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Client Alert

March 22, 2019

LSTA, LMA and APLMA Publish Sustainability Linked Loan Principles

Click for PDF Sustainability linked loans, a fast-growing loan product introduced in the United States last year, got a significant boost this week with the promulgation of the Sustainability Linked Loan Principles by the leading syndicated lending industry associations.  The SLLPs establish a voluntary framework for designing and negotiating sustainability linked loans, in order to assure the integrity of the asset class and promote its development. Sustainability Linked Loans – an Offshoot of Green Finance This week, the sustainable lending asset class took another step forward with the publication of the Sustainability Linked Loan Principles (the “SLLPs”) by the top three global syndicated lending industry associations.  The Loan Syndications and Trading Association (LSTA), the Loan Market Association (LMA), and the Asia Pacific Loan Market Association (APLMA) promulgated the SLLPs as a voluntary framework representing “the next step in collaboratively developing global standards for sustainable lending” (see LSTA’s Week in Review, March 22, 2019). A type of loan product that has taken root in Europe over the past few years, and arrived in 2018 in the United States, “sustainability linked loans” are loans that have certain of their terms, most typically the pricing, tied to sustainability performance targets – such as the borrower’s use of renewable energy, or its ESG (Environmental, Social and Governance) score as evaluated by a third party rating agency.  This is distinct from traditional “green finance”, in which the proceeds of the financing are earmarked for specific green projects; in most instances, sustainability linked loans are used for general corporate purposes. In order to meet their objective of facilitating and supporting environmentally and socially sustainable economic activity and growth – and to provide appropriate assurances to investors, regulators and other stakeholders – sustainability linked loans must tie their incentives (such as reduced pricing) to sustainability performance targets (1) that are “ambitious and meaningful to the borrower’s business”, and (2) that represent some improvement relative to the performance baseline.  The SLLPs’ goal is “to promote the development and preserve the integrity of the sustainability linked loan product” by setting out a framework of voluntary recommended guidelines, to be applied on a case-by-case basis by market participants, in order to secure these sustainability benefits. Core Components for Sustainability Linked Loans The SLLPs outline four core components for sustainability linked loans: 1. Relationship to Borrower’s Overall Corporate Social Responsibility (CSR) Strategy The borrower should align the loan’s sustainability performance targets with its overall sustainability objectives, as set forth in its CSR strategy, and communicate clearly to the lenders how the performance targets incentivized by the loan fit within those overall objectives. 2. Target Setting – Measuring the Sustainability of the Borrower Appropriate – and appropriately ambitious – performance targets need to be negotiated between the borrower and the lender group for each transaction.  The performance targets can be internal (tracking metrics such as energy efficiency, water consumption, sustainable sourcing and recycling, among others), or external – assessed by independent service providers against external rating criteria.  Appendix 1 of the SLLPs provides an indicative list of common categories of sustainability performance targets, but different, customized performance targets may be appropriate for specific transactions. In some cases, it may be helpful to seek an expert third party’s opinion in developing suitable metrics and performance targets.  It is important that the targets be meaningful and apply over the life of the loan, to incentivize ongoing positive change. 3. Reporting Borrowers should maintain up to date information relating to their performance targets, whether those targets are internally or externally scored.  The SLLPs recommend that such information be provided to the lender group at least once a year, and preferably also made publicly available. 4. Review Validation of the borrower’s performance is imperative.  However, the need for external review is to be negotiated on a case-by-case basis.  Where the information relating to the performance target is not made publicly available or otherwise accompanied by an audit statement, external review of the borrower’s performance is strongly recommended, and the SLLPs recommend that such review be performed on an annual basis at least.  By contrast, where the borrower is a public company that includes information on its sustainability performance metrics in its public disclosures, the need for additional third party validation is less pressing, though such validation may still be desirable. Conclusion Green finance, and sustainability linked loans, are on an upward trajectory.  LPC saw almost $60B globally in green and sustainability linked loans in 2018, quadrupling the volume recorded in 2017 (see LSTA’s Week in Review, February 1, 2019).  2018 was also the year that sustainability linked loans were first seen in the United States, with two loans that adopted internal sustainability performance metrics.  Earlier this month, Xylem Inc. became the first U.S. company to issue a sustainability linked loan with an external performance target – a comprehensive ESG score assessed by Sustainalytics, an expert third party provider of ESG ratings.  (Gibson Dunn represented Xylem in the transaction.) The publication of the SLLPs represents another milestone in the development of this loan product, providing market participants with an important framework to guide expectations, inform market practice, and enhance the integrity of the asset class. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you work or the following authors in New York: Aaron F. Adams (+1 212.351.2494, afadams@gibsondunn.com) Yair Y. Galil (+1 212.351.2313, ygalil@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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March 20, 2019

Supreme Court Remands Cy Pres-Only Class Action Settlement Question Over Standing Concerns

Click for PDF Decided March 20, 2019 Frank v. Gaos, No. 17-961  The Supreme Court determined that questions concerning plaintiffs’ standing to challenge Google’s alleged violations of user privacy prevented the Court from deciding whether cy pres-only class action settlements are fair, reasonable, and adequate under Federal Rule of Civil Procedure 23(e). Background: Plaintiffs, on behalf of a putative class of 129 million users of Google’s search engine, alleged that Google violated users’ privacy under the Stored Communications Act, 18 U.S.C. § 2701 et seq., by disclosing the search terms they used to third-party websites. The parties agreed to an $8.5 million class action settlement consisting of $2 million in attorneys’ fees and costs and $6.5 million distributed as a cy pres award to various institutions studying internet privacy and information sharing. Under the proposed settlement, class members would receive no money. The district court approved the settlement, concluding that it would not be feasible to distribute the $6.5 million portion of the settlement to class members. The Ninth Circuit affirmed. Issue:  Whether a class action settlement is fair, reasonable, and adequate under Federal Rule of Civil Procedure 23(e) when class members receive no direct, monetary relief and instead all of the settlement funds are distributed to cy pres beneficiaries. Court’s Holding:  The lower courts should decide in the first instance whether any named plaintiff has Article III standing. “Resolution of the standing question should take place in the District Court or the Ninth Circuit in the first instance. We therefore vacate and remand for further proceedings.” Per Curiam What It Means: Although the Supreme Court granted certiorari to decide an important question concerning cy pres awards, the Court, in response to an argument raised by the Solicitor General in an amicus brief, ordered supplemental briefing on whether any named plaintiff had Article III standing. The Court ultimately accepted the Solicitor General’s view that the case should be remanded for the lower courts to address that question in the first instance—thus demonstrating the effect that an amicus brief can have on the outcome of a case. In the lower courts, the plaintiffs alleged that they had Article III standing because Google, by disclosing their search terms, allegedly violated their rights under the Stored Communications Act to be free from unlawful disclosure of certain communications. But the Supreme Court questioned whether those allegations established Article III standing in light of Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), which recognized that the alleged violation of a statutory right does not automatically satisfy Article III’s injury-in-fact requirement. Justice Thomas dissented. As in his concurring opinion in Spokeo, Justice Thomas reiterated that “a plaintiff seeking to vindicate a private right need only allege an invasion of that right to establish standing.” He would have held that the named plaintiffs had standing based on the alleged violation of Google’s private duties owed to them under state and federal law. Justice Thomas also would have reversed the class certification and class settlement orders and held that the absent class members’ interests were not adequately represented because only the named plaintiffs and class counsel received significant benefits, and the lack of relief for absent class members rendered the settlement unfair and unreasonable under Rule 23(e). Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Related Practice: Class Actions Theodore J. Boutrous, Jr. +1 213.229.7804 tboutrous@gibsondunn.com Christopher Chorba +1 213.229.7396 cchorba@gibsondunn.com Theane Evangelis +1 213.229.7726 tevangelis@gibsondunn.com
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March 19, 2019

China Revamps Laws on Foreign Investments

Click for PDF On March 15, 2019, the National People’s Congress of China passed the Foreign Investment Law (the “Foreign Investment Law”) which, upon taking effect on January 1, 2020, will replace some of the basic laws and regulations relating to foreign investments in China (the “Existing Laws”).  This new law represents a major overhaul of China’s foreign investment regulatory regime developed over the last four decades. Current Regime The Existing Laws consist primarily of three pieces of legislation:  the Sino-Foreign Joint Venture Law (the “Equity JV Law”), the Foreign Enterprise Law (the “WFOE Law”) and the Sino-Foreign Co-operative Joint Venture Law (the “Co-operative JV Law”).  Each of these laws allows foreign investors to invest in a particular type of legal entity in China.  Under the WFOE Law, for example, a foreign investor can incorporate a wholly foreign owned enterprise (a “WFOE”).  Similarly, under the Equity JV Law and the Co-operative JV Law, foreign investors can set up equity or co-operative joint ventures with Chinese partners (the “Joint Ventures”).  The WFOEs and the Joint Ventures are collectively referred to as foreign invested enterprises (the “FIEs”).  Apart from these laws, China has (and periodically updates) a foreign investment catalogue (the “Foreign Investment Catalogue”) which divides foreign investments into those that are encouraged and those that are on a negative list (the “Negative List”).  The Negative List contains two sub-categories: the prohibited (i.e., no foreign investment is allowed) and the restricted (i.e., foreign investment is allowed subject to satisfaction of certain conditions).  Those sectors that are not on the encouraged list or the Negative List are treated as permitted. The overriding feature of China’s regulation of foreign investments is that the FIEs are treated very differently from companies that are not owned by foreign investors (the “Domestic Companies”).  While China is not unique in this regard, it is the degree of such difference that sets China apart from many other countries.  For instance, the FIEs not only have to satisfy the requirements under the Foreign Investment Catalogue, they also must be registered as different legal entities and subject to different governance procedures compared with the Domestic Companies.  Furthermore, the FIEs are often required to obtain more approvals and enjoy less benefits than the Domestic Companies. Over the last several years, partly as a result of complaints and pressure from foreign governments and businesses, China has taken steps to grant more equal treatment to the FIEs.  While the incorporation documents for all FIEs had to be reviewed and approved by China’s Ministry of Commerce (“MOFCOM”), such requirement is now only applicable to investments in sectors on the Negative List.  The Foreign Investment Law can be seen as another step towards creating a more level playing field in China for both the FIEs and the Domestic Companies. Major Provisions The major provisions of the Foreign Investment Law include the following: National Treatment The Foreign Investment Law specifically provides that the market entry management system for foreign investments in China consists of national treatment plus complying with the Negative List.  In other words, unless otherwise required under the Negative List, the FIEs should be treated in the same way as the Domestic Companies.  This is the first time such national treatment principle is expressly and unequivocally provided in a national law in China. The law also includes some specific requirements for national treatment, including that government policies in supporting business development be applied equally to the FIEs and that equal treatment be accorded to the FIEs in respect of government procurements. Moreover, after the Foreign Investment Law becomes effective, the FIEs will undergo the same incorporation process required under the PRC Company Law (instead of the Existing Laws) as the Domestic Companies.  The FIEs will also be governed in the same way as the Domestic Companies. Protection of Foreign Investments In addition to national treatment, the Foreign Investment Law also contains some  general principles which apparently are aimed at allaying concerns over lack of protection of foreign investments in China, including: there will be no expropriation of foreign investments, unless in special circumstances required for public interest and conducted through a legal process with fair and reasonable compensation made in a timely fashion; the intellectual property rights of the foreign investors and FIEs will be protected and infringements of such rights will be prosecuted strictly according to law; while voluntary technological cooperation between Chinese and foreign investors is encouraged, the terms of such cooperation should be discussed by the investing parties themselves based on principles of fairness and equality, and government authorities or officials may not force transfer of technology through administrative means; government authorities and officials must keep confidential commercial secrets obtained from the foreign investors and FIEs while performing normal government functions; government authorities may not decrease the lawful rights of the FIEs, increase their obligations, impose market entry or exit conditions or interfere with their normal business activities, unless otherwise required by law; local government authorities must honor and perform promises to and contracts with the foreign investors and FIEs made pursuant to law; and a mechanism will be established to collect and address complaints from the FIEs. Requirements under Other Laws The Foreign Investment Law also refers to a number of other laws and regulations relating to foreign investments in China, such as the PRC Anti-Monopoly Law and regulations relating to national security review.  These laws and regulations will continue to be applicable after the Foreign Investment Law comes into effect. Unanswered Questions The Foreign Investment Law is generally viewed as an improvement over the Existing Laws, but it also leaves some important questions unanswered.  One glaring example is that MOFCOM issued a prior draft of the Foreign Investment Law in 2015 for public comments (the “2015 Draft”), which, among other things, dealt with issues relating to variable interest entities (the “VIEs”) (please click here for our comments on the 2015 Draft).  However, the VIE related provisions have all been dropped from the promulgated Foreign Investment Law.  As the VIE structure has been widely used in investments in certain sectors in China for many years, the fact that the Chinese government is still unwilling or unready to tackle this issue is a disappointment to many foreign investors. Furthermore, the Foreign Investment Law is a rather short piece of legislation which contains primarily broad language on general principles.  The extent to which it will actually improve the environment for foreign investments in China will depend on what specific rules and policies will be adopted to implement the law.  For instance, the current Negative List was issued in June 2018.  Many foreign investors are hoping that, with the passage of the Foreign Investment Law, the Negative List will be updated again to further liberalize restrictions on foreign investments in certain sectors.  Similarly, the Foreign Investment Law provides that foreign investors can freely remit out of China their earnings, royalties, capital gains and proceeds from disposal of assets.  However, given China’s tight foreign exchange controls, foreign investors often encounter obstacles and delays in actually making such remittance.  One encouraging development was that three days after the Foreign Investment Law was passed, China’s forex authority issued a circular revising and simplifying rules on cross border financing activities by multinational companies. The Foreign Investment Law is intended to promote and protect foreign investments by making the FIEs less “foreign” in China.  This is a challenge as well as a welcome step in a country which traditionally has believed strongly that there is a big difference between what is domestic and what is foreign.  It remains to be seen whether the purported benefits for foreign investors under  the Foreign Investment Law will be fully realized in real life. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about this development.  Please contact the Gibson Dunn lawyer with whom you usually work or the following authors: Yi Zhang - Hong Kong (+852 2214 3988, yzhang@gibsondunn.com) Fang Xue - Beijing (+86 10 6502 8687, fxue@gibsondunn.com) Keron Guo - Beijing (+86 10 6502 8505, kguo@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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March 13, 2019

