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August 14, 2018

CFIUS Reform: Our Analysis

Click on PDF On August 13, 2018, President Trump signed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“FY 2019 NDAA”), an omnibus bill to authorize defense spending that includes—among other measures—legislation that will significantly expand the scope of inbound foreign investments subject to review by the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”).  Named for John McCain, the senior senator from Arizona who is battling brain cancer after six terms in the Senate, the FY 2019 NDAA incorporates the Foreign Investment Risk Review Modernization Act (“FIRRMA”), legislation that was proposed late last year to reform the CFIUS review process, as well as the new Export Control Reform Act of 2018 (“ECRA”). CFIUS is an inter-agency committee authorized to review the national security implications of investments made by foreign companies and persons in U.S. businesses (“covered transactions”), and to block transactions or impose measures to mitigate any threats to U.S. national security.[1]  Established in 1975 and last reformed in 2007, observers have pointed to an antiquated regulatory framework that hinders the Committee’s ability to review the national security implications posed by an increasing number of Chinese investments targeting sensitive technologies in the United States.  During its consideration, FIRRMA enjoyed bipartisan congressional support and was endorsed several times in the process by the Trump administration, but encountered a fair amount of criticism from U.S. industry groups.  After months of intense negotiation between the House, Senate, and the Trump administration, the final version of the bill includes several important changes from its earlier iterations, which we described here and here. Summary of Key Changes After months of intense lobbying and negotiations, the House and Senate have agreed upon language that will expand the scope of transactions subject to CFIUS review beyond those in which a foreign company gains control of a U.S. business.  The Committee will now have the authority to review certain real estate transactions, as well as investments that impact the critical infrastructure and critical technologies sector, even if the foreign acquirer does not have control over such businesses.  Provisions that would have included certain outbound investments in the scope of covered transactions have been abandoned in favor of language requiring updated U.S. export controls to regulate “emerging” and “foundational” technologies.  Furthermore, the CFIUS review process will be reformed in several significant ways, as FIRRMA provides for mandatory short-form “light” filings and tightens the timeframe for CFIUS reviews.  Taken together, these changes represent a significant departure from the Committee’s past practice. FIRRMA includes the following reforms: Expanded Scope of Review.  FIRRMA expands the scope of transactions subject to the Committee’s review by granting CFIUS the authority to examine the national security implications of a foreign acquirer’s non-controlling investments in U.S. businesses that deal with critical infrastructure, critical technology, or the personal data of U.S. citizens.  FIRRMA also provides CFIUS with authority to review real estate transactions—including leases, sales, and concessions—involving air or maritime ports or in close proximity to sensitive U.S. government facilities.  Critically, as we discuss below, a carve out for indirect investments through investment funds may exempt certain transactions involving private equity funds from the Committee’s expanded jurisdiction.  According to Frequently Asked Questions (“FAQs”) published by the U.S. Department of the Treasury, the FIRRMA provisions which expand the scope of transactions subject to review will take effect at a later date, most likely after the publication of implementing regulations.[2] Extended Formal Timeline.  Effective immediately, FIRRMA extends the Committee’s initial review period from 30 to 45 days, and authorizes CFIUS to extend the subsequent 45-day investigation phase by 15 days “in extraordinary circumstances” (the Senate draft had proposed a 30 day extension period).  Although these measures provide for longer formal review times, other changes to the review process will eliminate much of the uncertainty with regard to the timing of a CFIUS review, and could ultimately cut down on the duration of the Committee’s deliberations.  According to the Treasury Department FAQs, notices that were accepted on or before the effective date of FIRRMA will remain subject to a 30-day review period. “Light” Filings.  In lieu of the lengthy notice that is currently required in voluntary CFIUS filings, new  “light” filings may now be submitted for certain transactions instead of the lengthy voluntary notices that are currently required.  FIRRMA makes filing with the Committee mandatory in certain circumstances, but provides the Committee the authority to set the precise amount.  The streamlined “light” filing review process will go live on the earlier of 18 months after FIRRMA’s enactment or 30 days after the publication of implementing regulations.  Notably, FIRRMA authorizes the Committee to conduct pilot programs to implement the new review procedure for 18 months after the enactment of the bill. Filing Fee.  FIRRMA also imposes a filing fee, but again authorizes the Committee to shape this requirement in its implementing regulations. Expanded Scope of Transactions Subject to CFIUS Review 1.      