public Policy Practice (+1 212-351-3850, denerstein@gibsondunn.com)

Privacy, Cybersecurity and Data Innovation Group:

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)

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)

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)

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

I. Introduction

Following two major cybersecurity events, President Biden issued a sweeping Executive Order on May 12, 2021,[1] reinforcing his commitment that fighting cyberattacks is “a top priority and essential to national and economic security.” The executive action is the latest of the Administration’s efforts on “prevention, detection, assessment, and remediation of cyber incidents,” coming on the heels of the Colonial Pipeline ransomware attack, and just a few months after the SolarWinds breach.

In brief, reports in December 2020 revealed that hackers accessed the systems of SolarWinds, an IT management software company, and implemented malicious code that enabled the hackers to install malware that was used to spy on SolarWinds and its customers, including several U.S. government agencies and many Fortune 500 companies. And in early May 2021, Colonial Pipeline, an oil pipeline system, was targeted by a criminal cybergroup encrypting its system and demanding a ransom. Although aimed at business technology, the attack caused Colonial Pipeline to shut down operations on a major pipeline serving the Northeast, leading to gas shortages and panic buying.

These two high-profile incidents illustrate the reality that cyberattacks are a growing threat facing both the public and private sectors. The scope and incidence of these attacks has grown steadily year over year, with experts from Cybersecurity Ventures estimating that cybercrime will cost $6 trillion globally in 2021 and continue to grow by 15% annually over the next five years.[2] Cyberattacks can have wide-ranging implications, including theft of sensitive personal data, breach of state and trade secrets, and network and power disruptions, so investment in cybersecurity infrastructure is critical.

In light of these threats, the Order is the latest step in the Biden Administration’s commitment to “disrupt and deter our adversaries from undertaking significant cyberattacks.” President Biden’s appointments have signaled his seriousness in this regard — he has appointed a number of experienced cybersecurity professionals to significant roles, including for the newly-created role of National Cyber Director and a Deputy National Security Advisor for Cyber and Emerging Technology (a role that elevated the subject within the Administration). While the Administration has indicated intentions to push for more comprehensive cybersecurity legislation, in the interim, the Order will have a significant impact on the way that federal government agencies and government contractors approach cybersecurity. The Administration intends the Order to also “encourage private sector companies to follow the Federal Government’s lead,” a strategy that had prior success with the widespread adoption of the National Institute of Standards and Technology’s 2014 voluntary cybersecurity framework.

II. Key Provisions of the Executive Order

The Order aims to improve the nation’s cybersecurity and protect federal government networks against sophisticated, malicious cyber activity from both nation-state actors and cyber criminals. As many high-profile cyber incidents have shared risk factors and other commonalities, such as similar cybersecurity vulnerabilities and a lack of robust defenses, the Order focuses on measures likely to have an immediate and wide-ranging impact on critical infrastructure systems, such as strengthening federal network protections, promoting information-sharing between the U.S. government and private sector, and enhancing the ability to respond to incidents. While many federal agencies and contractors already maintain and abide by existing agency-specific cybersecurity measures, the Order establishes additional mechanisms and standards to ensure that all information systems used or operated by federal agencies or contractors “meet or exceed” the cybersecurity standards and requirements set forth in the Order.

The Order aims to spur substantial participation and investment from a diverse array of relevant stakeholders in both the public and private sectors. Although the Order’s requirements apply only to federal agencies and contractors, the Order acknowledges the private sector’s integral role in providing and maintaining domestic critical infrastructure. To this end, the Order expressly encourages the private sector — including entities that are not government contractors — to adopt comparable and ambitious measures to minimize future cyber incidents.

The Order contains eight key components and provisions for modernizing the federal government’s defenses and responses to cyberattacks, which are summarized below.

The Order calls for the review and update of Federal Acquisition Regulation (“FAR”) and Defense Federal Acquisition Regulation Supplement (“DFARS”) requirements to ensure that federal contractors collect, preserve, and share information related to cyber threats and incidents. The anticipated revisions to the FAR and DFARS provisions would also require service providers to collaborate with federal agencies in investigating and responding to incidents or potential incidents. The Order establishes a federal government policy that information and communications technology service providers must promptly report the discovery of cyber incidents to the appropriate federal agencies, and contemplates revisions to the FAR identifying the types of cyber incidents that will trigger such reporting, the types of information to be reported, the time periods within which to report cyber incidents based on a graduated scale of severity, and the types of contractors and service providers to be covered by the proposed language. The Order also contemplates the standardization of agency-specific cybersecurity requirements through the anticipated FAR updates. Furthermore, the Biden Administration has conveyed its expectation that these revised contract terms will spur adoption of the practices by the private sector more broadly.

Sec. 3. Modernizing Federal Government Cybersecurity.

Recognizing that the cyber threat environment is “dynamic and increasingly sophisticated,” the Order identifies necessary steps for modernizing its approach to cybersecurity and ensuring effective defenses, including: (1) adopting security best practices; (2) advancing toward Zero Trust Architecture; (3) accelerating movement to secure cloud services, including Software as a Service (“SaaS”), Infrastructure as a Service (“IaaS”), and Platform as a Service (“PaaS”); (4) centralizing and streamlining access to cybersecurity data to drive analytics for identifying and managing cybersecurity risks; and (5) investing in both technology and personnel to match these modernization goals.

Tools such as multi-factor authentication and encryption for data at rest and in transit, as well as endpoint detection response, logging, and operating in a zero-trust environment, will be rolled out across federal government networks on a tight timeline. The Order also requires the development of cloud-security technical reference architecture documentation that illustrates recommended approaches to cloud migration and data protection, as well as the development and issuance of a cloud-service governance framework. Notably, the Order also requires modernization of the existing FedRAMP program, a government-wide program that delivers a standard approach to the security assessment, authorization, and continuous monitoring of cloud products and services.

Sec. 4. Enhancing Software Supply Chain Security.

The Order also seeks to improve the security of commercial software used by the federal government in three ways. First, the Order calls for the creation of baseline guidelines and standards for the security of software used by the federal government based on industry best practices established by the National Institute of Standards and Technology (“NIST”) with input from “the Federal Government, private sector, academia, and other appropriate actors.” Second, the Order seeks to jumpstart the market for secure software by leveraging federal buying power. The Order requires the FAR Council to consider recommendations for contract language requiring software suppliers to comply with, and attest to complying with, the new software standards. Agencies will then be directed to remove and remediate software products that do not meet the amended FAR requirements. Third, the Order directs NIST to develop a cybersecurity “pilot program” labeling initiative to give consumers visibility into the security of the software.

Sec. 5. Establishing a Cyber Safety Review Board.

The Order establishes a Cyber Safety Review Board composed of both federal officials and representatives from private-sector entities to review and assess threat activity, vulnerabilities, mitigation activities, and agency responses related to “significant” cyber incidents. The Board, which is modeled after the National Transportation Safety Board’s investigations of civil transportation incidents, would convene following significant cyber incidents and provide recommendations for improving cybersecurity and incident response practices.

Sec. 6. Standardizing the Federal Government’s Playbook for Responding to Cybersecurity Vulnerabilities and Incidents.

As current cybersecurity vulnerability and incident response procedures vary across agencies, the Order calls for standardized response processes to “ensure a more coordinated and centralized cataloging of incidents and tracking of agencies’ progress toward successful responses.” The Order mandates that federal agencies work together in the development of a “standard set of operational procedures (playbook)” that incorporates NIST standards, as well as articulates all phases of an incident response while also building in flexibility. The Administration intends for this playbook to “also provide the private sector with a template for its response efforts.”

Sec. 7. Improving Detection of Cybersecurity Vulnerabilities and Incidents on Federal Government Networks.

Endpoint detection and response is an emerging technology intended to address the need for continuous monitoring and response to advanced threats. The Order calls for an Endpoint Detection and Response (EDR) initiative to “support proactive detection of cybersecurity incidents within Federal Government infrastructure, active cyber hunting, containment and remediation, and incident response.” Federal adoption of EDR has lagged behind the private sector, which has already begun incorporating it as central component of cybersecurity programs within industry.

Sec. 8. Improving the Federal Government’s Investigative and Remediation Capabilities.

The Order requires “agencies to establish requirements for logging, log retention, and log management, which shall ensure centralized access and visibility for the highest level security operations center of each agency,” and requires that the FAR Council consider the recommendations for these policies in promulgating the revisions to the FAR described in Section 2 of the Order. Therefore, companies should anticipate changes to contractual requirements to establish logging policies.

Sec. 9. National Security Systems.

The Order calls for “National Security Systems requirements that are equivalent to or exceed the cybersecurity requirements set forth in this order that are otherwise not applicable to National Security Systems,” which will be reflected in a National Security Memorandum (“NSM”). Generally speaking, a “national security system” is an information system used or operated by an agency or contractor that involves intelligence activities, cryptologic activities, command and control of military forces, equipment integral to a weapon or weapons system, or that is critical to the fulfilment of military or intelligence missions.

III. Analysis and Takeaways

Among the many takeaways from the Order, the most noteworthy is the expected and intended impact beyond federal agencies and contractors, given the express goal of influencing the broader private sector’s cybersecurity best practices. The Order’s ultimate impact will largely be shaped by the regulations issued in the coming months to comply with these new requirements.

The Order contemplates an aggressive timeline for these reforms, with deadlines ranging between 45 and 120 days for agencies to begin implementing many of the Order’s key requirements.
Many of these requirements have already been established as common or best practices in the private sector, but widespread adoption by federal agencies may encourage additional private sector businesses to conform to these standards.
With the forthcoming guidelines, private companies — regardless of whether they intend to pursue federal contracts — may see a new “best practice” to which its own standards will be compared and evaluated. As a result, the requirements promulgated in response to the Order could impact what amounts to “reasonableness” and the duty of care for civil liability.
The Order’s recognition of the need for collaboration and cooperation between the federal government and the private sector creates an opportunity for input from private sector stakeholders. Industry should monitor forthcoming rulemakings to implement the Order and consider opportunities to comment.

The legal issues and obligations related to Executive Order 14028, entitled “Improving the Nation’s Cybersecurity,” are likely to shift as federal agencies implement its provisions. We will continue to monitor and advise on developments to stay on the forefront of this rapidly-changing area. We are available to guide companies through these and related issues. Please do not hesitate to contact us with any questions.

____________________

[1] See Exec. Order No. 14,028, 86 Fed. Reg. 26,633 (May 12, 2021).

[2] Steve Morgan, Cybercrime To Cost The World $10.5 Trillion Annually By 2025, Cybercrime Magazine (Nov. 13, 2020), https://cybersecurityventures.com/cybercrime-damage-costs-10-trillion-by-2025/.

This alert was prepared by Alexander H. Southwell, Eric D. Vandevelde, Ryan T. Bergsieker, Lindsay M. Paulin, Jennifer Katz and Terry Y. Wong.

Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, lpaulin@gibsondunn.com)
Jennifer Katz – New York (+1 212-351-4066, jkatz@gibsondunn.com)

Privacy, Cybersecurity and Data Innovation Group:

Government Contracts Group:
Dhananjay S. Manthripragada – Los Angeles (+1 213-229-7366, dmanthripragada@gibsondunn.com)
John W.F. Chesley – Washington, D.C. (+1 202-887-3788, jchesley@gibsondunn.com)
Joseph D. West – Washington, D.C. (+1 202-955-8658, jwest@gibsondunn.com)
Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, lpaulin@gibsondunn.com)
Justin Paul Accomando – Washington, D.C. (+1 202-887-3796, jaccomando@gibsondunn.com)

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

On April 28, 2021, the U.S. Senate approved a resolution to repeal EPA’s 2020 policy amendments to regulations of upstream and midstream oil and gas operations. Under the 2020 policy amendments, the Trump Administration had declined to regulate oil and gas transmission and storage operations or set methane emission limits under Section 111 of the Clean Air Act’s (“CAA”) New Source Performance Standards (“NSPS”). If the U.S. House of Representatives approves the resolution and it is signed by the President, then the 2020 policy amendments would no longer be in effect, thus restoring key aspects of an earlier rule from the Obama Administration regulating methane from production and processing facilities at upstream oil and gas facilities as well as transmission and storage operations.

Key Takeaways:

The recent Senate resolution targets the last Administration’s rulemaking declining to regulate methane emissions from production and processing operations at oil and gas facilities. The soon-to-be repealed rule also declined to regulate associated transmission and storage operations.
Once the House of Representatives passes the same resolution and it is signed into law by President Biden, EPA will be able to quickly commence regulation of methane emissions for this sector as well as volatile organic compounds (“VOC”) and methane emissions for transmission and storage operations.
Impacted sources in the sector should begin evaluating compliance with the 2016 Obama Administration rules governing methane from production and processing operations as well as transmission and storage operations.
For production and processing operations, compliance with methane requirements should complement existing VOC compliance programs under NSPS Subpart OOOOa, although additional requirements could attach for operations in areas of ozone nonattainment.
The 2020 technical amendments to the NSPS Subpart OOOOa program governing production and processing operations remain unaffected.

Detailed Analysis: Beginning in 2012 and again in 2016, the Obama administration promulgated new regulations of the oil and gas industry under the CAA’s NSPS (“2016 NSPS”). Pursuant to the 2016 NSPS, the transmission and storage segment of the oil and gas industry was included in the NSPS regulated source category.[1] This applied the NSPS standards to storage tanks, compressors, equipment leaks, and pneumatic controllers, among other sources in the transmission and storage segment.[2] The 2016 NSPS also added methane emission limits for the same segment.[3]

In 2020, EPA repealed these changes, issuing final policy amendments that removed the transmission and storage segment sources from the NSPS source category.[4] Further, EPA rescinded the separate methane emission limits for the production and processing segments of the source category while retaining limits for VOCs, and EPA also interpreted the CAA to require a “significant contribution finding” for any particular air pollutant before setting performance standards for that pollutant unless EPA addressed the pollutant when first listing or regulating the source category.[5] This latter requirement was significant, among other reasons, because the EPA did not consider methane emissions at the time it initially listed the oil and gas source category in 1979, and would thus require “significant contribution finding” for methane.[6]

In a separate rulemaking also finalized in 2020, EPA made a number of separate technical amendments to the 2016 NSPS.[7] This final rule was not cited in the resolution that passed the Senate.

This week, Congress began the process of reversing course. The Senate passed a resolution, S.J. RES. 14,[8] which disapproved of the EPA’s 2020 policy amendments. The Senate voted by a 52-42 margin, with three Republicans voting in the majority, to repeal the 2020 policy amendments pursuant to its authority under the Congressional Review Act (“CRA”). Pursuant to the CRA, certain agency rules must be reported to Congress and the Government Accountability Office.[9] After receiving the report, Congress is authorized to disapprove of the promulgated rule within 60 session days.[10] Significantly, when certain criteria are met, a joint resolution of disapproval cannot be filibustered in the Senate.[11] Moreover, disapproval carries with it longer term effects: the CRA prohibits a rule in “substantially the same form” as the disapproved rule from being subsequently promulgated (unless so authorized by a subsequent law).

Although the Senate resolution is a significant step towards repeal of the 2020 policy amendments, the 2016 NSPS are not yet back in effect. In order to repeal the 2020 rule and reinstate the 2016 NSPS (subject to the technical changes finalized in 2020 that are unaffected by the CRA resolution), the House of Representatives will also need to pass the same resolution, which it is expected to vote on in the coming weeks.[12] Disapproval renders the 2020 rule “as though such rule had never taken effect.”[13] Questions remain as to whether this repeal will reignite past litigation challenging the 2012 and 2016 NSPS rulemakings.

Affected facilities in the transmission and storage segments of the source category that will soon be subject to the NSPS should prepare for compliance. Furthermore, all facilities in the source category subject to NSPS, including in the production and processing segments, should ensure that they have adequate controls to meet the 2016 NSPS requirements for methane emissions. The practical impact of this reversion is uncertain, particularly given EPA’s findings in 2020 that separate methane limitations for these segments of the industry are redundant because controls used to reduce VOC emissions also reduce methane. Moreover, given the uncertainty created by the CRA’s language that a disapproved rule is rendered not only ineffective moving forward but also “as though such rule had never taken effect,” EPA likely will need to issue guidance to regulated entities in order to explain its expectations for compliance and the timing thereof. EPA likely also will need to promulgate a ministerial rule restoring the applicable regulatory text from the 2016 NSPS in the Code of Federal Regulations.

Litigation over the 2012 and 2016 rulemakings, currently held in abeyance, likely will resume in the wake of this resolution. In addition, EPA will once again be responsible for issuing an existing source rule for this source category. Because EPA rescinded methane limits for the source category, EPA was no longer required to issue emission guidelines to address existing sources. This will change after the CRA resolution is approved.

_____________________

[1] EPA Issues Final Policy Amendments to the 2012 and 2016 New Source Performance Standards for the Oil and Natural Gas Industry: Fact Sheet, epa.gov (Aug. 13, 2020), https://www.epa.gov/sites/production/files/2020-08/documents/og_policy_amendments.fact_sheet._final_8.13.2020_.pdf.

[2] EPA’s Policy Amendments to the New Source Performance Standards for the Oil and Gas Industry, epa.gov (Aug. 2020), here.

[3] Supra note 1. For additional analysis of the previous standard, see S. Fletcher and D. Schnitzer, “Inside EPA’s Plan for Reducing Methane Emissions,” Law360 (Aug. 20, 2015), available at https://www.gibsondunn.com/wp-content/uploads/documents/publications/Fletcher-Schnitzer-Inside-EPAs-Plan-For-Reducing-Methane-Emissions-Law360-08-20-2015.pdf; “Client Alert: EPA Announces Program Addressing Methane Emissions from Oil and Gas Production,” (Jan. 15, 2015), available at https://www.gibsondunn.com/epa-announces-program-addressing-methane-emissions-from-oil-and-gas-production/

[4] Supra note 1.

[5] Id.

[6] See id.

[7] Id.

[8] A joint resolution providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by the Environmental Protection Agency relating to “Oil and Natural Gas Sector: Emission Standards for New, Reconstructed, and Modified Sources Review”, S.J.Res.14, 117th Cong. (2021).

[9] 5 U.S.C. §801(a)(1)(A).

[10] See 5 U.S.C. §802.

[11] See 5 U.S.C. §802(d).

[12] Jeff Brady, Senate Votes To Restore Regulations On Climate-Warming Methane Emissions, NPR (Apr. 28, 2021), https://www.npr.org/2021/04/28/991635101/senate-votes-to-restore-regulations-on-climate-warming-methane-emissions.

[13] 5 U.S.C. §801(f).

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:

Stacie B. Fletcher – Washington, D.C. (+1 202-887-3627, sfletcher@gibsondunn.com)
David Fotouhi – Washington, D.C. (+1 202-955-8502, dfotouhi@gibsondunn.com)
Mark Tomaier – Orange County, CA (+1 949-451-4034, mtomaier@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)

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

Join Gibson Dunn panelists Michelle Kirschner and Matthew Nunan for a discussion of:

Recent FCA criminal prosecutions;
Lessons for board governance from the Aviva plc Final Notice;
Update on the Investment Firms Prudential Regime (IFPR) and remuneration;
Crystal ball gazing

View Slides (PDF)

Michelle M Kirschner: A partner in the London office. She advises a broad range of financial institutions, including investment managers, integrated investment banks, corporate finance boutiques, private fund managers and private wealth managers at the most senior level.

Matthew Nunan: A partner in the London office. He specializes in financial services regulation and enforcement, investigations and white collar defense.

Martin Coombes: An associate in the London office and a member of the Financial Institutions group. He specialises in advising on UK and EU financial services regulation. This includes a wide range of financial services and compliance issues including advice on UK and EU regulatory developments, the regulatory aspects of corporate transactions and the on-going compliance obligations of financial services firms.

Chris Hickey: An associate in the London office and a member of the firm’s Financial Institutions group. He advises on a range of UK and EU financial services regulatory matters. This includes the regulatory elements of corporate transactions, regulatory change management and ongoing compliance requirements to which firms are subject.

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On his first day in office, President Biden signed an Executive Order that directed his administration to focus on addressing climate change, and issued a mandate that certain agencies immediately review a number of agency actions from the previous administration regarding greenhouse gas (GHG) emissions.[1] In keeping with that directive, the National Highway Traffic Safety Administration (NHTSA) and the U.S. Environmental Protection Agency (EPA) have formally announced their intent to reconsider the 2019 Safer Affordable Fuel-Efficient Vehicles Rule Part One: One National Program (SAFE 1),[2] which curtailed California’s ability to establish and enforce more stringent GHG emission standards and a Zero Emission Vehicle (ZEV) sales mandate.[3] These steps are consistent with the Biden administration’s efforts to move swiftly to reexamine—and possibly to revoke—environmental regulations promulgated under the Trump administration, and could serve as a prime example of the shifting regulatory landscape for industries subject to GHG regulations.

Through SAFE 1, EPA withdrew the portions of California’s waiver under Section 209(b)(1) of the Clean Air Act (CAA) that allowed California to establish its own GHG emission standards and establish a mandate for the sale of ZEVs.[4] EPA went on to interpret the CAA as preventing other states from adopting California’s GHG standards, as well.[5] In the same action, NHTSA similarly cut back on California’s independent regulatory powers by concluding that NHTSA’s authority to regulate fuel economy under the Energy Policy and Conservation Act (EPCA) preempted all state and local regulations “related to” fuel economy.[6]

On April 22 and April 23, 2021, respectively, NHTSA and EPA formally announced that they are reconsidering this action, and will be soliciting public comment on the agencies’ separate proposed paths forward.

NHTSA

On April 22, 2021, NHTSA issued a notice of proposed rulemaking that would repeal those portions of SAFE 1 (including the regulatory text and interpretive statements in the preamble) that found California’s GHG and ZEV mandates preempted by EPCA.[7] In particular, NHTSA proposes to conclude that it lacks legislative rulemaking authority to issue a preemption regulation. The notice does not take a position on the substance of EPCA preemption. Rather, NHTSA says merely that it seeks to restore a “clean slate”—i.e., to take no formal agency position on express preemption by EPCA.[8]

The notice goes on to state, however, that even if NHTSA had legislative rulemaking authority, it would nonetheless repeal SAFE 1 because “NHTSA now has significant doubts about the validity of its preemption analysis as applied to the specific state programs discussed in SAFE 1,”[9] including federalism concerns and concerns with the “categorical” manner of the analysis taken in SAFE 1.[10]

NHTSA’s notice of proposed rulemaking includes a comment period of 30 days after publication in the Federal Register, which is expected in the coming days.

EPA

One day after NHTSA issued its notice, EPA announced its parallel action on SAFE 1. In its notice, EPA takes no new positions on the Agency’s authority to withdraw a previously granted waiver or the statutory interpretation of CAA Section 209.[11] Rather, EPA’s notice merely summarizes its past positions and tees up these issues, along with issues raised in administrative petitions, for public comment as part of a reconsideration. The notice states that the Agency now believes that there are “significant issues” with the positions taken in SAFE 1 and that “there is merit in reviewing issues that petitioners have raised” in the reconsideration petitions submitted to EPA.[12] However, the notice does not propose to take any specific alternative interpretation.

Notably, EPA has not initiated a rulemaking proceeding, but rather describes this as an informal adjudication.[13] The Agency also states that for waiver decisions, “EPA traditionally publishes a notice of opportunity for public hearing and comment and then, after the comment period has closed, publishes a notice of its decision in the Federal Register. EPA believes it is appropriate to use the same procedures for reconsidering SAFE 1.”[14]

A virtual public hearing will take place on June 2, 2021, and EPA will accept comments until July 6, 2021.[15]

Conclusion

In announcing the reconsideration of SAFE 1, EPA Administrator Michael Regan stated, “Today, we are delivering on President Biden’s clear direction to tackle the climate crisis by taking a major step forward to restore state leadership and advance EPA’s greenhouse gas pollution reduction goals.”[16] Final agency actions resulting from these reconsiderations are still months away, but EPA’s and NHTSA’s announcements signal the agencies’ continuing focus on GHG emissions and revisiting regulations issued by the previous administration. As executive branch agencies continue to carry out the directives in President Biden’s Executive Orders related to climate change, the landscape for regulated industries will remain in flux.

___________________________

[1] Exec. Order No. 13990, 86 Fed. Reg. 7037, 7041 (Jan. 25, 2021) (issued Jan. 20, 2021).