Paragon Court Upholds Bankruptcy Courts’ Constitutional Authority to Adjudicate Fraudulent Transfer Claims

Click for PDF The Supreme Court’s watershed Stern v. Marshall decision altered the division of labor between bankruptcy courts and district courts, establishing that bankruptcy courts lacked authority under Article III of the United States Constitution to enter final orders resolving certain “core” claims notwithstanding Congress’s grant of such authority in the Bankruptcy Code.[1] A recent decision by the Bankruptcy Court for the District of Delaware in the bankruptcy case of offshore drilling contractor Paragon Offshore[2] represents the latest chapter in Stern’s ongoing aftermath.[3] While Stern focused on a state law tortious interference counterclaim, Paragon involves quintessential bankruptcy causes of action: fraudulent transfer claims held by the debtor’s estate. In Paragon, the court determined that under Stern v. Marshall and related case law, Article III does not preclude bankruptcy courts from entering final orders to resolve fraudulent transfer claims brought by a debtor’s successor-in-interest against a defendant that has not asserted a claim against the debtor’s estate. In so holding, the bankruptcy court disagreed with prior decisions by the Ninth Circuit and district courts in the Southern District of New York, setting the stage for a continuing battle on appeal and creating the potential for an eventual circuit split on the issue. The decision also provides guidance on the related issue of implied consent to bankruptcy court authority under Stern. I.    Background And Procedural Context The Paragon decision arose in an adversary proceeding brought by a post-confirmation litigation trust (the “Litigation Trust”) against Noble Corporation plc (“Noble”), a former parent entity that spun off Paragon Offshore plc and certain of its debtor affiliates (collectively, “Paragon”) in an August 2014 transaction (the “Spinoff”). The Litigation Trust brought certain causes of action, including five fraudulent transfer claims, against Noble, alleging that the Spinoff defrauded Paragon’s creditors. Specifically, the complaint alleged that Noble used the Spinoff to isolate a fleet of aged offshore drilling rigs in a newly created group of subsidiaries named Paragon Offshore, caused Paragon to incur $1.73 billion of indebtedness, transferred the proceeds to Noble, and distributed Paragon equity to Noble shareholders, leaving limited value behind for Paragon’s creditors. Paragon commenced voluntary chapter 11 proceedings on February 14, 2016. Shortly after the petition date, the debtors proposed an ultimately unsuccessful plan (the “Failed Plan”) that incorporated a settlement agreement between Noble and Paragon (the “Settlement Agreement”). The Settlement Agreement provided broad releases for Noble and affiliated parties in connection with claims arising out of the Spinoff, including fraudulent transfer or similar claims.[4] The releases’ effectiveness was conditioned on bankruptcy court approval of the Settlement Agreement and effectiveness of the Failed Plan. In November 2016, the bankruptcy court denied confirmation of the Failed Plan on feasibility grounds.[5] The debtors then proposed a new plan that did not incorporate the Settlement Agreement, which the bankruptcy court confirmed on June 7, 2017 (the “Confirmed Plan”). The Confirmed Plan created the Litigation Trust as a successor to the debtors and distributed interests in the Litigation Trust to Paragon’s creditors.[6] Noble provided input into the drafting of the Confirmed Plan, but did not object at any point to its inclusion of language granting the bankruptcy court exclusive jurisdiction to adjudicate claims held by the Litigation Trust “to the fullest extent permitted by law.”[7] On December 15, 2017, the Litigation Trust commenced the adversary proceeding against Noble and other defendants (collectively, the “Defendants”). The Defendants responded by filing a motion to determine, arguing that the bankruptcy court lacked constitutional authority to adjudicate the fraudulent transfer claims (among other claims), and seeking a determination that the bankruptcy court could only enter proposed findings of fact and conclusions of law with respect to such claims.[8] The Defendants argued that the Supreme Court’s decisions in Stern and Granfinanciera, S.A. v. Nordberg (“Granfinanciera”) compelled the conclusion that the bankruptcy court lacked the constitutional authority to issue final orders when a debtor or its successor-in-interest files a fraudulent transfer claim against a party that has not filed a claim in the underlying bankruptcy case.[9] II.    Threshold Issue of Consent As a threshold matter, the bankruptcy court considered whether Noble had implicitly consented to the bankruptcy court’s entry of final orders with respect to the fraudulent transfer claims. Under Wellness Int’l Network, Ltd. v. Sharif, the court would not need to reach the Article III issues raised by the Defendants if it found such consent.[10] The Litigation Trust argued that Defendants had implicitly consented by entering into the Settlement Agreement, and by failing to object to the Confirmed Plan’s providing the bankruptcy court with exclusive jurisdiction over the claims against Noble, despite Noble’s active participation in the negotiation of the plan. The court rejected both arguments, first concluding that Noble’s agreement to allow the court to approve the Settlement Agreement did not necessarily constitute consent to its eventual adjudication of then-unasserted underlying claims.[11] Second, the court held that a failure to object to a plan provision providing a bankruptcy court with ongoing jurisdiction does not constitute waiver of a party’s rights to have claims heard by an Article III court, because Stern drew an express distinction between subject matter jurisdiction and the allocation of constitutional authority.[12] III.    The Court’s Stern Analysis Turning to the Article III issue, the bankruptcy court initially noted that, by challenging its authority, the Defendants sought a determination that a federal statute was unconstitutional because the 1984 amendments to the Bankruptcy Code (the “1984 Amendments”) directed bankruptcy courts to enter final orders in core proceedings.[13] Core proceedings expressly include “proceedings to determine, avoid, or recover fraudulent conveyances.”[14] With this in mind, the court observed that the general principle of judicial restraint “weighs heavily against such a declaration,” because “federal statutes are presumed constitutional.”[15] The Defendants argued that the Supreme Court had already ruled on the constitutionality of fraudulent transfer actions against non-claimants in Granfinanciera and Stern. Accordingly, the bankruptcy court’s decision turned on whether the two precedents controlled, based on a close analysis of each case. Similar to the circumstances in Paragon, Granfinanciera involved a party with no claim against a bankruptcy estate being hauled into bankruptcy court to defend against a fraudulent transfer claim. The Supreme Court held that such a party “has a right to a jury trial when sued by the trustee in bankruptcy to recover an allegedly fraudulent monetary transfer.”[16] However, the Paragon court distinguished Granfinanciera because the issue before the court was not Article III authority, but rather the right to a jury trial under the 7th Amendment, and whether the so-called “public rights exception” could limit that right. While the Supreme Court did cite Article III case law to bolster its ultimate conclusion, the bankruptcy court observed that Granfinanciera specifically avoided addressing the constitutionality of the division of labor between bankruptcy courts and district courts established by Congress through the 1984 Amendments.[17] Thus, while observing that it was “a difficult question,” the court concluded that Granfinanciera did not control the Article III issue before it.[18] Turning to Stern, the bankruptcy court acknowledged that it “was very much an Article III case, and it discusses the Granfinanciera holding at length.”[19] Nevertheless, citing the Supreme Court’s admonition in Stern that the decision should be read narrowly and its “crystal clear statement” that Congress had exceeded its Article III power only “in one isolated respect,” the court concluded that Stern did not control because that isolated issue—a bankruptcy court’s constitutional authority to finally resolve a state law counterclaim that is not necessarily resolved in the proof of claim process—was not before the bankruptcy court.[20] Notably, the bankruptcy court acknowledged that other courts, including the Ninth Circuit and three judges in the Southern District of New York, reached the opposite conclusion and held that Stern extended Granfinanciera to the Article III context. But the court observed that in Executive Benefits Insurance Agency v. Arkison, the Supreme Court indicated ambiguity on the issue by expressly assuming, without deciding, that fraudulent transfer claims were Stern claims.[21] Having concluded that neither Granfinanciera nor Stern controlled, the bankruptcy court declined to extend their holdings to deem bankruptcy courts’ final adjudication of fraudulent transfer claims unconstitutional and denied the motion to determine.[22] IV.    Practical Implications Paragon provides bankruptcy court litigants with several points of guidance for forum-determinative Stern issues. First, a party’s entry into a settlement agreement submitted to a bankruptcy court for approval does not necessarily constitute that party’s implicit consent to the bankruptcy court’s authority to finally adjudicate such claims.[23] Second, a party’s failure to object to an exclusive jurisdiction provision in a plan during that party’s active participation in plan development does not constitute consent to the bankruptcy court’s constitutional authority, indicating that parties may negotiate plan provisions without thereby waiving their entitlement to an Article III tribunal. Third, the Paragon decision makes it more likely that fraudulent transfer claims can be finally adjudicated by bankruptcy courts—at least in the Third Circuit. Given that the decision creates a split in authority, and in light of the court’s statement that the Stern issue was “a difficult question,” it appears likely that the result will be tested on appeal. _______________________    [1]   564 U.S. 462, 503 (2011) (“Stern”).    [2]   Paragon Litigation Trust v. Noble Corp. plc (In re Paragon Offshore, plc), Ch. 11 Case No. 16-10386 (CSS), Dkt. No. 2178 (Bankr. D. Del. Mar. 11, 2019) (“Paragon”); Adv. Proc. No. 17-51882 (CSS).    [3]   For prior client alerts discussing Stern-related developments in connection with the permissibility of third-party non-debtor releases, see https://www.gibsondunn.com/two-recent-bankruptcy-court-decisions-on-third-party-releases-highlight-divergent-approaches-to-the-operative-proceeding-analysis/; https://www.gibsondunn.com/post-confirmation-sunedison-bankruptcy-release-decision-rejects-operative-proceeding-analysis-finds-lack-of-jurisdiction-to-approve-third-party-releases/.    [4]   Paragon at 7.    [5]   Id. at 7-8.    [6]   Id. at 8.    [7]   Id.    [8]   Id. at 8-9.    [9]   492 U.S. 33 (1989). [10]   135 S. Ct. 1932, 1947-48 (2015). [11]   Paragon at 13-14. [12]   Id. at 14-15. [13]   28 U.S.C. §§ 157 and 158. [14]   28 U.S.C. § 158(b)(2)(H). [15]   Paragon at 16 (citing Koslow v. Commonwealth of Pennsylvania, 302 F.3d 161, 175 (3d Cir. 2002); Union Pac. R.R. Co. v. United States, 99 U.S. (9 Otto) 700, 718 (1878)). [16]   Granfinanciera, 492 U.S. at 36. [17]   Paragon at 20 (quoting Granfinanciera at 64) (“[The Supreme] Court took pains to declare that it did not ‘express any view as to whether . . . Article III allows jury trials in fraudulent conveyance actions to be held before non-Article III bankruptcy judges subject to the oversight provided by the district courts pursuant to the 1984 Amendments.’”). [18]   Id. at 19-21. [19]   Id. at 21. [20]   Id. at 21-23. [21]   573 U.S. 25, 37 (2014). [22]   Paragon at 23-24. [23]   Because the Paragon settlement agreement never became effective, parties negotiating settlement agreements with debtors should also include carefully drafted language addressing this point to avoid any argument that the Paragon holding is distinguishable. Gibson, Dunn & Crutcher's lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm's Business Restructuring and Reorganization practice group, or any of the following: Matthew K. Kelsey - New York (+1 212-351-2615, mkelsey@gibsondunn.com) Samuel A.  Newman - Los Angeles (+1 213-229-7644, snewman@gibsondunn.com) J. Eric Wise – New York (+1 212-351-2620, ewise@gibsondunn.com) Matthew P. Porcelli - New York (+1 212-351-3803, mporcelli@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: David M. Feldman - New York (+1 212-351-2366, dfeldman@gibsondunn.com) Robert A. Klyman - Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Jeffrey C. Krause - Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Michael A. Rosenthal - New York (+1 212-351-3969, mrosenthal@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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March 7, 2019

2018 Year-End FDA and Health Care Compliance and Enforcement Update – Providers

Click for PDF Two years into the Trump Administration, the regulatory and enforcement landscape impacting health care providers continues to be extraordinarily dynamic and complex.  Recent policy statements and changes indicate that while the government’s health oversight enforcement efforts remain very robust in some areas, particularly in opioid-related cases, there may be a more tempered approach in other areas.  For example, consistent with prior pronouncements, the Trump Administration evidenced a further move away from health care regulation in December 2018 when it published a 119-page report suggesting, among other policy changes, an overall easing of state and federal health care laws in an effort to promote market efficiency.[1]  And, as we discuss further below, the Affordable Care Act continues to be challenged in the court system following legislative removal of the statute’s individual mandate and other developments. Through the end of 2018, the U.S. Department of Justice (“DOJ”) and U.S. Department of Health and Human Services (“HHS”) continued to achieve resolutions in a steady stream of investigations of health care providers, which featured substantial financial recoveries and negotiated corporate integrity agreements (“CIAs”)—albeit on a smaller scale than that seen during the Obama administration.  Moreover, the enforcement tone from the top appears to be shifting.  As Deputy Associate Attorney General Stephen Cox stated at the 2019 Advanced Forum on False Claims and Qui Tam Enforcement, the DOJ is committed to its role as “gatekeeper,” to prevent “non-meritorious” or “abusive” qui tam cases from going forward: Bad cases that result in bad case law inhibit our ability to enforce the False Claims Act in good and meritorious cases . . . . This is why we have instructed our lawyers to consider dismissing qui tam cases when they are not in our best interests.  This authority is an important tool to protect the integrity of the False Claims Act and the interests of the United States.[2] In his address, Deputy Associate Attorney General Cox discussed another recent DOJ reform signaling a shift away from certain affirmative enforcement actions: its ban on using guidance documents and other non-legally binding materials to create binding requirements.  He stated that “it is improper to try to use guidance to bind the public by imposing legal obligations beyond those already enshrined in existing statutes or properly promulgated regulatory provisions.  Put simply, agency guidance should educate, not regulate.”[3] In this year-end update, we begin with an overview of recent DOJ and HHS enforcement efforts affecting health care providers, including a review of notable case law developments in the False Claims Act (“FCA”) space, followed by a discussion of recent regulatory and case law developments in the Anti-Kickback Statute (“AKS”) and the Stark Law. As always, we are happy to discuss these developments with you.  A further collection of recent publications and presentations on these and other key issues is available here. I.    DOJ ENFORCEMENT ACTIVITY A.    False Claims Act Enforcement Activity The second half of 2018 continued the recent downward trend in the number of FCA health care provider settlements as compared to prior years.  In the 2018 calendar year, the DOJ announced a total of about 65 settlements involving providers, as compared to 87 resolutions and 106 resolutions in 2017 and 2016, respectively.  These 65 settlements amounted to approximately $985 million, which is below the $1.2 billion and $1.1 billion collected by the government from health care providers in FCA settlements in the prior two years.  As a typical FCA case can take two years or more to investigate before reaching resolution or an intervention decision by the government,  it is difficult to say whether the lower number of settlements in 2018 compared to prior years is due to a change in DOJ policies or priorities.  There is reason to anticipate, however, that providers may have success pushing back on aggressive FCA enforcement going forward, if the Brand Memo and related statements by the DOJ are any indication. Indeed, the DOJ continues to announce policy changes that, individually and in the aggregate, clearly suggest a more tempered affirmative civil enforcement approach.  In November, Deputy Attorney General Rod Rosenstein announced a revised DOJ policy regarding company cooperation and the identification of culpable individuals in corporate cases—a revision of 2015’s so-called “Yates memo” policies.[4]  Though the DOJ is still focused on prosecuting responsible individuals in corporate cases, the revisions suggest it will limit its scarce enforcement resources to pursuing key individuals, rather than every employee whose “routine activities . . . were part of an illegal scheme.”  