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Client Alert

June 17, 2019

Supreme Court Holds That The First Amendment Does Not Apply To Private Operators Of Public Access Television Channels

Click for PDF Decided June 17, 2019 Manhattan Community Access Corp. v. Halleck, No. 17-1702  Today, the Supreme Court held 5-4 that private operators of public access television channels are not state actors subject to the First Amendment. Background: The First Amendment generally restricts only state action.  Private entities, however, may be treated as state actors in some circumstances, such as where they perform functions traditionally performed by the government alone.  Here, New York City designated Manhattan Neighborhood Network (“MNN”)—a private, independent non-profit corporation—to operate public access television channels in Manhattan.  After Respondents produced a video criticizing MNN, MNN banned the video, and prohibited Respondents from submitting content to MNN.  Respondents sued MNN and others under the First Amendment.  The Second Circuit held that public access channels are public speech forums protected by the First Amendment, and that MNN—as the entity selected by the City to administer those channels—is a state actor, even though it is not controlled or funded by the government. Issue: Does a private entity that operates public access channels qualify as a state actor subject to the First Amendment?  Court’s Holding: No.  Private operators of public access channels are not state actors subject to the First Amendment because the operation of public access channels on a cable system is not a function traditionally reserved exclusively to the government. “[M]erely hosting speech by others is not a traditional, exclusive public function and does not alone transform private entities into state actors subject to First Amendment constraints.” Justice Kavanaugh, writing for the majority What It Means: While the First Amendment constrains state actors when they operate public speech forums, the decision confirms that those constraints do not apply to private entities.  Merely operating a public forum does not make a private entity into a state actor under the traditional test for state action because operating a public speech forum is not a traditional, exclusive public function.  Instead, private entities that operate forums for speech retain their “editorial discretion” over the speech and speakers on those forums. The Court rejected the argument that MNN qualifies as a state actor simply because the City designated it to operate the channels.  Instead, the Court compared the City’s designation to a government license, government contract, or government-granted monopoly, which “d[o] not convert the private entity into a state actor—unless the private entity is performing a traditional, exclusive public function.”  Similarly, the Court explained that a private entity does not become a state actor simply because the government regulates its activities. Justice Sotomayor’s dissent would have held that the City retained a property interest in the channels pursuant to an agreement with the cable system that hosted them.  She would have concluded, therefore, that MNN qualified as a state actor in administering the City’s property interest.  The majority disagreed, holding that the agreement did not give the City a formal property interest.  The majority emphasized that the analysis may have been different if the City administered the channels itself or retained a property interest in them. The opinion is the sixth this Term from Justice Kavanaugh, and offers insight into his approach to First Amendment issues.  The decision expressly applies to private operators of public access cable channels, but has implications for Internet companies and property owners that also provide forums for public speech. As always, Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Theodore J. Boutrous, Jr. +1 213.229.7804 tboutrous@gibsondunn.com Related Practice: Media, Entertainment and Technology Scott A. Edelman +1 310.557.8061 sedelman@gibsondunn.com Kevin Masuda +1 213.229.7872 kmasuda@gibsondunn.com Orin Snyder +1 212.351.2400 osnyder@gibsondunn.com
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June 6, 2019

Supreme Court Round-Up: A Summary of the Court’s Opinions, Cases to Be Argued This Term, and Other Developments

As the Supreme Court continues its 2018 Term, Gibson Dunn’s Supreme Court Round-Up is summarizing the issues presented in the cases on the Court’s docket and the opinions in the cases the Court has already decided.  The Court has finished hearing arguments this Term, and we are awaiting decisions in 27 cases.  Gibson Dunn presented 3 oral arguments this Term, in addition to being involved in 12 cases as counsel for amici curiae.  The Court has granted certiorari in 18 cases for the 2019 Term. Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions.  The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions.  The Round-Up provides a concise, substantive analysis of the Court’s actions.  Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next.  The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions. To view the Round-Up, click here. Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases.  During the Supreme Court’s 5 most recent Terms, 9 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 20 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the class action, intellectual property, separation of powers, and First Amendment fields.  Moreover, although the grant rate for certiorari petitions is below 1%, Gibson Dunn’s certiorari petitions have captured the Court’s attention:  Gibson Dunn has persuaded the Court to grant 25 certiorari petitions since 2006. *   *   *   * 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 attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group. Theodore B. Olson (+1 202.955.8500, tolson@gibsondunn.com) Amir C. Tayrani (+1 202.887.3692, atayrani@gibsondunn.com) Brandon L. Boxler (+1 202.955.8575, bboxler@gibsondunn.com) Andrew G.I. Kilberg (+1 202.887.3759, akilberg@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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June 5, 2019