[2] 84 Fed. Reg. 51310 (Sept. 27, 2019). The SAFE 1 Rule was challenged in a series of consolidated cases before the U.S. Court of Appeals for the D.C. Circuit, where Gibson Dunn represented a coalition of automotive industry members as Intervenors in support of the rule. See Union of Concerned Scientists v. NHTSA, No. 19-1230 (D.C. Cir.). That matter has been held in abeyance at the request of the United States pending further review of the SAFE 1 rulemaking by EPA and NHTSA.

[3] Press Release, U.S. Dep’t of Transp., NHTSA, NHTSA Advances Biden-Harris Administration’s Climate & Jobs Goals (Apr. 22, 2021), here; U.S. EPA, Notice of Reconsideration of a Previous Withdrawal of a Waiver for California’s Advanced Clean Car Program (Light-Duty Vehicle Greenhouse Gas Emission Standards and Zero Emission Vehicle Requirements), here.

[4] 84 Fed. Reg. at 51328.

[5] Id. at 51350.

[6] Id. at 51313.

[7] U.S. Dep’t of Transp., NHTSA, Notice of Proposed Rulemaking (prepublication version), Corporate Average Fuel Economy (CAFE) Preemption (Apr. 22, 2021), here.

[8] Id. at 12.

[9] Id. at 13.

[10] Id. at 37.

[11] U.S. EPA, Notice of Reconsideration (prepublication version), California State Motor Vehicle Pollution Control Standards; Advanced Clean Car Program; Reconsideration of a Previous Withdrawal of a Waiver of Preemption; Opportunity for Public Hearing and Public Comment (Apr. 23, 2021), here.

[12] Id. at 7.

[13] Id. at 27.

[14] Id.

[15] Id. at 2.

[16] Press Release, U.S. EPA, EPA Reconsiders Previous Administration’s Withdrawal of California’s Waiver to Enforce Greenhouse Gas Standards for Cars and Light Trucks (Apr. 26, 2021), here.

The following Gibson Dunn lawyers assisted in preparing this client update: Ray Ludwiszewski, Stacie Fletcher, David Fotouhi, Rachel Corley, and Veronica Till Goodson.

Stacie B. Fletcher – Co-Chair (+1 202-887-3627, sfletcher@gibsondunn.com)
David Fotouhi (+1 202-955-8502, dfotouhi@gibsondunn.com)
Raymond B. Ludwiszewski (+1 202-955-8665, rludwiszewski@gibsondunn.com)
Daniel W. Nelson – Co-Chair (+1 202-887-3687, dnelson@gibsondunn.com)
Rachel Levick Corley (+1 202-887-3574, rcorley@gibsondunn.com)
Veronica Till Goodson (+1 202-887-3719, vtillgoodson@gibsondunn.com)

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

This April 2021 edition of Gibson Dunn’s Aerospace and Related Technologies Update discusses newsworthy developments, trends, and key decisions from 2020 and early 2021 that are of interest to companies in the aerospace, space, defense, satellite, and drone sectors as well as the financial, technological, and other institutions that support them.

This update addresses the following subjects: (1) commercial unmanned aircraft systems, or drones; (2) recent government contracts decisions involving companies in the aerospace and defense industry; and (3) the commercial space sector.

___________________

I. Unmanned Aircraft Systems

A. New Rules Remote ID
B. Flight Over People, Over Vehicles, or at Night
C. Continued Lack of Clarity on Airspace
D. Newsworthy FAA Approvals
E. COVID-19 and Use of Drones

II. Government Contracts

III. Space

A. First Private Human Space Launch
B. Noteworthy Space Achievements in Countries Other than the United States
C. Other Noteworthy Space Developments
D. NASA’s Perseverance Rover, Past Updates, and Future Plans
E. Record-Setting Private investment
F. Satellite Internet Constellations
G. Expected Impact of Biden Administration

___________________

I. Unmanned Aircraft Systems

A. New Rules Remote ID

On December 28, 2020, the FAA released final rules regarding the Remote Identification of Unmanned Aircraft (“Remote ID”) and operations at night.[1] These rules, published in the Federal Register on January 15, 2021,[2] require that certain unmanned aircraft (“drones”) broadcast their identification and location during operation. The final rules reflect the FAA’s attempt to balance the competing interests in the federal airspace between commercial operators, hobbyists, law enforcement, and the general public.

The FAA received significant feedback on the Remote ID rules following its initial December 31, 2019 Notice of Proposed Rulemaking (“NPRM”), accumulating over 53,000 comments from manufacturers, organizations, state and local governments, and a significant number of individual recreational pilots.[3] In a departure from the original proposal, under the final rule, drones must broadcast the required Remote ID information “using radio frequency spectrum compatible with personal wireless devices” rather than over the internet to a third-party service provider.[4] The FAA received substantial feedback criticizing the original proposal as expensive and requiring additional hardware and a data plan from a wireless carrier, depending on internet connectivity.[5] But with drones now required to broadcast Remote ID information over ranges that can be received by cell phones, members of law enforcement and the general public will be able to receive the broadcasts and determine flight information about drones flying in their vicinity without special receiving technology.[6]

Compliance with Remote ID Rules

The rules create three ways in which operators and manufacturers can comply with the Remote ID rules: (1) a drone containing “Standard Remote ID,” (2) a drone retrofitted with a “broadcast module,” and (3) a drone without Remote ID operating recreationally in specified areas.[7] The rules include an exception for drones weighing less than 0.55 pounds (250 grams), which are not subject to the Remote ID rules if flown recreationally.[8]

Standard Remote ID

The primary form of compliance is “Standard Remote ID.”[9] Standard Remote ID is built into a drone at the time of manufacturing and tested for compliance via FAA-approved methods. It requires the most robust broadcast, including the location of both the drone and its operator, along with certain flight parameters, a unique ID assigned to the drone and registered by the operator, and an emergency status indication. Additionally, Standard Remote ID drones must be configured to prevent takeoff if the Remote ID equipment is not functional.

Remote ID Broadcast Module

The second form of compliance involves the installation on a drone of a Remote ID “broadcast module.”[10] This allows drones not manufactured with Standard Remote ID, including those currently in use, to comply with the Remote ID rules. The broadcast module’s transmission is similar to Standard Remote ID, except that it broadcasts the takeoff location rather than the location of the operator. Furthermore, drones outfitted with a broadcast module are not required to send an emergency status indication, and need not prevent the drone from taking off if the module is not functional. Unlike Standard Remote ID drones, those fitted with a Remote ID broadcast module are expressly limited to operation within visual line of sight.

Manufacturers should not rely on the Remote ID broadcast module moving forward. Starting eighteen months after the final rule becomes effective, manufacturers must meet the Remote ID standard in their production of drones. Restrictions on operation of noncompliant drones will take effect thirty months after the final rule becomes effective. As of now, the FAA has delayed implementation of the rule until April 21, 2021 as part of the Biden administration’s regulatory freeze.[11]

FAA-Recognized Identification Areas

Lastly, the new rules create FAA-Recognized Identification Areas (“FRIAs”) in which drones can be operated recreationally without complying with the Remote ID rules.[12] FRIAs are fixed locations where drones can be flown safely, thus preserving minimally regulated operations at hobbyist airfields, such as those maintained by the Academy of Model Aeronautics. In a departure from the proposed rules in the NPRM, which limited applicants to community-based organizations, the new rules expanded the list of potential FRIA applicants to include educational institutions.

Addressing Concerns Regarding Improper Use

The commercial drone industry has faced questions and concerns that drones will be operated in an unprofessional manner or used by malicious individuals to obtain data for nefarious purposes.[13] Law enforcement and government agencies have also shared concerns related to illegal operations, such as interference with manned aircraft.[14] The Remote ID rules will help address those concerns by allowing these organizations to identify the drone owner or determine if the drone is not equipped with Remote ID and not legally operating. Addressing these concerns will minimize some of the resistance the industry has faced. Further, Remote ID helps lay a foundation for an ecosystem in which tens of thousands of drones operate autonomously beyond visual line of sight on a daily basis. Although the current rules may be modified and more technology-developed, transmitting basic identification and location information will be a pillar of future large-scale autonomous operations. These rules are an important early step on the path to an integrated regime for regulating a rapidly growing body of unmanned aeronautical operations.

B. Flight Over People, Over Vehicles, or at Night

On December 28, 2020, the FAA released final rules impacting drone operations over people, over moving vehicles, or at night.[15] Prior to the new rules, Part 107 of the FAA regulations required commercial drone operators to receive a waiver in order to fly over people, over moving vehicles, or at night. In early 2019, the FAA and the Department of Transportation shared an NPRM, proposing alterations to Part 107 to make the operation of small unmanned aircraft over people or at night legal, under certain circumstances, without a waiver. On January 15, 2021, the final rule was published in the Federal Register.[16] The rule is scheduled to take effect on April 21, 2021.[17]

Drone Operations Over People

The new law permits commercial drone operations over people under certain conditions based on four categories of drones operating under Part 107. Category One, Two, and Four drones must be compliant with Remote ID rules discussed above to have sustained flight over open-air assemblies, but Category Three drones may never operate over open-air assemblies.

Category One is the most lenient category, consisting of drones that are both under 0.55 pounds (250 grams) and lack any exposed rotating parts that would cause lacerations.[18] Due to the weight restrictions, the drones in this Category will most likely initially be limited to photography and videography drones, but these restrictions may result in innovation of new lightweight sensors for expanded operations within Category One.

Categories Two and Three cover drones greater than 0.55 pounds and less than 55 pounds.[19] These categories allow drones to be flown over people only if the manufacturer has proven that a resulting injury to a person would be under a specified severity threshold. Category Two aircraft will need to demonstrate a certain injury threshold, and Category Three aircraft will have a higher injury threshold with additional operating limitations. Category Three drones can only operate over people (1) in a restricted access site in which all individuals on the ground have notice, or (2) without maintaining any sustained flight over people unless they are participating in the operations or protected by a structure.[20]

The new rules also created a fourth category that was not included under the proposed rules, but clarifies that specific drones for which the FAA has issued an airworthiness certificate under Part 21 can conduct operations over people unless prohibited under its operating limitations.[21]

Drone Operations Over Moving Vehicles

Although the proposed rule did not allow operations over moving vehicles, the final rule does allow such operations under two circumstances: (1) if in a restricted access site and the people in the vehicle are on notice, or (2) when the drone does not maintain sustained flight over moving vehicles.[22] This addition is a welcome change for all drone operators who no longer have to cancel, delay, or change an operation due to an unexpected vehicle or nearby traffic.

Drone Operations at Night

The rule also allows operations at night under two conditions: (1) the remote pilot in command must complete an updated initial knowledge test or online recurrent training, and (2) the drone must have proper anti-collision lighting that is visible for at least three statute miles.[23] Operators will be pleased with this change because it removes the need for nighttime waivers and delays associated with obtaining such waivers.

Looking Ahead

The Part 107 changes are steps in the right direction for increased commercial use of drones. Operating over people, moving vehicles, and at night expands the applications and timing of operations available to commercial operators. The additions to the proposed rules, such as permitting operations over moving vehicles, are an indication that the FAA is listening to the drone community and working to advance this industry.

C. Continued Lack of Clarity on Airspace

While new rules for Remote ID and operations over people, over moving vehicles, and at night are helpful to move the industry forward, they do not address the most challenging legal issue that remains for the commercial drone industry: control of low-altitude airspace. It remains unclear as to how much, if any, airspace is owned by private landowners and whether states and municipalities have any jurisdiction over low-altitude airspace. Furthermore, a legislative solution on this issue is increasingly improbable, and it will instead likely be decided by the courts years in the future.

In a nutshell, the confusion regarding low-altitude operations stems from the FAA’s claim that it controls the airspace “from the ground up” and that the claim that it does not control all the airspace below 400 feet is a “myth.”[24] However, many local governments and property owners do not agree with the FAA’s interpretation. While the FAA has jurisdiction over “navigable airspace,” many assert that the boundary of where that airspace ends and begins is far from clear.[25]

To date, this boundary has not been directly addressed by a court in the context of drones. The closest that federal courts have come to addressing this issue was in July 2016 when U.S. District Judge Jeffrey Meyer, of the District of Connecticut, questioned the FAA’s position: “[T]he FAA believes it has regulatory sovereignty over every cubic inch of outdoor air in the United States . . . . [T]hat ambition may be difficult to reconcile with the terms of the FAA’s statute that refer to ‘navigable airspace.’”[26] The dicta raised the question of where the FAA’s authority begins, but noted that the “case does not yet require an answer to that question.”[27] In time a case will require such an answer.

The legal uncertainty surrounding low-altitude operations remains one of the most significant barriers to large-scale commercial operations, and it is likely to be one of the most important issues for the industry for years to come.

D. Newsworthy FAA Approvals

This past year saw several groundbreaking approvals of new uses for unmanned aircraft systems, specifically in operations beyond the visual line of sight and in the agricultural context. The industry also saw progress in setting airworthiness standards.

Beyond the Visual Line-of-Sight Approvals

Perhaps the most well-known approval occurred in August 2020, when, according to public filings, the FAA approved Amazon’s use of a fleet of Prime Air delivery drones, allowing the company to expand its unmanned package delivery operations.[28] The FAA issued this authorization under Part 135 of its Unmanned Aircraft Systems regulations, which govern the use of drones beyond the visual line of sight (“BVLOS”) of the operator.[29] Although the Prime Air fleet is not yet fully scaled, this authorization enables the company to soon be able to deliver packages weighing five pounds or less in areas with relatively low population density.[30]

Further expanding the boundaries of BVLOS drone use, the FAA gave its first-ever approval of a company’s use of automated drones without a human operator on site earlier this year.[31] In January 2021, the FAA authorized American Robotics, a Boston-based drone systems developer that specializes in operating in rugged environments, to begin such automated operations.[32] Obtaining this approval required a four-year testing program in which the company ran up to ten automated drone flights per day.[33] While only beginning to be fully understood, the automated use of drones without the need for on-site human personnel could have enormous ramifications for the agricultural, energy, and infrastructure industries.[34]

Agricultural Use Approvals

The agricultural industry may experience additional aerospace innovation after the FAA approved the Iowa-based startup Rantizo’s use of drone swarms to spray crops.[35] The company received approval in July 2020 to operate three-drone swarms, which move in concert with one another with the help of one drone operator and one visual observer.[36] The approval will allow the company to cover between 40 and 60 acres of farmland per hour.[37]

Rantizo was not the only company to receive approval to operate drone swarms. In October 2020, the company DroneSeed obtained FAA approval to use five-drone swarms of heavy-lift drones beyond the visual line of sight for reforestation efforts in Arizona, California, Colorado, Montana, New Mexico, and Nevada.[38] Each of the company’s drones can carry up to a 57-pound payload, and reports suggest that the company may focus its reforestation efforts on areas ravaged by wildfires.[39]

Creation of Airworthiness Standards

Lastly, in September 2020, the FAA opened for public comment its first-ever set of type-certification airworthiness standards relating to drones, with the goal of streamlining the certification of certain classes of drones.[40] Whereas the FAA has airworthiness standards in place for most types of manned aircraft, allowing companies seeking approval of such vehicles to avoid a cumbersome, case-by-case process, no such process previously existed for drones. The creation of a standard airworthiness certificate for drones as a class of aircraft could significantly shorten the drone approval process, potentially accelerating innovation in the aerospace industry.

E. COVID-19 and Use of Drones

As discussed in last year’s update, many expected the global COVID-19 pandemic to usher in a new era of drone applications. In the early months of the pandemic, governments began using drones in novel ways: spraying disinfectant across large areas, developing disease detection mechanisms, and even enforcing social distancing requirements. Though these initial reports of drone usage in the age of COVID-19 dealt mostly with disease control efforts, corporations soon shifted their focus to the socially distant environment, turning to drones to facilitate deliveries to consumers and medical providers alike and provide services in a safer way.

Consumer Deliveries

For years, corporations have been hoping to facilitate deliveries via drone, and the pandemic amplified consumer interest. With more and more people looking to avoid crowds and stay at home, demand for drone delivery of consumer goods increased, and many companies deployed their technology to facilitate deliveries via drone.

Wing (Alphabet’s drone delivery company) launched a pilot program in October 2019, partnering with several local retailers to deliver certain products to people in Christiansburg, Virginia.[41] Since the pandemic, it has expanded its program by adding new products and new retailers, and deliveries have more than doubled.[42]

In North Dakota, Flytrex, an airborne delivery service company, launched a program allowing customers to order from a selection of 200 Walmart items.[43] The two companies recently introduced a partnership in North Dakota for grocery deliveries.[44] The company also delivers snacks to golfers at King’s Walk course in North Dakota.[45]

In addition to consumer goods, food delivery via drone has also increased since the pandemic. In fact, Flytrex has begun testing drone delivery of food and drink items in North Carolina.[46] And in Alabama, the company Deuce Drone has partnered with some restaurants for drone doorstep delivery.[47]

As discussed above, in August 2020, Amazon received FAA approval under Part 135 of FAA regulations to “safely and efficiently deliver packages to customers.”[48] This allows Amazon to transport property on small drones “beyond the visual line of sight.”[49] Amazon, which began testing drones in 2013, is continuing to test the technology and has not yet deployed drones at scale.[50]

Medical Supplies Deliveries

Drones also delivered medical supplies in 2020. In May, Zipline, a company that has been using drones to deliver blood in Rwanda since 2016, began delivering medical supplies and personal protective equipment via drones to a medical center in North Carolina.[51]

In November 2020, Wal-Mart received approval to deliver COVID-19 test kits to El Paso, Texas residents.[52] A few months later, Nevada-based Flirtey announced: “that it has successfully conducted multiple deliveries of at-home COVID-19 test kits in Northern Nevada during the initial phase of its test program.”[53] Drone delivery of COVID-19 test kits is more efficient and more convenient, and it reduces exposure risks.[54]

Remote Service Providers

Beyond deliveries, the pandemic also drove up demand for remote services as companies adapted to social distancing guidelines that made providing in-person services more difficult. Since the pandemic started, flights by construction-related companies are up 70%.[55] DroneDeploy, a startup that “has a program that analyzes drone footage of farmers’ fields and helps make recommendations about when to apply pesticides” has reported that these agriculture flights have tripled during the first several months of the pandemic.[56] The company also reported significant increases in flights using its energy app, which helps solar panel installers calculate where best to place the panels.[57]

Lasting Impact?

Though there has certainly been an expansion of drone services in the U.S., this expansion is not widespread. Many of the examples discussed above are limited to small geographic areas and it is still unclear when mass adoption will occur. While the pandemic appears to have pushed forward the adoption of drone delivery and service programs, it is unclear if that mentality will change after societies are no longer quarantined at home. Will there be as much of a demand for drone deliveries and services once there is no longer a pandemic-driven crisis?

Despite these uncertainties, many are optimistic about the future of drone deliveries. Technologies are improving, and most of the elements needed for the widespread adoption of drones are already available in the market.[58]

II. Government Contracts

In this update, we summarize select recent government contracts decisions that involve companies in the aerospace and defense industry, as well as decisions that may be of interest to them, from the tribunals that hear government contracts disputes. These cases address a wide range of issues with which government contractors in the aerospace and defense industry should be familiar.

DFARS 252.227-7103(f) Does Not Prohibit Markings On Noncommercial Technical Data That Restrict Third-Party Rights

In The Boeing Co. v. Sec’y of the Air Force, 983 F.3d 1321 (Fed. Cir. 2020), the Federal Circuit considered whether Defense Federal Acquisition Regulation Supplement 252.227-7103(f) (“DFARS 252.227-7103(f)”) applies to legends that restrict only the rights of third parties but do not restrict the rights of the Government. Boeing applied a legend to its technical data that stated, “NON-U.S. GOVERNMENT ENTITIES MAY USE AND DISCLOSE ONLY AS PERMITTED IN WRITING BY BOEING OR THE U.S. GOVERNMENT.” The Government rejected Boeing’s data deliverables because the legend allegedly did not conform to DFARS 252.227‑7103(f), which stated that the contractor could “only assert restrictions on the Government’s rights,” and specified the legends authorized under the contract. The Armed Services Board of Contract Appeals’ (“ASBCA”) decisions below found in favor of the Government. On appeal, Boeing argued that its legend conformed to the requirements of DFARS 252.227-7103(f) because the clause is applicable only to legends that assert restrictions on the Government’s rights, and is silent on legends that assert restrictions on the rights of third parties. The Federal Circuit agreed with Boeing that DFARS 252.227-7103(f) applies only to legends that assert restrictions to the Government’s rights in the data, and is silent on legends that restrict the rights of third parties. The Federal Circuit remanded the decision to the ASBCA to decide whether, as a matter of fact, Boeing’s legend asserted rights that restricted the Government’s rights in the data on which the legend was included.

ASBCA Declines To Decide Whether Fly America Act Applies To Indirect Costs

In Lockheed Martin Corp., ASBCA No. 62377 (Jan. 7, 2021), the ASBCA did not reach the question of whether the Fly America Act, 49 U.S.C.A. § 40118, as implemented by Federal Acquisition Regulation 52.247-63, Preference for U.S.-Flag Air Carriers, applies to a contractor’s indirect costs because there was no “live dispute” between the parties. FAR 52.247-63, “requires that all . . .Government contractors and subcontractors use U.S.-flag air carriers for U.S. Government-financed international air transportation of personnel (and their personal effects) or property, to the extent that service by those carriers is available.” It further requires that “[i]f available, the Contractor, in performing work under this contract, shall use U.S.-flag carriers for international air transportation of personnel (and their personal effects) or property.”

In 1997, Lockheed Martin Corporation and the Government entered into a memorandum of understanding (“MOU”) that the Fly America Act applied only to direct costs. However, in 2019, the corporate administrative contracting officer (“CACO”) withdrew the MOU on the purported basis that the MOU had misinterpreted FAR 52.247-63, and issued a final decision asserting the interpretation that FAR 52.247-63 applies to indirect costs. The ASBCA did not address the merits of the issue, finding that because Lockheed had not changed its practices as a result of the Government’s withdrawal of the MOU or the CACO’s final decision, there was no evidence that there was a live dispute to decide.

ASBCA Clarifies Types Of Activities That Are Not Unallowable Costs Under The FAR

In Raytheon Co. & Raytheon Missile Sys., ASBCA Nos. 59435 et al., (Feb. 1, 2021), the ASBCA issued a lengthy decision on the allowability of various types of costs incurred by Raytheon Company and its business segment Raytheon Missile Systems (“Raytheon”). The ASBCA sustained all but $18,109 of Raytheon’s appeals of the Government’s $11.8 million claims. The types of costs addressed in the decision include costs for Raytheon’s Government relations group, costs for Raytheon’s corporate development group, and airfare costs.

Government Relations Costs. In 2007 and 2008, Raytheon included Government relations group costs as indirect costs in its incurred cost submissions, but withdrew a portion of those costs as unallowable lobbying costs in accordance with FAR 31.205-22, Lobbying and political activity costs, which requires that contractors “maintain adequate records to demonstrate that the certification of costs as being allowable or unallowable…pursuant to this subsection complies with the requirements of this subsection.” The Government disagreed with Raytheon’s practice and disallowed 100 percent of the costs incurred by Raytheon’s Government relations group as expressly unallowable costs.

The ASBCA held that the Government had the burden to prove that the costs were expressly unallowable and that there was no basis to shift the burden to the contractor. The ASBCA further held that the Government did not meet its burden of proving that any of the Government relations costs included in Raytheon’s incurred costs submissions were unallowable, and that Raytheon’s method of removing unallowable lobbying costs was proper based on its disclosed accounting practice.

Corporate Development Costs. Raytheon included a portion of corporate development group costs as indirect costs in its incurred cost submission in 2007 and 2008, but withdrew a portion of the costs as unallowable organizational costs under FAR 32.205-27, Organization Costs. Raytheon implemented a “bright line” rule for its employees to determine the difference between costs for allowable activities under FAR 31.205-12, Economic Planning Costs, and FAR 31.205-38, Selling costs, and costs for unallowable activities under FAR 31.205-27. The Board found Raytheon’s corporate development employees kept track of their time in accordance with the bright line rule, that the allowable costs for the corporate development group were supported by documentation and credible witness testimony, and that the Defense Contract Management Agency (“DCMA”) did not meet its burden of proving that the corporate development costs were unallowable organization costs under FAR 31.205-27.