Therefore, to qualify for maximum cooperation credit, companies are instructed to focus on providing information about every individual who had substantial culpable involvement in the relevant conduct, rather than seeking to identify every single individual who was even remotely involved in the alleged conduct.  Additionally, the revised policy restores discretion to DOJ attorneys to grant releases for individuals in corporate settlements where the DOJ is unlikely to pursue separate enforcement actions against those individuals. In light of these developments, it is interesting that the average recovery per settlement in 2018 ($15 million) nevertheless exceeded the averages in 2017 ($13 million) and 2016 ($9 million). The three largest recoveries from 2018 are on par with, or greater than, the top recoveries for FCA settlements of health care providers in recent years.  In fact, this year’s top three recoveries—$270 million,[5] $216 million,[6] and $84 million[7]—are significantly higher than those in 2017 ($155 million, $118 million, and $75 million), and are roughly in line with those from 2016 ($368 million, $145 million, and $125 million).  This may demonstrate that even if providers have been somewhat successful in pushing back against FCA actions, enforcement actions against providers remain a cornerstone of the DOJ’s FCA enforcement efforts. Number of FCA Settlements with Providers, by Provider Type FCA settlements announced in 2018 spanned a variety of legal theories and provider types, including hospitals (13 total), clinics and single providers (31 total), skilled nursing and rehabilitation services (5 total), ambulance services (4 total), pharmacies (3 total), and home health providers (2 total).  The “Other” medical services group (7 total) included providers such as an autism therapy services provider, intra-operative monitoring services, diagnostic laboratory testing, and wound care.  As in prior years, clinics and single providers comprised the bulk of settlements by count, but did not represent the most significant settlements by dollar amount.  Rather, as illustrated by the chart below, the sum from the 13 settlements with hospitals amounted to over $475 million (on average, $36 million per case), whereas the total from the 31 settlements with clinics and single providers amounted to only about $347 million (on average, $11 million per case). FCA Settlement Totals with Providers, by Provider Type In 2018, as in prior years, the most prevalent legal theory among health care provider settlements was that the provider had billed government health programs for items or services that were not medically necessary (19 claims).  This is illustrated in the below table. For many of these cases, medical necessity was the sole underlying theory of liability (13 cases), but in at least 6 cases, the DOJ presented alternative theories of liability, including claims the provider had submitted insufficient or falsified documentation.[8] Number of FCA Settlements with Providers, by Allegation Type Of note, claims alleging providers billed federal health programs for services that were not provided increased significantly from 2017.  By year-end 2018, there were at least 18 such claims, representing about 21% of the roughly 87 claims.[9]  In 2017, by contrast, only about 15 of the 110 claims (14%) alleged providers had billed for services not provided.[10]  In one case out of the District of South Carolina, the DOJ settled with an autism therapy services company for $8.8 million based on allegations the provider had billed federal and state government health programs for services that were not actually provided, or misrepresented the services actually provided.[11]  In addition, the DOJ settled with five Maryland medical practices and providers for services not provided, alleging that each of the providers billed for an additional test that was not actually performed.[12] In 2018, the DOJ also settled a number of claims based on the AKS (13 claims), upcoding (11 claims), unqualified personnel providing care (8 claims), physician self-referral (7 claims), claims of insufficient/falsified documentation (6 claims), and substandard care (2 claims).  Notably, three of the top five settlements from 2018 involved allegations of upcoding, and many cases with claims of upcoding included additional theories of liability.  For example, in one case out of the Central District of California, the DOJ settled with a national Medical Services Organization (“MSO”) for $270 million based on allegations that the MSO had engaged in a variety of practices, including disseminating improper medical coding guidance, that yielded artificially increased CMS reimbursements.[13]  The settlement also resolved whistleblower allegations that the provider had engaged in “one-way” chart reviews, in which the provider scoured its patients’ medical records to find additional diagnoses to enable managed care plans to obtain added revenue from the Medicare program, but ignored inaccurate diagnosis codes revealed by these reviews that, if deleted, would have decreased Medicare reimbursement or required the pans to repay money to Medicare.[14] The DOJ also continues to prioritize the investigation and settlement of AKS claims, with roughly 13 claims settled by the DOJ against health care providers this year.  Many of the cases involving AKS claims also allege claims of physician self-referral and/or improper billing.  For example, in August 2018, a regional hospital system based Detroit, Michigan, paid $84.5 million to resolve such allegations; this settlement is discussed further in Section III, below. B.    FCA-Related Case Law Developments 1.    Developments in Implied False Certification Theory Even as the number of appellate courts interpreting the Supreme Court’s 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar[15] proliferate, lower courts continue to grapple with the standards for materiality and scienter under the implied false certification theory.  As we discussed in our 2018 Mid-Year Update, 2018 saw a growing circuit split regarding the extent to which the government’s continued payment to a defendant after gaining awareness of alleged non-compliance negates FCA materiality.  The First, Second, and Third Circuits have previously found that the government’s failure to take action against the defendant despite knowledge of the alleged regulatory violations was conclusive proof that those violations were not material to payment,[16] while the Ninth Circuit has found that continued payment does not render alleged violations immaterial as a matter of law.[17] In January 2018, the Middle District of Florida overturned a $350 million jury verdict on the grounds that the evidence did not support a finding of FCA materiality and scienter where the government continued making payments to the defendants despite being on notice of defendants’ alleged billing violations.[18]  In July 2018, the DOJ filed an amicus brief in support of the appeal pending before the Eleventh Circuit, arguing that the government’s failure to recoup payments or take enforcement actions after learning of a provider’s non-compliance does not bar recovery under the FCA, and that under Escobar, the court’s focus should be on what action the government might have taken if violations were known prior to payment being made.[19]  The DOJ argued that under Escobar, “the materiality inquiry is meant to shed light on the government’s decision-making at the time of the relevant transaction—not at some later date after the transaction is over.”[20] In January 2019, the Supreme Court denied the petition for certiorari in United States ex rel. Campie v. Gilead Sciences, Inc., leaving in place the Ninth Circuit’s holding in favor of relators with respect to materiality.[21]  The decision came after the DOJ filed an amicus brief recommending that the petition be denied and stating that the DOJ would move to dismiss the case if it was sent back to the district court in accordance with the Ninth Circuit’s ruling.[22]  Of note, the DOJ agreed with the Ninth Circuit’s ruling that Plaintiffs had sufficiently pleaded materiality under Escobar; however, it argued that the case would be a poor vehicle for considering the question presented, because it is unclear what the government knew and when.[23] A petition for certiorari seeking review of the Sixth Circuit’s decision reinstating a qui tam claim in Brookdale Senior Living Communities, Inc. v. U.S. ex rel. Prather is also pending before the Supreme Court.[24]  In Brookdale, the relator alleged that the Defendant had violated Medicare regulations by failing to obtain physician signatures on home health certifications as soon as possible after the physician established a plan of care and submitted those services for payment.[25]  The district court dismissed the case for failure to plead sufficiently the elements of materiality.[26]  On appeal, the Sixth Circuit reversed, holding that the relator’s failure to plead facts related to the government’s past payment practices did not affect the materiality analysis at the pleading stage.[27]     In its petition for certiorari, the Defendant argues that the materiality element requires the plaintiff to show that the government refused payment on the basis of similar violations in the past and that the scienter element requires the defendant to possess knowledge that the alleged violation was material to the government’s payment decision.[28]  We will continue to monitor these cases and report back in a future update. 2.    Developments in FCA Statute of Limitations Provisions In a seemingly technical aspect of FCA law that will nonetheless have a substantial impact on FCA litigation against providers, on November 16, the Supreme Court took up review of a circuit split regarding the proper application of the FCA’s statute-of-limitations tolling provision, 31 USC § 3731(b)(2), to relators in cases where the government has not intervened.  Section 3731(b) requires that an FCA case be filed either (1) six years after the date on which the violation is committed, or (2) three years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed.[29]  The Court granted Gibson Dunn’s petition for cert to review the Eleventh Circuit’s decision in United States ex rel. Hunt v. Cochise Consultancy, Inc.,[30] which held (i) that the longer limitations period in section 3731(b)(2) was available to qui tam relators even if the government declined to intervene in the case, and (ii) that the three-year limitations period began when the government—not the relator—had actual or constructive knowledge of the fraud allegations.  Previously, the Third and Ninth Circuits had held that the section 3731(b)(2) limitations period is available to qui tam relators in the absence of government intervention, but it ran from the time of the relator’s knowledge in those circumstances.[31]  In contrast, the Fourth and Tenth Circuits had held that section 3731(b)(2) is available only if the government intervenes, not in a case a relator handles alone after declination.[32]  The Supreme Court’s ruling will hopefully resolve this three-way divide and provide clarity for future application of the FCA’s statute of limitations provisions, which in turn could have a material effect on the number of qui tam cases brought by relators. C.    Affordable Care Act Developments Nearly nine years after its passage, the Affordable Care Act continues to be tested in the court system.  In December 2018, a Texas federal judge struck down the entire Affordable Care Act, finding that the Affordable Care Act’s individual mandate provision will no longer be a valid exercise of congressional taxing power when the Tax Cuts and Jobs Act of 2017 eliminates the mandate’s tax penalty in 2019.[33]  U.S. District Judge Reed O’Connor held that the Supreme Court’s reasoning in National Federation of Independent Businesses v. Sebelius[34] “compels the conclusion that the Individual Mandate may no longer be upheld under the Tax Power. And because the Individual Mandate continues to mandate the purchase of health insurance, it remains unsustainable under the Interstate Commerce Clause.”[35]  Judge O’Connor held that the remaining provisions of the ACA are “inseverable” from the individual mandate and are therefore invalid.[36]  The underlying case was brought by a coalition of Republican attorneys general from twenty states.  Democrat attorneys general for sixteen states and the District of Columbia, who intervened as defendants in the Texas case, filed a notice of appeal to the Fifth Circuit.[37]  The Affordable Care Act remains in effect pending the appeals process.[38]  If both aspects of the ruling are upheld, the decision would have a wide-ranging impact on health care regulatory provisions far beyond the individual mandate and insurance exchanges, such as on the ACA’s provisions relating to drug approvals and prices, consumer protections, Medicare reimbursement, Anti-Kickback Statute amendments, and other critical regulatory and enforcement issues. In contrast, in September 2018, Maryland filed a complaint seeking a declaratory judgment that the Affordable Care Act is constitutional and enforceable.[39]  In its complaint, Maryland argued that the Affordable Care Act’s individual mandate will not become unconstitutional when its tax penalty disappears, such that no portion of the Affordable Care Act need be struck down.[40]  Just this month, the District of Maryland issued a memorandum opinion denying the request for declaratory judgment and dismissing the case without prejudice due to lack of standing.[41]  The Court found that Maryland had failed to show a “concrete and particularized injury” because its allegations did not demonstrate a real threat that the Trump administration would cease enforcement of the ACA; however, it explicitly invited Maryland to revive the suit if the injury alleged becomes more concrete.  We will watch these cases as they progress through the federal courts, and report on continuing developments in our 2019 mid-year update. D.    Opioid Crisis Enforcement Efforts The DOJ has continued its assault on the nation’s opioid crisis through, among other means, a broad-based use of criminal prosecutions and civil enforcement actions against a wide variety of targets in the distribution chain.  In August 2018, the DOJ issued the first-ever civil injunctions under the Controlled Substances Act against doctors who allegedly prescribed opioids illegally.[42]  The DOJ filed complaints against two Ohio doctors and obtained temporary restraining orders barring them from writing prescriptions after an investigation led to allegations that the doctors had recklessly and unnecessarily prescribed opioids and other drugs, providing them to patients upon request.[43]  Then-Attorney General Jeff Sessions described the announcement as a “warning to every trafficker, every crooked doctor or pharmacist, and every drug company.”[44] The DOJ also sent a warning message to foreign synthetic opioid manufacturers when it unsealed a 43-count indictment against leaders of a Chinese fentanyl trafficking organization.[45]  Two Chinese citizens were charged with operating a conspiracy to manufacture and ship deadly fentanyl analogues and 250 other drugs to at least 25 countries and 37 states.[46]  The indictment alleged that the organization was responsible for the fatal overdoses of two people in Akron, Ohio.[47] As we discussed in our 2018 Mid-Year Update, the DOJ previously launched Operation Synthetic Opioid Surge, or Operation S.O.S., to focus on prosecuting suppliers of synthetic opioids, rather than drug users.  In a September statement at Office of Justice Programs’ National Institute of Justice Opioid Research Summit, then-Attorney General Sessions applauded the success of Operation S.O.S.[48]  He credited the shift in focus from prosecuting users to suppliers with helping to reduce the amount of overdose deaths in Manatee County, Florida by half since last year.[49]  In an effort to replicate those results elsewhere, then-Attorney General Sessions announced that the DOJ sent ten prosecutors to help implement the “no amount too small” strategy in ten districts with exceptionally high rates of drug-related deaths.[50]  Sessions noted that this is in addition to the twelve prosecutors sent to drug “hot spot districts” and the more than 300 new prosecutors he dispatched around the country.[51] Most recently, in October 2018, the DOJ announced an award of almost $320 million to a variety of entities and programs, including drug courts, research efforts, and programs aimed helping impacted children and youth, in an effort to combat the opioid crisis in America.  The funds will be invested into all three parts of the Administration’s plan to end the opioid epidemic: prevention, treatment, and enforcement.[52]  The funding is further evidence of the DOJ’s ongoing commitment to leveraging its resources against opioid-related health care fraud and crimes.  We have no reason to expect this to change under the newly-confirmed Attorney General, William Barr. II.    HHS ENFORCEMENT ACTIVITY A.    HHS OIG Activity 1.    2018 Developments and Trends According to its Semiannual Report to Congress, HHS OIG will report approximately $3.43 billion in expected recoveries from its investigative and audit enforcement efforts in 2018.[53]  As we predicted in our 2018 Mid-Year Update, recoveries are slightly down from the agency’s $4.13 billion in 2017 recoveries and $5.66 billion in 2016 recoveries.[54]  Expected recoveries consist of audit receivables (representing amounts identified in HHS OIG audits that HHS officials have determined should not be charged to the government) and investigative receivables (consisting of expected criminal penalties, civil or administrative judgments, or settlements that have been ordered or agreed upon).[55]  HHS OIG’s drop in recoveries was partly driven by the decrease in investigative receivables from $4.13 billion in Fiscal Year 2017 to $2.91 billion in Fiscal Year 2018.[56] For Fiscal Year 2018, HHS OIG reported 764 open criminal actions and 813 open civil actions, including FCA suits, civil monetary penalty (“CMP”) settlements, and administrative recoveries, against individuals or entities.[57]  Both figures indicate a decrease on the criminal side as compared to Fiscal Year 2017, where HHS OIG reported 881 criminal actions and 826 civil actions.