EMIR Refit Enters into Force on June 17, 2019 – Impacts and Action Items for End-Users

Click for PDF On May 28, 2019, final text was published in the Official Journal of the European Union (“OJEU”) for substantive amendments to the European Market Infrastructure Regulation (“EMIR”)[1] relating to the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for uncleared OTC derivatives contracts, the registration and supervision of trade repositories, and the requirements for trade repositories (“EMIR Refit”).[2]  EMIR Refit becomes effective on June 17, 2019 (20 days after publication in the OJEU)[3], and most of its provisions will begin applying on that date, while others will be phased in. Many of the changes of EMIR Refit aim to reduce compliance costs for end-user counterparties that are non-financial counterparties (“NFCs”) and smaller financial counterparties (“FCs”).  Some of these changes include (i) an exemption from the reporting of intragroup transactions; (ii) an exemption for small FCs from the clearing obligation, (iii) removal of the obligation and legal liability for reporting when an NFC transacts with an FC, and (iv) a determination of the NFC clearing obligation on an asset-class-by-asset-class basis.  While these amendments provide relief, end-users should be keenly aware of the nuances of the text of EMIR Refit, the extent to which relief applies, the timing and steps involved in these changes and any notifications which must be filed.  In particular, with the fast-approaching June 17, 2019 implementation date for EMIR Refit, end-users should take note of two immediate action items.  The first relates to an end-user’s requirement to perform a new calculation to determine whether or not it exceeds the clearing threshold, while the second requires an end-user to file a notification with the relevant national competent authorities (“NCAs”) in order to take advantage of an exemption for the reporting of intragroup transactions. In this alert, we outline some of the key impacts of EMIR Refit on end-users, including the changes to the clearing threshold calculations, the intragroup exemption from reporting and the relief provided to shift responsibility of the reporting obligation from NFCs below the clearing threshold to FCs, as well as the action items resulting from these changes.[4] I.  Changes to Clearing Threshold Calculation – Immediate Action Required EMIR Refit creates a new regime to determine when an NFC and an FC are subject to the clearing obligation.  These determinations will be based on whether the position of an NFC or an FC, as applicable, exceeds the requisite clearing thresholds.  In particular, the NFCs and FCs must determine whether their aggregate month-end average position for the previous 12 months across the entire group exceeds any of the thresholds for a particular asset class.  If an NFC or FC does not make this calculation by June 17, 2019, or if it exceeds the calculation, it must notify the European Securities and Markets Authority (“ESMA”) and the relevant NCA immediately and such NFC or FC will become subject to the clearing obligation beginning four months following such notifications.[5]  Further, NFCs and FCs that are currently subject to the clearing obligation and that remain subject to the clearing obligation under EMIR Refit must still provide notifications to ESMA and the relevant NCA. A.  Impacts on and Action Items for NFCs Under EMIR Refit, whether an NFC is subject to the clearing obligation is separately determined for each particular asset class for which the clearing threshold is exceeded.  Previously, EMIR required that if an NFC exceeded the clearing threshold in one asset class, then all of its OTC derivatives would be subject to the clearing obligation (to the extent the clearing obligation was applicable); however, EMIR Refit modifies this “all or nothing” requirement for NFCs.  Instead, the clearing obligation under EMIR Refit is determined on an asset-class-by-asset-class basis such that an NFC may exceed the clearing threshold for one asset class and be subject to the clearing obligation for that asset class, but may not be subject to the clearing obligation for other asset classes where the NFC does not exceed the clearing threshold.  If an NFC exceeds the clearing obligation in one asset class, it is nonetheless subject to margin requirements for all of its OTC derivatives transactions as the NFC exemption from margin for OTC derivatives remains an “all or nothing” determination.[6] EMIR Refit changes the way in which the entities calculate their positions by replacing Articles 10(1) and (2) of EMIR (which provided that NFCs are required to determine whether their rolling average position over 30 working days) with new provisions that provide that NFCs may calculate, every 12 months, their aggregate month-end average OTC derivatives positions for the previous 12 months across their entire worldwide group and for each asset class.[7]  NFCs would exclude from the calculation transactions that are “objectively measurable as reducing risks related to commercial activity or treasury financing activity” of the NFC or the NFC group (e.g., hedging transactions do not count towards the clearing threshold calculation) but would include intragroup transactions in the calculation.[8]  This average position in each asset class must then be compared against the following clearing thresholds[9]: Asset class Gross Notional Threshold Credit Derivatives €1 billion Equity Derivatives €1 billion Interest Rate Derivatives €3 billion Foreign Exchange Derivatives €3 billion Commodity and Other Derivatives €3 billion The first calculation must be performed by June 17, 2019 and once a year thereafter.  As mentioned above, if an NFC does not calculate its positions it will by default become subject to the clearing obligation in all asset classes.  We note that NFCs that make the calculation and determine that they fall below the clearing threshold in all asset classes, while not required to notify ESMA or their NCA, will nonetheless be required to notify their counterparties.  