Real Estate Transactions The Committee has focused on the national security risks associated with foreign real estate transactions in close proximity to sensitive U.S. government installations or military bases, but until now it did not have the authority to address transactions that did not involve the acquisition of an existing U.S. business, including leases or concessions.  FIRRMA effectively codifies the Committee’s standard practice of examining the proximity of a physical property to any sensitive military or U.S. government facility, as well as key U.S. air or maritime ports, but it also provides the Committee with the authority to examine a wider array of real estate transactions.  However, FIRRMA also gives the Committee the authority to prescribe regulations that limit or clarify the scope of this expanded jurisdiction over real estate transactions.  For example, the Committee is empowered to narrow the types of “foreign persons” that are required to seek the Committee’s approval. Specifically, FIRRMA authorizes CFIUS to review the purchase or lease by, or concessions to, a foreign company of U.S. real estate that is: “located within or will function as part of, an air or maritime port;” “in close proximity to a U.S. military installation or another facility or property of the United States government that is sensitive for reasons relating to national security;” “could reasonably provide the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility or property;” “could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance;” and “meets such other criteria as the Committee prescribes by regulation, except that such criteria may not expand the categories of real estate to which this clause applies ….” At first glance, these provisions provide a drastic expansion of the Committee’s authority over a foreign person’s non-controlling investments in U.S. real estate.  However, FIRRMA gives the Committee significant leeway to propose regulations that would limit the scope of real estate transactions subject to review.  First, the bill exempts the purchase of any “single housing unit” as well as real estate in “urbanized areas” as defined by the U.S. Census Bureau, except as otherwise prescribed by the Committee in regulations in consultation with the Defense Department.  Second, FIRRMA specifies that the Committee shall prescribe regulations to ensure that the term “close proximity” “refers only to a distance or distances within which the purchase, lease or concession of real estate could pose a national security risk” in connection to a U.S. government facility.  Third, FIRRMA allows for the further narrowing of the scope of this provision by granting the Committee authority to prescribe regulations that further define the term “foreign person” for purposes of such transactions. This last limitation is perhaps the most important.  As written, the Committee would appear to have jurisdiction over any real estate transaction that falls within the categories specified above, even if the foreign person is only a passive, minority investor.  FIRRMA grants the Committee the authority to limit the transactions subject to its review by providing that it “shall specify criteria to limit the application of such clauses to the investments of certain categories of foreign persons,” and that such criteria shall take into consideration “how a foreign person is connected to a foreign country or foreign government, and whether the connection may affect the national security of the United States.”  We expect such guidance to consider the extent to which foreign persons from countries with a heightened security risk—in particular, China—would have control or physical access to such properties. 2.      Critical Infrastructure, Critical Technologies and Sensitive Data FIRRMA will also expand the scope of transactions subject to the Committee’s review to include—subject to further implementing regulations—“any other investment” by a foreign person in an unaffiliated U.S. business or “change in the rights that a foreign person has” with regard to any U.S. business that: owns, operates, manufacturers, supplies or services critical infrastructure; produces, designs, tests, manufacturers, fabricates or develops one or more critical technologies; or maintains or collects sensitive personal data of United States citizens that may be exploited in a matter that threatens national security. The type of non-controlling “other investments” that trigger the Committee’s review includes several types of non-passive investments.  Such investments subject to CFIUS jurisdiction include those which afford a foreign person “access to any material non-public technical information in the possession” of the U.S. business; “membership or observer rights” or “the right to nominate an individual” to the board of directors or equivalent governing body of the U.S. business; and “any involvement, other than through voting of shares, in substantive decision-making” of the U.S. business with regard to: the use, development, acquisition, safekeeping, or release of sensitive personal data of United States citizens maintained or collected” by the U.S. business; the use, development, acquisition or release of critical technologies, or the management, operation, manufacture or supply of critical infrastructure. Again, FIRRMA grants CFIUS the authority to limit this expanded scope in several important ways.  First, the definition of the term “material nonpublic technical information” is subject to further regulations prescribed by the Committee, and is limited to information not available in the public domain that “provides knowledge, know-how, or understanding … of the design, location, or operation of critical infrastructure” or “is necessary to design, fabricate, develop, test, produce or manufacture crucial technologies, including processes, techniques or methods.”  FIRRMA excludes financial information regarding the performance of a U.S. business from the definition of material nonpublic technical information.  