[58]  This reflects a drop of over 13% in the number of criminal actions, and, as noted in the 2018 Mid-Year Update, the slight decrease in the number of civil actions breaks a years-long steady rise in civil actions.   Additionally, this is the first time in recent years we have seen civil enforcement actions surpass criminal enforcement actions. 2.    Proposed and Final Rules Despite assertions by the current administration that agency rulemaking would be curtailed, throughout the last fiscal year, CMS and HHS OIG finalized multiple rules and proposed many more.[59] In August 2018, CMS finalized the inpatient and long-term care hospital prospective payment system (IPPS/LTCH PPS) rule, which contained new requirements mandating that hospitals publicize a list of their standard changes online in a machine-readable format by January 1, 2019.[60]  The rule also states that hospitals must update their list of prices at least annually.  CMS explained its reasoning for the new requirement as stemming from its “concern[] that challenges continue to exist for patients due to insufficient price transparency, including patients being surprised by out-of-network bills for physicians, such as anesthesiologists and radiologists, who provide services at in-network hospitals, and by facility fees and physician fees for emergency room visits.”[61] Additionally, in November 2018, CMS published its final rule updating the Physician Fee Schedule.  While this rulemaking is generally standard, notable in this year’s rule is that, starting in 2019, CMS will be reimbursing doctors for virtual check-ins, remote image evaluation, and other technology-enabled services that have begun to proliferate in recent years.[62] 3.    Notable Reports and Reviews In this year’s report on the Top Management and Performance Challenges, HHS OIG identified twelve key challenges it is currently facing in the enforcement space.[63]  The number one challenge, consistent with DOJ and other agency enforcement efforts, is preventing and treating opioid misuse.  HHS OIG noted that as an agency, it has “many opportunities” to address the issue and listed some of the ways in which it has addressed the challenge.[64]  For example, HHS OIG highlighted efforts by CMS to provide guidance in combating the opioid crisis by identifying substance use disorders covered by Medicaid, as well as the “more than 160 defendants [] charged with participating in Medicare and Medicaid fraud schemes related to opioids or treatment for opioid use disorders.”[65] Among its other top challenges, HHS OIG includes more general goals such as “ensuring program integrity,” “protecting the health and safety of vulnerable populations,” and “improving financial and administrative management and reducing improper payments.”[66] 4.    Significant HHS OIG Enforcement Activity a)    Exclusions HHS OIG is permitted in some cases and required in others to exclude entities and individuals from participation in federal health care programs,[67] a powerful tool and potential collateral consequence that looms over other civil and criminal enforcement proceedings.  After record-setting exclusion figures for 2014 and 2015, HHS OIG reported a decline in exclusions in 2016 and again in 2017.  In 2018, that trend continued, with 2,712 entities and individuals excluded this year, in comparison to 3,244 entities and individuals excluded in 2017.[68] These exclusions involve 59 entities – matching 2017’s total – with pharmacies accounting for 17 exclusions, up from 12 exclusions in 2017.[69]  While mental health facilities and home health agencies accounted for the next most frequent entity exclusions in 2017, these were not commonly excluded entities in 2018; after pharmacies, the next most commonly excluded entity was community mental health centers (12 exclusions) followed by clinics (4 exclusions). [70]  Among excluded individuals, 270 were identified as business owners or executives, down from last year’s high of 348 business owners or executives.[71]  This year, nearly half of all excluded individuals – 42% – were identified as nurse practitioners, nurses, or nurse’s aides working as non-business owner licensed health care service providers. b)    Civil Monetary Penalties In the 2018 calendar year, HHS OIG announced 135 civil monetary penalties (“CMPs”) resulting from settlement agreements and self-disclosures that recovered approximately $71.07 million.[72]  As we predicted in our 2018 Mid-Year Update, these recoveries represent a significant increase in comparison to last year’s recoveries of $36.5 million over 95 CMPs.[73]  In line with past years, false or fraudulent billing continues to be a leading reason for assessment of CMPs,  accounting for 58 CMPs (43% of the total number), and about $44.8 million, or 63%, of total recoveries assessed in 2018.  As in past years, HHS OIG also routinely pursued CMPs in which entities employed individuals that the entities allegedly knew or should have known were excluded from federal health care programs.  These cases account for 47 of the CMPs assessed this year, amounting to about $6.0 million in penalties.  Some of the largest penalties this year came from violations of AKS and Stark Law physician self-referral prohibitions.  The 17 penalties in AKS and Stark cases amounted to approximately $15.6 million together.  Penalties also were assessed for violations of the Emergency Medical Treatment and Labor Act (“EMTALA”) and other issues. The largest penalties in 2018, as in 2017 and 2016, have stemmed from self-disclosure cases.  HHS OIG’s self-disclosure protocol provides for reduced penalties as an incentive, so this may be an indication that these cases would have had even larger repayment amounts had they not been self-disclosed.  Each of the top ten largest penalties in 2018 resulted from self-disclosure to HHS OIG.  Most of the larger penalties came during the first half of the year and are summarized in our 2018 Mid-Year Update; the largest CMPs assessed during the second half of this year are summarized below:[74] On September 13, 2018, after self-disclosing conduct, a hospital in Manhattan, Kansas agreed to pay approximately $3.8 million to resolve allegations that it submitted claims to federal health care programs for medically unnecessary bronchoscopies that lacked medical documentation. After it self-disclosed conduct to HHS OIG, on October 23, 2018, a hospital in Columbus, Georgia agreed to pay approximately $3.3 million to resolve allegations that it had paid remuneration to a management company in the form of incentive payments for performance metrics that were not met and were not materially updated to incentivize performance.  HHS OIG further contended that the hospital paid remuneration to a cardiology practice in the form of a forgiven or uncollected debt owed as a result of the practice exceeding the tenant improvement allowances of their lease agreement. A general hospital in Raleigh, North Carolina agreed to pay approximately $2.3 million on September 24, 2018 after it disclosed that it leased an employed physician from a community hospital for the provision of cardiology services at the community hospital.  HHS OIG contended that during this time the community hospital paid the general hospital a fee for the lease of the physician, and the general hospital paid the physician salary and bonus payments for the cardiology services performed by the physician at the community hospital.  HHS OIG alleged that the general hospital offered and paid remuneration in the form of salary and bonus payments to the physician that were in excess of the community hospital’s lease fee to the general hospital and that should have been paid by the community hospital. c)    Corporate Integrity Agreements HHS OIG continues to employ CIAs as a mechanism to resolve enforcement actions and create assurances that the provider will comply with Medicare and Medicaid rules and regulations.  In Fiscal Year 2018, 31 CIAs took effect, a decline from last year’s 51 CIAs.[75]  CIAs are often linked with other enforcement penalties, particularly FCA and AKS settlements with the DOJ, because HHS OIG often agrees to waive its permissive exclusion authority—which can be triggered by FCA claims—in exchange for the defendant’s acceptance of prospective integrity obligations. In the largest health care FCA settlement of 2018, a wholesale pharmaceutical company paid $625 million to resolve allegations arising from its operation of a facility that improperly repackaged oncology-supportive injectable drugs into pre-filled syringes and improperly distributed those syringes to physicians treating cancer patients.[76]  This settlement surpasses last year’s largest payment of $465 million.[77]  The company had also agreed to pay $260 million in criminal fines and forfeiture for this conduct last year, bringing the total penalties it has paid to resolve liability to $885 million.[78]  As part of its settlement, the company entered into a five-year CIA.[79]  Though the company had already established a compliance program, the CIA requires the company to re-commit to and expand its compliance program.[80]  The CIA requires that the company put in place an incentive compensation restriction plan to fine senior management that have violated company policies and, notably, mandates extensive certification of compliance with Drug Enforcement Agency (“DEA”) requirements.[81]  According to the terms of the CIA, the Chief Compliance Officer must report directly to the audit committee of the board of directors.[82] In the latter half of 2018, multiple settlements with CIAs resolved allegations of kickbacks and improper physician relationships, continuing the recent strong focus on AKS and Stark Law enforcement.  For example, a Pennsylvania-based operator of long‑term care and rehabilitation hospitals across the country agreed to pay $13.2 million to resolve allegations that it used contracts with physicians to induce them to refer patients to its hospitals.[83]  The company also entered into a five-year CIA as part of the agreement, which requires, among other things, that the company appoint a Compliance Officer who “shall not be . . . subordinate to the General Counsel or Chief Financial Officer or have any responsibilities that involve acting in any capacity as legal counsel.”[84]  The company is also required to track all remuneration and document all fair market value determinations for arrangements that could potentially implicate AKS.[85]  Similarly, a Philadelphia-based group of vascular centers entered into a CIA and a minimum $3.8 million settlement to resolve allegations that it submitted false claims to Medicare for services that resulted from referrals that the group had induced through improper remuneration to physician investors and medical directors.[86]  The CIA requires the company to “engage in significant compliance efforts over the next five years, including a focus on [the company’s] arrangements with physicians and other health care providers for compliance with [AKS.]”[87] As described in the 2018 Mid-Year Update, a wider variety of entities are being subjected to CIAs.  In the second half of 2018, for example, CIAs were imposed upon multiple hospital systems.  In a matter that concluded in both a civil recovery and criminal plea, a former hospital chain paid over $216 million to resolve civil allegations that it billed government health care programs for more-costly inpatient services that should have been billed as observation or out-patient services, paid illegal remuneration to physicians in return for patient referrals to its hospitals, and inflated claims for emergency department facility fees.[88]  In addition to these civil recoveries, the hospital chain’s subsidiary pleaded guilty to one count of conspiracy to commit health care fraud arising from illegal conduct designed to aggressively increase admissions to the hospital and paid a $35 million monetary penalty.[89] B.    Significant CMS Activity 1.    Transparency and Data Accessibility CMS released an eighth update of the Market Saturation and Utilization Tool[90]—the second update of this data tool in 2018 after an update was released in April, as described in our 2018 Mid-Year Update.[91]  This tool provides interactive maps and related data sets showing provider services and utilization data for selected health services, and is one of many tools used by CMS to monitor and manage market saturation as a means to help prevent potential fraud, waste, and abuse.  The updated tool includes a quarterly update of the data regarding the twelve health services areas from the previous release, and also includes Cardiac Rehabilitation Programs and Psychotherapy data. 2.    Continued Implementation of Moratoria As explained in past updates, the Affordable Care Act authorizes CMS to impose moratoria on certain regions, preventing new provider enrollments in certain geographic areas deemed as “hot spots” for fraud.  The moratoria are imposed after consultation with the DOJ and HHS OIG and reviewed for continued necessity every six months.  The moratoria, which block any new provider enrollments for nonemergency ambulance services in New Jersey, Pennsylvania, and Texas, and for home health agencies in Florida, Texas, Illinois, and Michigan, were reviewed and extended again for a six month period on August 2, 2018.[92] C.    OCR and HIPAA Enforcement As cybersecurity and data privacy issues have increasingly appeared as headline news and become cutting edge areas of the law, so too has HHS increasingly focused on enforcement of patient information protections under the Health Information Portability and Accountability Act (“HIPAA”).   HHS’s Office of Civil Rights (“OCR”) reported that as of January 31, 2019, it had reviewed and resolved 194,951 HIPAA complaints since HIPAA privacy rules went into effect in April 2003.[93]  In 2018, OCR reported ten settlements or rulings amounting to approximately $25.7 million in fines for HIPAA violations.[94]  This year marks the highest total recoveries from HIPAA settlements and rulings, surpassing 2016’s $23.5 million then-record total. This year’s record HIPAA enforcement haul was driven in large part by the largest HIPAA settlement in history—a fine of $16 million paid by a national health insurance company after a series of cyberattacks led to the largest-ever health data breach and exposed the electronic protected health information of almost 79 million people.[95]  In addition, this year an Administrative Law Judge ruled that a comprehensive cancer center in Texas violated HIPAA and granted summary judgment to OCR on all issues, requiring the center to pay $4.3 million in penalties.[96] 1.    Developments in HIPAA Compliance Guidance Protection of patients’ confidential information, and electronically stored information in particular, continues to be a high priority for HHS enforcement, just as cybersecurity and data privacy issues explode in complexity and public attention.  As discussed in past updates, OCR continues to issue regular Cybersecurity Newsletters to provide guidance on the specific security measures providers can take to decrease exposure to various security threats and vulnerabilities that exist in the health care sector, and how to reduce breaches of electronic-protected health information (“ePHI”).  HHS has not said that following the measures outlined in these newsletters creates any kind of safe harbor; rather, the newsletters are designed to “assist” the regulated community to become more knowledgeable about risk areas.   Brief summaries of the newsletters that have been issued in the second half of this year are below; for those issued in the first half of the year, see the 2018 Mid-Year Update. The July newsletter discusses the importance of disposing of electronic devices in a secure manner, since improper disposal of these devices and media puts the information stored on these items, which may be ePHI, at risk of a potential breach.[97]  The newsletter reminds readers that HIPAA-covered entities and business associates are required to implement policies and procedures regarding the disposal and re-use of hardware and electronic media containing ePHI. The August 2018 newsletter reviews considerations for securing electronic media and devices in order to reduce the risk of loss and theft of these items containing ePHI.[98]  The importance of training, inventory, and records of movement is emphasized. The final Cybersecurity Newsletter of 2018, released in October, uses National Cybersecurity Awareness Month to review cybersecurity safeguards, including encryption, social engineering, audit logs, and secure configurations.[99] III.    ANTI-KICKBACK STATUTE DEVELOPMENTS As evidenced by the enforcement decisions summarized above, the AKS remains a primary theory for actions against health care providers, and case law developments in the second half of 2018 continue to impact the risk environment for providers.  At the same time, renewed attention has been paid to the ways in which the AKS prevents the adoption of a value-based care approach.  We discuss important AKS-related regulatory and case developments below. A.    AKS-Related Case Law Similar to the first half of 2018, the second half of 2018 was relatively quiet with respect to AKS case law.  However, there were a few cases of note, including additional guidance interpreting materiality under Escobar.  The AKS prohibits an individual from knowingly or willingly offering, soliciting or receiving  “remuneration” in exchange for referrals of health care items or services reimbursable by federal health care programs.[100]  Courts have interpreted the word “remuneration” broadly to include anything of value.  This trend of broad interpretation continued in State v. MedImmune, Inc.[101]  In that case, the District Court for the Southern District of New York held that the State of New York adequately pled that “the sharing of [personal health information] with specialty pharmacies could plausibly constitute ‘remuneration’ in violation of the federal anti-kickback statute.”[102]  The State had sued MedImmune under the New York False Claims Act based on purported AKS violations, alleging that MedImmune sales personnel would “curry favor” with hospital administrators in exchange for access to confidential personal health information, MedImmune allegedly would pass on to a specialized pharmacy to use in identifying prime candidates for MedImmune’s neonatal respiratory drug.