Indeed, ESMA recently updated its EMIR Q&A to explain that a “counterparty should obtain representations from its counterparties detailing their status” and noted that if a representation is not obtained from a counterparty it must be assumed that the counterparty is subject to the clearing obligation.[10] Four Key Action Items for NFCs Collect the necessary data and calculate OTC derivatives positions by asset class by June 17, 2019 and compare against the clearing thresholds (failure to do so will render the NFC subject to the clearing obligation and margin requirements).  NFCs should make such calculation in accordance with the requirements under EMIR Refit and should maintain appropriate documentation of such calculation for audit purposes. Notify ESMA and the relevant NCA (i) if the clearing threshold is breached in one or more asset classes or (ii) if no calculation is performed.  In the event the notifying NFC is subject to the clearing obligation, such NFC is required to establish clearing arrangements within four months of the notification. Notify counterparties of clearing status (i.e., whether above or below the threshold) and make any relevant changes to existing documentation. Ensure that reporting fields are consistent with any changes to the NFC’s clearing requirements. Impacts on and Action Items for Small FCs EMIR Refit enables certain FCs with limited OTC derivatives activities to be excluded from the clearing obligation.  Previously, EMIR required all FCs to comply with the relevant clearing requirements regardless of the amount of their activities such that every FC was subject to the clearing obligation.  By comparison, the exclusion for FCs is much more limited than the exclusion for NFCs; unlike NFCs, FCs are required to include all OTC derivatives activities in their clearing threshold calculation, including hedging transactions, and FCs maintain the “all or nothing” calculation and do not benefit from the more nuanced asset-class-by-asset-class determination.[11]  In all cases, FCs will remain subject to margin requirements on OTC derivatives.[12] Under EMIR Refit, FCs may calculate, every 12 months, their aggregate month-end average OTC derivatives positions for the previous 12 months across their entire worldwide group and for each asset class.  FCs would not exclude any OTC derivatives transactions from these calculations and would include hedging and intragroup transactions for other entities within the FC’s group.  This average position in each asset class must then be compared against the same clearing thresholds described above for NFCs. Just like NFCs, FCs must make their first calculation by June 17, 2019 and then each year thereafter.  Those FCs that do not make the calculation or that exceed the clearing threshold in one asset class would be subject to the clearing obligations in all asset classes and must notify ESMA and the relevant NCA immediately.  Further, even those FCs that fall below the clearing threshold will be required to notify by their counterparties of their status. Four Key Action Items for FCs Collect the necessary data and calculate OTC derivatives positions by asset class by June 17, 2019 and annually thereafter (failure to do so will render the FC subject to the clearing obligation).  FCs should make such calculation in accordance with the requirements under EMIR Refit and should maintain appropriate documentation of such calculation for audit purposes. Notify ESMA and relevant NCA (i) if the clearing threshold is breached in one or more asset classes or (ii) if no calculation is performed.  In the event the notifying FC is subject to the clearing obligation, such FC is required to establish clearing arrangements within four months of the notification. Notify counterparties of clearing status (i.e., whether above or below the threshold) and make any relevant changes to existing documentation. Ensure that reporting fields are consistent with any changes to the FC’s clearing requirements. II.  Exemption from Intragroup Transaction Reporting – Immediate Action Required Under the current reporting requirements in Article 9 of EMIR, all counterparties subject to EMIR are required to report their intragroup transactions (i.e., inter-affiliate transactions) to a trade repository.  However, effective June 17, 2019, EMIR Refit provides relief to NFCs from the requirement to report these intragroup transactions in certain circumstances.  Specifically, EMIR Refit provides an exemption from the reporting of derivatives contracts “within the same group where at least one of the counterparties is [an NFC] or would be qualified as [an NFC] if it were established in the [EU]” subject to the following criteria: Both counterparties are included in the same consolidation on a full basis; Both counterparties are subject to appropriate centralized risk evaluation, measurement and control procedures; and The parent undertaking is not an FC.[13] While this intragroup exemption from reporting is likely to provide significant relief to NFCs (particularly the global nature of the exemption), it is important to note that the exemption is not self-executing and that notification to the relevant NCA is required.  Specifically, the text requires counterparties wishing to take advantage of the exemption to “notify their competent authorities of their intention to apply the exemption.”[14]  The text further explains that “[t]he exemption shall be valid unless the notified competent authorities do not agree upon the fulfilment of the conditions [of such exemption] within three months of the date of notification.”[15] The language as drafted lacks some clarity as to how such notification to an NCA may be achieved in order to perfect this intragroup exemption.  For example, it is not clear what form the notification must take, whether it can cover multiple entities and whether a notification for one jurisdiction on behalf of the group may be recognized in another jurisdiction.  