Airfare Costs. With respect to airfare costs, the ASBCA addressed two distinct issues: (1) whether the pre-Jan. 11, 2010 version of FAR 31.205-46(b) required Raytheon to take into account its corporate discounts in determining its allowable airfare; and (2) whether Raytheon’s policy of allowing business class travel for trans-oceanic flights in excess of 10 hours was reasonable and consistent with FAR 31.205-46(b). Prior to Jan. 11, 2010, FAR 31.205-46(b) stated:

Airfare costs in excess of the lowest customary standard, coach, or equivalent airfare offered during normal business hours are unallowable except when such accommodations require circuitous routing, require travel during unreasonable hours, excessively prolong travel, result in increased cost that would offset transportation savings, are not reasonably adequate for the physical or medical needs of the traveler, or are not reasonably available to meet mission requirements. However, in order for airfare costs in excess of the above standard airfare to be allowable, the applicable condition(s) set forth in this paragraph must be documented and justified.

(Emphasis added.) Effective Jan. 11, 2010, FAR 31.205-46(b) was amended to read: “Airfare costs in excess of the lowest priced airfare available to the contractor during normal business hours are unallowable except …” (emphasis added).

The ASBCA concluded that prior to Jan. 11, 2010, contractors were not required to factor in any negotiated corporate discounts when determining the allowable amounts of airfare costs. The ASBCA also held that Raytheon’s travel policy “documented and justified premium airfare,” as required by FAR 31.205-46(b), and that there is no requirement that premium airfare be “documented and justified” on an individual, flight-by-flight basis. Moreover, the ASBCA held that the CO acted within the scope of his authority when he determined that Raytheon’s travel policy complied with FAR 31.205-46(b), and that his determination was binding on DCMA.

ASBCA Rules That Government Shares Liability for Contractor’s Underfunded Pension Plan

In Appeal of Northrop Grumman Corp., ASBCA No. 61775 (Oct. 7, 2020), the ASBCA found that Northrop Grumman (“NG”)’s valuation of a nonqualified defined benefits pension plan adopted in 2003 and frozen in 2014 was compliant with the Cost Accounting Standards despite the Government’s objections to the company’s valuation methodology. During the plan’s existence, NG allocated its costs to numerous government contracts, all of which included FAR 52.215-15, Pension Adjustments and Asset Reversions; FAR 52.230-2, Cost Accounting Standards; and FAR 52.233-1, Disputes.

When the plan was frozen, NG calculated that the plan’s liabilities exceeded its market value and requested that the Government pay its pro rata share to NG to “true-up” the plan under CAS 413. The Government argued, inter alia, that NG’s reduction to its calculation of investment income to account for taxes on such income was non-compliant with CAS 412. Although the Board disagreed with NG’s approach of reducing its investment rate of return by the marginal tax rate, the Board found that roughly the same outcome would have been achieved had NG accounted for taxes as an administrative expense. Because FAR 30.602(c)(1) provides that the Government should make no adjustment to the contract when there is no material cost difference due to the alleged CAS violation, the Board sustained NG’s appeal and remanded to the parties to calculate the amount due and owing from the Government to NG.

Contractor’s REAs Were Not Contract Disputes Act (“CDA”) Claims Subject to the CDA Statute of Limitations

In Appeal of BAE Sys. Ordnance Sys., Inc., ASBCA No. 62416 (Feb. 10, 2021), the Board considered whether BAE’s requests for equitable adjustment (“REAs”) constituted claims in light of the Federal Circuit’s recent decision in Hejran Hejrat Co. Ltd v. United States Army Corps of Engineers, 930 F.3d 1354 (Fed. Cir. 2019). In Hejran Hejrat, the Federal Circuit ruled that, under certain circumstances, an REA can actually constitute an implicit request for a final decision.

BAE submitted three REAs seeking reimbursement for state-issued fines it received as a result of environmental conditions at the plant. The contracting officer (“CO”) replied that he would “entertain reimbursement” of a portion of the state fines, but later issued a “final determination” rejecting the REAs entirely. Subsequently, BAE submitted a CDA claim to which the Government failed to respond. BAE appealed the deemed denial of its claim to the Board. The Army then moved to dismiss the appeal asserting that BAE’s challenge to the CO’s decision was untimely because the REAs were, in fact, CDA claims, and the CO’s final determination upon them was thus a CO’s Final Decision. In denying the government’s motion to dismiss the appeal for lack of jurisdiction as outside of the CDA’s statute of limitations, the Board found that “BAE did all that it could to keep its REAs from falling within the realm of being also considered CDA claims by carefully avoiding making a request — explicit or implicit — for a [contracting officer]’s final decision.” Therefore, the Board found that BAE’s claims were timely filed and denied the government’s motion to dismiss.

III. Space

A. First Private Human Space Launch

On November 15, 2020, the launch of SpaceX’s Resilience marked the first “NASA-certified commercial human spacecraft system.”[59] The mission is the first of six crewed missions NASA and SpaceX plan to fly as part of the Commercial Crew Program, a program designed to provide “safe, reliable, and cost-effective transportation to and from the International Space System from the United States.”[60] The crew is comprised of four members, including three NASA astronauts and one member of the Japan Aerospace Exploration Agency.[61]

Resilience autonomously docked at the International Space Station on November 16, 2020 for a sixth-month stay, making it the longest space mission launched from the United States. During the mission, the crew is conducting various science and research investigations, including a “study using chips with tissue that mimics the structure and function of human organs to understand the role of microgravity on human health and diseases.”[62] The crew will also conduct various space walks, encounter several uncrewed spacecraft, and welcome crews from the Russian Soyuz vehicle and the next SpaceX Crew Dragon.[63] At the end of the mission, Resilience will autonomously undock and return to Earth.

B. Noteworthy Space Achievements in Countries Other than the United States

Countries and private companies are racing to the Moon, Mars, and even asteroids. This space race involves countries that are both newcomers to space and those that seek a return to the unknown.

China

Chang’e-5’s Lunar Exploration Mission

Following the Chang’e-4’s successful lunar exploration mission in 2019,[64] China reached the Moon again in 2020. On November 23, 2020, Chang’e-5 lifted off from Wenchang Space Launch Center on Hainan Island, China and went into the Moon’s orbit on November 28, 2020.[65] The descender craft separated from the orbiter on November 29, 2020 and landed on the Mons Rümker region of Oceanus Procellarum on December 1, 2020.[66] Once on the Moon’s surface, the lander system used a scoop and drill to dig up lunar samples.[67] After collection and storage, Chang’e-5 made its return to Earth on December 16, 2020, landing in the Siziwang Banner grassland of the autonomous region of Inner Mongolia in northern China.[68] The successful mission retrieved about 1,731 g (61.1 oz.) of lunar samples.[69] Chang’e-5 was China’s first successful lunar sample return mission,[70] and the first in the world in over four decades since the Soviet Union’s Luna-24 in 1976.[71]

The Chang’e-5 venture demonstrates China’s increasing capability in space, and is part of a broader effort under the Chinese National Space Administration Chang’e Lunar Exploration Program.[72] The Chang’e-6, expected to launch in 2023, will be China’s next lunar sample-return mission.[73]

Tianwen-1 Reaches Mars’s Orbit

China’s first independent interplanetary mission is well underway with the launch of the Tianwen-1 spacecraft on July 23, 2020.[74] After a 202-day, 295-million-mile journey through space, it arrived in orbit around Mars on February 10, 2021.[75] The first phase of Tianwen-1’s mission is to circle Mars’s orbit and map the planet’s morphology and geology, while allowing the orbiter to find a secure landing zone.[76]

About three months after arrival into orbit, in May 2021, the craft’s lander is expected to detach from its orbiter and descend onto Mars’s surface in a region known as Utopia Planitia.[77] Once on the surface, the lander will unveil a rover carrying a panoramic camera.[78] The solar-powered rover will also investigate surface soil characteristics for potential water-ice distribution with a ground-penetrating radar.[79] Tianwen-1 comes on the heels of several successful lunar missions for China’s space program.[80]

China’s Ambitious Plans for a Space Station

China has ambitious plans for a new space station.[81] Tianhe, the station’s core module, is expected to launch sometime in 2021.[82] The module is 59 feet (18 meters) long, weighs about 24 tons (22 metric tons), and will provide living space and life support for astronauts and house the outpost’s power and propulsion elements.[83] Tianhe’s launch will be one of eleven total liftoffs that will be required to build the space station, which China wants to finish by the end of 2022.[84]

China’s iSpace Fails to Reach Orbit During Second Attempt

China’s iSpace, also known as Beijing Interstellar Glory Space Technology Ltd. (a different company than the Japanese lunar startup ispace) was the first Chinese private company to reach orbit when it successfully launched its Hyperbola-1 rocket on July 25, 2019.[85] On February 1, 2021, iSpace’s four-stage Hyperbola-1 rocket failed to reach orbit during its second attempt to go to space.[86]

Despite its failed launch, iSpace is a prominent name in the Chinese private space industry, having raised $173 million in Series B funding for the Hyperbola rocket line. The company has indicated plans for a potential IPO and is in the midst of creating its Hyberbola-2 rocket.[87] Other private Chinese companies, including Galactic Energy, One Space, and Deep Blue Aerospace, are planning launches later this year.[88]

Japan

Hayabusa2’s Samples From Asteroid Ryugu

After spending over a year collecting and storing samples on a near-Earth asteroid named Ryugu,[89] Japan’s Hayabusa2 spacecraft started its journey back towards Earth in November 2019.[90] It completed its yearlong journey to return the asteroid samples back to Earth on December 5, 2020.[91] The return capsule landed in South Australia, carrying with it samples from the asteroid’s surface and interior.[92] From the samples, scientists hope to learn more about the composition of Ryugu’s minerals, as well as the origin and evolution of the solar system.[93]

Hayabusa2 was originally launched in 2014,[94] and its mission is far from over.[95] The Hayabusa2’s main craft separated from the return capsule just two days before the delivery of Ryugu’s samples was complete and retreated back to work on an extended mission.[96] Hayabusa2’s extended mission will feature visits to two more asteroids, one in 2026 and another in 2031.[97]

Japanese Startup Is Targeting the Moon in 2021

A Japanese startup, ispace (a different company than China’s iSpace), is targeting the Moon.[98] On August 22, 2020, company representatives stated ispace intends to go to the lunar surface on a stationary lander in 2021.[99] The company is also planning a second mission in 2023, in which it will deploy a rover for surface exploration.[100] These two missions will ride as secondary payloads on SpaceX Falcon 9 rockets, and together make up ispace’s Hakuto-Reboot program.[101]

United Arab Emirates

Hope Arrives on Mars

On February 9, 2021, the UAE’s Hope orbiter entered into Mars’s orbit,[102] making the UAE the fifth country to visit the Red Planet (China became the sixth the next day with its Tianwen-1 mission),[103] and the first Arab nation in history to do so.[104] Hope will take up a near-equatorial orbit as it observes the planet’s atmosphere, weather, and climate systems.[105] Hope also aims to study the leakage of hydrogen and oxygen into space, which scientists suspect is a contributing factor to Mars missing the once-abundant water that previously occupied its surface.[106]

Russia

Expected Launch of Luna-25 in October 2021

After a nearly half-century hiatus for its space program,[107] Russia is gearing up for a launch to the Moon.[108] Russia’s Luna-25 spacecraft will be the first Russian or Soviet Moon mission since 1976,[109] and will mark the reactivation of Russia’s Moon exploration program.[110] The Luna-25 lander will include scientific instruments to research the composition and structure around the Moon’s south pole.[111] Luna-25 is expected to launch in October 2021.[112]

Looking Ahead

As more countries join the space race, the global community benefits from all of research, technology, and discoveries resulting from outer space exploration. With upcoming missions to the Moon, Mars, and the development of a space station, the upcoming year is sure to result in tremendous advancement in our understanding of space.

C. Other Noteworthy Space Developments

The last year featured a number of developments in space technology, including from SpaceX, which became the first private company to launch astronauts to space, made progress on its Starship design, and launched a public beta program of its Starlink satellite internet service.

Crewed Flights

On May 30, 2020, SpaceX became the first private company to launch astronauts into orbit.[113] The mission marked the first launch of NASA astronauts from the U.S. since the space shuttles were retired in 2011.[114] The Falcon 9 Rocket carried a Crew Dragon capsule, an upgraded version of SpaceX’s Dragon capsule, which has been used to carry cargo to the space station.[115] While on board, the astronauts, tested all of the systems and verified that they performed as designed.[116] The astronauts arrived at the International Space Station on May 31, 2020,[117] and returned safely to Earth on August 2, 2020.[118]

Just five and a half months later, SpaceX sent astronauts to space again. As discussed above, on November 15, 2020, NASA’s SpaceX Crew-1 mission lifted off—the first of six crewed missions NASA and SpaceX plan to fly as part of the Commercial Crew Program, a program designed to provide safe, reliable, and cost-effective transportation between the ISS and the U.S.[119] The mission marked many firsts, including “the first flight of the NASA-certified commercial system designed for crew transportation.”[120] In contrast to the May launch, the Crew-1 mission transported four astronauts (three NASA astronauts and one from the Japan Aerospace Exploration Agency) to the International Space Station for a six-month science mission.[121] The crew arrived safely on November 16, and will eventually reboard Crew Dragon for transport back to Earth.[122]

Starship SN Flights

Following the successful launch of its first astronaut mission in May, SpaceX shifted gears to focus on the Starship, the rocket designed to launch cargo and up to 100 passengers at a time on missions to the Moon and Mars.[123] CEO Elon Musk acknowledged that the rocket has many milestones to reach before people can fly in it.[124]

After multiple launches of several starship prototypes failed, on August 4, 2020, SpaceX flew the Starship SN5 test vehicle for the first time ever.[125] Though the SN5 was only in the air for about 40 seconds, the short hop allowed SpaceX to gather valuable data necessary to analyze and smooth out the launch process.[126]

Just several weeks later, SpaceX launched SN6, which rose to nearly 500 feet above the ground before touching down near the launchpad.[127] Similar to the SN5 launch, the launch of the SN6 prototype was used to help SpaceX understand the technologies needed for a fully reusable launch system for deep space missions.[128]

On December 9, 2020, SpaceX launched Starship SN8 to 40,000 feet above its facility in Boca Chica, Texas.[129] After completing several objectives, including testing its aerodynamics and flipping to prepare for landing, the rocket exploded on impact as it attempted to land.[130] SpaceX declared the launch a success; despite the fiery landing, the nearly seven-minute flight provided helpful information to improve the probability of success in the future.[131]

Other Updates

SpaceX launched many satellites into orbit in 2020. Throughout the year, SpaceX launched satellites for the U.S. Space Force[132] and foreign militaries.[133] SpaceX also began to launch satellites for its Starlink mega-constellation, an infrastructure project designed to provide global broadband coverage to people in rural and remote areas.[134] As of January 29, 2021, SpaceX had deployed 1,023 satellites over the course of 18 launches.[135] In October, SpaceX began a public beta program of the Starlink satellite internet service in the northern U.S., Canada, and the U.K.[136] By February 2021, the Starlink satellite internet service had over 10,000 users.[137]

SpaceX had a monumental fundraising year. In May, SpaceX raised more than $346 million.[138] In August, the company reported its largest single fundraising round to date: $1.9 billion in new funding.[139] SpaceX also sold an additional $165 million in common stock.[140] In December, SpaceX began discussing another funding round with investors. This round will likely value the company at a minimum of $60 billion and possibly as high as $92 billion.[141]

D. NASA’s Perseverance Rover, Past Updates, and Future Plans

Two of NASA’s biggest accomplishments this year were the successful landing of the Perseverance Rover on Mars and the publication of the Artemis Plan, a document that outlines NASA’s intention to return a human to the Moon.

Perseverance Rover

On February 18, 2021, NASA’s Perseverance Rover landed safely in an area known as Jezero Crater on Mars.[142] Perseverance’s mission is to search for signs of ancient life and collect samples of rock and regolith for a return to Earth.[143] The Perseverance Rover will examine Martian dirt and rock with a variety of sophisticated scientific gear, including an instrument called SuperCam, which will zap rocks with a laser and gauge the composition of the resulting vapor.[144] The Rover will also utilize its drill and long robotic arm to collect samples and seal them into special tubes, and these samples will be brought back to Earth, perhaps as early as 2031.[145] Once returned, these samples will be analyzed and studied by scientists for decades to come.[146]

Artemis Plan

The United States is pushing forward on its plans to return to the Moon, with NASA publishing its comprehensive Artemis Plan in September 2020.[147] Under the Artemis Plan, the United States plans to send the next man and first woman to the Moon by 2024, and establish a sustained human presence on the Moon by 2028.[148] However, Congress is only providing $850 million for work on the Human Landing System to support NASA’s Artemis mission, well short of the requested $3.37 billion on the project.[149] This shortfall is the biggest risk to the ambitious goals and timing of the Artemis Plan.[150]

The Artemis I Mission

Artemis I is set to be the first mission under the Artemis Plan, and it is currently scheduled for launch on November 2021.[151] It will be an uncrewed mission from NASA’s Kennedy Space Station in Florida.[152] This mission will allow NASA to test its powerful new Space Launch System and Orion spacecraft.[153]

Commercial Lunar Payload Services

Under the Artemis Plan, NASA established the Commercial Lunar Payload Services initiative (“CLPS”) to partner with the U.S. commercial space industry to introduce new lander technologies and deliver payloads to the surface of the Moon.[154] As of February 2021, NASA had 14 companies on contract through CLPS to bid on delivery science experiments and technology demonstrations to the lunar surface.[155] Most recently, NASA awarded Firefly Aerospace of Cedar, Texas approximately $93.3 million to deliver a suite of ten science investigations and technology demonstrations to the Moon in 2023.[156]

Lunar Orbital Platform Gateway

The Lunar Orbital Platform Gateway is instrumental to NASA’s goal of sustaining a human presence on the Moon.[157] The Gateway will be a station orbiting the Moon that will serve as a holding area for astronaut expeditions and science investigations, as well as a port for deep space transportations.[158] NASA has selected SpaceX to provide launch services for the first two Gateway modules, the Power and Propulsion Element (“PPE”) and Habitation and Logistics Outpost (“HALO”), which are targeted to launch together no earlier than May 2024.[159]

Human Landing System

NASA’s Human Landing System Program (“HLS”) is tasked with developing a lander that will haul two astronauts to the Moon in 2024, and then safely return them to lunar orbit before their trip back to Earth.[160] Three companies have been selected to begin development work for the HLS: Blue Origin (of Kent, Washington), Dynetics, a Leidos company (of Huntsville, Alabama), and SpaceX (of Hawthorne, CA).[161] HLS is also charged with developing a sustainable, long-term presence on and around the Moon.[162]

E. Record-Setting Private investment

Over the past several years, there has been increased interest in investing in pure aerospace companies, and more recently, space and space-satellite-based companies have become the focus of special-purpose acquisition companies (“SPACs”).[163] Numerous milestones are driving the rise of space stocks traded on exchanges. For example, companies such as Virgin Galactic have been developing, and are on the cusp of starting, a commercial space tourism service; AstraSpace is entering the public market through a blank-check merger with Holicity; and Momentus is going public via Stable Road Capital, among others.[164] In addition to the above, exchange traded funds (“ETF”) have been rising in popularity as well.

To further illustrate the above, one only has to look to ETFs such as Procure Space ETF, a space-related fund launched in 2019, which has holdings in various space stocks.[165] In January, Cathie Wood’s Ark Investment Management announced in a filing that it was looking to start the ARK Space Exploration ETF.[166] This ETF would focus on exposure to “companies involved in space-related businesses like reusable rockets, satellites, drones, and other orbital and sub-orbital aircrafts.”[167]

In terms of SPACs, the aerospace industry has shown a significant amount of growth. SPACs are among the trendiest, high-growth investment opportunities in the finance world at the moment.[168]A SPAC raises money through an IPO to acquire an existing operating company. In the past, we have seen successful SPACs such as when Virgin Galactic merged with Social Capital Hedosophia, or when Momentus Space merged with Stable Road Acquisition Corp.[169] Another company considering a merger with a SPAC is Kraus Hamdani Aerospace, whose aircraft can “safely carry satellite payloads within the stratosphere, providing a lower cost alternative to satellites with zero carbon footprint[.]”[170] It appears that SPACs can provide a beneficial pathway for aerospace companies to obtain important access to capital.

There are other companies to watch for as well in the near term. Firefly Aerospace is a “small launch vehicle developer” that is increasingly nearing its first orbital launch attempt, and it is looking to raise $350 million to “scale up production and work on a new, larger vehicle.”[171] This is after Relativity Space, a similar launch vehicle developer, raised $500 million in November of 2020.[172]

In viewing the industry, it seems clear that the rise in space and space-related development is leading to more and more opportunities for small to large companies to expand into the public markets in order to raise the capital necessary to further expand these companies’ operations. Moreover, with the similar rise in ETFs and SPACs, access to equity in space companies, which may have been limited to a select few in years prior, is now more available to the general public than ever before. As such, the space industry market should be one to follow and watch for in the coming years.

F. Satellite Internet Constellations

The space industry, which includes the consumer broadband sector, saw record private investment in 2020.[173] One area of investment was in the continued development of satellite constellations that provide internet access across the globe. These new technologies offer great business potential and provide internet access to underserved remote populations. In fact, federal agencies are encouraging more private investment in the space economy, including internet satellite constellations.[174]

In December 2020, the FCC awarded $9.2 billion in funding to bidders as part of the Phase I Auction from its Rural Digital Opportunity Fund (“Fund”). The Fund, established in 2019 with $20 billion in funding, is to be used for providing internet access to the millions of Americans without internet access, particularly in rural and remote areas.[175] The funding is estimated to provide high-speed broadband internet service to 5.22 million users[176]— Former FCC Chairman Ajit Pai described it as the “single largest step ever taken to bridge the digital divide.”[177] According to Pai, the awards would bring “welcome news to millions of unconnected rural Americans who for too long have been on the wrong side of the digital divide. They now stand to gain access to high-speed, high-quality broadband service.”[178]

On January 19, 2021, over 150 members of Congress wrote a letter urging the FCC “to thoroughly vet the winning bidders to ensure that they are capable” and to “consider opportunities for public input on the applications.”[179] Among other requirements, winning bidders must deliver financial statements, coverage maps, and certify to the FCC that their network is able to deliver “to at least 95% of the required number of locations in each relevant state.”[180]

Multiple companies developing satellite constellations that provide internet access from low earth orbit are creating many opportunities, but these projects have also led to some concern. The U.S. National Oceanic and Atmospheric Administration projected that the number of active satellites in orbit could increase by 50% or more in 2021.[181] The injection of more satellites into low earth orbit increases the risk of collisions between man-made objects, which could create orbital debris that itself might collide with other space objects, thus resulting in greater accumulations of “space junk.”[182] According to Morgan Stanley, some government agencies now struggle to track this orbital debris, creating potential demand for private companies to track and maintain this potentially catastrophic threat.[183]

The rapidly developing breakthroughs in satellite broadband internet access will bridge the gap in the digital divide, and be the driving force in a projected trillion-dollar industry. Morgan Stanley projects that the global space economy could generate more than $1 trillion in revenue by 2040, with satellite broadband accounting for 50-70% of the projected growth.[184]

G. Expected Impact of Biden Administration

The inauguration of President Biden on January 20, 2020 signaled the beginning of significant changes to policies of the Trump administration in many key areas, but thus far President Trump’s space-related policies have generally proven a uniquely bipartisan area of continuity during this latest transition of power.

Having inherited a global pandemic, among other issues, President Biden’s first priorities have primarily been more terrestrial in focus, and insight into future policy decisions generally have to be gleaned from statements made on the campaign trail. However, the administration’s early remarks regarding Trump-era ventures like the Space Force and NASA’s Project Artemis have given those with their eyes turned skyward reasons for optimism, which has only been bolstered by President Biden’s symbolic decoration of the Oval Office with a moon rock collected during the Apollo 17 mission of 1972.[185]

Space Force

On December 20, 2019, President Trump signed the National Defense Authorization Act for Fiscal Year 2020 (“NDAA”) establishing the United States Space Force as the sixth branch of the United States military, and the first new military service in more than 70 years.[186] Its duties are to “(1) protect the interests of the United States in space; (2) deter aggression in, from, and to space; and (3) conduct space operations.”[187] Since its establishment, about 2,400 service members have officially transferred into the Space Force service, with plans to grow to 6,400 active-duty troops and add a reserve component in 2021.[188]

Despite earlier speculation to the contrary, White House spokeswoman Jen Psaki recently affirmed that the Space Force “absolutely has full support of the Biden administration.”[189] In response, the Chief of Space Operations Gen. John Raymond emphasized that the White House’s unambiguous statement of support for the Space Force makes it “really clear that this is not a political issue, it’s an issue of national security.”[190] That same sentiment is also reflected in Congress among bipartisan lawmakers who view the new branch as integral to ensuring the military puts enough focus on space to counter China and Russia.[191] Although President Biden has not yet publicly detailed his plans for the future of the Space Force, it does appear to be here to stay.