[103]  The ruling joins the growing number of district courts taking a broad approach to the definition of “remuneration” under the AKS at the motion to dismiss stage. In Carrel v. AIDS Healthcare Foundation, Inc.,[104] the Eleventh Circuit held that a nonprofit health care organization can pay a bonus to its employees for referring patients to the organization without violating the AKS.  The relators claimed that the $100 bonuses that the AIDS Healthcare Foundation paid to its employees for patients who completed follow-up procedures at the Foundation constituted kickbacks.  Affirming a ruling by the Southern District of Florida, the court determined that the referral bonus fell within the AKS’s employee safe harbor provision, which protects from AKS enforcement payments from employers to employees in a bona fide employment relationship for items or services payable by federal health care programs.[105]  In its decision, the court noted that the Ryan White Act establishes the referral of patients as a “standalone compensable ‘service’” that is thus covered by the safe harbor’s exemption for payments to employees “in the provision of covered items or services.”[106]  Of note, the DOJ filed a statement of interest in support of the Foundation’s motion to dismiss, maintaining that the Foundation had correctly interpreted the law regarding the safe harbor.[107] In United States ex rel. Capshaw v. White,[108] the court denied the defendant’s motion to dismiss the government’s AKS and FCA claims on materiality grounds, holding that AKS violations are “inherently material” to government payment.[109]  At issue were allegations that the defendants, a physician and nurse who owned a small number of hospice companies, gave remuneration to a home health care company that was struggling financially in exchange for Medicare referrals.  The Northern District of Texas court in White found that the government sufficiently alleged that the defendants violated the AKS through these payments.[110]  In coming to its conclusion, the court cited several reasons.  First, AKS violations in general are not “insubstantial regulatory violation[s]” but rather are “serious, consequential felon[ies]” that carry the possibility of prison terms.[111]  Next, the court noted that the language of the AKS expressly provided that a claim that results from a violation of the AKS “constitutes a false or fraudulent claim.”[112] Third, AKS compliance is a condition of payment under Medicare Part D provider agreements (and under many state Medicaid provider applications).[113]  Based on this reasoning, the court rejected the defendants’ argument that AKS violations are similar to “garden-variety breaches of contract or regulatory violations.”[114]  The court concluded that the principles of materiality espoused in Escobar did not apply to the AKS.[115] B.    Regulatory Developments In August, HHS OIG issued a request for information (“RFI”) to identify ways in which it might modify or add new safe harbors to the AKS and exceptions to the beneficiary inducement provisions of the CMP statute in order to promote care coordination and value-based care initiatives.  The RFI, which is part of HHS OIG’s “Regulatory Sprint to Coordinated Care,” seeks input on regulations that “may act as barriers to coordinated care” or “value-based care.”[116] In its solicitation, HHS OIG identified several categories of particular interest and requested comments that address the following: alternative payment models, arrangements involving innovative technology, or other novel financial arrangements that the industry is interested in pursuing; incentives that industry is interested in providing to beneficiaries to promote care coordination and engagement, or proposals for reduction or elimination of beneficiary cost-sharing obligations; other topics, including current fraud and abuse waivers developed for testing models under the Center for Medicare and Medicaid Innovation, donations for cybersecurity-related items, the Accountable Care Organization Beneficiary Incentive Program, and telehealth technologies; and whether there should be alignment between Stark law exceptions and the AKS safe harbors. In the RFI, HHS OIG stated that it seeks to add new safe harbors in order to promote coordination of care and increase value-based care, while continuing to protect against fraud and abuse.[117]  The comment period closed on October 26, 2018; additional guidance has not been issued. C.    Notable HHS OIG Advisory Opinions During the second half of 2018, HHS OIG issued several AKS advisory opinions that provide useful guidance for health care providers. On July 18, HHS OIG evaluated a proposal by the offeror of Medicare Supplemental Health Insurance (“Medigap”) policies to enter into a preferred network arrangement with hospitals under which it would receive discounts on Medicare inpatient deductibles for its policyholders.[118]  The plan would then provide a credit of $100 to policyholders who used an in-network hospital for their inpatient stay.  HHS OIG determined that the arrangement neither met the requirements for protection under the safe harbor for waivers of beneficiary coinsurance and deductible amounts, nor the safe harbor for reduced premium amounts offered by health care plans.[119]  However, despite the lack of safe harbor protection, HHS OIG concluded that the proposal presented a low risk under the AKS, reasoning that the arrangement (i) would not impact per-service Medicare payments, (ii) was unlikely to prompt overutilization, (iii) would not unfairly affect competition among hospitals, (iv) was unlikely to impact clinical decision-making by providers, and (v) would operate transparently.[120]  On August 21 and October 29, HHS OIG approved two substantially similar arrangements involving Medigap policies under the same reasoning as set forth above.[121] On August 6, 2018, HHS OIG evaluated a proposal by a Group Purchasing Organization (“GPO”) to serve as the purchase agent for health care facilities that share a common parent organization with the GPO, referred to as “Affiliated Facilities.”[122]  The services the GPO provides for its current members extend beyond typical products and services to include negotiating discounts for IT platforms, emergency department staffing, physician recruitment, and telemedicine consults.[123]  Although HHS OIG concluded that the arrangement did not meet the GPO safe harbor, it concluded that the arrangement “would not materially increase the risk of fraud and abuse” under the AKS, reasoning that the majority of the GPO’s members would still be unrelated to the GPO and distinguishing the arrangement from suspect arrangements under which a wholly-owned subsidiary under a single corporate entity is essentially seeking referral fees.[124]  HHS OIG also noted that the larger volume might increase the GPO’s ability to obtain lower prices on goods and services.[125] In an advisory opinion issued on October 11, HHS OIG evaluated a health plan’s “proposal to pay providers and clinics to increase the amount of Early Periodic Screening, Diagnostic, and Treatment services” that they provide to Medicaid beneficiaries, finding that the proposed arrangement satisfied the safe harbor for eligible managed care organizations.[126]  In its opinion, HHS OIG explained that the safe harbor is satisfied because the plan is an eligible managed care organization, has an appropriate agreement to provide services, and the arrangement could help achieve the goal of increasing early diagnosis and treatment of health problems.[127] On November 13, HHS OIG found that a manufacturer’s proposal to provide free doses of its drug to hospitals to treat inpatients could constitute improper remuneration under the AKS.[128]  The company proposed to stock the drug at participating hospitals on a consignment basis, under which physicians seeking to prescribe the drug would submit a referral to the drug’s reimbursement hub and initiate therapy using the free vial.[129]  The reimbursement hub would provide additional free vials if needed for inpatient use and would provide the same for outpatients unable to secure insurance coverage for the drug.[130] Considering publicly available information outside of the materials submitted by the drug company, HHS OIG offered several reasons for its negative opinion.  HHS OIG’s reasons included: (i) the proposed arrangement “would relieve a hospital of a significant financial obligation that [it] otherwise would incur” in light of the “substantial price increases” for the drug in recent years; (ii) the savings to the hospital would not be passed on to the government, since the drug is not separately reimbursable in the inpatient setting; (iii) the proposal “could function as a seeding arrangement” because insurers, including federal health care programs, may end up paying for the drug when insured patients need to finish the treatment on an outpatient basis, and because providing the free drug to inpatients “facilitates [the] high price for the Drug’s other indications”; (iv) it “could result in steering or unfair competition” by encouraging hospitals to “influence prescribers to consider the Drug as a first option”; and (v) two of the barriers cited by the drug company (delayed access to the product and unwillingness to bear excess inventory risks) could be eliminated by stocking the drug on consignment basis without also providing the drug for free.  Significantly, HHS OIG also rejected the idea that the free vials would not be contingent on future purchases, explaining that patients would need to continue treatment with the drug as outpatients to avoid adverse medical consequences from halting the treatment they began for free on an inpatient basis.[131] IV.    STARK LAW DEVELOPMENTS The physician self-referral law, or Stark Law, imposes strict liability on any physician who makes referrals for certain health services to an entity with which the physician or his or her immediate family member has a “financial relationship,” or bills the government for any such referred services.  The Stark Law was enacted in an effort to “disconnect a physician’s health care decision making from his or her financial interests in other health care providers,” with the ultimate goal of ensuring that patients were presented with the best value and quality options.  In the time since the bill’s passage in 1989, industry stakeholders have realized that the Stark Law’s broad conception of a “financial relationship” and narrow, enumerated exceptions has the undesired effect of limiting innovative, high-value, cost-effective health care arrangements.  As discussed in our previous alerts, Stark Law reform is a common topic, and is receiving new attention under the Trump Administration.  CMS Administrator Seema Verma promised action on Stark Law reform and announced she hoped to issue proposed regulations loosening physician self-referral regulations by the end of 2018.  While proposed regulations are not yet available, regulatory and legislative developments indicate that reform may be on the horizon. A.    Regulatory and Legislative Updates As part of HHS’s “Regulatory Sprint” to improve coordinated care by identifying and eliminating regulatory obstacles, CMS published an RFI in June 2018 seeking “input from the public on how to address any undue regulatory impact and burden of the physical self-referral law.”[132]  To aid in assessment of existing obstacles, CMS invited broad comments on the Stark Law and its impacts and burdens, including feedback on the following: Existing or potential arrangements that involve designated health service (“DHS”) entities and referring physicians that participate in “alternative payment models or other novel financial arrangements,” regardless of whether such models and financial arrangements are sponsored by CMS; Exceptions to the Stark Law that would protect financial arrangements between DHS entities and referring physicians who participate in the same alternative payment model; Exceptions to the Stark Law that would protect financial arrangements that involve “integrating and coordinating care outside of an alternative payment model”; and Addressing the application of the Stark Law to financial arrangements among providers in “alternative payment models and other novel financial arrangements.”[133] Over the course of the two-month comment period, 375 responses poured in from industry stakeholders.[134]  CMS has not yet officially responded to the comments received, but a proposed regulation is anticipated sometime in 2019. On the legislative front, President Trump’s budget for Fiscal Year 2019 specifically included a legislative proposal to establish a new Stark Law exception for referral arrangements arising from an alternative payment model.[135] In December, the Administration published a report entitled “Reforming America’s Healthcare System Through Choice and Competition,” calling for a widespread loosening of federal and  state laws and regulations that impact the health care markets.  Among the solutions proposed in the report was a recommendation to repeal restrictions on the opening and expansion of physician-owned hospitals, restrictions that had been put in place under the Affordable Care Act.[136] B.    Notable Stark Law Enforcement The DOJ entered into two notable Stark Law settlements in the second half of 2018. In August, a Detroit-area hospital system agreed to pay $84.5 million to settle federal and state allegations that it offered financial incentives to physicians in return for patient referrals.[137]  As part of a CIA entered with HHS OIG, the hospital also agreed to a five-year independent outside review of its referral arrangements.  The case arose from four different cases brought in 2010 and 2011, which alleged that the hospital provided free or below-fair-market-value office space to a group of physicians, to induce referrals.[138] A health system serving patients in Illinois and parts of Wisconsin and Michigan agreed in December to pay $12 million to the United States and the State of Wisconsin to settle allegations that it violated the Stark Law by entering into unjustifiable compensation arrangements with two cardiologists.[139]  The DOJ alleged that the health system offered the physicians a compensation package above fair market value that accounted for anticipated future referrals from those physicians. V.    CONCLUSION We anticipate a variety of interesting and notable developments in 2019, as the DOJ and HHS continue to define their priorities and undertake enforcement actions.  We look forward to updating you on the latest in our 2019 Mid-Year Alert.  In the meantime, we welcome the opportunity to speak with you about these updates or any other related issues. [1] See U.S. Dep’t of the Treasury, Reforming America’s Healthcare System Through Choice and Competition (Dec. 2018), https://home.treasury.gov/system/files/136/Reforming_Americas_Healthcare_System_Through_Choice_and_Competition.pdf [hereinafter “Reforming Healthcare Report”]. [2] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Delivers Remarks at the 2019 Advanced Forum on False Claims and Qui Tam Enforcement (Jan. 28, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-delivers-remarks-2019-advanced-forum-false. [3] Id. [4] See  Rod J. Rosenstein,  Deputy Att’y General, Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0. [5] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medicare Advantage Provider to Pay $270 Million to Settle False Claims Act Liabilities (Oct. 1, 2018), https://www.justice.gov/opa/pr/medicare-advantage-provider-pay-270-million-settle-false-claims-act-liabilities. [6] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Hospital Chain Will Pay Over $260 Million to Resolve False Billing and Kickback Allegations; One Subsidiary Agrees to Plead Guilty (Sept. 25, 2018), https://www.justice.gov/opa/pr/hospital-chain-will-pay-over-260-million-resolve-false-billing-and-kickback-allegations-one [hereinafter “HMA Settlement”] (the hospital chain also agreed to pay $216 as part of a related civil settlement). [7] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Detroit Area Hospital System to Pay $84.5 Million to Settle False Claims Act Allegations Arising From Improper Payments to Referring Physicians” (Aug. 2, 2018), https://www.justice.gov/opa/pr/detroit-area-hospital-system-pay-845-million-settle-false-claims-act-allegations-arising. [8] E.g., Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Banner Health Agrees to Pay Over $18 Million to Settle False Claims Act Allegations (Apr. 12, 2018), https://www.justice.gov/opa/pr/banner-health-agrees-pay-over-18-million-settle-false-claims-act-allegations; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Signature HealthCARE to Pay More Than $30 Million to Resolve False Claims Act Allegations Related to Rehabilitation Therapy (June 8, 2018), https://www.justice.gov/opa/pr/signature-healthcare-pay-more-30-million-resolve-false-claims-act-allegations-related. [9] Note that the number of claims is greater than the number of cases because many cases involve more than one theory of liability. [10] The 2016 numbers (33 out of 146 claims, or 23%), are closer to those from this year. [11] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Early Autism Project, Inc., South Carolina’s Largest Provider of Behavioral Therapy for Children with Autism, Pays the United States $8.8 Million to Settle Allegations of Fraud (Aug. 2, 2018), https://www.justice.gov/usao-sc/pr/early-autism-project-inc-south-carolinas-largest-provider-behavioral-therapy-children. [12] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, United States Reaches Settlement With Maryland Healthcare Providers To Settle False Claims Allegations Relating To In Office Testing (Mar. 16, 2018), https://www.justice.gov/usao-md/pr/united-states-reaches-settlement-maryland-healthcare-providers-settle-false-claims-act. [13] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medicare Advantage Provider to Pay $270 Million to Settle False Claims Act Liabilities (Oct. 1, 2018), https://www.justice.gov/opa/pr/medicare-advantage-provider-pay-270-million-settle-false-claims-act-liabilities. [14] Id. [15] 136 S. Ct. 1989 (2016). [16] See United States ex rel. Nargol v. DePuy Orthopaedics, Inc, 865 F.3d 29 (1st Cir. 2017); Coyne v. Amgen, Inc, No. 17-1522-cv, 2017 WL 6459267 (2nd Cir. Dec. 18, 2017); United States ex rel. Petratos v. Genentech Inc., 855 F.3d 481 (3d Cir. 2017). [17] See United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890, 907 (9th Cir. 2017). [18] United States ex rel. Ruckh v. Salus Rehabilitation, LLC, 304 F. Supp. 3d 1258 (M.D. Fla. 2018). [19] See Brief for the United States of America as Amicus Curiae in Support of Appellant, Angela Ruckh v. Salus Rehabilitation, LLC, et al, No. 18-10500 (11th Cir. July 20, 2018). [20] See id. at 19. [21] See Pet. for a Writ of Cert., Gilead Sciences Inc. v. United States ex rel. Campie (filed Dec. 26, 2017). [22] See Brief for the United States of America as Amicus Curiae, Gilead Sciences Inc. v. United States ex rel. Campie, No. 17-936 (Nov. 30, 2018). [23] Id. [24] See Pet. for a Writ of Cert., Brookdale Senior Living Communities, Inc. v. U.S. ex rel. Prather (filed Dec. 26, 2017). [25] See United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 265 F. Supp. 3d 782, 787-90 (M.D. Tenn. 2017), rev'd and remanded sub nom. United States v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018). [26] See Brookdale Senior Living, 265 F. Supp. 3d at  801. [27] See Brookdale Senior Living, 892 F.3d at 836. [28] See Pet. for a Writ of Cert., Brookdale Senior Living Communities, Inc. v. U.S. ex rel. Prather (filed Nov. 20, 2018). [29] 31 USC § 3731(b)(2). [30] 887 F.3d 1081 (11th Cir. 2018).  