Further, while EMIR Refit creates a notification requirement and not an “approval” requirement, market participants must determine whether they seek to take advantage of the intragroup exemption upon notification to the NCA(s) or choose to wait until the three-month NCA response period lapses. NCAs may have different views and requirements with respect to what is required of this notification, but a multinational corporation with affiliates in multiple EU countries may be required to notify the NCA of each jurisdiction in which an affiliate seeking to rely on the intragroup exemption is located.  Accordingly, any counterparty seeking to take advantage of the intragroup exemption should review whether its NCA has provided guidance regarding the notification and/or reach out to its NCA to review with the applicable notification requirements for purposes of claiming the intragroup exemption.[16] Key Action Item for NFCs Those NFCs that wish to rely on the intragroup exemption from reporting must notify their relevant NCAs that they intend to rely on the exemption in order for such exemption to be available (following such notification(s), the intragroup exemption will apply unless the NCA responds three months to inform the NCA that it does not agree that the conditions for the intragroup exemption are met). III.  Changes to Reporting Obligation for NFCs Below the Clearing Threshold (“NFC-s”) Article 9 of EMIR currently provides a dual-sided reporting regime where all parties subject to EMIR must report the details of their OTC derivatives to a trade repository.  EMIR Refit seeks to ease these reporting burdens for NFC-s by providing that FCs will be “solely responsible and legally liable” for reporting contracts concluded with an NFC- on behalf of both counterparties, as well as for ensuring the accuracy of the details so reported.[17]  In other words, EMIR Refit does not create a single-sided reporting regime, but rather modifies its existing dual-sided reporting regime such that the FC will be responsible for reporting data for itself and for the NFC- where the NFC- retains no legal liability for the reporting of such data or the accuracy of the details of such data.[18]  NFC-s are responsible for providing the FC that is reporting the data with the details of the contracts that the FC “cannot be reasonably expected to possess” and the NFC- will remain responsible for the accuracy of that information.[19] EMIR Refit notably does not extend this reporting relief to OTC derivatives between an NFC- and a third-country counterparty that would be an FC if established in the EU (a “third-country FC”), unless the third-country reporting regime has been deemed equivalent and the third-country FC has reported the relevant transactions under such equivalent regime.  These restrictions on third-country FCs are particularly important given that the United States has not been deemed an equivalent regime and counterparties domiciled in the United Kingdom will become third-country FCs following the United Kingdom’s expected exit from the EU later this year.[20] Additionally, EMIR Refit provides NFC-s that have already invested in a reporting system with the option to opt out of this new regime and continue to report the details of their contracts that have been executed with FCs in the same manner as they report under EMIR, rather than having the FC counterparty report on behalf of the NFC-, by informing the FC that they would like to do so.[21] Unlike the intragroup exemption and the changes to the clearing obligation, these changes to the reporting obligation do not come into force until June 18, 2020. Three Key Action Items for NFC-s NFC-s should identify which of their counterparties are FCs in order to determine the counterparty relationships that will benefit from this relief and those where the NFC- will retain the reporting obligation (this will help to identify where delegated reporting agreements can be terminated and where they should remain in place). Provide information to FC counterparties that they cannot reasonably be expected to possess (FCs will likely reach out for this information (e.g., whether a transactions is a hedging transaction)). NFC-s that wish to opt out of the new reporting regime and continue to report the details of their OTC derivatives should notify their FC counterparties as soon as possible.    [1]   Regulation (EU) No 648/2012 of the European Parliament and Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.    [2]   Regulation (EU) No 2019/834 of the European Parliament and Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories.    [3]   In 2015, the European Commission conducted a comprehensive review of the EMIR to help to reduce disproportionate costs and burdens imposed by EMIR and simplify rules without putting financial stability at risk.  This review included, among other things, the European Commission’s Public Consultation on the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories and their broader Call for Evidence on the European Union (“EU”) regulatory framework for financial services.  See Public Consultation on Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories; see also Call for Evidence, EU Regulatory Framework for Financial Services.  Following this review, on May 4, 2017, the European Commission proposed amendments to EMIR in the context of its Regulatory Fitness and Performance (Refit) program.  The EU Council published its compromise text on December 11, 2017 and ECON Committee report was adopted by EU Parliament on May 16, 2018.  The EU Council and EU Parliament reached political agreement on EMIR Refit on February 5, 2019.  Following that, Parliament’s ECON Committee approved the text, it was approved in plenary, adopted by EU Council and ultimately signed on May 20, 2019.    [4]   EMIR Refit also (i) extends the definition of “financial counterparties” to include EU alternative investment funds (AIFs) and their EU alternative investment fund managers (AIFMs); (ii) ends the frontloading requirement; (iii) ends the backloading requirement; (iv) provides power for ESMA and the European Commission to suspend the clearing and derivatives trading obligation; (v) extends the clearing exemption for risk-reducing transactions of pension schemes for two additional years with the ability to extend further; (vi) creates an obligation to provide clearing services on fair, reasonable, non-discriminatory and transparent terms (FRANDT); and (vii) requires regulators to validate risk management procedures for the exchange of collateral.    [5]   See ESMA Public Statement, Implementation of the new EMIR Refit regime for the clearing obligation for financial and non-financial counterparties, March 28, 2019, available at https://www.esma.europa.eu/sites/default/files/library/esma70-151-2181_public_statement_on_refit_implementation_of_co_regime_for_fcs_and_nfcs.pdf.    [6]   Recital (8) of EMIR Refit explains that “[NFCs] should nonetheless remain subject to the requirement to exchange collateral where any of the clearing thresholds is exceeded.”    [7]   Article 1(8)(a) of EMIR Refit.    [8]   Article 10(1) of Commission Delegated Regulation (EU) No 149/2013.    [9]   The clearing thresholds are defined under Article 11 of Commission Delegated Regulation (EU) No 149/2013. [10]   ESMA, Questions and Answers, Implementation of the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR), pp. 21-22 (May 28, 2019). [11]   Article 1(3) of EMIR Refit. [12]   Recital (7) of EMIR Refit explains that “small financial counterparties should be exempted from the clearing obligation, but they should remain subject to the requirement to exchange collateral to mitigate any systemic risk.” [13]   Article 1(7)(a) of EMIR Refit. [14]   Id. [15]   Id. [16]   We note that some NCAs have provided guidance or forms on how notification of the reliance on the intragroup exemption should be submitted while others have not.  See, e.g., EMIR: FCA Notification for an Intragroup Exemption from Reporting, available at https://www.fca.org.uk/publication/forms/emir-reporting-exemption-form.pdf. [17]   Article 1(7)(b) of EMIR Refit. [18]   While many NFC-s currently delegate the reporting responsibility to their counterparties, under EMIR delegated reporting the NFC-s retain the legal liability to report and for the accuracy of the data that is reported by the counterparties on the NFC-’s behalf. [19]   Id. [20]   For example, if an NFC- were to transact with an EU bank, the NFC- would no longer have a reporting obligation; however, if the NFC- were to transact with a US-based bank, the NFC- would retain the reporting obligation and delegated reporting would likely be desired. [21]   It should be noted that if an NFC- decides to opt-out of the new EMIR Refit reporting regime, it will retain the legal liability for reporting the OTC derivatives data as well as the liability for ensuring the accuracy of such data. The following Gibson Dunn lawyers assisted in preparing this client update: Jeffrey Steiner and Erica Cushing. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm's Financial Institutions and Derivatives practice groups, or any of the following: Europe: Patrick Doris - London (+44 20 7071 4276, pdoris@gibsondunn.com) Amy Kennedy - London (+44 20 7071 4283, akennedy@gibsondunn.com) Lena Sandberg - Brussels (+32 2 554 72 60, lsandberg@gibsondunn.com) United States: Michael D. Bopp - Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Arthur S. Long - New York (+1 212-351-2426, along@gibsondunn.com) Jeffrey L. Steiner - Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Erica N. Cushing - Denver (+1 303-298-5711, ecushing@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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June 3, 2019

Supreme Court Holds That Title VII’s Administrative Exhaustion Requirement Is Not A Jurisdictional Prerequisite To Suit

Click for PDF Decided June 3, 2019 Fort Bend County, Texas v. Davis, No. 18-525 Today, the Supreme Court unanimously held that Title VII’s requirement that employment-discrimination plaintiffs present their claims to the Equal Employment Opportunity Commission (“EEOC”) before filing suit is a mandatory claim-processing rule subject to ordinary principles of waiver and forfeiture, not a jurisdictional prerequisite that can be raised at any point during the litigation. Background: Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq., requires employees to file a charge with the EEOC before suing an employer for discrimination. When it receives a charge, the EEOC must notify the employer and investigate the allegations. If the EEOC chooses not to sue, or if the EEOC cannot complete its investigation within 180 days, the employee is entitled to a “right-to sue” notice. That notice allows the employee to sue the employer for the claim(s) presented in the charge. In this case, an employer litigated a religious-discrimination claim for five years before arguing that the plaintiff did not properly raise the claim in her EEOC charge. The district court agreed, reasoned that Title VII’s charge-filing requirement is a non-waivable jurisdictional rule, and dismissed the case for lack of jurisdiction. The Fifth Circuit reversed, reasoning that the charge-filing requirement is a waivable claim-processing rule, and that the employer forfeited any arguments based on that rule by raising them too late in the litigation. Issue:  Is Title VII’s charge-filing requirement a non-waivable jurisdictional rule or a waivable claim-processing rule? Court’s Holding:  Title VII’s charge-filing requirement is a mandatory claim-processing rule that speaks to a plaintiff’s procedural obligations and “must be timely raised to come into play.” It is “not a jurisdictional prescription delineating the adjudicatory authority of courts” that may be raised at any point in the litigation. “[A] rule may be mandatory without being jurisdictional, and Title VII’s charge-filing requirement fits that bill.” Justice Ginsburg, writing for the unanimous Court What It Means: The decision does not change Title VII’s requirement that employees file a charge with the EEOC before suing an employer for discrimination. However, because this charge-filing requirement is a claim-processing rule, not a jurisdictional rule, employers must promptly raise any exhaustion-related defenses or risk waiver. The opinion might lead to increased litigation risks and costs for employers, as federal courts can exercise subject-matter jurisdiction over Title VII claims even when the plaintiff has failed to file a proper charge with the EEOC. The Court did not address whether the charge-filing requirement or other mandatory claim-processing rules are subject to equitable exceptions based on concerns for fairness and justice. As always, Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Related Practice: Labor and Employment Catherine A. Conway +1 213.229.7822 cconway@gibsondunn.com Jason C. Schwartz +1 202.955.8242 jschwartz@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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May 28, 2019