Space Exploration

In early February 2021, the White House also announced support for Project Artemis, NASA’s effort to return astronauts to the lunar surface. President Biden’s endorsement of the Artemis program means it will become the first major deep space human exploration effort with funding to survive a change in presidents since Apollo, after several fitful efforts to send astronauts back to the moon and beyond ultimately went nowhere.[192]

The Trump administration embraced exploration and directed NASA to speed up its moon campaign, directing it to land another man, and the first woman, on the lunar surface by 2024, but the time frame of this goal appears to be stifled by budgetary constraints, safety concerns, and other matters of national priority like COVID-19 relief.[193] For example, NASA requested a total of $25.2 billion for FY2021, a 12 percent increase over FY2020, in order to pay for Artemis. Although Congress had been steadily adding money to NASA’s budget for several prior years, in this case it provided less, $23.3 billion, suggesting there are limits to what it will allocate.[194]

Additionally, speculation remains that the Biden administration may instead prioritize NASA missions focused on increasing earth-observation capabilities, rather than space exploration. Lori Garver, the NASA deputy administrator during the Obama administration, was a key speaker at the SpaceVision 2020 convention on November 7 and 8, 2020. She noted, “[m]anaging the Earth’s ability to sustain human life and biodiversity will likely, in my view, dominate a civil space agenda for a Biden-Harris administration.”[195] However, eleven Democratic senators have already sent a letter to President Biden urging greater funding for Project Artemis, stressing that other NASA programs should not be cannibalized to pay for it.[196] As such, the first explicit insight into President Biden’s support for human spaceflight, and the timeline at which it can proceed, will likely be the FY2022 budget request that the President will send to Congress in the coming months.

Nevertheless, space exploration remains an overwhelmingly popular and bipartisan goal among Americans. Polls taken last year showed, for example, that 80% of Americans believed space travel supports scientific discovery; 78% had a favorable impression of NASA; 73% said NASA contributes to pride and patriotism; and 71% said NASA is not just a desirable agency, but a necessary one.[197] Such uniquely bipartisan support in this area cannot go unnoticed by the administration. Indeed, it appears that even if delayed for now, the question of landing another man or woman on the moon—or beyond—is a matter of when, not if, for the Biden Administration.

________________________

[1] Press Release – U.S. Department of Transportation Issues Two Much-Anticipated Drone Rules to Advance Safety and Innovation in the United States, Fed. Aviation Admin. (Dec. 28, 2020), available at https://www.faa.gov/news/press_releases/news_story.cfm?newsId=25541.

[2] Fed. Aviation Admin., Final Rule on Remote Identification of Unmanned Aircraft (Jan. 15, 2021), available at https://www.federalregister.gov/documents/2021/01/15/2020-28948/remote-identification-of-unmanned-aircraft.

[3] Id. at 4396.

[4] Id. at 4507–08.

[5] Id. at 4406.

[6] See id. at 4428.

[7] Id. at 4391.

[8] Id. at 4447.

[9] Id. at 4507.

[10] Id. at 4507–08.

[11] Fed. Aviation Admin., Operation of Small Unmanned Aircraft Systems Over People; Delay; Withdrawal; Correction (Mar. 10, 2021), available at https://public-inspection.federalregister.gov/2021-04881.pdf.

[12] Fed. Aviation Admin., supra note 2 at 4511–12.

[13] See James Roger, The dark side of our drone future, The Bulletin (Oct. 4, 2019), available at https://thebulletin.org/2019/10/the-dark-side-of-our-drone-future/.

[14] See Office of the Attorney General, Guidance Regarding Department Activities to Protect Certain Facilities or Assets from Unmanned Aircraft and Unmanned Aircraft Systems (Apr. 13, 2020), available at https://www.justice.gov/archives/ag/page/file/1268401/download.

[15] Fed. Aviation Admin., Operations Over People General Overview (Jan. 4, 2021), available at https://www.faa.gov/uas/commercial_operators/operations_over_people/.

[16] Operation of Small Unmanned Aircraft Systems Over People, 86 Fed. Reg. 4,314 – 4,387 (14 CFR 11, 21, 43, 107) (Jan. 15, 2021), available at https://www.federalregister.gov/documents/2021/01/15/2020-28947/operation-of-small-unmanned-aircraft-systems-over-people.

[17] Fed. Aviation Admin., Operation of Small Unmanned Aircraft Systems Over People; Delay; Withdrawal; Correction (Mar. 10, 2021), available at https://public-inspection.federalregister.gov/2021-04881.pdf.

[18] Id. at 4315

[19] Id. at 4315-16

[20] Id.

[21] Id. 4316-17

[22] Fed. Aviation Admin., Executive Summary Final Rule on Operation of Small Unmanned Aircraft Systems Over People (Dec. 28, 2020), available at https://www.faa.gov/news/media/attachments/OOP_Executive_Summary.pdf.

[23] Id.

[24] Fed. Aviation Admin., Busting Myths about the FAA and Unmanned Aircraft (Mar. 7, 2014), available at https://www.faa.gov/news/updates/?newsId=76240.

[25] 49 U.S.C. § 40103(b)(1); 49 U.S.C. § 40102(32); 14 C.F.R. § 91.119(b)(c).

[26] Huerta v. Haughwout, No. 3:16-cv-358, Dkt. No. 30 (D. Conn. July 18, 2016).

[27] Id.

[28] Annie Palmer, Amazon wins FAA approval for Prime Air drone delivery fleet, CNBC (Aug. 31, 2020), available at https://www.cnbc.com/2020/08/31/amazon-prime-now-drone-delivery-fleet-gets-faa-approval.html.

[29] Id.

[30] Id.

[31] Flying robots get FAA approval in first for drone sector, ZDNet (Jan. 20, 2021), available at https://www.zdnet.com/article/flying-robots-get-faa-approval-in-first-for-drone-sector/.

[32] Id.

[33] Id.

[34] Id.

[35] Rantizo receives FAA approval to operate drone swarms, Clay and Milk (July 7, 2020), available at https://clayandmilk.com/2020/07/07/rantizo-receives-faa-approval-to-operate-drone-swarms/.

[36] Id.

[37] Id.

[38] DroneSeed is first in U.S. to receive approval from FAA for post-wildfire reforestation in California and five other states, PR Newswire (Oct. 6, 2020), available at https://www.prnewswire.com/news-releases/droneseed-is-first-in-us-to-receive-approval-from-faa-for-post-wildfire-reforestation-in-california-and-five-other-states-301146779.html.

[39] Id.

[40] Fed. Aviation Admin., Notice of Proposed Rulemaking on Type Certification of Certain Unmanned Aircraft Systems (Sept. 18, 2020), available at https://www.federalregister.gov/documents/2020/09/18/2020-17882/type-certification-of-certain-unmanned-aircraft-systems.

[41] Alan Levin, Alphabet’s Drone Delivery Service in Virginia Sees Surge During Pandemic, Transport Topics (Apr. 8, 2020), available at https://www.ttnews.com/articles/alphabets-drone-delivery-service-virginia-sees-surge-during-pandemic.

[42] Id.

[43] Aaron Pressman, Drone industry flies higher as COVID-19 fuels demand for remote services, Fortune (July 13, 2020), available at https://fortune.com/2020/07/13/coronavirus-drones-dji-wing-flytrex-covid-19-pandemic/.

[44] Id.

[45] Ryan Duffy, A Q&A with Flytrex CEO and Cofounder Yariv Bash, Emerging Tech Brew (Feb. 22, 2021), available at https://www.morningbrew.com/emerging-tech/stories/2021/02/22/qa-flytrex-ceo-cofounder-yariv-bash.

[46] Brian Straight, If drones can deliver Starbucks, what’s taking so long for packages?, Modern Shipper (Feb. 15, 2021), available at https://www.freightwaves.com/news/if-drones-can-deliver-starbucks-whats-taking-so-long-for-packages.

[47] Tyler Fingert, The future of doorstep delivery being tested in Mobile; Drones could soon deliver orders in minutes, Fox 10 News (Aug. 5, 2020), available at https://www.fox10tv.com/news/mobile_county/the-future-of-doorstep-delivery-being-tested-in-mobile-drones-could-soon-deliver-orders-in/article_93138836-d786-11ea-872e-536e9c4176b9.html.

[48] Palmer, supra note 28.

[49] Id.

[50] Id.

[51] John Porter, Zipline’s drones are delivering medical supplies and PPE in North Carolina, The Verge (May 27, 2020), available at https://www.theverge.com/2020/5/27/21270351/zipline-drones-novant-health-medical-center-hospital-supplies-ppe.

[52] Walmart using drones to deliver Covid-19 test kits to El Paso homes, ABC-7 KVIA (Nov. 16, 2020), available at https://kvia.com/news/business-technology/2020/11/16/walmart-to-start-using-drones-to-delivery-covid-19-test-kits-to-homes-in-el-paso/.

[53] Kaleb Roedel, Flirtey successfully conducts drone deliveries of COVID test kits, Nevada Appeal (Feb. 19, 2021), available at https://www.nevadaappeal.com/news/2021/feb/22/flirtey-successfully-conducts-drone-deliveries-cov/.

[54] Id.

[55] Aaron Pressman, Drone industry flies higher as COVID-19 fuels demand for remote services, Fortune (July 13, 2020), available at https://fortune.com/2020/07/13/coronavirus-drones-dji-wing-flytrex-covid-19-pandemic/.

[56] Id.

[57] Id.

[58] Bijan Khosravi, How The Global Pandemic Became An Inflection Point for Drones, Forbes (Dec. 6, 2020), available at https://www.forbes.com/sites/bijankhosravi/2020/12/06/how-the-global-pandemic-became-an-inflection-point-for-drones/?sh=1fa1ddb01870.

[59] NASA’s SpaceX Crew-1 Astronauts Headed to International Space Station, NASA (Nov. 15, 2020), available at https://www.nasa.gov/press-release/nasa-s-spacex-crew-1-astronauts-headed-to-international-space-station.

[60] Id.

[61] Id.

[62] Id.

[63] Id.

[64] See Adam Mann, China’s Chang’e Program: Missions to the Moon, Space.com (Feb. 1, 2019), available at https://www.space.com/43199-chang-e-program.html.

[65] NASA Space Science Data Coordinated Archive, Chang’e 5, NASA, available at https://nssdc.gsfc.nasa.gov/nmc/spacecraft/display.action?id=2020-087A.

[66] Id.

[67] Jonathan Amos, China’s Chang’e-5 mission returns Moon samples, BBC (Dec. 16, 2020), available at https://www.bbc.com/news/science-environment-55323176.

[68] Id.

[69] NASA, supra note 65.

[70] Adam Mann, China’s Chang’e 5 mission: Sampling the lunar surface, Space.com (Dec. 10, 2020), available at https://www.space.com/change-5-mission.html.

[71] Id.

[72] See Mann, supra note 64.

[73] Dr. David R. Williams, Future Chinese Lunar Missions, NASA (Dec. 21, 2020), available at https://nssdc.gsfc.nasa.gov/planetary/lunar/cnsa_moon_future.html.

[74] Andrew Jones, China’s Tianwen-1Mars probe captures epic video of Red Planet during orbital arrival, Space.com (Feb. 12, 2021), available at https://www.space.com/tianwen-1.html.

[75] Id.

[76] Vicky Stein, Tianwen-1: China’s first Mars mission, Space.com (Feb. 8, 2021), available at https://www.space.com/tianwen-1.html.

[77] Id.

[78] Jones, supra note 74.

[79] Id.

[80] See Mann, supra note 64.

[81] See Mike Wall, China plans to launch core module of space station this year, Space.com (Jan. 7, 2021), available at https://www.space.com/china-space-station-core-module-launch-spring-2021.

[82] Id.

[83] Id.

[84] Id.

[85] Elizabeth Howell, China’s ispace fails to reach orbit in 2nd launch attempt, Space.com (Feb. 4, 2021), available at https://www.space.com/chinese-startup-ispace-rocket-launch-failure.

[86] Id.

[87] Id.

[88] Id.

[89] Smriti Mallapaty, Asteroid dust recovered from Japan’s daring Hayabusa2 mission, Nature.com (Dec. 15, 2020), available at https://www.nature.com/articles/d41586-020-03451-6.

[90] Meghan Bartels, Samples of asteroid Ryugu arrive in Japan after successful Hayabusa2 capsule landing, Space.com (Dec. 8, 2020), available at https://www.space.com/hayabusa2-asteroid-ryugu-samples-arrive-in-japan.

[91] Id.

[92] Id.

[93] Mallapaty, supra note 89.

[94] Bartels, supra note 90.

[95] See Doris E. Urrutia, Japan’s asteroid sample-return spacecraft Hayabusa2 gets extended mission, Space.com (Sept. 30, 2020), available at https://www.space.com/japan-asteroid-mission-hayabusa2-extended.

[96] Bartels, supra note 90.

[97] Urrutia, supra note 95.

[98] Mike Wall, Japanese Company ispace Now Targeting 2021 Moon Landing for 1st Mission, Space.com (Aug. 23, 2019), available at https://www.space.com/japan-ispace-first-moon-mission-2021.html.

[99] Id.

[100] Id.

[101] Id.

[102] Jonathan Amos, UAE Hope mission returns first image of Mars, BBC (Feb. 14, 2021), available at https://www.bbc.com/news/science-environment-56060890.

[103] Meghan Bartels, Behold! See the 1st Mars closeup from UAE’s Hope orbiter (photo), Space.com (Feb. 16, 2021), available at https://www.space.com/uae-hope-mars-spacecraft-first-close-photo.

[104] Natasha Turak and Dan Murphy, United Arab Emirates becomes first Arab country to reach Mars, CNBC (Feb. 10, 2021), available at https://www.cnbc.com/2021/02/09/mars-probe-uae-attempts-to-become-first-arab-country-to-reach-mars-with-hope-probe.html.

[105] Jonathan Amos, Hope probe: UAE launches historic first mission to Mars, BBC (July 19, 2020), available at https://www.bbc.com/news/science-environment-53394737.

[106] Id.

[107] Leonard David, Luna-25 Lander Renew Russian Moon Rush, Scientific American (Aug. 27, 2020), available at https://www.scientificamerican.com/article/luna-25-lander-renews-russian-moon-rush/.

[108] Id.

[109] Leonard David, Russia gearing up to launch moon mission in 2021, Space.com (Aug. 7, 2020), available at https://www.space.com/russia-moon-mission-luna-25.html.

[110] Id.

[111] Id.

[112] Id.

[113] Kenneth Chang et al., SpaceX Launch: Highlights from NASA Astronauts’ Trip to Orbit, The New York Times (May 30, 2020), available at https://www.nytimes.com/2020/05/30/science/spacex-launch-nasa.html.

[114] Id.

[115] Id.

[116] Id.

[117] Meghan Bartels, Space X’s 1st Crew Dragon with astronauts docks at space station in historic rendezvous, Space.com (May 31, 2020), available at https://www.space.com/spacex-crew-dragon-demo-2-docking-success.html.

[118] Mike Wall, SpaceX Crew Dragon makes historic 1st splashdown to return NASA astronauts home, Space.com (Aug. 2, 2020), available at https://www.space.com/spacex-crew-dragon-demo-2-splashdown.html.

[119] NASA’s SpaceX Crew-1 Astronauts Headed to International Space Station, NASA (Nov. 15, 2020), available at https://www.nasa.gov/press-release/nasa-s-spacex-crew-1-astronauts-headed-to-international-space-station.

[120] Id.

[121] Id.

[122] Id.

[123] Michael Sheetz, SpaceX launches and lands another Starship prototype, the second flight test in under a month, CNBC (Sep. 3, 2020), available at https://www.cnbc.com/2020/09/03/spacex-launches-and-lands-starship-sn6-prototype-in-flight-test.html.

[124] Id.

[125] Mike Wall, SpaceX’s Starship SN5 prototype soars on 1st test flight! ‘Mars is looking real,’ Elon Musk says, Space.com (Aug. 5, 2020), available at https://www.space.com/spacex-starship-sn5-prototype-1st-test-flight.html.

[126] Id.

[127] Sheetz, supra note 123.

[128] Tariq Malik, SpaceX launches Starship SN6 prototype test flight on heels of Starlink mission, Space.com (Sep. 3, 2020), available at https://www.space.com/spacex-starship-sn6-first-test-flight.html.

[129] Michael Sheetz, SpaceX’s prototype Starship rocket reaches highest altitude yet but lands explosively on return attempt, CNBC (Dec. 9, 2020), available at https://www.cnbc.com/2020/12/09/spacex-starship-rocket-sn8-explodes-after-high-altitude-test-flight-.html.

[130] Id.

[131] Id.

[132] Amy Thompson, SpaceX launches advanced GPS satellite for US Space Force, sticks rocket landing, Space.com (June 30, 2020), available at https://www.space.com/spacex-space-force-gps-3-sv03-launch-success.html.

[133] Amy Thompson, SpaceX launches South Korea’s 1st military satellite, nails rocket landing at sea, Space.com (July 20, 2020), available at https://www.space.com/spacex-launches-south-korean-military-satellite-anasis-2-lands-rocket.html.

[134] Amy Thompson, SpaceX launches 60 Starlink internet satellites, sticks rocket landing, Space.com (Sep. 3, 2020), available at https://www.space.com/spacex-starlink-11-satellites-launch-september-2020.html.

[135] Michael Sheetz, SpaceX looks to build next-generation Starlink internet satellites after launching 1,000 so far, CNBC (Jan. 29, 2021), available at https://www.cnbc.com/2021/01/28/spacex-plans-next-generation-starlink-satellites-with-1000-launched.html.

[136] Id.

[137] Michael Sheetz, SpaceX says its Starlink satellite internet service now has over 10,000 users, CNBC (Feb. 4, 2021), available at https://www.cnbc.com/2021/02/04/spacex-starlink-satellite-internet-service-has-over-10000-users.html?recirc=taboolainternal.

[138] Samantha Mathewson, SpaceX raises $1.9 billion in latest funding round: report, Space.com (Aug. 21, 2020), available at https://www.space.com/spacex-raises-1.9-billion-funding-round.html.

[139] Id.

[140] Id.

[141] Reuters, Wire Service Content, SpaceX Valuation to Hit at Least $60 Billion in New Funding Round – Business Insider, U.S. News (Jan. 28, 2021), available at https://www.usnews.com/news/technology/articles/2021-01-28/spacex-finalizing-new-funding-round-at-minimum-valuation-of-60-bln-business-insider.

[142] Mike Wall, Touchdown! NASA’s Perseverance rover lands on Mars to begin hunt for signs of ancient life, Space.com (Feb. 18, 2021), available at https://www.space.com/perseverance-mars-rover-landing-success.

[143] Id.

[144] Id.

[145] Id.

[146] Id.

[147] See NASA, The Artemis Plan (2020), available at https://www.nasa.gov/sites/default/files/atoms/files/artemis_plan-20200921.pdf.

[148] Thalia Patrinos, Artemis Moon Program Advances – The Story So Far, NASA (Oct. 7, 2019), available at https://www.nasa.gov/artemis-moon-program-advances.

[149] Id.

[150] See Elizabeth Howell, NASA receives $23.3 billion for 2021 fiscal year in Congress’ omnibus spending bill: report, Space.com (Dec. 22, 2020), available at https://www.space.com/nasa-2021-budget-congress-omnibus-spending-bill.

[151] Lia Rovira and Deborah Byrd, NASA’s moon program – Artemis – boosted at White House press briefing, EarthSky (Feb. 6, 2021), available at https://earthsky.org/space/what-is-nasas-artemis-program-moon.

[152] Id.

[153] Id.

[154] Commercial Lunar Payload Services, NASA (Feb. 9, 2021), available at https://www.nasa.gov/content/commercial-lunar-payload-services-overview.

[155] Id.

[156] Sean Potter, NASA Selects Firefly Aerospace for Artemis Commercial Moon Delivery in 2023, NASA (Feb. 4, 2021), available at https://www.nasa.gov/press-release/nasa-selects-firefly-aerospace-for-artemis-commercial-moon-delivery-in-2023.

[157] See Adam Mann, NASA’s Artemis Program, NASA (July 3, 2019), available at https://www.space.com/artemis-program.html.

[158] Kelli Mars, Gateway, NASA (Feb. 11, 2021), available at https://www.nasa.gov/gateway.

[159] Sean Potter, NASA Awards Contract to Launch Initial Elements for Lunar Outpost, NASA (Feb. 10, 2021), available at https://www.nasa.gov/press-release/nasa-awards-contract-to-launch-initial-elements-for-lunar-outpost.

[160] Leonard David, NASA’s 2024 Moon Goal: Q&A with Human Landing System Chief Lisa Watson-Morgan, NASA (Oct. 7, 2019), available at https://www.space.com/nasa-2024-moon-human-landing-system-chief-interview.html.

[161] Sean Potter, NASA Names Companies to Develop Human Landers for Artemis Moon Mission, NASA (Jan. 4, 2021), available at https://www.nasa.gov/press-release/nasa-names-companies-to-develop-human-landers-for-artemis-moon-missions.

[162] See Mike Wall, NASA picks SpaceX, Dynetics and Blue Origin-led team to develop Artemis moon landers, Space.com (Apr. 30, 2020), available at https://www.space.com/nasa-artemis-moon-landers-spacex-blue-origin-dynetics-selection.html.

[163] Gillian Rich, First Space Stock of its Kind Faces SpaceX Threat, Crowded Field, Investors.com (Feb. 2, 2021), available at https://www.investors.com/news/space-stocks-astra-space-to-go-public-but-faces-spacex-threat-crowded-field/.

[164] Gillian Rich, You Can’t Buy SpaceX Yet But These Space Stocks Are Up For Grabs, Investors.com (Mar. 25, 2021), available at https://www.investors.com/news/space-stocks-upstart-space-companies-moon-mars/.

[165] Id.

[166] ARK ETF Trust, Registration Statement Under The Securities Act of 1933 Amendment No. 31, Securities and Exchange Commission (Jan. 13, 2021), available at https://www.sec.gov/Archives/edgar/data/0001579982/000110465921003837/tm212832d1_485apos.htm.

[167] Ark Invest, Space Exploration, Ark-Invest.com (2021), available at https://ark-invest.com/strategy/space-exploration/.

[168] Mike Bellin, Alan Jones, and Eric Watson, How special purpose acquisition companies (SPACs) work, PWC (accessed Apr. 2, 2021), available at https://www.pwc.com/us/en/services/audit-assurance/accounting-advisory/spac-merger.html.

[169] Rich, supra note 164.

[170] Melissa Rowley, How SPACs Are Changing The Investment Landscape For Space Exploration And Beyond, Forbes (Feb. 9, 2021), available at https://www.forbes.com/sites/melissarowley/2021/02/09/how-spacs-are-changing-the-investment-landscape-for-space-exploration-and-beyond/?sh=5a2ba29435c4.

[171] Rich, supra note 164.

[172] Id.

[173] 5 Key Themes in the New Space Economy, Morgan Stanley (Feb. 4, 2021), available at https://www.morganstanley.com/ideas/space-economy-themes-2021.

[174] Id.

[175] Michael Sheetz and Magdalena Petrova, Why in the Next Decade Companies Will Launch Thousands More Satellites Than in all of History, CNBC (Dec. 15, 2019), available at https://www.cnbc.com/2019/12/14/spacex-oneweb-and-amazon-to-launch-thousands-more-satellites-in-2020s.html; Federal Communications Commission, 2020 BROADBAND DEPLOYMENT, 5 FCC Rcd 8986 (11) (Apr. 20, 2020), available at https://docs.fcc.gov/public/attachments/FCC-20-50A1.pdf.

[176] David Shepardson, FCC Awards $9.2 Billion to Deploy Broadband to 5.2 Million U.S. Homes, Businesses U.S. (2020), available at https://www.reuters.com/article/us-usa-internet-fcc/fcc-awards-9-2-billion-to-deploy-broadband-to-5-2-million-u-s-homes-businesses-idUSKBN28H2V1.