Gibson Dunn is handling this case. [31] See United States ex rel. Malloy v. Telephonics Corp., 68 F. App’x 270 (3d Cir. 2003); United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211 (9th Cir. 1996). [32] See United States ex rel. Sanders v. N. Am. Bus Indus., Inc., 546 F.3d 288 (4th Cir. 2008); United States ex rel. Sikkenga v. Regence BlueCross BlueShield of Utah, 472 F.3d 702 (10th Cir. 2006). [33] See Order Granting Plaintiffs Partial Summary Judgment, Texas et al. v. United States of America et al, No. 4:18-cv-00167-O (N.D. Tex. Dec. 14, 2018). [34] 567 U.S. 519 (2012). [35] Id. at 2. [36] See id. at 55. [37] See Intervenor-Defendants’ Notice of Appeal, Texas et al. v. United States of America et al., No. 4:18-cv-00167-O (filed Jan. 3, 2019). [38] See Order Granting Stay and Partial Final Judgment, Texas et al. v. United States of America et al., No. 4:18-cv-00167-O (N.D. Tex. Dec. 30, 2018). [39] See Complaint, Maryland v. U.S. et al., No. 1:18-cv-02849 (D. Md. 2018). [40] Id. [41] See Memorandum Opinion, Maryland v. U.S. et al., No. 1:18-cv-02849 (D. Md. Feb. 1, 2018). [42] See Press Release, Office of Pub. Affairs, US Dep’t of Justice, Justice Department Takes First-of-its-Kind-Legal Action to Reduce Opioid Over-Prescription (Aug. 22, 2018), https://www.justice.gov/opa/pr/justice-department-takes-first-its-kind-legal-action-reduce-opioid-over-prescription. [43] Id. [44] Id. [45] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Two Chinese Nationals Charged with Operating Global Opioid and Drug Manufacturing Conspiracy Resulting in Deaths (Aug. 22, 2018), https://www.justice.gov/opa/pr/two-chinese-nationals-charged-operating-global-opioid-and-drug-manufacturing-conspiracy. [46] Id. [47] Id. [48] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General Sessions Delivers Remarks at the Office of Justice Programs’ National Institute of Justice Opioid Research Summit (Sept. 25, 2018), https://www.justice.gov/opa/speech/attorney-general-sessions-delivers-remarks-office-justice-programs-national-institute. [49] Id. [50] Id. [51] Id. [52] See Press Release, Office of Pub. Affairs, US Dep’t of Justice, Justice Department is Awarding Almost $320 Million to Combat Opioid Crisis (Oct. 1, 2018), https://www.justice.gov/opa/pr/justice-department-awarding-almost-320-million-combat-opioid-crisis. [53] See U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1 to Sept. 30, 2018), at 4, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2018/2018-fall-sar.pdf [hereinafter 2018 SA Report]. [54] See U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1 to Sept. 30, 2017), at 4, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2017/sar-fall-2017.pdf [hereinafter 2017 SA Report]; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Apr. 1 to Sept. 30, 2016), at iv, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2016/sar-fall-2016.pdf [hereinafter 2016 SA Report]. [55] 2016 SA Report, supra n.54, at iv. [56] 2018 SA Report, supra n.53, at 4; 2017 SA Report, supra n.54, at 32; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Semiannual Report to Congress (Oct. 1 to Mar. 31, 2017), at ix, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2017/sar-spring-2017.pdf [hereinafter 2017 Midyear SA Report]. Approximately $600,000 in audit receivables were reported in Fiscal Year 2017, compared with $521 million in Fiscal Year 2018. See 2017 SA Report, supra n.54, at 67; 2017 Midyear SA Report at 40; ; 2018 SA Report, supra n.53, at 4. [57] 2018 SA Report, supra n.53, at 4. [58] 2017 SA Report, supra n.54, at 4. [59] See Office of Information & Regulatory Affairs, Office of Management & Budget, Agency Rule List – Fall 2018,  https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=0900 (last visited Jan. 5, 2019). [60] See Ctrs. for Medicare & Medicaid Servs., Fact Sheet: Fiscal Year (FY) 2019 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) Prospective Payment System Final Rule (CMS-1694-F) (Aug. 2, 2018), https://www.cms.gov/newsroom/fact-sheets/fiscal-year-fy-2019-medicare-hospital-inpatient-prospective-payment-system-ipps-and-long-term-acute-0. [61] Id. [62] See Ctrs. for Medicare & Medicaid Servs., Fact Sheet: Final Policy, Payment, and Quality Provisions Changes to the Medicare Physician Fee Schedule for Calendar Year 2019 (Nov. 1, 2018), https://www.cms.gov/newsroom/fact-sheets/final-policy-payment-and-quality-provisions-changes-medicare-physician-fee-schedule-calendar-year. [63] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., 2018 Top Management and Performance Challenges, available at https://oig.hhs.gov/reports-and-publications/top-challenges/2018/2018-tmc.pdf [hereinafter TMPC Report]. [64] Id. [65] Id. [66] Id. [67] 42 U.S.C. § 1320a-7a. [68] 2018 SA Report, supra n.53, at 4; 2017 SA Report, supra n.54, at 4. [69] U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., LEIE Downloadable Databases, http://oig.hhs.gov/exclusions/exclusions_list.asp (last visited Jan. 4, 2019). [70] Id. [71] Id. [72] Data gathered through HHS OIG press releases and publicly available information. See generally U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Civil Monetary Penalties and Affirmative Exclusions, http://oig.hhs.gov/fraud/enforcement/cmp/index.asp (last visited Jan. 4, 2019) [hereinafter CMP Assessments]; U.S. Dep’t of Health & Human Servs., Office of the Inspector Gen., Provider Self-Disclosure Settlements, http://oig.hhs.gov/fraud/enforcement/cmp/psds.asp (last visited Jan. 4, 2019) [hereinafter Provider Self-Disclosure Settlements]. [73] See id. [74] Id. [75] See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., Corporate Integrity Agreement Documents, https://oig.hhs.gov/compliance/corporate-integrity-agreements/cia-documents.asp (last visited Jan. 6, 2019). [76] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, AmerisourceBergen Corp. To Pay $625 Million To Settle Civil Fraud Allegations Resulting From Its Repackaging And Sale Of Adulterated Drugs And Unapproved New Drugs, Double Billing And Providing Kickbacks (Oct. 1, 2018), https://www.justice.gov/usao-edny/pr/amerisourcebergen-corp-pay-625-million-settle-civil-fraud-allegations-resulting-its [hereinafter “ABC Settlement”]. [77] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017), https://www.justice.gov/opa/pr/mylan-agrees-pay-465-million-resolve-false-claims-act-liability-underpaying-epipen-rebates. [78] See ABC Settlement, supra n.76. [79] See AmerisourceBergen Corporation Corporate Integrity Agreement (Sept. 27, 2018), https://www.justice.gov/ usao-edny/press-release/file/1097511/download. [80] Id. [81] Id. [82] Id. [83] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Post Acute Medical Agrees to Pay More Than $13 Million to Settle Allegations of Kickbacks and Improper Physician Relationships (Aug. 15, 2018), https://www.justice.gov/opa/pr/post-acute-medical-agrees-pay-more-13-million-settle-allegations-kickbacks-and-improper. [84] Id. [85] Id. [86] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Vascular Access Centers to Pay at Least $3.825 Million to Resolve False Claims Act Allegations (Oct. 23, 2018), https://www.justice.gov/opa/pr/vascular-access-centers-pay-least-3825-million-resolve-false-claims-act-allegations. [87] Id. [88] See HMA Settlement, supra n.6. [89] Id. [90] Press Release, Ctrs. for Medicare & Medicaid Servs., Market Saturation and Utilization Data Tool (Oct. 29 2018), https://www.cms.gov/newsroom/fact-sheets/market-saturation-and-utilization-data-tool-4. [91] Press Release, Ctrs. for Medicare & Medicaid Servs., Market Saturation and Utilization Data Tool (April 13, 2018), https://www.cms.gov/newsroom/fact-sheets/market-saturation-and-utilization-data-tool. [92] 83 Fed. Reg. 37747 (Aug. 2, 2018), https://www.federalregister.gov/documents/2018/08/02/2018-16547/medicare-medicaid-and-childrens-health-insurance-programs-announcement-of-the-extension-of-temporary. [93] U.S. Dep’t of Health & Human Servs., Health Information Privacy, Enforcement Highlights (Jan. 31, 2019), https://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/data/enforcement-highlights/index.html. [94] Data gathered through HHS press releases and other publicly available information. See generally U.S. Dep’t of Health & Human Servs., HIPAA News Releases & Bulletins, https://www.hhs.gov/hipaa/newsroom (last visited Jan. 7, 2019). [95] Id. [96] Id. [97] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Guidance on Disposing of Electronic Devices and Media (July 2018), https://www.hhs.gov/sites/default/files/cybersecurity-newsletter-july-2018-Disposal.pdf. [98] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, Considerations for Securing Electronic Media and Devices (Aug. 2018), https://www.hhs.gov/sites/default/files/cybersecurity-newsletter-august-2018-device-and-media-controls.pdf. [99] U.S. Dep’t of Health & Human Servs., Office of Civil Rights, National Cybersecurity Awareness Month (Oct. 2018), https://www.hhs.gov/sites/default/files/cybersecurity-newsletter-october-2018-cybersecurity-month.pdf. [100] 42 U.S.C. § 1320a-7b(b). [101] 342 F. Supp. 3d 544, (S.D.N.Y Sept. 2018). [102] Id. at 553. [103] Id. at 549. [104] Carrel v. AIDS Healthcare Foundation, Inc., 898 F.3d 1267 (11th Cir. 2018). [105] Id. at 1272-75. [106] Id. at 1273. [107] Id. at 1271. [108] United States ex rel. Capshaw v. White, No. 3:12-CV-4457-N, 2018 WL 6068806 (N.D. Tex. Nov. 20, 2018). [109] Id. at *4 (internal quotation marks omitted). [110] Id. at *3. [111] Id. at *4 (internal citations and quotation marks omitted). [112] Id. (internal citations and quotation marks omitted). [113] Id. [114] Id. [115] Id. [116] Medicare and State Health Care Programs: Fraud and Abuse; Request for Information Regarding the Anti-Kickback Statute and Beneficiary Inducements CMP, 83 Fed. Reg. 43607 (Aug. 27, 2018), https://www.federalregister.gov/documents/2018/08/27/2018-18519/medicare-and-state-health-care-programs-fraud-and-abuse-request-for-information-regarding-the. [117] Id. at 43609-11. [118] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 18-06 at 2-3 (July 18, 2018), https://oig.hhs.gov/fraud/docs/advisoryopinions/2018/AdvOpn18-06.pdf. [119] Id. at 5. [120] Id. at 5-6. [121]  See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 18-09 (Aug, 21, 2018), https://oig.hhs.gov/fraud/docs/advisoryopinions/2018/AdvOpn18-09.pdf; U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 18-12  (Oct. 29, 2018), https://oig.hhs.gov/fraud/docs/advisoryopinions/2018/AdvOpn18-12.pdf. [122] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 18-07 at 2-3 (Aug. 6, 2018), https://oig.hhs.gov/fraud/docs/advisoryopinions/2018/AdvOpn18-07.pdf. [123] Id. [124] Id. at 6-7. [125] Id. [126] U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OIG Advisory Op. 18-11 at 9 (Oct. 11, 2018), https://oig.hhs.gov/fraud/docs/advisoryopinions/2018/AdvOpn18-11.pdf. [127] Id. at 6-9. [128] U.S. Dep’t of Health and Human Servs., Office of Inspector Gen., OIG Advisory Op. 18-14, at 1-2 (Nov. 13, 2018), https://oig.hhs.gov/fraud/docs/advisoryopinions/2018/AdvOpn18-14.pdf. [129] Id. at 4. [130] Id. [131] Id. at 10-12. [132] U.S. Dep’t of Health & Human Servs., Ctrs. for Medicare & Medicaid Svcs., Medicare Program; Request for Information Regarding the Physician Self-Referral Law, 83 Fed. Reg. 29524, 29524 (June 25, 2018), https://www.govinfo.gov/content/pkg/FR-2018-06-25/pdf/2018-13529.pdf. [133] Id. at 29525-26 [134] Roxanna Guilford-Blake, Sprinting Toward Value: HHS & Congress May Be Ready to Reconsider the Stark Law, Cardiovascular Business (Nov. 18, 2018), https://www.cardiovascularbusiness.com/topics/healthcare-economics/sprinting-toward-value-hhs-congress-may-be-ready-reconsider-stark-law. [135] 83 Fed. Reg. at 29525. [136] See Reforming Healthcare Report, supra n.1, at 73-74. [137] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Detroit Area Hospital System to Pay $84.5 Million to Settle False Claims Act Allegations Arising from Improper Payments to Referring Physicians (Aug. 2, 2018), https://www.justice.gov/opa/pr/detroit-area-hospital-system-pay-845-million-settle-false-claims-act-allegations-arising. [138] Id. [139] Press Release, U.S. Atty’s Off., U.S. Dep’t of Justice, E.D. Wis., Aurora Health Care, Inc. Agrees to Pay $12 Million to Settle Allegations Under the False Claims Act and the Stark Law (Dec. 11, 2018), https://www.justice.gov/usao-edwi/pr/aurora-health-care-inc-agrees-pay-12-million-settle-allegations-under-false-claims-act. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Stephen Payne, John Partridge, Jonathan Phillips, Julie Rapoport Schenker, Claudia Kraft, Maya Nuland, Stevie Pearl, Susanna Schuemann, Margo Uhrman, and Madelyn La France. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: Washington, D.C. Stephen C. Payne, Chair, FDA and Health Care Practice Group (+1 202-887-3693, spayne@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Marian J. Lee (+1 202-887-3732, mjlee@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) New York Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D. W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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March 5, 2019

EU Regulation on Establishing a Framework for Screening of Foreign Direct Investments into the European Union Has Been Adopted

Click for PDF The regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments (“FDI”) into the European Union (“EU”) was adopted on March 5, 2019.  This new regulation (“FDI Regulation”) is based on a proposal by the European Commission (“Commission”) presented in September 2017 following an initiative for investment reviews at the EU level by the French, German and Italian governments from February 2017. The FDI Regulation will come into force on the 20th day following its publication in the Official Journal of the EU, hence, presumably sometime in April. It will, however, only apply 18 months after entry into force, thereby giving the EU member states (“Member States”) enough time to take necessary measures for its implementation. The FDI Regulation establishes an EU-coordinated cooperation among Member States and is the result of the EU’s efforts to strike a balance between the opportunities globalization offers and the potential cross-border impact of FDI inflows on security or public order of the Member States and the EU as a whole. By establishing a common framework for screening by Member States and for a mechanism for cooperation on EU level concerning FDI, the FDI Regulation seeks to provide legal certainty for Member States’ screening mechanisms on the grounds of security and public order (by, e.g., expressly determining critical infrastructure, critical technologies, supply of critical inputs, access to sensitive information, and freedom and pluralism of the media as factors that may be taken into consideration in national screening decisions) and to ensure EU-wide coordination and cooperation on the screening of FDI likely to affect security or public order.[1] The creation of designated contact points and the regulated exchange of information at an EU level is aimed to increase transparency and awareness on FDI likely to affect security or public order. The FDI Regulation also provides the Members States and the Commission with the means to address such risks to security or public order. The Commission may issue an opinion and the other Member States may provide comments which are both non-binding but shall be given due consideration by the Member State where the FDI is planned or has been completed. Where an FDI is likely to affect projects and programs of EU interest (regarding areas such as research, space, transport and energy), the Member State concerned will even have to take utmost account of the Commission’s opinion and provide an explanation to the Commission if its opinion is not followed. The FDI Regulation neither aims to harmonize national screening mechanisms (which currently exist in 14 out of 28 Member States), nor does it replace national screening mechanisms with a single EU screening mechanism, i.e., it does not create a European one-stop shop solution. The FDI Regulation also does not oblige Member States without screening mechanisms in place to establish one. The decision whether to set up a screening mechanism, or to screen a particular FDI, remains the sole responsibility of the Member State concerned.[2] Any maintenance, amendment or adoption of a screening mechanism, however, needs to be in line with the provisions of the FDI Regulation.