Supreme Court Holds That Third-Party Defendants May Not Remove Class Action Counterclaims To Federal Court

Click for PDF Decided May 28, 2019 Home Depot U.S.A., Inc. v. George W. Jackson, No. 17-1471 Today, the Supreme Court held 5-4 that when a defendant in a state court action files a counterclaim against a third party as a class action, the third-party defendant may not remove the class action counterclaim to federal court. Background: Citibank filed an action in state court to collect on a credit card debt.  In response, the debtor filed a class action counterclaim under state consumer protection law against Citibank and named Home Depot—a third-party retailer not previously involved in the case—as an additional defendant.  Relying upon the Class Action Fairness Act of 2005 (CAFA), which permits “any defendant” to remove certain state class actions to federal court, see 28 U.S.C. § 1453(b), as well as the general removal provision, 28 U.S.C. § 1441(a), Home Depot sought to remove the case to federal court.  A federal district court concluded that Home Depot could not do so because Home Depot was not a defendant in the original debt-collection action and therefore was not a “defendant” within the meaning of the removal statute.  The Fourth Circuit affirmed. Issue: Does a third-party defending itself against a class action counterclaim qualify as a “defendant” under the general removal provision or the removal provision of CAFA, such that the third-party may remove the case from state to federal court? Court’s Holding: No.  The term “defendant” in the removal statutes means only “the party sued by the original plaintiff,” not a counterclaim defendant or third-party joined in the case by a defendant. “[T]he limits that Congress has imposed on removal show that it did not intend to allow all defendants an unqualified right to remove.” Justice Thomas, writing for the majority What It Means: The Court explained that district courts determine whether a civil action is removable to federal court by assessing whether the action—not the claim—could have been filed originally in federal court.  As a result, the Court reasoned, removal must be based on the complaint, not any later-filed counterclaims or third-party claims. The Court emphasized that “the filing of counterclaims that included class-action allegations against a third party did not create a new ‘civil action’ with a new ‘plaintiff’ and a new ‘defendant.’”  Instead, the “defendant” for purposes of removal was the party sued by the original plaintiff.  The Court thus extended to third-party counterclaim defendants its longstanding holding in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), that an original plaintiff may not remove a state court counterclaim to federal court. The Court concluded that CAFA did not require a different result:  CAFA was “intended only to alter certain restrictions on removal”—such as the requirement that all defendants agree to removal—“not [to] expand the class of parties who can remove a class action.”  The Court thus held that the word “defendant” had the same meaning in CAFA as in the general removal provision. The decision was authored by Justice Thomas and joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan.  Justice Alito authored a dissent on behalf of the four remaining Justices.  Although “counterclaim class actions” are relatively rare, Justice Alito cautioned that the Court’s decision could encourage more plaintiffs to structure their class actions as counterclaims in state courts in an attempt to circumvent the protections afforded by CAFA and to avoid litigating in a federal forum.  The majority emphasized that authority to amend the statute to preclude such litigation tactics rests with Congress, not the Court. As always, Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com 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 © 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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May 24, 2019

Supreme Court Rules That Trademark Licensee Retains License Rights Following Rejection in Bankruptcy

Click for PDF On May 20, 2019, the Supreme Court held in Mission Product Holdings, Inc. v. Tempnology, LLC, __ S. Ct. __, 2019 WL 2166392 (May 20, 2019) that a chapter 11 debtor-licensor’s rejection of a trademark license agreement under section 365(a) of the Bankruptcy Code does not terminate the license granted in the agreement.  Most lower courts that have addressed this issue found that a licensor’s rejection of a trademark license agreement in bankruptcy terminated the license, noting that the protections afforded by Bankruptcy Code section 365(n) to licenses of certain types of intellectual property do not apply to trademark licenses. As a result of this decision, licensees of trademarks (including licensees of a bundle of different types of intellectual property that include trademarks) could be expected to conclude that they no longer need to implement special measures to protect against termination of such license in bankruptcy.[1] I.  Background of Rejection and Trademark Licenses Section 365(a) of the Bankruptcy Code allows a debtor (or trustee) to assume or reject an executory contract or unexpired lease.[2]  Pursuant to section 365(g), “the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease.”