[177] Christopher Davenport, FCC Announces Billions of Dollars in Awards to Provide Rural Areas with Broadband Access, Washington Post (Dec. 7, 2020), available at https://www.washingtonpost.com/technology/2020/12/07/fcc-digital-divide-spacex-broadband/.

[178] Id.

[179] Ryan Tracy, Elon Musk’s SpaceX Riles Its Rivals for Broadband Subsidies, The Wall Street Journal (Jan. 31 2021), available at www.wsj.com/articles/elon-musks-spacex-riles-its-rivals-for-broadband-subsidies-11612108801.

[180] Public Notice: Rural Digital Opportunity Fund Phase I Auction (Auction 904) Closes; Winning Bidders Announced; FCC Form 683 Due January 29, 2021, Federal Communications Commission (Dec. 7, 2020), available at https://docs.fcc.gov/public/attachments/DA-20-1422A1.pdf.

[181] Morgan Stanley, supra note 173.

[182] The Economist, It’s time to tidy up space, The Economist (Jan. 16, 2021), available at https://www.economist.com/leaders/2021/01/14/its-time-to-tidy-up-space.

[183] Morgan Stanley, supra note 173.

[184] Space: Investing in the Final Frontier | Morgan Stanley, Morgan Stanley (July 24, 2020), available at https://www.morganstanley.com/ideas/investing-in-space.

[185] Jeffrey Kluger, The Biden Presidency Could Fundamentally Change the U.S. Space Program, Time (Jan. 29, 2021), available at https://time.com/5933447/biden-space-nasa/.

[186] Sec’y of the Air Force Public Affairs, With the Stroke of a Pen, U.S. Space Force Becomes a Reality (Dec. 20, 2019), available at https://www.spaceforce.mil/News/Article/2046055/with-the-stroke-of-a-pen-us-space-force-becomes-a-reality.

[187] National Defense Authorization Act for Fiscal Year 2020, S. 1790, 116th Cong. § 952 b(4) (as passed by Senate, June 27, 2019), available at https://www.congress.gov/116/bills/s1790/BILLS-116s1790enr.pdf‌.

[188] Rebecca Kheel, Space Force Expected To Live On Past Trump Era, The Hill (Dec. 19, 2021), available at https://thehill.com/policy/technology/530936-space-force-expected-to-live-on-past-trump-era.

[189] Reuters, Biden Decides to Stick with Space Force as Branch of U.S. Military, Reuters (Feb. 3, 2021), available at https://www.reuters.com/article/us-usa-biden-spaceforce/biden-decides-to-stick-with-space-force-as-branch-of-u-s-military-idUSKBN2A32Z6.

[190] Sandra Erwin, Raymond: Space Force ‘Not a Political Issue’, Space News (Mar. 3, 2021), available at https://spacenews.com/raymond-space-force-not-a-political-issue/.

[191] Kheel, supra note 199.

[192] Christian Davenport, The Biden Administration Has Set Out To Dismantle Trump’s Legacy, Except In One Area: Space, The Washington Post (Mar. 2, 2021), available at https://www.washingtonpost.com/technology/2021/03/02/biden-space-artemis-moon-trump/.

[193] Marcia Smith, Biden Administration “Certainly” Supports Artemis Program, Space Policy Online (Feb. 4, 2021), available at https://spacepolicyonline.com/news/biden-administration-certainly-supports-artemis-program/.

[194] Id.

[195] Lia Rovira, How Will the U.S. Space Program Fare Under Joe Biden?, EarthSky, (Jan. 10, 2021), available at https://earthsky.org/human-world/how-will-the-u-s-space-program-fare-under-joe-biden.

[196] Smith, supra note 204.

[197] Kluger, supra note 196.

The following Gibson Dunn lawyers assisted in preparing this client update: Dhananjay Manthripragda, Jared Greenberg, Lindsay Paulin, Sarah Ediger, Macey Olave, Andrew Blythe, Jacob Rierson, Sarah Scharf, Casper Yen, Alayna Monroe, Zak Baron, and Christopher Wang.

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Each month, Gibson Dunn’s Media, Entertainment and Technology Practice Group highlights notable developments and rulings that may impact future litigation in this area. This month we focus on the increasingly popular digital asset known as non-fungible tokens or “NFTs” and related issues in the entertainment space and beyond.

Issue: Non-Fungible Tokens (NFTs)

Summary: NFTs have gone mainstream in what some have called a new “gold rush.” An NFT sold for almost $70 million at a Christie’s auction last month, NFTs of basketball video highlights have generated hundreds of millions of dollars in sales on the NBA Top Shot platform, and NFTs even were the subject of a skit on a recent episode of Saturday Night Live. Some consider them a fad or a bubble, citing the almost $600,000 sale of an image of an animated flying cat with a pop-tart body that anyone can download from the internet for free. But in one form or another, NFTs are here to stay. Even if the market matures and interest wanes in some unconventional pieces of digital art, NFTs will continue to offer a significant potential revenue stream for artists and entities in the film and television, music, and online gaming industries, among many others. We highlight below some of the emerging legal and policy issues related to NFTs, which include intellectual property law, profit participation issues, securities law, and even climate change.

What do the music group Megadeth, former University of Iowa basketball player Luka Garza, and New York City track and field center The Armory have in common? In the span of 24 hours earlier this month, each of them entered the rapidly expanding NFT market. They joined a number of artists and entertainers who have led the charge in selling NFTs. As film studios and other entities with large content libraries consider following suit, they will need to consider a number of deeply rooted legal issues against a relatively new technological backdrop.

I. Background

There are widely varied understandings of NFTs and related issues concerning tokens and blockchain technology. While many of our readers are familiar with these terms, a brief introduction is helpful to frame the issues that follow.

A. What are NFTs and What is the Blockchain?

An NFT, or “non-fungible token,” is a unique unit of data stored on a public ledger of transactions called a blockchain. The unique data could represent an image, an electronic deed to a piece of property, or a digital ticket for a particular seat at a sporting event. In contrast to these “non-fungible” tokens, cryptocurrencies such as Bitcoin and Ether—just like U.S. dollars, British pounds and other “fiat” government-issued currencies—are fungible; one penny in your pocket has the same intrinsic value as the penny under your couch cushion.

Today, NFTs generally reside on the Ethereum blockchain, which also supports, among other things, the cryptocurrency Ether—the second largest cryptocurrency in terms of market capitalization and volume after Bitcoin. While other blockchains can have their own versions of NFTs, right now Ethereum is the most widely used (though NBA Top Shot uses the Flow blockchain).

But what is a blockchain? As noted above, it is an electronic database or ledger showing a history of transactions. Each transaction is represented by an entry into the electronic ledger and multiple ledger entries are ordered in data batches known as “blocks” to await verification on the network. New blocks are added after the current block reaches its data limit. The blocks are connected using cryptography: each block contains a “hash” (a sort of coded electronic signature linking it to the previous block), which is how the blockchain gets its name.

A key feature of the Ethereum blockchain that distinguishes it from a database one might have at a business or law firm is that the blockchain is decentralized across a community of servers. Data is not stored in any one location or managed by any particular body. Rather, it exists on multiple computers simultaneously, with network participants holding identical copies of the ledger reflecting the encrypted transactions.

That is why blockchains are touted as both verifiable and secure. It is similar to the tracking details showing each step in a package’s journey from the shipper to its final delivery destination. Unlike the tracking details provided by a shipping company, however, on the blockchain no one person can alter that record to change the encrypted data without the network’s users noticing and rejecting the fraudulent version. And if any one computer system fails, there are duplicate images of the tracking details on the blockchain ledger available on other computers around the world.

B. What Do You Get When You Buy An NFT?

While an NFT is unique, it is important to keep in mind what that unique digital item actually is. In most cases the NFT is a digital identifier recording ownership, not—to borrow an example from the above—the actual image of the pop-tart cat. What amounts to your “receipt” is reflected in the blockchain, but the image file itself resides elsewhere.

This has to do with blockchain storage limitations and costs. The digital image itself theoretically can be stored in metadata on the blockchain, but in the vast majority of cases it is hosted on a regular website or the decentralized InterPlanetary File System (IPFS). The identifier is logged on the blockchain, but if the image is taken down from its non-blockchain location—say, because it violates someone’s copyright—the NFT could end up being a unique digital path to a closed door (even if there may be seemingly identical “copies” of the digital asset elsewhere). The immutable purchase record would remain on the blockchain, but the original image might not be viewable.

Almost uniformly, the NFT transfer conveys an interest in a licensed copy while copyright ownership of the underlying image or song is not transferred. The NFT may be in a limited edition and it may have some additional perceived value because it is officially authorized by the copyright holder or originated from the address of the copyright holder. But while the underlying copyright can be transferred when the NFT is sold or licensed, typically it isn’t. The terms and conditions of an NFT platform may reveal the limits of what actually is being transferred and how it might be used.

Under NBA Top Shot’s terms, for example, the purchaser who obtains a license to a “Moment” cannot use it for a commercial purpose, modify it, or use the image alongside anything the NBA considers offensive or hateful. An NFT platform that controls the image file is able to remove that file from its platform.

* * *

Monetization strategies for NFTs are constantly evolving, so one cannot generalize and say that all NFTs fall in one legal bucket or another. An NFT can be fair use of a copyright or it can violate it. An NFT likewise could be a simple collectible or it may be offered in such a way to convert it into a security subject to myriad regulations and disclosure requirements. It depends on the NFT. But as the market evolves, complicated questions will need to be answered by NFT creators, platforms, and, potentially, courts.

II. Intellectual Property

Any NFT platform must be particularly focused on the intellectual property rights underlying the NFTs stored, sold, or licensed on the platform. A single NFT may include various copyrightable elements, including a video clip and any accompanying music. Whereas the platform may be able to invoke a statutory liability protection with respect to some potential claims—like defamation—certain intellectual property claims are not precluded.

Specifically, Section 230 of the Communications Decency Act of 1996 shields certain online service providers from liability for hosting content that someone else created. In particular, Section 230(c)(1) states that “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”

To the extent Section 230 applies to a particular NFT platform, the law’s broad protection still has carve-outs. Among other things, it does not apply to “any law pertaining to intellectual property.” Courts have different interpretations of the scope of Section 230’s reference to “intellectual property.” In Perfect 10 v. CCBill, 488 F.3d 1102 (9th Cir. 2007), the Ninth Circuit ruled that Section 230 permitted claims under federal intellectual property laws but preempted state intellectual property claims alleging a violation of the plaintiff’s right of publicity. In Atlantic Recording Corp. v. Project Playlist, Inc., 603 F. Supp. 2d 690 (S.D.N.Y. 2009), a Southern District of New York court reached the opposite conclusion, holding that the “intellectual property” carve-out extended beyond intellectual property claims under federal law to include state-law claims.

Whether or not an NFT platform would be subject to potential liability for violating someone’s state-law right in her or his name and likeness, federal intellectual property law still would apply. And offering an NFT that potentially infringes a copyright could result in liability for the platform if, for example, it does not take the necessary steps under the Digital Millennium Copyright Act. That risk is heightened for some platforms given how easy it is to tokenize someone else’s work. Speculators can turn any digital image into an NFT that they can then try to sell, even if the original creator does not agree to that use or even know about it.

Studios and other intellectual property rights holders will need to be especially vigilant in protecting their intellectual property—and NFT platforms likewise will need to promptly remove content if a copyright owner notifies it of an infringement—as the market for small pieces of content expands.

III. Profit Participations

Especially in the current NFT environment, it is not difficult to imagine the potential value of tokenized iconic moments from movies and television. Of course, there would be a number of contractual issues for a rightsholder to navigate, which would vary from deal to deal. Valuable clips might come from movies dating back long before the advent of NFTs, the internet, or even computers. The relevant agreements certainly would not address NFTs, but even analogous provisions might be difficult to identify. Agreements may refer to “clips,” for example, but typically a clip is used to promote the full program or film rather than to be monetized on its own.

Depending on what it depicts, an NFT might not be a “clip” at all. Again using NBA Top Shot as an example, a “Moment” is not just a short video excerpt showing a pass or dunk; it is a package of on-court video, still photographs, digital artwork, and game information. Contracts would need to be analyzed to determine if the NFT should be categorized as a clip, a derivative production, merchandising, promotional material, or something else, with potential consequences on the calculation of gross receipts and any corresponding rights to profit participations or Guild royalties.

Exclusivity provisions in film or television licenses to third parties might bar or limit a studio from “minting” an NFT from a work in its library. Other considerations might also limit a rightsholder’s willingness to enter the NFT space. With vast libraries of well-known and high‑quality content, however, studios are better positioned than most to take advantage of the increased interest and marketability of discrete portions of a film or program.

IV. Securities Law

Particularly in light of the SEC’s increased focus on cryptocurrencies, including its recent lawsuit accusing Ripple Labs Inc. and two of its executives of engaging in an unregistered “digital asset securities offering,” anyone involved in marketing an NFT should give careful consideration to whether the NFT is a security under U.S. law.

This should be of particular concern to the celebrities marketing their own NFTs. Several years ago, in response to celebrity endorsements for cryptocurrency Initial Coin Offerings (ICOs), the SEC warned that “[a]ny celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.”[1] A failure to do so would be “a violation of the anti-touting provisions of the federal securities laws.”[2] The same principle would apply to NFTs, with the key question being whether an NFT is a security. This issue has significant bearing on the NFT platform as well. If an NFT is a security, the offeror must follow securities law disclosure requirements and restrictions on who may invest.

The term “security” in U.S. securities laws includes an “investment contract” as well as other instruments like stocks and bonds. Both the SEC and federal courts often use the “investment contract” analysis to determine whether unique instruments, such as digital assets, are securities subject to federal securities laws.

To determine whether a digital asset has the characteristics of an investment contract, courts apply a test derived from the U.S. Supreme Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Under that Howey test, federal securities laws apply where

there is an investment of money or some other consideration,
in a common enterprise,
with a reasonable expectation of profits,
to be derived from the efforts of others.

Again, it would depend on the NFT, but transactions that resemble a fan buying a collectible likely would not be securities under this test. The notion that an NFT is non-fungible also makes it less likely to be a security.

Nevertheless, the NFT market is a creative one. Many NFTs, for example, are configured through the “smart contracts”—which are essentially computer programs—to automatically pay out royalties to the digital artwork’s original creator with every future sale of the NFT on that platform; the artist could package those royalty rights for sale to potential investors.

NFT issuers also can sell fractional interests in NFTs or groups of NFTs. As prices for some NFTs climb into the stratosphere, this approach becomes more appealing to potential buyers who want a piece of the NFT but are unwilling or unable to pay for the whole thing. According to recent statements by SEC Commissioner Hester Peirce, however, doing so increases the likelihood that the NFT would be deemed a security under the Howey test.[3] That likelihood grows where the NFT issuer or a third party claim to be able to help increase the NFT’s value.

V. Climate Change

A major issue that has arisen related to NFTs— and cryptocurrency generally—is their believed effect on the environment. Articles abound comparing the energy consumption of the Ethereum blockchain to entire countries. An analysis by Cambridge University asserts that what it calls the “Bitcoin network” uses more energy than Argentina.[4] NFTs thus have proven somewhat controversial, with one online marketplace for digital artists dropping its plans to launch an NFT platform after backlash that included an artist labeling NFTs an “ecological nightmare pyramid scheme.”[5]

Some contend that these ecological concerns are exaggerated and misleading, noting that NFTs themselves do not cause carbon emissions. As one platform wrote in a recent blog post, “Ethereum has a fixed energy consumption at a given point of time.”[6] The carbon footprint of the Ethereum blockchain would be the same if people minted more NFTs or stopped minting them altogether. But even the post acknowledges that “[i]t is true that Ethereum is energy intensive.”[7]

The crypto energy consumption issue relates to how blockchain technology currently operates. To validate a transaction—and engender trust in a system that is not backed by any central bank or other government authority—the blockchain network relies on a method called “Proof of Work.” The hashing function described above that allows the blocks to be chained together requires complex mathematical equations that only powerful computers can solve. “Miners” must solve these equations to add a new block to the chain. As incentive to solve the mathematical puzzles, the miner receives a reward of new tokens or transaction fees.

The energy costs to complete the hash functions under the Proof of Work model can be high, with miners using entire data centers to compete to solve the puzzles first and garner the reward. To mitigate any environmental effects, mining sites may increasingly rely on renewable energy and “stranded” energy, which is surplus energy created, for example, by excess power that some hyrdroelectric dams around the world generate during rainy seasons.

Another option, at least for the Ethereum blockchain, is moving to a “Proof of Stake” model. Rather than relying on miners using significant amounts of electricity in a race to solve an equation the fastest, the Proof of Stake model involves validators of transactions who are assigned randomly via an algorithm. These validators also have to commit some of their own cryptocurrency, giving them a “stake” in keeping the blockchain accurate.

Reports indicate that Ethereum may move to the Proof of Stake model as soon as this year.[8] Doing so would decrease energy consumption associated with NFTs, allow more transactions per second than in the Proof of Work model, and seemingly remove (or at least mitigate) an apparent drag on the willingness of some to embrace NFTs.

At the same time, one recent article noted what a crypto-mining finance company executive called the “‘inherent security issue of using the native tokens of a blockchain to decide the future of those tokens or the blockchain.’”[9] If the value of the tokens fall, the value of a validator’s stake falls along with it. The validator then has less to lose if they decide to propose an incorrect transaction or otherwise misbehave.

VI. Conclusion

NFTs present significant opportunities for content creators and owners, but they also present novel legal and policy issues across a wide range of areas as the technology continues to evolve. Beyond those listed here, areas of potential concern include Commodities/Derivatives, Tax, Data Privacy, and Cross-Border Transactions. Understanding the potential complications of moving into the NFT space is a necessity in anticipation of the regulatory scrutiny and litigation that often follow similar explosions of interest and investment.

_______________________

[1] https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos (Nov. 1, 2017).

[2] Id.

[3] https://cointelegraph.com/news/sec-s-crypto-mom-warns-selling-fractionalized-nfts-could-break-the-law (Mar. 26, 2021).

[4] https://www.bbc.com/news/technology-56012952 (Feb. 10, 2021).

[5] https://www.theverge.com/2021/3/15/22328203/nft-cryptoart-ethereum-blockchain-climate-change (Mar. 15, 2021).

[6] https://medium.com/superrare/no-cryptoartists-arent-harming-the-planet-43182f72fc61 (Mar. 2, 2021).

[7] Id.

[8] https://www.coindesk.com/ethereum-proof-of-stake-sooner-than-you-think (Mar. 17, 2021).

[9] https://cryptonews.com/exclusives/proof-of-disagreement-bitcoin-s-work-vs-ethereum-s-planned-s-9788.htm (Apr. 3, 2021).

The following Gibson Dunn lawyers assisted in the preparation of this client update: Michael Dore and Jeffrey Steiner.

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

Scott A. Edelman – Co-Chair, Media, Entertainment & Technology Practice, Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com)
Kevin Masuda – Co-Chair, Media, Entertainment & Technology Practice, Los Angeles (+1 213-229-7872, kmasuda@gibsondunn.com)
Orin Snyder – Co-Chair, Media, Entertainment & Technology Practice, New York (+1 212-351-2400, osnyder@gibsondunn.com)
Brian C. Ascher – New York (+1 212-351-3989, bascher@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 members of the firm’s Digital Currencies and Blockchain Technology team:

Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On April 15, 2021, the United States announced a significant expansion of sanctions on Russia, including new restrictions on the ability of U.S. financial institutions to deal in Russian sovereign debt and the designation of more than 40 individuals and entities for supporting the Kremlin’s malign activities abroad. As part of a sprawling package of measures, the Biden administration imposed sectoral sanctions on some of Russia’s most economically consequential institutions—including the country’s central bank, finance ministry, and sovereign wealth fund. The administration also blacklisted an array of individuals and entities implicated in Russia’s annexation of Crimea, foreign election interference, and the SolarWinds cyberattack. Most of the sanctions authorities included in newly issued Executive Order (“E.O.”) 14024 were already in force across a range of earlier Executive Orders and actions promulgated to respond to Russia’s initial incursion into Crimea in 2014, Moscow’s malicious cyber activities, election interference, chemical weapons attacks, and human rights abuses. This new initiative, however, suggests that the Biden administration is prepared to move aggressively to deter Moscow from further engaging in destabilizing activities. Moreover, we assess that this new initiative by the Biden administration is designed, at least in part, to elicit multilateral support, principally from the United Kingdom and the European Union. Whether Washington’s transatlantic allies take up the call (London is apparently poised to follow soon) and whether these measures ultimately change Russia’s behavior remains to be seen. In the meantime, the already frosty relationship between the West and Moscow appears likely to further deteriorate, which could have significant repercussions for multinational companies active in both jurisdictions.

Executive Order 14024

E.O. 14024 authorizes blocking sanctions against, among others, (1) persons determined to operate in certain sectors of the Russian economy; (2) those determined to be responsible for or complicit in certain activities on behalf of the Russian Government such as malicious cyber activities, foreign election interference, and transnational corruption; (3) Russian Government officials; and (4) Russian Government political subdivisions, agencies, and instrumentalities. As noted above, many of these bases for designation already exist under earlier Executive Orders. The duplication of these authorities suggests that the Biden administration may be looking both to put its own stamp on U.S. sanctions policy and to have a single, consolidated sanctions tool that it can use to target the full range of Russian malign behavior. E.O. 14024 also expands upon some of those earlier authorities, for example, by authorizing the imposition of sanctions against the spouse and adult children of individuals sanctioned pursuant to the new E.O. This is a somewhat uncommon provision apparently designed to prevent sanctions evasion by those who may seek to shift assets to close relatives—a strategy that the United States has seen in its implementation and enforcement of Russian sanctions, especially with respect to oligarchs.

Restrictions on Russian Sovereign Debt

While the 46 individual and entity designations (discussed more fully below) are potentially impactful on the specific parties targeted, the most systemically important component of E.O. 14024 comes in the form of a new Directive issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). Such directives have in the past only been issued in the context of sectoral sanctions imposed against Russia. This latest Directive prohibits U.S. financial institutions, as of June 14, 2021, from either (1) participating in the primary market for “new” ruble and non-ruble denominated bonds issued by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation (Russia’s principal sovereign wealth fund), or the Ministry of Finance of the Russian Federation, or (2) lending ruble or non-ruble denominated funds to those three entities. Modeled on earlier sectoral sanctions targeting major actors in Russia’s financial services, energy, defense, and oil sectors, the new Directive prohibits U.S. financial institutions from engaging only in certain narrow categories of transactions involving the targeted entities. Absent some other prohibition, U.S. banks may continue engaging in all other lawful dealings with the named entities. This reflects the delicate balance that President Biden and earlier administrations have attempted to strike by imposing meaningful consequences on large, globally significant actors without at the same time roiling global markets or imposing unpalatable collateral consequences on U.S. allies. Notably, the Biden administration stopped far short of more draconian measures such as blacklisting Russia’s sovereign wealth fund, or the Russian Government itself (as the Trump administration did in Venezuela).

The sectoral sanctions on Russia’s central bank, sovereign wealth fund, and finance ministry are further circumscribed in several key respects. First, they do not become effective until 60 days after the issuance of the Directive. Second, they are one of the rare instances in which OFAC’s Fifty Percent Rule does not apply, meaning that the Directive’s restrictions extend only to bonds issued by, and loans made to, the three named Russian Government entities and not to any other entities in which they may own a direct or indirect majority interest. Third, the Directive also does not prohibit U.S. financial institutions from participating in the secondary market for Russian sovereign bonds—a potentially wide loophole under which U.S. banks may continue to purchase such debt, just not directly from the three targeted entities. This is a loophole that could be significantly closed if the United Kingdom and European Union adopted similar measures—further supporting our assessment that the administration designed these restrictions in part to be imposed alongside similar restrictions promulgated by London and Brussels.

Particularly in light of existing restrictions on U.S. banks’ ability to participate in the primary market for non-ruble denominated Russian sovereign bonds, and from lending non-ruble denominated funds to the Russian sovereign, the Directive’s main significance is that it will make it more difficult for the Russian Government, starting on June 14, 2021, to borrow new funds in local currency. From a policy perspective, the Directive therefore appears calculated to further restrict potential sources of financing for the Russian state—in effect, penalizing the Kremlin by driving up its borrowing costs. Such a seemingly narrow expansion of restricted activities also leaves room to further strengthen measures if the Kremlin’s malign activities continue.