[3] Even though the FDI Regulation stresses that Member States without screening mechanisms are not required to create one, the mere existence of a screening framework at the EU level may nonetheless increase the likelihood of more Member States establishing a national screening mechanism – examples being Hungary, which has introduced a national screening mechanism in January 2019, as well as Sweden and the Czech Republic which may follow suit in the near future. The establishment of a screening framework will also have an impact on currently existing screening mechanisms, most of which will have to be adjusted to allow for the integration of the new EU cooperation process. It is likely that besides extending time frames, national screening rules may be tightened (further), as it is for instance expected in the case of Germany. The developments in Europe can be seen as part of a global trend towards more awareness and scrutiny of foreign investments. Background Prior to the FDI Regulation, there was no comprehensive framework at EU level for the screening of FDI on the grounds of security or public order. No formal coordination was in place, neither between the Commission and the Member States nor amongst the Member States themselves. When the Commission presented its draft proposal for the FDI Regulation in September 2017, only 12 out of 28 Member States had a national mechanism for screening of FDI in place; meanwhile 14 Member States screen FDI, namely Austria, Denmark, Germany, Hungary, Finland, France, the Netherlands, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the United Kingdom. These national FDI screening mechanisms are not aligned and may differ widely in their scope and design. Key Aspects of the FDI Regulation Enhanced Cooperation A key aspect of the FDI Regulation is the establishment of a formal mechanism for cooperation between the Member States, and between Member States and the Commission, which takes on an active role. The cooperation mechanism is enabled through the following instruments: Designated Contact Points. All Member States (regardless of a national screening mechanism being in place or not) and the Commission have to establish a contact point for the implementation of the FDI Regulation.[4] Such contact points should be appropriately placed within the respective administration, and have the qualified staff and the powers necessary to perform their functions under the coordination mechanism and to ensure a proper handling of confidential information.[5] Direct cooperation and exchange of information between the contact points shall be supported through a secure and encrypted system provided by the Commission. The Member States (and the Commission alike) need to ensure the protection of confidential information acquired in application of the FDI Regulation in accordance with EU law and their national law. It also needs to be ensured that classified information shared under the FDI Regulation is not downgraded or declassified without the prior written consent of the originator.[6] The foregoing confidentiality obligations are particularly important to protect and avoid misuse of commercially sensitive information. The FDI Regulation further stipulates that personal data has to be processed in accordance with EU data protection laws and only to the extent necessary for screening of FDI by the Member States and for ensuring the effectiveness of the cooperation provided for in the FDI Regulation, and may only be kept for the time necessary to achieve the purposes for which it was collected.[7] Group of Experts. A group of experts on the screening of FDI into the EU was set up by Commission decision of November 29, 2017.[8] The group of experts consists of representatives of the Member States and is chaired by a representative of the Commission’s Directorate General for trade. It functions as a second institutional coordination body – next to the envisaged FDI screening contact points – and provides advice and expertise to the Commission on matters relating to FDI into the EU.[9] The group of experts provides a forum to discuss issues relating to the screening of FDI, share best practices and lessons learned, and exchange views on trends and issues of common concern relating to FDI.[10] International Cooperation. The FDI Regulation encourages international cooperation by expressly stating that the Member States and the Commission may also cooperate with the responsible authorities of (like-minded) third countries on issues related to the screening of FDI on grounds of security and public order.[11] Other Stakeholders and Interest Groups. Albeit not directly invited to share their viewpoint (and somewhat hidden in the recital), economic operators, civil society organizations, and social partners such as trade unions may convey relevant information in relation to FDI likely to affect security or public order to the Member States and the Commission, which might consider such information.[12] Active Role of the Commission. The Commission is now equipped with the competence to request information and share its opinion on FDI that are likely to affect (i) projects and programs of EU interest on grounds of security or public order, or (ii) security and public order in more than one Member State which allows it to play an active role in the cooperation mechanism. The Member State where the FDI is planned or has been completed needs to give due consideration to the Commission’s opinion, or, in case of projects and programs of EU interest likely being affected, is even required to take utmost account of it and provide an explanation if it does not follow the Commission’s opinion. Increased Transparency on FDI The FDI Regulation introduces certain notification, reporting and information requirements related to FDI inflows and screening mechanisms, which shall increase the level of transparency and information exchange. The Member States are required to initially notify the Commission of their existing screening mechanisms no later than 30 days after the entry into force of the FDI Regulation. No later than three months after having received such notifications, the Commission will make publicly available (and keep up to date) a list of the Member States’ existing screening mechanisms. Any newly adopted screening mechanism or any amendment to an existing screening mechanism needs to be notified to the Commission within 30 days of the entry into force of the newly adopted screening mechanism or of any amendment to an existing mechanism. By March 31 of each year, the Member States are required to submit to the Commission an annual report which shall include aggregated information on (i) FDI that took place in their territory, on the basis of information available to them, (ii) the requests received from other Member States, and (iii) the application of their screening mechanisms (including the decisions allowing, prohibiting or subjecting FDI to conditions or mitigating measures and the decisions regarding FDI likely to affect projects and programs of EU interest), if any.[13] The Commission is expected to provide standardized forms in order to improve the quality and comparability of information provided by the Member States and to facilitate compliance with the notification and reporting obligations.[14] The Commission in turn will provide an annual report to the European Parliament and the Council on the implementation of the FDI Regulation, which will be made public for greater transparency. The FDI Regulation further provides for a notification requirement regarding FDI undergoing screening in a Member State with screening mechanism as well as a minimum level of information with regard to all FDI falling under the scope of the FDI Regulation, to be shared either mandatorily (for FDI undergoing screening) or upon request (for FDI not undergoing screening for lack of a national screening mechanism), unless such information is not available in exceptional circumstances despite best efforts. Minimum information to provide includes aspects such as the ownership structure and the business operations of the foreign investor and the target company, as well as the financing of the planned or completed investment and its source. Legal Certainty By creating a framework for screening mechanisms of Member States, the FDI Regulation aims to provide legal certainty for Member States and investors. Screening mechanisms of Member States need to be based on the grounds of security and public order, thereby being compliant with the requirements for imposing restrictive measures under GATS,[15] OECD,[16] or Free Trade Agreements (FTAs), and sending a signal against protectionism.[17] Member States shall apply time frames under their screening mechanisms and allow for the consideration of comments of other Member States and the opinion of the Commission. Rules and procedures relating to screening mechanisms shall provide for the protection of confidential information made available to the Member State conducting the screening, not discriminate between third countries and be transparent by way of setting out the circumstances triggering the screening, the grounds for screening and the applicable detailed procedural rules. National screening mechanisms shall also be equipped with measures necessary to identify and prevent circumvention of the screening mechanisms and screening decisions, and provide foreign investors and target companies concerned with the possibility to seek recourse against the screening decisions of the national authorities. Scope of Application A foreign direct investment, pursuant to the FDI Regulation, is an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the target company to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity. Not covered by the FDI Regulation are portfolio investments, i.e. investments without any intention to influence the management and control of a company. Foreign investor is defined as a natural person of a third country or a company of a third (i.e., non-EU) country, intending to make or having made an FDI. How does the new EU cooperation mechanism work? There are three different scenarios to distinguish: (a) FDI undergoing screening by a Member State, (b) FDI not undergoing screening for lack of a national screening mechanism, and (c) FDI likely to affect projects or programs of EU interest. (a) FDI undergoing screening in a Member State with screening mechanism Step 1: The Member State conducting the screening notifies the Commission and the other Member States of the FDI and provides information. The Member States shall, as soon as possible, notify the Commission and the other Member States of any FDI in their territory that is undergoing screening. The notification may include a list of Member States whose security or public orders is deemed likely to be affected and shall indicate whether the FDI is likely to fall within the scope of the EC Merger Regulation. Information to be provided in the notification of an FDI includes: the ownership structure of the foreign investor and of the target company in which the FDI is planned or has been completed, including information on the ultimate investor and participation in the capital; the approximate value of the FDI; the products, services and business operations of the foreign investor and of the target company in which the FDI is planned or has been completed; the Member States in which the foreign investor and the target company in which the FDI is planned or has been completed, conduct relevant business operations; the funding of the investment and its source, on the basis of the best information available to the Member State; and the date when the FDI is planned to be completed or has been completed. The Member State conducting screening may request the foreign investor or the target company in which the FDI is planned or has been completed to provide the above information.[18] Step 2: The other Member States and the Commission notify the Member State conducting the screening of their intention to provide comments or an opinion and may request additional information. After being notified of the FDI, other Member States and the Commission have 15 calendar days to notify the Member State conducting the screening of their intent to provide comments or an opinion, and to request additional information. Any request for additional information, however, has to be duly justified, limited to information necessary to provide comments or issue an opinion, proportionate to the purpose of the request and not unduly burdensome for the Member State conducting the screening. The Member State conducting the screening shall endeavor to provide such additional information, if available, to the requesting Member States and/or the Commission without undue delay. Step 3: Determining whether the FDI is likely to affect security or public order (screening factors). The FDI Regulation provides for a non-exhaustive list of factors that the Member States and the Commission may take into consideration when determining whether an FDI is likely to affect security or public order. Firstly, the Member States and the Commission may consider the FDI’s potential effects on, inter alia: critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defense, electoral or financial  infrastructure, and sensitive facilities as well as land and real estate crucial for the use of such infrastructure; critical technologies and dual-use items as defined in point 1 of Article 2 of Council Regulation (EC) no. 428/2009[19], including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies; supply of critical inputs, including energy and raw materials, as well as food security; access to sensitive information, including personal data, or the ability to control such information; or the freedom and pluralism of the media. Secondly, the Member States and the Commission may also take into account, in particular: whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding; whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or whether there is a serious risk that the foreign investor engages in illegal or criminal activities. Step 4: The other Member States and the Commission may provide comments or an opinion. Other Member States may provide comments to the Member State conducting the screening if they consider that the FDI is likely to affect their security or public order, or if they have information relevant for such screening. The Commission may issue an opinion addressed to the Member State conducting the screening if it considers that the FDI is likely to affect security or public order in more than one Member State, or if it has relevant information in relation to that FDI. The Commission may issue an opinion irrespective of whether other Member States have provided comments. The Commission shall, however, issue an opinion where justified following comments from at least one-third of Member States considering that the FDI is likely to affect their security or public order. Other Member States’ comments and the Commission’s opinion have to be duly justified. The Member State conducting the screening may also itself request that the Commission issues an opinion, or other Member States provide comments if it considers that the FDI in its territory is likely to affect its security or public order. Comments and opinions are to be addressed and sent to the Member State conducting the screening no later than 35 calendar days following the receipt of the information conveyed with the notification of the FDI (see above). If additional information was requested, such comments or opinions are to be issued no later than 20 calendar days following receipt of the additional information or the notification that such additional information cannot be obtained. Moreover, the Commission – irrespective of having notified its intention to issue an opinion (pursuant to Step 2 above) – may issue an opinion following comments from other Member States where possible within the aforementioned deadline(s), but not later than 5 calendar days after those deadline have expired. Should the Member State conducting the screening consider that its security or public order requires immediate action, it may issue a screening decision before the time frames above have lapsed. The Member State conducting the screening will need to notify the other Member States and the Commission of said intention and duly justify the need for immediate action. The other Member States and the Commission shall hence endeavor to provide its comments or opinion expeditiously. The Commission will notify the other Member States that comments were provided or that an opinion was issued. Step 5: The Member State conducting the screening makes final screening decision after having given due consideration to the comments of the other Member States and to the opinion of the Commission. The Member State conducting the screening needs to give due consideration to the comments of the other Member States and to the opinion of the Commission. Recital 17 of the FDI Regulation elaborates in this regard that a Member State should give due consideration through, where appropriate, measures available under its national law, or in its broader policy-making, in line with its duty of “sincere cooperation” laid down in Article 4 para. 3 Treaty on European Union (“TEU”). The final screening decision in relation to any FDI, however, remains the sole responsibility of the Member State conducting the screening. For the sake of clarity, the Commission and the other Member States do not have the power to overrule the screening decision made by the competent national authority of the Member State conducting the screening. (b) FDI not undergoing screening (for lack of a national screening mechanism) Step 1: The other Member States and the Commission may request information from the Member State where the FDI is planned or has been completed without undergoing screening. Where the Commission or a Member State considers that an FDI planned or completed in another Member State, where it is not undergoing screening for lack of a national screening mechanism, is likely to affect security or public order, it may request information from the Member State where the FDI is planned or has been completed. Such information may include: the ownership structure of the foreign investor and of the target company in which the FDI is planned or has been completed, including information on the ultimate investor and participation in the capital; the approximate value of the FDI; the products, services and business operations of the foreign investor and of the target company in which the FDI is planned or has been completed; the Member States in which the foreign investor and the target company in which the FDI is planned or has been completed, conduct relevant business operations; the funding of the investment and its source, on the basis of the best information available to the Member State; and the date when the FDI is planned to be completed or has been completed. Additional information to the above may be requested. Please note that the Member State where an FDI is planned or has been completed may request the foreign investor or the target company in which the FDI is planned or has been completed to provide the above information.