[3]  As a result of rejection, the debtor is relieved from future performance obligations under the agreement, and the contract counterparty is entitled to a general unsecured claim for the damages resulting from the debtor’s nonperformance.[4] In a seminal decision in 1985, the Fourth Circuit held in Lubrizol that a licensor-debtor’s rejection of a patent license under section 365(a) of the Bankruptcy Code had the additional impact of revoking the licensee’s patent license.[5]  Lubrizol was the first appellate decision to declare that rejection of a license agreement under section 365(a) terminates a licensee’s license.  As a result of the Lubrizol decision, “Congress sprang into action,” enacting section 365(n) to “ensure the continuation of patent (and some other intellectual property) licensees’ rights.”[6] Notably, section 365(n) does not apply to trademark licenses;[7] therefore, most courts addressing the issue had determined that a licensee’s trademark license did not survive a debtor’s rejection of a trademark license agreement.[8] II.  Procedural History in Mission Product Holdings In Mission Product Holdings, Tempnology, LLC (the “Debtor”) had entered into a license agreement with Mission Product Holdings, Inc. (“Mission”) in which it granted Mission the exclusive license to distribute trademarked products in the United States along with a non-exclusive license to use the trademarks worldwide.[9]  The Debtor subsequently filed bankruptcy and sought and received authority to reject the agreement pursuant to section 365(a) of the Bankruptcy Code.[10] Following rejection of the license agreement, the parties agreed that the Debtor was relieved from any future performance under the agreement and that Mission could file a general unsecured claim against the Debtor for damages resulting from the Debtor’s nonperformance.[11]  However, the Debtor also sought a declaration by the bankruptcy court that rejection terminated Mission’s right to use the Debtor’s trademarks.[12] The bankruptcy court agreed that rejection terminated Mission’s trademark license, reasoning that a negative inference should be drawn from Congress’s failure to protect trademark rights in section 365(n), and distinguishing trademark rights from the treatment of other intellectual property rights under section 365(n).[13]  The First Circuit affirmed the bankruptcy court’s decision, declining to follow the Seventh Circuit’s decision in Sunbeam, which held that rejection by a debtor does not terminate the licensee’s trademark license.[14] III.  Supreme Court’s Analysis The Supreme Court’s analysis in Mission Product Holdings largely rests on the plain language of the Bankruptcy Code.  Specifically, section 365(g) provides that rejection constitutes a “breach,” and, therefore, “[r]ejection of a contract—any contract—in bankruptcy operates not as a rescission but as a breach.”[15]  The Court adopted the Sunbeam interpretation of section 365(g) and rejected the “negative inference” that some courts had extrapolated from section 365(n) with respect to trademark protection, emphasizing the “general bankruptcy rule” that a debtor’s estate “possess anything more than the debtor itself did outside bankruptcy.”[16] Accordingly, the Court reversed the First Circuit’s decision and held that the Debtor’s rejection of the license agreement did not revoke Mission’s trademark license.[17] IV.  Implications of Decision Courts in future cases involving licenses of intellectual property that is governed by section 365(n) (e.g., licenses of patents, copyrights or trade secrets) will need to consider the extent to which, if at all, the Mission Product Holdings decision affects the treatment of such licenses under section 365.[18]  Based on the plain language of section 365(n), which expressly applies to rejection of certain intellectual property licenses, and the Court’s decision recognizing section 365(n) as “embellishing on or tweaking the general rejection-as-breach rule,” it seems likely that courts will hold that section 365(n) continues to govern the extent to which a licensee of intellectual property other than trademarks can preserve its license rights following rejection of the underlying license.[19] The Mission Product Holdings decision may result in disparate treatment for trademark licenses as compared to other types of intellectual property.  Justice Sotomayor provides an example of such disparate treatment in her concurring opinion:  section 365(n) provides that a “licensee that chooses to retain its rights postrejection must make all of its royalty payments; the licensee has no right to deduct damages from its payments even if it otherwise could have done so under nonbankruptcy law.”[20]  Because a trademark licensee is not required to comply with section 365(n), she notes that “the Court’s holding confirms that trademark licensees’ postrejection rights and remedies are more expansive in some respects than those possessed by licensees of other types of intellectual property.”[21]  It should be noted, however, that a licensee that continues to exercise its trademark license rights following rejection will be subject to applicable state law requirements, which may include a continuing obligation to pay royalties or license fees to the licensor in a manner consistent with the requirements of section 365(n)(2)(B). On the other hand, a court may determine that a trademark licensee’s rights are more limited in some respects.  For example, section 365(n) specifically provides that a covered licensee may elect to retain its rights to “enforce any exclusivity provision” of a rejected license agreement.[22]  In the context of a trademark license, it is not clear whether a debtor could breach an exclusive trademark license agreement and begin licensing to third parties or whether a licensee is nevertheless entitled to equivalent protections based on nonbankruptcy law and the Supreme Court’s reasoning in Mission Product Holdings.  It might also be possible, without the protections of section 365(n), for a licensee to forfeit its trademark rights following rejection by a debtor based on the terms of the license and “applicable nonbankruptcy law.”