Sanctions Targeting Russia’s Other Troubling Activities

In addition to imposing restrictions on Russian sovereign debt, the Biden administration also designated dozens of individuals and entities to OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List for their involvement in Russia’s destabilizing operations abroad. As a result of these designations, U.S. persons are generally prohibited from engaging in transactions involving the targeted individuals and entities and any property and interests in property of the targeted persons that come within U.S. jurisdiction are frozen. Underscoring the scope of the Biden administration’s concerns, these sanctions designations target an accumulation of Russian activities during the preceding months, including efforts to cement Russian control of the Crimea region of Ukraine, foreign election interference, and the SolarWinds cyberattack.

Among those targeted were eight individuals and entities involved in Russia’s annexation of Crimea. In particular, OFAC designated various persons involved in constructing the Kerch Strait Bridge, which connects the Crimean peninsula by rail to the Russian mainland. These designations also targeted Russian and local government officials for attempting to exercise control over Crimea, as well as a detention facility in the Crimean city of Simferopol that has been implicated in human rights abuses. Through these actions—which come amid reports of Russian troops massing on the eastern Ukrainian border—the United States appears to be signaling its continuing commitment to the territorial integrity of Ukraine.

In a second batch of designations, OFAC added a further 32 individuals and entities to the SDN List for attempting to influence democratic elections in the United States and Africa at the behest of the Russian state. Notably, these designations include a network of Russian intelligence-linked websites that allegedly engaged in a campaign of disinformation and election interference. OFAC also targeted associates and enablers of Yevgeniy Prigozhin, the principal financial backer of the Russia-based Internet Research Agency, as well as the Russian political consultant Konstantin Kilimnik. This set of sanctions targets not only Russian actors engaged in disinformation on behalf of the Russian government, but also those that facilitate this harmful behavior—adding a new layer of accountability to the extensive disinformation-related sanctions put in place over the last five years.

Finally, the Biden administration announced a long-awaited group of designations targeting six companies in the Russian technology sector in response to last year’s high-profile SolarWinds cyberattack on government and private networks—which the United States for the first time definitively attributed to Russia’s intelligence services. These technology companies, which were the first to be designated pursuant to E.O. 14024, were targeted because they are funded and operated by the Russian Ministry of Defense and allegedly helped research and develop malicious cyber operations for Russia’s three main intelligence agencies.

Taken together, these actions targeting a broad spectrum of disruptive activities beyond Russia’s borders mark a significant escalation of U.S. pressure on Moscow. U.S. Secretary of the Treasury Janet Yellen in a statement described the measures as “the start of a new U.S. campaign against Russian malign behavior,” implying that additional designations may be on the horizon. For example, a fresh round of sanctions could soon be announced if further harm were to come to the jailed Russian dissident Alexey Navalny.

Next Steps Between Washington and Moscow

This week’s wide-ranging sanctions on Moscow suggest that President Biden is likely to continue using sanctions and other instruments of economic coercion to deter and impose costs on the Kremlin. As for what this latest development means for foreign investors and multinational companies, the answer depends in part on how Russia ultimately responds. By reportedly holding out the possibility of a U.S.-Russia summit in a recent call with Russia’s President Vladimir Putin, as well as refraining from imposing more biting sanctions, President Biden appears to have left open the possibility of limited retaliation by Russia and an eventual de-escalation of tensions between Washington and Moscow. The Kremlin’s public response so far has been muted, including the expulsion of a handful of U.S. diplomats and the imposition of sanctions against eight senior U.S. officials. However, if Russia were to respond more forcefully—such as by launching an incursion further into Ukraine or through renewed cyberattacks against the United States and allied nations—the imposition of more severe sanctions barring U.S. persons from participating in the secondary market for Russian bonds or the designation of a major enterprise in the country’s energy sector could occur. At a minimum, the sanctions announced this past week are likely to further increase the risks, and the yield, associated with new issuance of Russian sovereign debt—marking the beginning of a new chapter in U.S. Government efforts to change the Russian Government’s behavior, or at least impose significant costs if the Kremlin refuses to alter course.

The following Gibson Dunn lawyers assisted in preparing this client update: Scott Toussaint, Judith Alison Lee, Adam Smith, Stephanie Connor, Christopher Timura and Laura Cole.

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

United States:
Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
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Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com)
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Courtney M. Brown – Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com)
Laura R. Cole – Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com)
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Protecting First Amendment rights has long been a hallmark of Gibson Dunn’s practice. In particular, we have vigilantly defended freedom of the press and its indispensable role in a healthy democracy. On this episode of the podcast, Ted Boutrous and Ted Olson discuss some of the most important and interesting First Amendment cases they’ve worked on.

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HOSTS:

Ted Boutrous – Theodore J. Boutrous, Jr., a partner in the Los Angeles office of Gibson, Dunn & Crutcher LLP, is global Co-Chair of the firm’s Litigation Group and previously led the firm’s Appellate, Crisis Management, Transnational Litigation and Media groups. He also is a member of the firm’s Executive and Management Committees. Recognized for a decade of excellence in the legal profession, the Daily Journal in 2021 named Mr. Boutrous as a Top Lawyer of the Decade for his victories. As a tireless advocate and leader for high-stakes and high-profile cases, Mr. Boutrous was also named the 2019 “Litigator of the Year, Grand Prize Winner” by The American Lawyer.

Ted Olson – Theodore B. Olson is a Partner in Gibson, Dunn & Crutcher’s Washington, D.C. office; a founder of the Firm’s Crisis Management, Sports Law, and Appellate and Constitutional Law Practice Groups. Mr. Olson was Solicitor General of the United States during the period 2001-2004. From 1981-1984, he was Assistant Attorney General in charge of the Office of Legal Counsel in the U.S. Department of Justice. Except for those two intervals, he has been a lawyer with Gibson, Dunn & Crutcher in Los Angeles and Washington, D.C. since 1965.

On April 6, 2021, New York Governor Andrew Cuomo signed into law Senate Bill 297B/Assembly Bill 164B (the “New York LIBOR Legislation”), the long anticipated New York State legislation addressing the cessation of U.S. Dollar (“USD”) LIBOR.[1] The New York LIBOR Legislation generally tracks the legislation proposed by the Alternative Reference Rates Committee (“ARRC”).[2] It provides a statutory remedy for so-called “tough legacy contracts,” i.e., contracts that reference USD LIBOR as a benchmark interest rate but do not include effective fallback provisions in the event USD LIBOR is no longer published or is no longer representative, and that will remain in existence beyond June 30, 2023 in the case of the overnight, 1 month, 3 month, 6 month and 12 month tenors, or beyond December 31, 2021 in the case of the 1 week and 2 month tenors.[3]

Under the new law, if a contract governed by New York law (1) references USD LIBOR as a benchmark interest rate and (2) does not contain benchmark fallback provisions, or contains benchmark fallback provisions that would cause the benchmark rate to fall back to a rate that would continue to be based on USD LIBOR, then on the date USD LIBOR permanently ceases to be published, or is announced to no longer be representative, USD LIBOR will be deemed by operation of law to be replaced by the “recommended benchmark replacement.” The New York LIBOR Legislation provides that the “recommended benchmark replacement” shall be based on the Secured Overnight Financing Rate (“SOFR”) and shall have been selected or recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC for the applicable type of contract, security or instrument. The recommended benchmark replacement will include any applicable spread adjustment[4] and any conforming changes selected or recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC.

The New York LIBOR Legislation also establishes a safe harbor from liability for the selection and use of a recommended benchmark replacement and further provides that a party to a contract shall be prohibited from declaring a breach or refusing to perform as a result of another party’s selection or use of a recommended benchmark replacement.

It should be noted that the New York LIBOR Legislation does not affect contracts governed by jurisdictions other than New York, and that the parties to a contract governed by New York law remain free to agree to a fallback rate that is not based on USD LIBOR or SOFR; the new law does not override a fallback to a non-USD LIBOR based rate (e.g., the Prime rate) agreed to by the parties to a contract. Although this legislation provides crucial safeguards, it should not be viewed as a substitute for amending legacy USD LIBOR contracts where possible. Rather, it should be viewed as a backstop in the event that counterparties are unwilling or unable to agree to adequate fallback language prior to the cessation date or date of non-representativeness.

The ARRC, the Federal Reserve Board and several industry associations and groups have expressed their strong support for the new law.[5]

__________________

[1] See https://www.nysenate.gov/legislation/bills/2021/S297.

[2] See https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/libor-legislation-with-technical-amendments.

[3] We note that certain contracts, such as derivatives entered into under International Swaps and Derivatives Association (ISDA) standard documentation, provide for linear interpolation of the 1 week and 2 month USD LIBOR tenors until USD LIBOR ceases to exist for all tenors on June 30, 2023. The New York LIBOR Legislation provides that if the first fallback in a contract is linear interpolation, then, for the 1 week or 2 month tenor USD LIBOR contracts, the parties to the contract would continue to use linear interpolation for the period between December 31, 2021 and June 30, 2023. See the definition of “LIBOR Discontinuance Event” and “LIBOR Replacement Date” in the New York LIBOR Legislation.

[4] Note that the ICE Benchmark Administration Limited and the UK Financial Conduct Authority formally announced LIBOR cessation and non-representative dates for USD LIBOR on March 5, 2021. These announcements fixed the spread adjustment contemplated under certain industry-standard documents. See Gibson Dunn’s Client Alert: The End Is Near: LIBOR Cessation Dates Formally Announced, available at https://www.gibsondunn.com/the-end-is-near-libor-cessation-dates-formally-announced/.

[5] See “ARRC Welcomes Passage of LIBOR Legislation by the New York State Legislature,” ARRC (March 24, 2021, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210324-arrc-press-release-passage-of-libor-legislation; see also, Randall Quarles, Keynote Address at the “The SOFR Symposium: The Final Year,” an event hosted by the Alternative Reference Rates Committee, New York, New York (March 22, 2021), available at https://www.federalreserve.gov/newsevents/speech/quarles20210322a.htm.

Gibson Dunn’s lawyers are available to answer questions about the LIBOR transition in general and these developments in particular. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets, Derivatives, Financial Institutions, Global Finance or Tax practice groups, or the following authors of this client alert:

Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
John J. McDonnell – New York (+1 212-351-4004, jmcdonnell@gibsondunn.com)

Please also feel free to contact the following practice leaders and members:

Capital Markets Group:
Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com)
Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com)
Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com)
Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)

Derivatives Group:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
Darius Mehraban – New York (+1 212-351-2428, dmehraban@gibsondunn.com)
Erica N. Cushing – Denver (+1 303-298-5711, ecushing@gibsondunn.com)

Financial Institutions Group:
Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)

Global Finance Group:
Aaron F. Adams – New York (+1 212 351 2494, afadams@gibsondunn.com)
Linda L. Curtis – Los Angeles (+1 213 229 7582, lcurtis@gibsondunn.com)
Ben Myers – London (+44 (0) 20 7071 4277, bmyers@gibsondunn.com)
Michael Nicklin – Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com)
Jamie Thomas – Singapore (+65 6507 3609, jthomas@gibsondunn.com)

Tax Group:
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Benjamin Fryer – London (+44 (0) 20 7071 4232, bfryer@gibsondunn.com)
Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224/+1 212-351-2344), jtrinklein@gibsondunn.com)
Bridget English – London (+44 (0) 20 7071 4228, benglish@gibsondunn.com)
Alex Marcellesi – New York (+1 212-351-6222, amarcellesi@gibsondunn.com)

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 key petitions for certiorari in cases originating in the Federal Circuit, addresses the Federal Circuit’s announcement that Judge Wallach will be taking senior status and the court’s updated Rules of Practice, and discusses recent Federal Circuit decisions concerning issue preclusion, Section 101, appellate procedure for PTAB appeals, and the latest mandamus petitions on motions to transfer from the Western District of Texas.

Federal Circuit News

Supreme Court:

Today, the Court decided Google LLC v. Oracle America, Inc. (U.S. No. 18-956). In a 6-2 decision, the Court held that because Google “reimplemented” a user interface, “taking only what was needed to allow users to put their accrued talents to work in a new and transformative program,” Google’s copying of the Java API was a fair use of that material as a matter of law. The Court did not decide the question whether the Copyright Act protects software interfaces. “Given the rapidly changing technological, economic, and business-related circumstances,” the Court explained, “[the Court] should not answer more than is necessary to resolve the parties’ dispute.” The Court therefore assumed, “purely for argument’s sake,” that the Java interface is protected by copyright.

This month, the Supreme Court did not add any new cases originating at the Federal Circuit. As we summarized in our January and February updates, the Court has two such cases pending: United States v. Arthrex, Inc. (U.S. Nos. 19-1434, 19-1452, 19-1458); and Minerva Surgical Inc. v. Hologic Inc. (U.S. No. 20-440).

The Court will hear argument on the doctrine of assignor estoppel on Wednesday, April 21, 2021, in Minerva v. Hologic.

Noteworthy Petitions for a Writ of Certiorari:

There are three new potentially impactful certiorari petitions that are currently before the Supreme Court:

Ono Pharmaceutical v. Dana-Farber Cancer Institute (U.S. No. 20-1258): “Whether the Federal Circuit erred in adopting a bright-line rule that the novelty and non-obviousness of an invention over alleged contributions that were already in the prior art are ‘not probative’ of whether those alleged contributions were significant to conception.”

Warsaw Orthopedic v. Sasso (U.S. No. 20-1284): “Whether a federal court with exclusive jurisdiction over a claim may abstain in favor of a state court with no jurisdiction over that claim.”

Sandoz v. Immunex (U.S. No. 20-1110): “May the patent owner avoid the rule against double patenting by buying all of the substantial rights to a second, later-expiring patent for essentially the same invention, so long as the seller retains nominal ownership and a theoretical secondary right to sue for infringement?”

The petitions in American Axle & Manufacturing, Inc. v. Neapco Holdings LLC (U.S. No. 20-891) and Ariosa Diagnostics, Inc. v. Illumina, Inc. (U.S. No. 20-892) are still pending.

After requesting a response, the Court denied Argentum’s petition in Argentum Pharmaceuticals LLC v. Novartis Pharmaceuticals Corporation (U.S. No. 20-779). Gibson Dunn partners Mark Perry and Jane Love were counsel for Novartis.

Other Federal Circuit News:

Judge Wallach to Retire. On March 16, 2021, the Federal Circuit announced that Judge Evan J. Wallach will retire from active service and assume senior status, effective May 31, 2021. Judge Wallach served on the Federal Circuit for nearly 10 years and, prior to that, served on the U.S. Court of International Trade for 16 years. Judge Wallach’s full biography is available on the court’s website. On March 30, President Biden announced his intent to nominate Tiffany Cunningham for the empty seat. Ms. Cunningham has been a partner in the Patent Litigation practice of Perkins Coie LLP since 2014, and serves on the 17-member Executive Committee of the firm. She began her legal career as a law clerk to Judge Dyk.

Federal Circuit Practice Update

Updated Federal Circuit Rules. Pursuant to the court’s December 9, 2020 public notice, the court has published an updated edition of the Federal Circuit Rules. This edition incorporates the emergency amendment to Federal Circuit Rule 15(f) brought about by the court’s en banc decision in NOVA v. Secretary of Veterans Affairs (Fed. Cir. No. 20‑1321).

Upcoming Oral Argument Calendar

The list of upcoming arguments at the Federal Circuit are 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.

Case of Interest:

New Vision Gaming & Development, Inc. v. SG Gaming, Inc. (Fed. Cir. No. 20‑1399): This case concerns “[w]hether the unusual structure for instituting and funding AIA post-grant reviews violates the Due Process Clause in view of Tumey v. Ohio, 273 U.S. 510 (1927), and its progeny, which establish ‘structural bias’ as a violation of due process.” It attracted an amicus brief from US Inventor in support of appellant, which argues that the administrative patent judges’ compensation and performance rating system affects their decision making. Panel M will hear argument in New Vision Gaming on April 9, 2021, at 10:00 AM Eastern.

Key Case Summaries (March 2021)

SynQor, Inc. v. Vicor Corp. (Fed. Cir. No. 19-1704): In an inter partes reexamination (“IPR”), the Patent Trial and Appeal Board (“PTAB”) found several claims of SynQor’s patent unpatentable over the prior art. SynQor appealed, arguing that common law preclusion arising from a prior reexamination involving two related patents collaterally estopped the Board from finding a motivation to combine.

The Federal Circuit panel majority (Hughes, J., joined by Clevenger, J.) vacated and remanded, holding that common law issue preclusion can apply to IPRs. Analyzing the statutory scheme, the majority determined that Congress did not intend to prevent application of common law estoppel. Instead, the estoppel provisions of 35 U.S.C. §§ 315(c), 317(b) were more robust than common law collateral estoppel and fully consistent with allowing common law estoppel. The majority also determined that IPRs satisfied the traditional elements of issue preclusion. The majority explained that unlike an ex parte reexamination, Congress provided the third-party reexamination requestor the opportunity to fully participate in inter partes proceedings. The majority also determined that inter partes reexaminations contained sufficient procedural elements necessary to invoke issue preclusion. In an IPR, a party has the opportunity to respond to the other party’s evidence, challenge an expert’s credibility and submit its own expert opinions. Thus, the majority found that the lack of cross-examination did not prevent common law issue preclusion from applying to IPRs.

Judge Dyk dissented, arguing that common law issue preclusion should not apply to inter partes reexaminations because of the lack of compulsory process and cross-examination.

In Re: Board of Trustees of the Leland Stanford Junior University (Fed. Cir. No. 20-1012): The PTAB affirmed the examiner’s final rejection of Stanford’s claims directed to determining haplotype phase, on the basis that the claims were ineligible. The process of haplotype phasing involves determining from which parent an allele was inherited. The PTAB held that the claims were directed to “receiving and analyzing information,” which are “mental processes within the abstract idea category,” and that the claims lacked an inventive concept.

The Federal Circuit (Reyna, J., joined by Prost, C.J. and Lourie, J.) affirmed. At step one, the court held that the claims were directed to the abstract idea of “mathematically calculating alleles’ haplotype phase.” At step two, it held that the claims lacked an inventive concept, noting that the claims recited no steps that “practically apply the claimed mathematical algorithm.” The court held that, instead, the claims merely stored the haplotype phase information, which could not transform the abstract idea into patent-eligible subject matter. It further held that the dependent claims recited limitations amounting to no more than an instruction to apply that abstract idea.

Mylan Laboratories v. Janssen Pharmaceutica (Fed. Cir. No. 20-1071): Mylan petitioned for IPR of Janssen’s patent. Janssen opposed institution on the grounds that instituting the IPR would be an inefficient use of the PTAB’s resources because of two co-pending district court actions: one against Mylan and a second against Teva Pharmaceuticals that was set to go to trial soon after the institution decision. The Board applied its six-factor standard articulated in Fintiv and denied institution. Mylan appealed and requested mandamus relief; arguing that denying IPR based on litigation with a third party undermined Mylan’s constitutional and other due process rights, and that application of the six-factor standard violated congressional intent.

The Federal Circuit (Moore, J., joined by Newman, J. and Stoll, J.) granted Janssen’s motion to dismiss the appeal and denied Mylan’s petition for a writ of mandamus. The court dismissed Mylan’s direct appeal and reiterated that the court lacks jurisdiction over appeals from decisions denying institution because Section 314(d) specifically makes institution decisions “nonappealable.” The court noted that “judicial review [of institution decisions] is available in extraordinary circumstances by petition for mandamus,” even though “the mandamus standard will be especially difficult to satisfy” when challenging a decision denying institution of an IPR. Indeed, the court noted that “it is difficult to imagine a mandamus petition that challenges a denial of institution and identifies a clear and indisputable right to relief.” Considering the merits of Mylan’s petition, the court explained that “there is no reviewability of the Director’s exercise of his discretion to deny institution except for colorable constitutional claims,” which Mylan had failed to present.

Uniloc 2017 v. Facebook (Fed. Cir. No. 19-1688): Uniloc appealed from a PTAB ruling that the petitioners were not estopped from challenging the claims and that the patents at issue were invalid as obvious. Facebook filed two IPR petitions and then joined an IPR petition that had been previously filed by Apple, which challenged only a subset of the claims in the Facebook petitions. LG then joined Facebook’s two petitions, but not Apple’s. After instituting trial on Facebook’s two IPR petitions, the PTAB issued it final written decision in the Apple IPR, upholding the validity of Apple’s claims. The PTAB determined that, as of the final written decision on the Apple IPR, Facebook was estopped from challenging the overlapping claims in its own IPR petitions under § 315 (e)(1). LG, however, was not estopped from challenging the overlapping claims.

The Federal Circuit (Chen, J., joined by Lourie, J. and Wallach, J.) affirmed. The panel first determined that it had jurisdiction to review the challenge because the final written decision in the Apple IPR did not issue until after the institution of trial on the Facebook petitions. Next, the panel held that LG was not a real-party-at-interest or privy of Facebook because there was no evidence of any sort of preexisting, established relationship that indicates coordination related to the Apple IPR. According to the panel, moreover, Facebook was not estopped from addressing the non-overlapping claims (even the claim that depended from an overlapping claim) because § 315 (e)(1) specifically applies to claims in a patent. The panel then addressed the PTAB’s obviousness determination regarding the challenged claims and affirmed the Board’s obviousness findings as supported by substantial evidence.

In Re TracFone Wireless (Fed. Cir. No. 21-118): Precis Group sued TracFone in the Western District of Texas, alleging that venue was proper because TracFone has a store in San Antonio. TracFone moved to transfer on the grounds that venue was inconvenient, as well as improper because it no longer has a branded store in the district. For several months, the district court (Judge Albright) did not decide the motion, and instead kept the case moving towards trial. After eight months, TracFone petitioned the Federal Circuit for a writ of mandamus.

In its decision granting mandamus, the Federal Circuit (Reyna, J., joined by Chen, J. and Hughes, J.) ordered Judge Albright to “issue its ruling on the motion to transfer within 30 days from the issuance of this order, and to provide a reasoned basis for its ruling that is capable of meaningful appellate review.” It also ordered that all proceedings in the case be stayed until further notice. Notably, the court explained “that any familiarity that [the district court] has gained with the underlying litigation due to the progress of the case since the filing of the complaint is irrelevant when considering the transfer motion and should not color its decision.” Judge Albright denied the motion to transfer the day after the mandamus decision issued.

The Federal Circuit has recently denied two other petitions for mandamus involving cases before Judge Albright. In In re Adtran, Inc. (Fed. Cir. No. 21-115), the court denied a petition for mandamus directing Judge Albright to stay all deadlines unrelated to venue pending a decision on transfer. In In re True Chemical Solutions (Fed. Cir. No. 21-131), the court denied a petition for mandamus reversing Judge Albright’s grant of a motion for intra-division transfer. Notably, Judge Albright now oversees 20% of new US patent cases (link).

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:
Wayne Barsky – Los Angeles (+1 310-552-8500, wbarsky@gibsondunn.com)
Josh Krevitt – New York (+1 212-351-4000, jkrevitt@gibsondunn.com)
Mark Reiter – Dallas (+1 214-698-3100, mreiter@gibsondunn.com)

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

On 26 March 2021, the European Commission (the “Commission”) published guidance on the circumstances under which it is likely to accept requests from national competition authorities within the EU to investigate mergers that do not meet the EU or even national jurisdictional tests (the “Guidance”).[1] The Guidance concerns the application of the referral mechanism under Article 22 of the EU Merger Regulation, a hitherto relatively little-used provision.[2] The Guidance firmly cements the Commission’s change in policy towards deals in the pharma and digital sectors, in particular with respect to so-called “killer acquisitions”, designed to address an apparent enforcement gap in these sectors.[3] The effect of the Guidance is likely to increase significantly the jurisdictional reach of the Commission, and may go so far as to lead to a de facto notification process in the absence of sufficient turnover to meet mandatory filing requirements.

1. A radical shift in the Commission’s approach

In a speech to the IBA in September 2020,[4] Commissioner Vestager (in charge of EU competition law enforcement) looked back on 30 years of EU merger control, including whether it is still right that the EU turnover-based thresholds for filings are the appropriate way to identify “mergers that matter for competition”. She noted that “these days, a company’s turnover doesn’t always reflect its importance in the market. In some industries, like the digital and pharmaceutical industries, competition in the future can strongly depend on new products or services that don’t yet have much in the way of sales”. In that speech, Vestager ruled out lowering the EUMR thresholds to capture such deals (as this would disproportionately capture a lot of irrelevant deals) and signalled that a change in approach to the Article 22 referral process “could be an excellent way to see the mergers that matter at a European scale”.