Second, FIRRMA grants the Committee the authority to prescribe regulations providing guidance on the types of transactions that are considered to be “other investment” for purposes of this provision. Moreover, FIRRMA delegates authority to the Committee to prescribe regulations that limit the types of investments in critical infrastructure that are subject to review to include “the subset of critical infrastructure that is likely to be of importance to the national security of the United States,” including an enumeration of specific types and examples. As with real estate transactions, FIRRMA limits the scope of these provisions by granting the Committee the authority to prescribe regulations that further define the term “foreign person” for purposes of such transactions.  The extent to which this provision evolved in the negotiation process is also noteworthy.  The final language replaces provisions of the Senate draft that would have exempted transactions from certain U.S. allies or those with parallel procedures to review foreign investment.  The final version of the bill also eliminated heightened scrutiny for transactions involving countries of “special concern.”  Instead, the FIRRMA expresses the “sense of Congress” that the Committee may consider the involvement of such countries when assessing the national security risks of a proposed transaction. FIRRMA also subjects to CFIUS review any “other transaction, transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent” the Committee’s review. 3.      A Private Equity Exception: Indirect Investments Through Investment Funds An express carve-out for indirect foreign investment through certain investment funds may prevent many transactions by private equity funds from falling into the Committee’s expanded jurisdiction.  Specifically, FIRRMA clarifies that an indirect investment by a foreign person in the types of U.S. businesses described above through an investment fund shall not trigger CFIUS review under certain circumstances, including where: the fund is managed exclusively by a U.S. general partner, managing member, or equivalent; the advisory board does not control the fund’s investment decisions or the investment decisions of the general partner, managing member, or equivalent; and the foreign person does not otherwise have the ability to control the fund or access to material nonpublic technical information as a result of its participation on the advisory board or committee. In this regard, if the foreign person is a limited partner and the fund is “managed exclusively” by U.S. persons, provided that the advisory board authority is limited accordingly, indirect investments by foreign persons through such funds will not be subject to CFIUS’ expanded jurisdiction over non-controlling “other investments,” as described above. 4.      Streamlined Review Process and Mandatory, “Light” Filings FIRRMA also seeks to streamline the CFIUS review process—a notoriously onerous procedure.  Under current practice, most CFIUS reviews commence when the parties to a transaction submit a joint voluntary notice, a lengthy filing that must include detailed information about the transaction, the acquiring and target entities, the nature of the target entity’s products, and the acquiring entity’s plans to alter or change the target’s business moving forward.[3] In practice, parties are expected to submit a “draft” notice to CFIUS prior to the commencement of the official 30-day review period, which provides the Committee and the parties with an opportunity to identify and resolve concerns before the official clock starts ticking.  In recent years, this informal review process has added a degree of unpredictability in terms of timing, as the “pre-filing” phase can consume several weeks.  FIRRMA requires that the Committee must respond to the draft pre-filing of a notice within 10 days, effectively closing a loophole CFIUS often used to manage its workflow and extend the transaction review period. The current CFIUS review process includes a 30-day initial review of a notified transaction, potentially followed by a 45-day investigation period, for a possible total of 75 days.  In certain circumstances, CFIUS may also refer a transaction to the President for decision, which must be made within 15 days.[4]  As the volume of transactions before the Committee has increased, it has become more common for CFIUS to ask parties to refile notices at the end of the official 75-day review period, thereby restarting the clock.  This has added a significant degree of uncertainty to the CFIUS review, compelling some parties to abandon deals or not to file at all. To address these timing issues, the bill extends the initial review period from 30 to 45 days, and authorizes CFIUS to extend the subsequent 45-day investigation phase by 15 days “in extraordinary circumstances” (the Senate draft had proposed a 30 day extension period).  The combination of these measures may allow longer official review times, but will eliminate much of the uncertainty associated with the timing of the process.  Critically, these new timeframes are effective immediately. In lieu of the lengthy voluntary notice required in the current CFIUS review process, FIRRMA authorizes parties to submit short form “declarations”—not to exceed 5 pages in length—at least 45 days prior to the completion of a transaction.  FIRRMA requires the Committee to respond to a declaration within 30 days of receipt by approving the transaction, requesting that the parties file a full written notice, or initiating a further review. FIRRMA generally authorizes CFIUS to prescribe regulations specifying the types of transactions for which such declarations will be required.  