[23] Given the different treatment afforded to trademark licenses, if a licensor of bundled intellectual property rights that include both rights governed by section 365(n) and trademark rights, even though the trademark rights are automatically preserved following rejection under Mission Product Holdings decision, those subsisting trademark rights likely will not be exercisable by the licensee in a meaningful fashion unless the other licensed intellectual property rights are retained through the licensee making an election under section 365(n), which requires the licensee to continue to pay the debtor-licensor any licensee fees owing under the agreement without setting off any damage claims it may have. The extent of the difference in treatment of rejected trademark licenses as compared to rejection of other types of intellectual property licenses is certain to be explored in future cases.    [1]   Measures adopted by prospective licensees include requiring the licensor to grant a security interest in valuable collateral to secure the licensor’s obligation to license the trademark or to arrange for the licensor to set up a bankruptcy-remote subsidiary to hold and license the trademark.    [2]   11 U.S.C. § 365(a); Mission Product Holdings, Inc. v. Tempnology, LLC, __ S. Ct. __, 2019 WL 2166392, at *2 (May 20, 2019) (“A contract is executory if performance remains due to some extent on both sides.”) (citation omitted).    [3]   11 U.S.C. § 365(g).    [4]   Mission Product Holdings, 2019 WL 2166392, at *2; 11 U.S.C. § 502(g)(1).    [5]   Lubrizol Enterprises v. Richmond Metal Finishers, 756 F.2d 1043, 1045-1048 (4th Cir. 1985).  Prior to the Fourth Circuit’s Lubrizol decision in 1985, a number of courts did not follow the rule adopted in Lubrizol.  See, e.g., Fenix Cattle Co. v Silver (In re Select-A-Seat Corp.), 625 F2d 290, 293 (9th Cir 1980) (observing that trustee’s rejection of software license did not affect licensee’s rights to continue to use and sell licensed computer software, and stating that a license “cannot be summarily terminated, but rejection can cancel covenants requiring future performances by the debtor”).    [6]   Mission Product Holdings, 2019 WL 2166392, at *7.    [7]   The legislative history of section 365(n) indicates that Congress concluded that trademark licenses raised special considerations because of a licensor’s affirmative obligation to monitor a licensee’s use of licensed trademarks and enforce quality control standards, and Congress intended bankruptcy courts to consider application of the principles of section 365(n) to trademark licenses on an equitable basis.  Senate Rep. No. 100–505, 100th Cong., 2d Sess. at 6 (1988), reprinted in 1988 U.S.C.C.A.N. 3200, states that “since these matters [relating to trademark licensing] could not be addressed without more study, it was determined to postpone Congressional action in this area and to allow the development of equitable treatment of the situation by bankruptcy courts.”    [8]   Mission Product Holdings, 2019 WL 2166392, at *7.  A notable exception is Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), where the Seventh Circuit held that a licensor’s rejection of a trademark license did not result in termination of the trademark license.  Given the inequity of a trademark licensee losing its rights through rejection, some courts extended protection to licensees by finding the subject trademark licenses not to be executory contracts that are subject to rejection under section 365(a) of the Bankruptcy Code. See, e.g., In re Exide Techs., 607 F.3d 957, 964-65 (3d Cir 2010) (exclusive, perpetual, fully paid trademark license deemed to be substantially performed and therefore not executory, notwithstanding the licensee’s indemnity, further assurances, and quality control obligations that remained unperformed).    [9]   Mission Product Holdings, 2019 WL 2166392, at *2. [10]   Id. [11]   Id. at *3. [12]   Id. [13]   Id. at *3-4. [14]   Mission Product Holdings, Inc., v. Tempnology, LLC (In re Tempnology, LLC), 879 F.3d 389, 404 (1st Cir. 2018) (citing Sunbeam Prods., 686 F.3d 372). [15]   Mission Product Holdings, 2019 WL 2166392, at *5. [16]   Id. at *6. [17]   Id. at *9.  Notably, the decision does not address the consequences of rejection of a license by a debtor-licensee and should not affect the treatment of intellectual property licenses that are rejected by a debtor-licensee. [18]   A licensee in such a case could argue that, because the Mission Product Holdings decision holds that a rejection does not rescind license rights, its license rights are automatically retained without it needing to satisfy the conditions for retention of a rejected license that are set forth section 365(n). [19]   Id. at *7 n.2. [20]   Id. at *9 (Sotomayor, J., concurring) (citing 11 U.S.C. § 365(n)(2)(C)(i)). [21]   Id. (Sotomayor, J., concurring). [22]   11 U.S.C. § 365(n)(1)(B). [23]   Mission Product Holdings, 2019 WL 2166392, at *9 (Sotomayor, J., concurring). 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, Intellectual Property, Technology Transactions or Media, Entertainment and Technology practice groups, or any of the following: David H. Kennedy - Palo Alto (+1 650-849-5304, dkennedy@gibsondunn.com) Jeffrey C. Krause - Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Benyamin S. Ross - Los Angeles (+1 213-229-7048, bross@gibsondunn.com) Matthew G. Bouslog - Orange County (+1 949-451-4030, mbouslog@gibsondunn.com) Please also feel free to contact the following practice group leaders and members: 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) Intellectual Property and Technology Transactions Groups: David H. Kennedy - Palo Alto (+1 650-849-5304, dkennedy@gibsondunn.com) Howard S. Hogan - Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Carrie M. LeRoy - Palo Alto (+1 650-849-5337, cleroy@gibsondunn.com) Media, Entertainment and Technology Group: Kevin Masuda - Los Angeles (+1 213-229-7872, kmasuda@gibsondunn.com) Benyamin S. Ross - Los Angeles (+1 213-229-7048, bross@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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