The Article 22 referral mechanism allows one or more Member States to ask the Commission to review a concentration that does not meet the EU thresholds but that (a) affects trade between Member States and (b) threatens to significantly affect competition within the territory of the Member State or States making the request. Until now, the Commission’s practice has been to discourage Article 22 referrals from Member States that did not have the power to review a deal under their own national merger control rules. This meant that deals that did not trigger national merger control in at least one Member State were not, in practice, referred for Commission review.

Vestager therefore stated that the Commission planned to “start accepting referrals from national competition authorities of mergers that are worth reviewing at the EU level – whether or not those authorities had the power to review the case themselves”.

The Guidance published on 26 March gives effect to this plan and sets out how the Commission foresees this new jurisdictional approach working.

2. What deals are likely to be caught by this new approach

The Commission can accept referrals with respect to any deal, regardless of whether national filings might be required or not, provided that it meets the two formal conditions noted above. The Guidance makes is clear that these are low thresholds:

An effect on trade between Member States requires no more than “some discernible influence on the pattern of trade between Member States”, whether direct or indirect, actual or potential. The Guidance highlights that customers located in different Member States, cross-border sales/availability, collection of data across borders or the commercialisation of R&D efforts in more than on Member State would all meet this requirement.
Threatening to significantly affect competition within the territory of the Member State requires no more than a demonstration that “based on a preliminary analysis, there is a real risk” of such an effect. Here, the Guidance notes that this could include circumstances such as the “ elimination of a recent or future entrant, making entry/expansion more difficult, or the ability and incentive to leverage a strong market position from one market to another.

Further, given the Commission’s approach to date with respect to Article 22 referrals, in practice, we would not expect the Commission to take a restrictive approach to whether these conditions are met, particularly in cases where the Commission invites a national competition authority to make a referral request.

It is clear that the Commission’s focus is not on all deals involving new entrants, but primarily on the pharma and digital sectors where “services regularly launch with the aim of building up a significant user base and/or commercially valuable data inventories, before seeking to monetise the business” and where “there have been transactions involving innovative companies conducting research & development projects and with strong competitive potential, even if these companies have not yet finalised, let alone exploited commercially, the results of their innovation activities”.[5]

The Guidance also specifies that the Commission is most likely to exercise its discretion to investigate where the deal that has been referred to it is one in which the “turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential”. This may occur where the value of the consideration received by the seller is particularly high compared to the current turnover of the target. It may also occur where one party:

is a start-up or recent entrant with significant competitive potential that has yet to develop or implement a business model generating significant revenues (or is still in the initial phase of implementing such business model);
is an important innovator or is conducting potentially important research;
is an actual or potential important competitive force;
has access to competitively significant assets (such as for instance raw materials, infrastructure, data or intellectual property rights); and/or
provides products or services that are key inputs/components for other industries.

As the above, non-exhaustive list, shows, this new approach has the potential to catch almost any deal involving a new pharma or digital start-up, innovative company or company exploring new market areas. It would also clearly catch so-called “killer acquisitions” of small companies with high potential future value.

3. How will the process work?

The Article 22 mechanism requires a Member State that wishes to make a referral to send a reasoned request to the Commission within 15 working days from when the concentration is made known to it.[6] The Commission then informs the other Member States and they have a further 15 working days to join the request if they so wish. After the expiry of this period, the Commission must decide within 10 working days if it accepts the referral request. Upon receipt of a referral request from a Member State, the Commission must inform the parties of the request. Once the parties are informed of this, the suspension obligation under the EU Merger Regulation applies and the transaction cannot be closed unless it has already been implemented.

Importantly, whilst the European merger control system is a pre-closing suspensory one and companies are used to assessing the need to factor in a Commission investigation prior to completion, the Guidance specifies that referrals can be made post-completion provided they are within a suitably short period. In this respect, the Guidance states that a period of six months is likely to be an appropriate period, although this may be longer if the deal is not made public on completion or if there is a sufficiently large potential for competition concerns or detrimental effect on consumers.

4. What does this mean for deals?

The new approach has the potential to significantly reduce legal certainty for companies engaged in M&A activity in these sectors and to increase the procedural burdens on parties.

By moving the possibility of an EU-level review away from turnover-based thresholds, towards a more qualitative assessment of potential effects, and allowing for investigations to be opened post-completion, the Commission’s change in approach means that the EU system now mirrors that of the UK (with its broad “share of supply” test and post-completion review process) for deals that do not meet the EU merger review thresholds. The level of uncertainty that the UK’s system has meant for deals in these sectors in light of recent CMA decisions (see client alert on Roche/Spark) will now be felt at wider, EU-level.

Additionally, there is little likelihood that the Commission would refrain from using its new approach to referrals extensively. The Guidance states that the Commission will engage actively with Member States to “identify concentrations that may constitute potential candidates for a referral” and encourages third-parties to contact either the Commission or the Member States to inform them of potential referral cases. Additionally, the Commission has, at the same time as it issued the Guidance, consulted on changes to the “simplified procedure” process to allow for easy/fast review of cases that do not raise competition concerns. The implication is that the Commission is “clearing the decks” to allow it to focus on these more interesting digital and pharma deals. We can therefore expect the Commission to actively seek out deals that might warrant an EU-level review and to secure their referral by one or more Member States.

For companies active in the pharma and digital sectors, their M&A planning will need to include not just an assessment of the relevant thresholds and filing requirements across EU Member States, but a more general assessment of the potential for an EU referral.

With the possibility that a Commission investigation could be initiated months after completion, with the attendant substantive risks, companies may find that it is advisable (at least in some circumstances) to proactively engage with the Commission to provide the information necessary to determine whether a deal is a good candidate for referral. Indeed, this type of de facto voluntary notification is expressly provided for in the Guidance.[7]

Companies’ M&A planning process will also need to factor in the potential impact on deal timing of this new approach. As section 3 above shows, the time period involved before the parties will even know if a deal is being investigated, not to mention the time involved for the actual Commission investigation, is significant.

___________________

[1] Commission Guidance on the application of the referral mechanism set out in Article 22 of the Merger Regulation to certain categories of cases, C(2021) 1959 final, available at: https://ec.europa.eu/competition/consultations/2021_merger_control/guidance_article_22_referrals.pdf.

[2] In the last 30 years, Article 22 referral requests by Member States have been made only 41 times: See https://ec.europa.eu/competition/mergers/statistics.pdf (statistics to end February 2021).

[3] In announcing the Guidance, together with the results of the Commission’s evaluation of the procedural and jurisdictional aspects of EU merger control, Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “A number of transactions involving companies with low turnover, but high competitive potential in the internal market are not reviewed by either the Commission or the Member States. A more frequent use of the existing tool of referrals under Article 22 of the Merger Regulation can help us capture concentrations which may have a significant impact on competition in the internal market”.

[4] Available at: https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/future-eu-merger-control_en.

[5] See Guidance, paragraph 9.

[6] This means being in receipt of sufficient information to make a preliminary assessment as to the existence of the criteria relevant for the assessment of the referral. It is unlikely that a newspaper article or press release would qualify as providing sufficient information for the national competition authorities to make an assessment. In practice, national competition authorities can be expected to request information from the parties about deals that have attracted their (or the Commission’s) attention and the 15-day period will start running upon receipt of the parties response to their information request.

[7] Guidance, paragraph 24.

The following Gibson Dunn lawyers prepared this client alert: Deirdre Taylor, Attila Borsos, Christian Riis-Madsen, and Ali Nikpay.

Antitrust and Competition Group:

Frankfurt
Georg Weidenbach (+49 69 247 411 550, gweidenbach@gibsondunn.com)

Munich
Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com)
Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com)

Hong Kong
Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com)
Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)

New York
Eric J. Stock (+1 212-351-2301, estock@gibsondunn.com)
Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com)

San Francisco
Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com)
Caeli A. Higney (+1 415-393-8248, chigney@gibsondunn.com)

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

The New York State Legislature appears set to enact into law a new tax on debt financing for commercial real estate transactions involving “mezzanine debt and preferred equity investments”[1] located solely in New York City, as part of the 2021-2022 budget.

Although similar bills have failed previously, the current bills appear likely to become law. The proposed law, reflected in both Senate Bill S2509B Pt. SS and the State Assembly Bill A03009B Pt. VV, would require mezzanine debt and preferred equity investments to be recorded and taxed in the same way that mortgages are currently. However, the bill’s text leaves a number of important questions open to interpretation, including: whether the bill applies to debt and investments outside the real estate context; whether it would have any practical impact on preferred equity investments; and whether it will be applied retroactively.

The bill is also open to a variety of potential legal challenges, outlined below.

A 2.8% Tax on “Mezzanine Debt or Preferred Equity Investment[s]” Used to Finance Real Estate in New York City

Under the bill, a lender who finances a property subject to a mortgage in New York City[2] must also record “any mezzanine debt or preferred equity investment related to the real property upon which the mortgage instrument is filed.”[3] And just as with recording a mortgage, the recording of the mezzanine debt or preferred equity would be associated with a tax. The tax would be levied at the same rate and in the same manner as the tax “on the recording of a mortgage instrument financing statement.”[4] Currently, the mortgage recordation tax in New York City on commercial properties is 2.8% of the principal debt. Thus, borrowers from lenders whose interests are in the form of mezzanine debt or preferred equity also would have to pay an additional 2.8% tax against the amount of debt funded under these instruments. All revenue collected from these new taxes would be remitted to the “New York City housing authority.”[5]

If a lender holding mezzanine debt or preferred equity fails to record the debt or equity under the new law, or to pay the associated tax, she would lose any “remedy otherwise available” under Article 9 of the Uniform Commercial Code.[6] Remedies under the UCC are the usual route for owners of a debt secured by equity interests in a legal entity to foreclose on such equity collateral in the event of default.

A Lack of Clarity

Many of the details of this new mezzanine debt tax remain unclear due to ambiguities in the bill’s text.

Breadth and scope. The bill is drafted to apply to mezzanine debt or preferred equity investment “related to … real property” and secured debt “in relation to real property.”[7] However, the bill does not define when debt qualifies as “related to” or “in relation to” real property. As such, the new law could be read to cover, and tax, any secured loan made to an operating company that happens to own an indirect interest in a New York City property. Such a broad scope would have profound implications for corporate debt transactions far beyond the world of real estate debt financing. For example, a credit line to an operating company secured by an equity pledge in all of its assets, a small portion of which may include New York real estate, may be subject to taxation under this bill. Among its ambiguities, the bill does not include any allocation of debt that is secured by equity interests in New York City real estate and other assets. Further, it has become customary for mortgage lenders on New York real estate—and in other jurisdictions where there is a lengthy time period to complete a mortgage foreclosure—to require a pledge of equity interests in the mortgage borrower as additional collateral for the loan. It is unclear whether the additional pledge of equity would require payment of a second tax on the same loan where mortgage recording taxes have already been paid.

Retroactivity. Relatedly, the bill is unclear as to whether it seeks to require a lender to pay the recordation tax for mezzanine debt or preferred equity already financed, or whether the tax would only apply to such loan instruments that come about after the bill is enacted into law. However, given the well-established presumption against retroactive legislation, this same lack of clarity makes it likely that a court would construe the bill not to impose a retroactive tax.[8]

Enforceability for preferred equity. As mentioned above, a lender holding mezzanine debt or preferred equity who fails to record would lose remedies otherwise available under Article 9 of the UCC.[9] However, lenders who hold preferred equity investments typically do not pursue UCC remedies in the first place. Rather, because the debt is structured as equity in a joint venture, defaults are treated as breaches of partnership contracts and remedies are governed by partnership and contract law. Thus, it is not clear if the bill would have a practical impact in these cases.

Potential Legal Challenges

As drafted, the bill may be vulnerable to legal challenge on multiple grounds. Notably, any challenge would likely need to be brought in New York State court, not federal court. Under the federal Tax Injunction Act, federal courts may not enjoin “the assessment, levy or collection of any tax under State law” where a remedy is available in the courts of the State.[10]

Vagueness. To the extent that the scope of the bill is materially unclear, as discussed above, it may be open to challenge as unconstitutionally vague, in violation of due process. A statute is unconstitutionally vague when “it fails to give fair notice to the ordinary citizen that the prohibited conduct is illegal, [and] it lacks minimal legislative guidelines, thereby permitting arbitrary enforcement[.]”[11] If expert industry actors are unable to discern which kinds of transactions and investments are subject to the new tax, and different interpretations could include or exclude entire fields of debt transaction, then the bill could likely be said to “fail to give fair notice” and create opportunities for “arbitrary enforcement.”

Retroactivity. If the bill is construed to apply retroactively, it may be subject to challenge under constitutional prohibitions against laws that “impair rights a party possessed when he acted” or which “impose[s] new duties with respect to transactions already completed.”[12]

Contracts Clause. Relatedly, the Contracts Clause of the United States Constitution prohibits any State from “pass[ing] any . . . Law impairing the Obligations of Contracts.”[13] To the extent one reads the bill as weakening a remedy a lender may otherwise have under a preexisting contract, the bill’s new recordation-and-tax hurdle is arguably unconstitutional. With that said, the United States Supreme Court has severely limited the reach of the Contracts Clause.[14]

Tax on intangibles. Under the New York Constitution, Art. 16, § 3, “[i]ntangible personal property shall not be taxed ad valorem nor shall any excise tax be levied solely because of the ownership or possession thereof[.]” The mortgage tax, on which the new bill is based, has been held not to violate this provision because it as “a tax upon the privilege of recording a mortgage,” and not a tax on any property itself.[15] However, the new tax is arguably distinguishable from, and not defensible under, this rationale. First, the recording of mezzanine debt and preferred equity investments would be a requirement, not a privilege, under the new bill[16]; and second, the privileges associated with recording mezzanine debt and preferred equity would be far fewer and less significant than those associated with recording a mortgage. On the other hand, the new bill arguably mandates recording only when a mortgage is also recorded; and it arguably would grant UCC Article 9 remedies as a new privilege associated with recording mezzanine debt and preferred equity investment.

Conclusion

Should this bill pass into law—as it seems likely to—the costs associated with financing commercial real estate transactions in New York City would increase substantially. However, the bill’s ambiguity in certain key respects leaves open important areas for interpretation and potential legal dispute and challenge.

____________________

[1] N.Y. State S. B. S2509B (2021), Pt. SS, § 1; N.Y. State Assemb. B. A03009B (2021), Pt. VV, § 1.

[2] See NYS Senate Bill S2509B, Pt. SS, §§ 1.1, 5.2 (2021) (“Within a city having a population of one million or more . . .”). New York City is the only city in the State of New York with a large enough population for this to apply.

[3] Id. at § 1.1.

[4] Id. at §§ 5.1–5.3, 5.6

[5] Id. at § 7.

[6] Id. § 1.4, 5.4.

[7] Id. §§ 1.4, 5.4.

[8] See St. Clair Nation v. City of New York, 14 N.Y.3d 452, 456–57 (2010) (“It is well settled under New York law that retroactive operation of legislation is not favored by courts and statutes will not be given such construction unless the language expressly or by necessary implication requires it” (internal quotation marks omitted)).

[9] Id. at §§ 1.4, 5.4.

[10] 28 U.S.C. § 1341.

[11] People v. Bright, 71 N.Y.2d 376, 379 (N.Y. 1988).

[12] Regina Metro. Co., LLC v. New York State Div. of Hous. & Cmty. Renewal, 35 N.Y.3d 332, 365 (2020) (quoting Landgraf v. USI Film Prods., 411 U.S. 244, 278-80 (1994)).

[13] U.S. Const., Art. I, § 10, cl. 1.

[14] See, e.g., Sveen v. Melin, 138 S. Ct. 1815, 1821 (2018).

[15] S.S. Silberblatt, Inc. v. Tax Comm’n, 5 N.Y.2d 635, 640 (N.Y. 1959); see also Franklin Soc. for Home Bldg. & Sav. v. Bennett, 282 N.Y. 79, 86 (N.Y. 1939).

[16] Compare N.Y. RPP 291 (“A conveyance of real property… may be recorded”) with Section 1.1 (“any mezzanine debt or preferred equity investment … shall also be recorded”).

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 Real Estate Practice Group, or the following authors in New York:

Andrew J. Dady (+1 212-351-2411, adady@gibsondunn.com)
Brian W. Kniesly (+1 212-351-2379, bkniesly@gibsondunn.com)
Andrew A. Lance (+1 212-351-3871, alance@gibsondunn.com)

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

With the California Privacy Rights and Enforcement Act (“CPRA”) almost two years out from its effective date of January 1, 2023, the California Consumer Privacy Act (“CCPA”) remains in effect—but remains a moving target for businesses seeking to comply. On March 15, 2021, the California Office of Administrative Law (“OAL”) approved additional regulations relating to the right to opt out of sale of personal information; these changes are effective immediately. Even as these changes to the CCPA took effect, California has begun preparing for enforcement of the CPRA: on March 17, 2021, California announced the appointment of the inaugural five-member board for the California Privacy Protection Agency (“CPPA”), which is empowered to draft regulations supporting to CPRA, and to enforce the CPRA after it becomes effective.

Highlights of the New CCPA Regulations

Among the notable provisions in the new CCPA regulations are the following:

New “Do Not Sell My Personal Information” Icon (§ 999.306(f)). This new regulation permits (but does not require) businesses that sell personal information (defined under the CCPA as the disclosure of personal information to a third party “for monetary or other valuable consideration”[1]) to provide consumers with the ability to opt-out of the sale of their personal information by clicking the icon below. The icon, however, cannot replace the requirement to post the notice of the right to opt-out and the “Do Not Sell My Personal Information” link at the bottom of the business’s homepage.[2] Earlier drafts of the CCPA regulations contained examples of similar icons that businesses could use, but they were omitted from the final version of the regulations issued in August 2020.

Offline Opt-Out Notices Explained (§ 999.306(b)(3)). The new regulations explicitly require offline businesses to inform consumers in an offline context of their right to opt-out and offer an offline method to exercise such right, but the requirements are more flexible than that those that apply to online platforms.[3] The regulations include the following examples for accomplishing this offline notice requirement.
- Notify consumers of their right to opt-out on the paper forms that collect the personal information.[4]
- Post signage in the area where the personal information is collected directing consumers where to find opt-out information online.[5]
- Inform consumers from whom personal information is collected over the phone during the call of their opt-out right.[6]
Mechanisms to Submit Opt-Out Requests Clarified (§ 999.306(h)). This new regulation provides that methods to submit opt-out requests should be “easy to execute and shall require minimal steps.”[7] Businesses are explicitly prohibited from using a method “that is designed with the purpose or has the substantial effect of subverting or impairing a consumer’s choice to opt-out.” The regulations include the following examples:
- The opt-out process cannot require more steps than the process to opt-in to the sale of personal information after having previously opted out or use confusing language, including double negatives (i.e., “Don’t Not Sell My Personal Information”).[8]
- Businesses cannot require consumers to scroll through a privacy policy (or similar document) to locate the mechanism for submitting a request after clicking on the “Do Not Sell My Personal Information” link. Businesses also generally cannot require consumers to click through or listen to reasons why they should not opt-out before confirming their request.
- Consumers cannot be required to provide personal information that is not necessary to implement the request (which is in addition to the August 2020 regulations’ prohibition against requiring consumers to provide additional personal information not previously collected by the business).
Verifying Authorized Agents to Exercise Consumer Requests (§ 999.326(a)). The CCPA creates a mechanism by which an authorized agent may submit personal information-related requests on behalf of a consumer, provided the agent is registered with the Secretary of State to conduct business in California. The March 2021 regulations amended Section 999.326 to provide that businesses may require the authorized agent to provide proof that the consumer gave the agent permission to submit a request to know or delete the personal information about the consumer collected by the business. However, the new regulations do not affect a business’s ability to require consumers to verify their own identity directly with the business or confirm that they provided the authorized agent permission to submit the request.[9]

California Privacy Protection Agency Members Announced

The CPRA established the CPPA, which is “vested with full administrative power, authority, and jurisdiction to implement and enforce [along with the Attorney General]” the CPRA (Section 1798.199.10(a)).[10] The Agency will consist of five members, appointed by the Governor (who appoints the Chair and one other member), the Attorney General, the Senate Rules Committee, and the Speaker of the Assembly (each of whom appoints one member).

This week, Governor Gavin Newsom, Attorney General Xavier Becerra, Senate President pro Tempore Toni Atkins, and Assembly Speaker Anthony Rendon announced their choices for the members of the California Privacy Protection Agency. Their choices span across academia, private practice, and nonprofits. Newsom appointed Jennifer M. Urban, Clinical Professor of Law and Director of Policy Initiatives for the Samuelson Law, Technology, and Public Policy Clinic at the University of California, Berkeley School of Law, as Chair of the state agency. Newsom designated John Christopher Thompson, Senior Vice President of Government Relations at LA 2028. Becerra appointed Angela Sierra, who recently served as Chief Assistant Attorney General of the Public Rights Division. Atkins appointed Lydia de la Torre, professor at Santa Clara University Law School, where she has taught privacy law and co-directed the Santa Clara Law Privacy Certificate Program. Rendon appointed Vinhcent Le, Technology Equity attorney at the Greenlining Institute, focusing on consumer privacy, closing the digital divide, and preventing algorithmic bias.

These members are tasked with—among other things—drafting CPRA regulations by July 2022, and enforcing the CPRA when it takes effect in January 2023.

We will continue to monitor the development of the CCPA, the CPRA, and other notable state privacy laws and regulations.

_______________________

[1] Cal Civ. Code § 1798.140(t)(1).

[2] Cal Civ. Code § 1798.135.

[3] Cal. Code Regs. Tit. 11, Div. 1, Chap. 20 § 999.306(b)(3).

[4] Cal. Code Regs. Tit. 11, Div. 1, Chap. 20 § 999.306(b)(3)(a).

[5] Id.

[6] Cal. Code Regs. Tit. 11, Div. 1, Chap. 20 § 999.306(b)(3)(b).

[7] Cal. Code Regs. Tit. 11, Div. 1, Chap. 20 § 999.306(h).

[8] Cal. Code Regs. Tit. 11, Div. 1, Chap. 20 § 999.306(h)(a).

[9] Cal. Code Regs. Tit. 11, Div. 1, Chap. 20 § 999.326(a)(1)-(2).

[10] For more information on the CPPA, please refer to our previous alert: https://www.gibsondunn.com/potential-impact-of-the-upcoming-voter-initiative-the-california-privacy-rights-act/.

This alert was prepared by Alexander Southwell, Ashlie Beringer, Ryan Bergsieker, Cassandra Gaedt-Sheckter, Jeremy Smith, and Lisa Zivkovic

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, the authors, or any of the following members of the firm’s Privacy, Cybersecurity and Data Innovation practice group:

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)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@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)

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

When Ted Olson argued Bush v Gore before the Supreme Court, it was one of the most important and historic moments in recent legal history. On this episode of “The Two Teds,” Olson and Ted Boutrous take a deep dive and explain what it took to manage the sprawling legal team and prepare for arguments. They also tackle the most recent election and draw parallels – and differences – between the 2020 and 2000 elections.

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On March 15, 2021, the U.S. Environmental Protection Agency (“EPA”) issued a final rule that requires electric generating units (“EGUs,” i.e., power plants) in 12 states to reduce ozone season nitrogen oxides (“NOx”) emissions. This final rule, issued pursuant to a court-ordered deadline, is the first significant regulatory action finalized by the Biden EPA.