[20] Any request for information, however, has to be duly justified, limited to information necessary to provide comments or to issue an opinion, proportionate to the purpose of the request and not unduly burdensome for the Member State where the FDI is planned or has been completed which, in turn, shall ensure that the requested information is made available to the Commission and the requesting Member States without undue delay. Step 2: Determining whether the FDI is likely to affect security or public order (screening factors). See above Step 3 for FDI undergoing screening in a Member State with screening mechanism. Step 3: The other Member States and the Commission may provide comments or an opinion. Other Member States may provide comments to the Member State where an FDI is planned or has been completed which is not undergoing screening in that Member State if they consider that the FDI is likely to affect their security or public order, or if they have relevant information in relation to that FDI. The Commission may issue an opinion addressed to the Member State in which the FDI is planned or has been completed if it considers that the FDI is likely to affect security or public order in more than one Member State, or if it has relevant information in relation to that FDI. The Commission may issue an opinion irrespective of whether other Member States have provided comments. The Commission shall, however, issue an opinion where justified following comments from at least one-third of Member States considering that the FDI is likely to affect their security or public order. Other Member States’ comments and the Commission’s opinion have to be duly justified. The Member State which duly considers that an FDI in its territory is likely to affect its security or public order may also itself request the Commission to issue an opinion, or other Member States to provide comments. Comments and opinions are to be addressed and sent to the Member State where the FDI is planned or has been completed no later than 35 calendar days following the receipt of the requested information or the notification that such information cannot be obtained. Should the Commission issue an opinion following comments from other Member States, it has 15 additional calendar days for issuing that opinion. In order to provide greater certainty for investors, Member States and the Commissions may only issue comments and an opinion in relation to completed FDI not undergoing screening for lack of a national screening mechanism for a limited period of 15 months after the FDI has been completed.[21] This time frame, however, does not apply to FDI completed before the entry into force of the FDI Regulation. The Commission will notify other Member States that comments were provided or that an opinion was issued. Step 4: The Member State where the FDI is planned or has been completed shall give due consideration to the comments of the other Member States and to the opinion of the Commission. The Member State where the FDI is planned or has been completed needs to give due consideration to the comments of the other Member States and to the opinion of the Commission. Recital 17 of the FDI Regulation elaborates in this regard that a Member State should give due consideration through, where appropriate, measures available under its national law, or in its broader policy-making, in line with its duty of “sincere cooperation” under Article 4 para. 3 TEU. The decision to screen an FDI or to establish a screening mechanism for that matter, however, remains the sole responsibility of the Member State in question. (c) FDI likely to affect projects or programs of EU interest If an FDI potentially affects “projects or programs of EU interest” on grounds of security and public order, the Commission’s opinion carries more weight in the sense that the Member State in which the FDI is planned or has been completed (i.e., regardless of whether the FDI is undergoing screening or not) needs not only to give due consideration to, but needs to take utmost account of, the Commission’s opinion and, additionally, provide an explanation to the Commission in case its opinion is not followed. Recital 19 of the FDI Regulation elaborates in this regard that a Member State should take utmost account of the opinion received from the Commission through, where appropriate, measures available under its national law, or in its broader policy-making, and provide an explanation to the Commission if it does not follow its opinion, in line with their duty of “sincere cooperation” under Article 4 para. 3 TEU. The underlying objective is to give the Commission a tool to protect projects and programs, which serve the EU as a whole and represent an important contribution to its economic growth, jobs and competitiveness.[22] “Projects or programs of EU interest” shall include projects and programs which involve a substantial amount or a significant share of EU funding, or which are covered by EU law regarding critical infrastructure, critical technologies or critical inputs, which are essential for security or public order. In its annex, the FDI Regulation sets out a list of eight projects and programs of EU interest, namely the European GNSS programs (Galileo & EGNOS), Copernicus, Horizon 2020, Trans-European Networks for Transport (TEN-T), Trans-European Networks for Energy (TEN-E), Trans-European Networks for Telecommunications, European Defense Industrial Development Program, and the Permanent structured cooperation (PESCO). The Commission is authorized to amend this list by way of adopting a delegated act. As for the cooperation mechanism, the above outlined procedures for FDI undergoing screening / not undergoing screening apply accordingly except for three modifications: (i) the Member State conducting the screening may indicate in the FDI notification whether it considers that the FDI is likely to affect projects and programs of EU interest; (ii) the Commission’s opinion shall be sent to the other Member States (instead of the Commission only notifying the other Member States of the fact that an opinion was issued); and (iii) the Member State where the FDI is planned or has been completed needs to take utmost account of the Commission’s opinion and provide an explanation to the Commission in case its opinion is not followed. Interplay with German Foreign Investment Control Current German Investment Control Regime Germany has had an FDI screening mechanism in place since 2004, which is based on the German Foreign Trade and Payments Act (Außenwirtschaftsgesetz or “AWG”) and codified in more detail in the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung or “AWV”). The German Federal Ministry of Economic Affairs and Energy (the “German Ministry”) has the competence to review and potentially prohibit or restrict investments in domestic companies (direct or indirect acquisition of 25% – if in a security-sensitive sector or a critical infrastructure now already of 10% – or more of the voting rights) by a foreign investor on the grounds of public order or security, or to ensure the protection of essential security interests of the Federal Republic of Germany. The rules for German investment control distinguish between so-called “sector-specific reviews” (defense and certain parts of IT security industry) and “cross-sector reviews” (all other industry sectors). In case of sector-specific reviews (defense and certain parts of IT security industry), the foreign investor – EU and non-EU investor – is obliged to report the transaction to the German Ministry which then has three months to initiate formal review proceedings or otherwise clearance is deemed granted. Should the German Ministry decide to enter into formal review proceedings, it has a further period of three months of receipt of certain information on the transaction to render a screening decision. Any such decision by the German Ministry, that is any clearance, restriction or prohibition of a transaction, is consensually agreed with the Foreign Office (Auswärtiges Amt), the Federal Ministry of Defense (Bundesministerium der Verteidigung), and the Federal Ministry of the Interior (Bundesministerium des Inneren). In case of cross-sector reviews (all industry sectors but defense and certain parts of IT security), German Ministry has the competence to review the transaction independently despite the foreign investor – non-EU/non-EFTA – being obliged to report the transaction to the German Ministry, that is if the target company operates a critical infrastructure as listed in sec. 55 para. 1 sentence 2 AWV. The German Ministry then has three months to initiate formal review proceedings; otherwise it foregoes its right to review the transaction. Foreign investors also have the option to apply – even prior to the signing of the acquisition agreement – for a certificate of non-objection (Unbedenklichkeitsbescheinigung), which shall be deemed granted if the German Ministry does not initiate formal review proceedings within two months of receipt of the application. For the sake of transaction security and time, investors will often make use of this option and apply for a certificate of non-objection (Unbedenklichkeitsbescheinigung). Either way, should the German Ministry decide to enter into formal review proceedings, it has a further period of four months of receipt of certain information on the transaction to render a screening decision. Any decision to restrict or prohibit the transaction requires the consent of the German government. Hence, both types of review proceedings, the sector-specific as well as the cross-sector review, may take up to six (or even seven) months. It is noteworthy, however, that, regardless of the industry sector concerned, the ultimate duration of a formal review proceeding is likely to stretch even longer in the individual case as the review period is suspended if and so long as negotiations on contractual arrangements ensuring the protection of public order and security are taking place between the German Ministry and the parties involved in the transaction. In December 2018, the German government further tightened its rules for German foreign investment control. The amended rules provide for greater scrutiny of FDI by lowering the threshold for review of investments in German companies by foreign investors from the acquisition of 25% of the voting rights down to 10% in circumstances where the target operates in security-sensitive sectors (defense and certain parts of IT security industry) or a critical infrastructure. In addition, the amendment also expands the scope of the German screening mechanism to include certain media companies that contribute to influencing the public opinion by way of broadcasting, teleservices or printed materials and stand out due to their special relevance and broad impact. While the lowering of the review threshold as such has the purpose to increase the number of reported, and ultimately, reviewed investments, the broader scope is aimed at preventing German mass media from being manipulated with disinformation by foreign investors or governments. Interplay and Potential Friction between German Investment Control and the FDI Regulation As said above, the newly established framework for screening of FDI into the EU does not supersede German investment control but rather adds a layer of overall transparency and awareness among the Member States and, arguably even more importantly, provides the German Ministry with additional screening factors it may consider when reviewing an FDI under German investment control rules. In the case of the German robot manufacturer Kuka for instance, this would have allowed the German Ministry to actually prohibit the takeover of Kuka by Chinese investors. While, in 2016, robotics itself was not deemed to affect the public order or security of the Federal Republic of Germany – even under the current, more tightened regime, it still is not – it is considered a critical technology pursuant to the FDI Regulation and, as such, may be taken into account by the German Ministry in its screening decision. The EU-wide cooperation process under the FDI Regulation will take place between the respective contact points appointed for the implementation of the FDI Regulation by the Commission and the Member States. The German contact point will almost certainly be the department of the German Ministry in charge of investment control. The German Ministry, therefore, continues to be the sole point of contact for investors. It will need to inform the Commission and other Member States of FDI which undergo German review. The time frame for cooperation activities under the FDI Regulation is generally set to 55 calendar days (60 calendar days in case the Commission decides to issue an opinion following comments from other Member States) but may be longer depending on the individual circumstances that go with the obligation of the Member State concerned to make available additional information requested “without undue delay”. At first glance, the time frames under the FDI Regulation do not seem to conflict with the German screening procedure given that the German Ministry has, depending on the sector concerned, two or three months, to decide on entering into formal screening proceedings while the Commission/other Member States have 15 calendar days to notify their intent to provide an opinion/comments and no longer than 35 calendar days to actually do so. The time frame to issue an opinion or comments, however, may easily stretch longer than 35 calendar days in the event that the Commission or other Member States include a request for additional information in their notification of intent because an opinion or comments only need to be issued (no later than) 20 calendar days following receipt of the additional information. Even though the Member State concerned – in our example the German Ministry – is to ensure that the information requested is made available without undue delay, it is highly unlikely that the Member State concerned will be in a position to provide the information the same day. Therefore, the Commission/other Member States may actually have (much) longer than 35 calendar days to provide an opinion/comments in the individual case which in turn may collide with current time frames under German investment control rendering it impossible for the German Ministry to effectively consider such opinion/comments. This will be true especially in case of applications for certificates of non-objection (Unbedenklichkeitsbescheinigung) which need to be processed within two months. Therefore, it is certain that the German rules will be amended to ensure that both time frames are reconciled. Instead of simply extending the time frames to allow for the inclusion of the new EU cooperation mechanism, it is also conceivable that the German screening process will not start or be suspended until the EU cooperation procedure is completed. There will also be a need to reconcile information requirements. The information to be provided under the EU cooperation mechanism goes beyond what is required under the German screening mechanism. It is to be expected that the information to be submitted under the German screening procedure will be extended to comply with information requirements under the FDI Regulation. Alongside of extended information requirements, foreign investors should also prepare for an increased need for translations, as the German Ministry requires information to be submitted in German – and will continue to do so – whereas information to be shared with the Commission and other Member State will most likely (and at least) need to be provided in English. The German Ministry anticipates that the implementation of the FDI Regulation will take at least until end of 2019 and that the German investment control regime most likely will be tightened even further in the process.    [1]   See FDI Regulation, recital no. 7.    [2]   See FDI Regulation, recital no. 8 and article 1 para. 3.    [3]   See FDI Regulation, article 3 para. 1.    [4]   See FDI Regulation, recital no. 26 and 27.    [5]   See FDI Regulation, recital no. 27.    [6]   See FDI Regulation, article 10 para. 3.    [7]   See FDI Regulation, article 14.    [8]   Commission Decision of November 29, 2017 setting up the group of experts on the screening of foreign direct investments into the European Union (not published in the Official Journal), C(2017) 7866 final.    [9]   See article 2 and article 5 of the Commission Decision of November 29, 2017 setting up the group of experts on the screening of foreign direct investments into the European Union (not published in the Official Journal), C(2017) 7866 final.   [10]   See FDI Regulation, recital no. 28.   [11]   See FDI Regulation, recital no. 29 and article 13.   [12]   See FDI Regulation, recital no. 14. [13]   See FDI Regulation, recital no. 22 and article 5.   [14]   See FDI Regulation, recital no. 22.   [15]   The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) which establishes a framework of rules to ensure that services regulations are administered in a reasonable, objective and impartial manner and do not constitute unnecessary barriers to trade.   [16]   The Organisation for Economic Co-operation and Development (OECD) is an international organization with currently 36 member countries committed to promote policies that will improve the economic and social well-being of people around the world by providing a forum in which governments can work together to share experiences and seek solutions to common problems.   [17]   Statement made by Commission member Dr. Sylvia Baule during her presentation at the panel discussion “M&A – The evolving landscape of foreign direct investment – Just another thing to deal with or the new ice age for cross-border M&A?” at the German & American Lawyers Association (Deutsch-Amerikanische Juristen-Vereinigung or “DAJV”) Working Group Day 2018.   [18]   See FDI Regulation, article 9 para. 4.   [19]   Council Regulation (EC) No 428/2009 of 5 May 2009 setting up a Community regime for the control of exports, transfer, brokering and transit of dual-use items (OJ L 134 29.5.2009, p. 1) (whereby ‘dual-use items’ shall mean items, including software and technology, which can be used for both civil and military purposes, and shall include all goods which can be used for both non-explosive uses and assisting in any way in the manufacture of nuclear weapons or other nuclear explosive devices).   [20]   See FDI Regulation, article 9 para. 4.   [21]   See FDI Regulation, recital no. 21.   [22]   See FDI Regulation, recital no. 19. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following: Wilhelm Reinhardt - Frankfurt (+49 69 247 411 520, wreinhardt@gibsondunn.com) Jens-Olrik Murach - Brussels (+32 2 554 7240, jmurach@gibsondunn.com) Stefanie Zirkel - Frankfurt (+49 69 247 411 513, szirkel@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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