Background. In 2008, EPA set new National Ambient Air Quality Standards (“NAAQS”) for ozone (the “2008 ozone NAAQS”).[1] This action triggered a requirement for states to submit State Implementation Plans (“SIPs”) to EPA addressing, in part, obligations under the Good Neighbor Provision of the Clean Air Act, pursuant to which SIPs must:

contain adequate provisions . . . prohibiting . . . any source or other type of emissions activity within the State from emitting any air pollutant in amounts which will . . . contribute significantly to nonattainment in, or interfere with maintenance by, any other State with respect to any [NAAQS].[2]

The Good Neighbor Provision effectively “requires upwind States to eliminate their significant contributions to air quality problems in downwind States.”[3] In general, states with non-attainment areas classified as Moderate or higher must submit SIPs to EPA to bring those areas into attainment according to the statutory schedule.[4] Under the 2008 ozone NAAQS, downwind states were required to comply with the NAAQS by July 20, 2018 (for areas in Moderate non-attainment) and by July 20, 2015 (for areas in Marginal non-attainment).[5]

Section 110(c)(1) of the Clean Air Act requires EPA to promulgate a Federal Implementation Plan (“FIP”) within two years after EPA: (1) finds that a state has failed to make a required SIP submission, (2) finds an SIP submission to be incomplete, or (3) disapproves an SIP submission.[6]

In 2011, EPA promulgated the Cross-State Air Pollution Rule (“CSAPR”), identifying emissions in 28 states that significantly affected the ability of downwind states to comply with 1997 and 2008 ozone NAAQS and the 2006 NAAQS for PM_2.5, and limiting these emissions by setting sulfur oxide (“SOx”) and annual and seasonal NOx “budgets.” EPA then promulgated FIPs for each of the 28 states covered by CSAPR that required EGUs in the covered states to participate in regional trading programs to achieve the necessary emission reductions.[7]

In 2016, EPA promulgated an update to CSAPR to revise seasonal ozone NOx emissions budgets for 22 states (the “CSAPR Update”).[8] The CSAPR Update implemented the budgets through FIPs requiring sources to participate in a revised CSAPR NOx ozone season trading program beginning with the 2017 ozone season, but did not require the upwind states to eliminate their significant contributions to downwind non-attainment by any specific date.[9] The CSAPR Update also did not address emissions from non-EGUs.[10] In 2018, EPA promulgated the CSAPR “Close-Out,” which determined that no further reductions in NOx emissions were required with respect to the 2008 ozone NAAQS for 20 of the states covered by the CSAPR Update.[11]

A host of environmental groups and states challenged the CSAPR Update in the D.C. Circuit, alleging that the rule either over-controlled or under-controlled upwind emissions.[12] The court upheld the CSAPR Update in most respects; however, the court rejected EPA’s argument that Clean Air Act Sections 110(a)(2)(D)(i) and 111, 42 U.S.C. §§ 7410(a)(2)(D)(i) & 7511, when read together, do not require Good Neighbor emissions reductions by a particular deadline.[13] The court held that because the rule did not require upwind states to eliminate their significant contributions to downwind ozone by the deadlines for downwind states to comply with the 2008 ozone NAAQS (or by any date at all), the CSAPR Update was inconsistent with the requirements of the Clean Air Act.[14] The court remanded the CSAPR Update to EPA without vacatur.[15] Shortly thereafter, a different panel of the D.C. Circuit vacated the CSAPR Close-Out because it “rest[ed] on an interpretation of the Good Neighbor Provision now rejected.”[16]

Following these D.C. Circuit decisions, certain downwind states filed suit against EPA in the Southern District of New York on the basis that, due to remand of the CSAPR Update and the vacatur of the Close-Out Rule, EPA had failed to perform its statutory duty to promulgate FIPs for upwind states addressing the Good Neighbor obligations for the 2008 ozone NAAQs.[17] The court agreed with the states and directed EPA to issue a final rule regarding the required FIPs by March 15, 2021.[18]

October 2020 Proposed Rule. On October 30, 2020, EPA published a proposed rule in response to these cases—the Revised Cross-State Air Pollution Rule Update for the 2008 Ozone NAAQS (the “Revised CSAPR Update Proposed Rule”).[19] The key elements of the proposed rule are:

A finding that the projected 2021 emissions from 9 upwind states do not significantly contribute to non-attainment or maintenance problems in downwind states and that the CSAPR Update FIPs for these states fully addressed the Good Neighbor obligations of these states.
A determination not to impose further obligations (i.e., budget reductions) on these 9 states.
A finding that the projected 2021 emissions for 12 upwind states significantly contribute to non-attainment or maintenance problems in downwind states.
Promulgation of new or amended FIPs to revise state NOx emission budgets reflecting additional emissions reductions from EGUs.
No limits on ozone season NOx emissions from non-EGU sources.

Some commenters to the Revised CSAPR Update Proposed Rule have asserted that the Proposed Rule over-controls upwind emissions and requires reductions in an unreasonably short amount of time, while other commenters asserted that the Proposed Rule under-controls upwind emissions and should require emissions reductions from non-EGU sources.

Final Rule and Key Takeaways. Consistent with the deadline set by the Southern District of New York, on March 15, 2021, EPA issued its final rule (the “Revised CSAPR Update”).[20] The final rule closely tracks the October proposal. The key elements of the final rule are:

A finding that further ozone season NOx emissions reductions to address Good Neighbor obligations as to the 2008 ozone NAAQS are necessary for 12 of the 21 states for which the CSAPR Update was found to be only a partial remedy. As such, EPA promulgated new or revised FIPs for these states that include new EGU NOx ozone season emissions budgets, with implementation of these emissions budgets beginning with the 2021 ozone season. These states are: Illinois, Indiana, Kentucky, Louisiana, Maryland, Michigan, New Jersey, New York, Ohio, Pennsylvania, Virginia, and West Virginia.[21]
A determination that it is feasible for EGUs to comply with the enhanced stringency of the budgets and there is sufficient time before the effective date of the rule to prepare to meet these budgets by either undertaking emissions control measures (other than installation of state-of-the-art combustion controls, which take effect for the 2022 ozone season) or through a new Trading Program.[22]
Implementation of new state-level, ozone season emissions budgets through a new CSAPR NOx Ozone Season Group 3 Trading Program comprising these 12 states. As part of establishing the Group 3 Program, EPA is permitting the creation of a limited initial bank of allowances by converting allowances banked in 2017–2020 under the existing Group 2 Trading Program at a conversion ratio of 8:1 (and certain additional conversions at a ratio of 18:1).[23]
A conclusion that the final rule resolves the interstate transport obligations of 21 states under the Good Neighbor Provision for the 2008 ozone NAAQS.[24]
A conclusion that limits on ozone season NOx emissions from non-EGU sources are not required to eliminate significant contribution to non-attainment or interference with maintenance in downwind states under the 2008 ozone NAAQS.[25]

The Revised CSAPR Update is likely EPA’s first use of a revised approach to calculate the social cost of carbon in a final regulatory action. According to EPA, climate benefits of the rule were based on the reductions in CO₂emissions and calculated using four different estimates of the social cost of carbon: model average at 2.5 percent, 3 percent, and 5 percent discount rates, and 95th percentile at a 3 percent discount rate.[26]

Looking to the future, the Revised CSPAR Update did not address any state’s obligations under the 2015 ozone NAAQS, which set lower primary and secondary standards for ground-level ozone.[27] EPA noted in the Revised CSAPR Update that it is working separately to address Good Neighbor obligations under the 2015 ozone NAAQS, “including consideration of any necessary control requirements for EGU and non-EGU sources.”[28] As environmental groups continue to push for emissions reductions from non-EGU sources, and as EPA continues to consider this issue (including whether emissions reductions become available at a comparable cost threshold to that of EGUs), it is possible that future rulemakings will seek to implement more stringent emissions reductions or emissions reductions from non-EGUs. Litigation challenging the Revised CSAPR Update in the D.C. Circuit appears likely, including the potential for motions seeking a stay of the rule pending judicial review based on the requirement for affected facilities to begin compliance with the more stringent emissions budgets when the rule becomes effective 60 days after publication.[29]

_____________________

[1] National Ambient Air Quality Standards for Ozone, 73 Fed. Reg. 16436 (Mar. 27, 2008).

[2] 42 U.S.C. § 7410(a)(2)(D)(i)(I). EPA has historically referred to SIP submissions made for the purpose of satisfying the applicable requirements of CAA sections 110(a)(1) and 110(a)(2), 42 U.S.C. § 7410(a)(1)–(2), as “infrastructure SIP” submissions.

[3] Wisconsin v. Envtl. Prot. Agency, 938 F.3d 303, 309 (D.C. Cir. 2019).

[4] 42 U.S.C. § 7511a.

[5] Wisconsin, 938 F.3d at 313.

[6] 42 U.S.C. § 7410(c).

[7] Federal Implementation Plans: Interstate Transport of Fine Particulate Matter and Ozone and Correction of SIP Approvals, 76 Fed. Reg. 48208 (Aug. 8, 2011).

[8] Cross-State Air Pollution Rule Update for the 2008 Ozone NAAQS, 81 Fed. Reg. 74504 (Oct. 26, 2016).

[9] Id. at 74504.

[10] Id. at 74542.

[11] Determination Regarding Good Neighbor Obligations for the 2008 Ozone National Ambient Air Quality Standard, 83 Fed. Reg. 65878, 65921 (Dec. 21, 2018).

[12] Wisconsin, 938 F.3d at 303.

[13] Id. at 312–15.

[14] Id. at 313.

[15] Id. at 336.

[16] New York v. Envtl. Prot. Agency, 781 F. App’x 4, 7 (D.C. Cir. 2019) (per curiam).

[17] New Jersey v. Wheeler, 475 F. Supp. 3d 308, 319 (S.D.N.Y. 2020).

[18] Id. at 334.

[19] Revised Cross-State Air Pollution Rule Update for the 2008 Ozone NAAQS, 85 Fed. Reg. 68964 (proposed Oct. 30, 2020).

[20] Revised Cross-State Air Pollution Rule Update for the 2008 Ozone NAAQS (March 15, 2021) (“Revised CSAPR Update”), prepublication version available at https://www.epa.gov/csapr/final-rule-revised-cross-state-air-pollution-rule-update.

[21] Id. at 13.

[22] Id. at 14.

[23] Id. at 14, 24-25.

[24] Id. at 9.

[25] Id. at 21.

[26] Id. at 26-27.

[27] National Ambient Air Quality Standards for Ozone, 80 Fed. Reg. 65292 (Oct. 26, 2015).

[28] Revised CSAPR Update at 40.

[29] See id. at 14.

David Fotouhi (+1 202-955-8502, dfotouhi@gibsondunn.com)
Mia Donnelly (+1 202-887-3617, mdonnelly@gibsondunn.com)

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

Energy, Regulation and Litigation Group:
William S. Scherman – Washington, D.C. (+1 202-887-3510, wscherman@gibsondunn.com)

Power and Renewables Group:
Peter J. Hanlon – New York (+1 212-351-2425, phanlon@gibsondunn.com)
Nicholas H. Politan, Jr. – New York (+1 212-351-2616, npolitan@gibsondunn.com)

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

On March 5, 2021, regulators and industry groups provided market participants with much anticipated clarity by announcing the dates for the cessation of publication of, and non-representativeness of, various settings of the London Interbank Offered Rate (“LIBOR”)[1] which will allow market participants to identify the date that their financial instruments and commercial agreements that reference LIBOR will transition to an alternative reference rate (e.g., a risk free rate).

The March 5th announcement is not only critical in providing certainty for the financial markets regarding timing for the replacement of LIBOR, but the announcement will also fix the spread adjustment contemplated under certain industry-standard documents as of March 5, 2021—thereby providing greater clarity around the economic impact of the transition from LIBOR to a risk free rate, like the Standard Overnight Financing Rate (“SOFR”) or the Sterling Overnight Index Average (“SONIA”).

LIBOR Announcement

The ICE Benchmark Administration Limited (“IBA”), the authorized administrator of LIBOR, published on March 5, 2021 a feedback statement on its consultation regarding its intention to cease the publication of LIBOR (the “IBA Feedback Statement”).[2] The IBA Feedback Statement comes in response to the consultation published by IBA on December 4, 2020 (the “Consultation”)[3] and confirmed IBA’s intention to cease the publication of:

EUR, CHF, JPY and GBP LIBOR for all tenors after December 31, 2021;
one week and two month USD LIBOR after December 31, 2021; and
all other USD LIBOR tenors (e.g., overnight, one month, three month, six month and twelve month) after June 30, 2023.

Concurrent with the publication of the IBA Feedback Statement, the UK Financial Conduct Authority (the “FCA”) announced the future cessation or loss of representativeness of the 35 LIBOR settings published in five currencies (the “FCA Announcement”) from the above mentioned dates.[4]

Summary of FCA Announcement and IBA Feedback Statement:

Last Date of Publication or Representativeness is December 31, 2021:
Currency	Tenors	Spread Adjustment Fixing Date	Result
EUR LIBOR	All Tenors (Overnight, 1 Week, 1, 2, 3, 6 and 12 Months)	March 5, 2021	Permanent Cessation.
CHF LIBOR	All Tenors (Spot Next, 1 Week, 1, 2, 3, 6 and 12 Months)	March 5, 2021	Permanent Cessation.
JPY LIBOR	Spot Next, 1 Week, 2 Month and 12 Month	March 5, 2021	Permanent Cessation.
JPY LIBOR	1 Month, 3 Month and 6 Month	March 5, 2021	Non-Representative. “Synthetic” rate possible for one additional year.
GBP LIBOR	Overnight, 1 Week, 2 Month and 12 Month	March 5, 2021	Permanent Cessation.
GBP LIBOR	1 Month, 3 Month and 6 Month	March 5, 2021	Non-Representative. “Synthetic” rate possible for a “further period” after end-2021.
USD LIBOR	1 Week and 2 Month	March 5, 2021	Permanent Cessation

Last Date of Publication or Representativeness is June 30, 2023:
Currency	Tenors	Spread Adjustment Fixing Date	Result
USD LIBOR	Overnight and 12 Month	March 5, 2021	Permanent Cessation.
USD LIBOR	1 Month, 3 Month and 6 Month	March 5, 2021	Non-Representative. “Synthetic” rate possible for a “further period” after end-June 2023.

The FCA Announcement and the IBA Feedback Statement are critical as they make clear the dates on which certain LIBOR settings will cease to exist or become non-representative (as described in more detail above), and they will serve as a “trigger event” for the fallback provisions in industry standard or recommended documentation, including those fallback provisions recommended by the Alternative Reference Rates Committee (“ARRC”) with respect to USD LIBOR and the fallback provisions in the International Swaps and Derivatives Association (“ISDA”) documentation.[5]

The FCA Announcement drew attention in markets around the globe. For example, the Asia Pacific Loan Market Association (“APLMA”) issued a statement on March 8, 2021 in which it clarified the APLMA’s understanding of the FCA Announcement: The APLMA stated that the FCA Announcement indicates that the most widely used USD LIBOR settings in Asia, such as 1, 3 and 6 Month USD LIBOR, will continue to be published until June 30, 2023 and will continue to be representative until that date. The APLMA also confirmed that based on undertakings received from the panel banks, the FCA does not expect that any LIBOR settings will become unrepresentative before the relevant dates set out above.

ISDA Index Cessation Event Announcement

Relatedly, shortly after the publication of the IBA Feedback Statement and the FCA Announcement, ISDA announced that these statements constitute an “Index Cessation Event” under the IBOR Fallbacks Supplement (Supplement Number 70 to the 2006 ISDA Definitions) and the ISDA 2020 IBOR Fallbacks Protocol, which in turn triggers a “Spread Adjustment Fixing Date” under the Bloomberg IBOR Fallback Rate Adjustments Rule Book for all LIBOR settings on March 5, 2021.[6] The ARRC has stated[7] that its recommended spread adjustments for fallback language in non-consumer cash products referencing USD LIBOR (e.g., business loans, floating rate notes, securitizations) will be the same as the spread adjustments applicable to fallbacks in ISDA’s documentation for USD LIBOR.[8] For further information on why a spread adjustment is necessary, see our previous alert from May 2020.[9]

This ISDA announcement provides market participants holding legacy contracts with greater clarity regarding the economic impact of the transition from LIBOR to risk free rates; however, even though the spread adjustment is now fixed, a value transfer is nonetheless expected to occur as a result of transition. This is because the spread adjustment looks backwards to the median difference between the risk free rate and LIBOR over the previous five years, which is unlikely to be equivalent to what the net present value of the relevant instrument would have been at the time of transition, had LIBOR not been discontinued / ceased to be representative. For example, in the case of USD LIBOR, when all tenors cease to be published or are deemed non-representative (at the end of December 2021 or June 2023, as the case may be) fallbacks for swaps will shift to SOFR, plus the spread adjustment that has now been fixed as of March 5, 2021. The fallback replacement rate of SOFR plus the spread adjustment that was fixed over two years prior is unlikely to match what would, absent transition, have been the net present value of such swap on the applicable LIBOR end date, thereby ultimately resulting in a value transfer to one party. However, the extent to which such value transfer will impact a particular financial instrument on the relevant LIBOR end date is unclear, as markets have been pricing in, and will continue to price in, the expected transition when valuing legacy instruments referencing LIBOR.

Potential “Synthetic” LIBOR for Limited Use

The IBA Feedback Statement explains that in the absence of sufficient bank panel support and without the intervention of the FCA to compel continued panel bank contributions to LIBOR, IBA is required to cease publication of the various LIBORs after the dates described above.[10] Importantly, the IBA Feedback Statement and the FCA Announcement note that the UK government has published draft legislation (in proposed amendments to the UK Benchmarks Regulation set out in the Financial Services Bill 2019-21)[11] proposing to grant the FCA the power to require IBA to continue publishing certain LIBOR settings for certain limited (yet to be finalized) purposes, using a changed methodology known as a “synthetic” basis.

Specifically, the FCA has advised IBA that “it has no intention of using its proposed new powers to require IBA to continue publication of any EUR or CHF LIBOR settings, or the Overnight/Spot Next, 1 Week, 2 Month and 12 Month LIBOR settings in any other currency beyond the intended cessation dates for such settings.” However, for the nine remaining LIBOR benchmark settings, the FCA has advised IBA that it will consult on using its proposed new powers to require IBA to continue publishing, on a synthetic basis, 1 Month, 3 Month and 6 Month GBP and JPY LIBOR (for certain limited periods of time) and will continue to consider the case for the “synthetic” publication of 1 Month, 3 Month and 6 Month USD LIBOR. On March 5, 2021, the FCA also published statements of policy regarding some of the proposed new powers that the UK government is considering granting to the FCA. These statements of policy include more detail on why the FCA is making these distinctions (e.g., to reduce disruption and resolve recognized issues around certain “tough legacy” contracts) and explain the intended methodology for the publication of the identified LIBORs on a synthetic basis (i.e., a forward looking term rate version of the relevant risk free rate, plus a fixed spread adjustment calculated over the same period, and in the same way as the spread adjustment implemented in the IBOR Fallbacks Supplement and the 2020 IBOR Fallbacks Protocol published by ISDA).[12]

If the FCA is granted the power to, and decides to require IBA to continue the publication of any LIBOR setting on a “synthetic” basis, the FCA Announcement makes clear that the synthetic LIBOR settings will no longer be deemed “representative of the underlying market and economic reality the setting is intended to measure”[13] (notwithstanding that the FCA may be able to compel the publication of a “synthetic” LIBOR rate for one or more of the 1 Month, 3 Month or 6 Month tenors for JPY LIBOR, GBP LIBOR and/or USD LIBOR beyond the set cessation date).

Notably, if the UK government decides to grant the FCA the power to, and the FCA decides to compel IBA to publish “synthetic” LIBOR for certain settings, the intent would be to assist only holders of certain categories of legacy contracts that have no or inappropriate alternatives and cannot practically be renegotiated or amended (so called “tough legacy” contracts, such as notes which may require up to 90% or 100% noteholder consent to amend the relevant terms of the note).[14] As such, the powers are intended to be of limited use, and regulators have consistently stressed the need for market participants to actively transaction their legacy contracts. For example, under the proposals in the UK Financial Services Bill, UK regulated firms would be prohibited from using such “synthetic” LIBOR settings in regulated financial instruments. The FCA plans to consult on the “tough legacy” contracts that will be permitted to use “synthetic” LIBOR in the second quarter of this year.

Conclusion

The announcements on March 5th bring us one step closer to the cessation of LIBOR. The announcements are likely to offer market participants much needed clarity regarding the timing, and economics, of the transition of LIBOR to alternative reference rates. They also provide a reminder to, and increase pressure on, market participants to actively transition their financial instruments and commercial agreements that reference LIBOR to risk free rates.

______________________

[1] LIBOR is the index interest rate for tens of millions of contracts worth hundreds of trillions of dollars, ranging from complex derivatives to residential mortgages to bilateral and syndicated business loans to commercial agreements.

[2] ICE LIBOR^® Feedback Statement on Consultation on Potential Cessation (March 5, 2021), available here.

[3] ICE LIBOR^® Consultation on Potential Cessation (December 2020), available here.

[4] “FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks,” Financial Conduct Authority (March 5, 2021), available here.

[5] We note that although the FCA Announcement and IBA Feedback Statement would constitute ”trigger events” under ARRC standard fallback language (e.g., a “Benchmark Transition Event”) and under ISDA standard fallback language (e.g., an “Index Cessation Event”), such financial instruments would continue to reference LIBOR until the date that LIBOR ceases to be published or is deemed non-representative (i.e., after December 31, 2021 or after June 30, 2023). In other words, the date on which LIBOR changes to a risk free rate and the “trigger event” will likely be two distinct events as a result of the announcement.

[6] See Future Cessation and Non-Representativeness Guidance on FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks, ISDA (March 5, 2021), available here; see also IBOR Fallbacks, Technical Notice – Spread Fixing Event for LIBOR, Bloomberg, available here.

[7] See “ARRC Commends Decisions Outlining the Definitive Endgame for LIBOR,” Alternative Reference Rates Committee (March 5, 2021), available here; “ARRC Announces Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products,” Alternative Reference Rates Committee (June 30, 2020), available here.

[8] The ARRC followed ISDA’s announcement stating that the IBA Feedback Statement and the FCA Announcement constitute a “Benchmark Transition Event” with respect to all USD LIBOR settings pursuant to the ARRC’s recommended fallbacks for new issuances of LIBOR floating rate notes, securitizations, syndicated business loans and bilateral business loans. See “ARRC Confirms a “Benchmark Transition Event” has occurred under ARRC Fallback Language,” ARRC (March 8, 2021), available here.

[9] See Tax implications of benchmark reform: UK tax authority weighs in, Gibson Dunn (May 2020) available here.

[10] IBA received 55 responses to the Consultation which are summarized in the IBA Feedback Statement. IBA notes that it shared and discussed the feedback received on the Consultation with the FCA.

[11] The text and status of the Financial Services Bill 2019-21 are available here.

[12] See “Proposed amendments to the Benchmarks Regulation,” Policy Statement, FCA (March 5, 2021) available here.

[13] FCA Announcement at footnote 3.

[14] See “Paper on the identification of Tough Legacy issues,” The Working Group on Sterling Risk-Free Reference Rates (May 2020), available here.

The following Gibson Dunn lawyers assisted in preparing this client update: Linda Curtis, Arthur Long, Jeffrey Steiner, Jamie Thomas, Bridget English, and Erica Cushing.

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, the authors, or any of the following practice group leaders and members:

Financial Institutions Group:
Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com)
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Michelle M. Kirschner – London (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)

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I. Introduction

II. Key Provisions of the Executive Order

Sec. 2. Removing Barriers to Sharing Threat Information.

Sec. 3. Modernizing Federal Government Cybersecurity.

Sec. 4. Enhancing Software Supply Chain Security.

Sec. 5. Establishing a Cyber Safety Review Board.

Sec. 6. Standardizing the Federal Government’s Playbook for Responding to Cybersecurity Vulnerabilities and Incidents.

Sec. 7. Improving Detection of Cybersecurity Vulnerabilities and Incidents on Federal Government Networks.

Sec. 8. Improving the Federal Government’s Investigative and Remediation Capabilities.

Sec. 9. National Security Systems.

III. Analysis and Takeaways

TABLE OF CONTENTS

I. Unmanned Aircraft Systems

A. New Rules Remote ID

B. Flight Over People, Over Vehicles, or at Night

C. Continued Lack of Clarity on Airspace

D. Newsworthy FAA Approvals

E. COVID-19 and Use of Drones

II. Government Contracts

III. Space

A. First Private Human Space Launch

B. Noteworthy Space Achievements in Countries Other than the United States

C. Other Noteworthy Space Developments

D. NASA’s Perseverance Rover, Past Updates, and Future Plans

E. Record-Setting Private investment

F. Satellite Internet Constellations

G. Expected Impact of Biden Administration

I. Background

A. What are NFTs and What is the Blockchain?

B. What Do You Get When You Buy An NFT?

II. Intellectual Property

III. Profit Participations

IV. Securities Law

V. Climate Change

VI. Conclusion

Federal Circuit News

Federal Circuit Practice Update

Upcoming Oral Argument Calendar

Key Case Summaries (March 2021)

1. A radical shift in the Commission’s approach

2. What deals are likely to be caught by this new approach

3. How will the process work?

4. What does this mean for deals?