The bill also requires the submission of declarations for transactions by which a foreign entity in which a foreign government has a substantial interest acquires a substantial interest in U.S. critical infrastructure or critical technology companies.  This “mandatory filing” requirement is a significant departure from past practice, where all CFIUS filings were voluntary.  However, CFIUS is authorized not only to define “substantial interest,” thereby limiting the transactions that are subject to this requirement, but also to waive the declaration filing requirement if the investment is not directed by a foreign government or the foreign buyer has historically cooperated with CFIUS.  This provision could be used to ease the regulatory burden on a number of state-owned financial institutions, such as state-owned pension plans and investment funds, that are not controlled by a foreign government. In contrast to the updated procedures for the full review and investigation process, the declaration review process will not be effective immediately, but will go live on the earlier of 18 months after FIRRMA’s enactment or 30 days after the Secretary of the Treasury determines that the Committee has the regulations, organizational structure, personnel and other resources necessary to administer the new procedure.  FIRRMA authorizes the Committee to conduct pilot programs to implement the new review procedure for 18 months after the enactment of the bill. 5.      Filing Fees Prior to the passage of FIRRMA, there were no filing fees associated with submitting a transaction for CFIUS review.  The new legislation provides for the imposition of such fees.  The House version capped CFIUS fees at the lesser of one percent of the value of the transaction or $300,000 (adjusted for inflation).  The Senate version provided a list of criteria for CFIUS to consider when determining the fee, and would have allowed for the imposition of an additional fee when requested to prioritize the handling of filings.  The final version of FIRRMA retains the House caps and authorizes the Committee to set the fee based on certain enumerated criteria.  Fees will only be assessed for transactions requiring a written notice, not the shorter declarations. 6.      Regulation of Outbound Technology Transfers Through Export Controls The inclusion of the ECRA in the NDAA is a remarkable development in several ways.  First, the modernization of the United States’ primary authority for U.S. export controls on non-military items, the Export Administration Act of 1979 (“EAA”), has been an achievement just out of reach for Congress for decades.  Second, the ECRA grants the President authority to regulate and enforce export controls in several new ways, and specialists at the Department of Commerce will be busy for many months (and likely years) drafting regulations to implement these authorities.  Third, and most relevant to technology transfers, the inclusion of the ECRA in the NDAA is an acknowledgement by Congress that the export licensing process administered by the Department of Commerce Bureau of Industry and Security (“BIS”) is likely to be a better way to implement at least some of the policy objectives that motivated earlier iterations of FIRRMA. a.      Controls on Exports of Emerging and Foundational Technologies The ECRA replaces one of the most controversial provisions included in earlier versions of FIRRMA, which sought to include outbound investments—such as joint ventures or licensing agreements—in the list of covered transactions subject to CFIUS review.  As originally drafted, the CFIUS reform legislation would have subjected to CFIUS review any contribution (other than through an ordinary customer relationship) by a U.S. critical technology company of both intellectual property and associated support to a foreign person through any type of arrangement.  In its final form, the ECRA will require the President to establish, in coordination with the Secretaries of Commerce, Defense, Energy, and State, a “regular, ongoing interagency process to identify emerging and foundational technologies” that are essential to national security but not are not “critical technologies” subject to CFIUS review. In an effort to close gaps in the existing export controls regimes that do not restrict the transfer of such emerging or foundational technologies, the NDAA adopts the language of an earlier Senate draft requiring the Secretary of Commerce to establish controls on the export, re-export, or in-country transfer of such technology, including requirements for licenses or other authorizations. With several notable exceptions, Congress generally stops short of specifying how the Secretary of Commerce should establish such controls.  First, the bill requires exporters to obtain a license before exporting any emerging and foundational technologies to countries subject to an arms embargo, such as China. Second, the bill directs the Secretary of Commerce to not place additional licensing requirements on several types of transactions.  These include: The sale or license of a finished item and the provision of associated technology if the U.S. party to the transaction generally makes the finished item and associated technology available to its customers, distributors, and resellers; The sale or license to a customer of a product and the provision of integration services or similar services if the U.S. party generally makes such services available to its customers; The transfer of equipment and the provision of associated technology to operate the equipment if the transfer could not result in the foreign person using the equipment to produce critical technologies; The procurement by the U.S. party of goods or services, including manufacturing services, from a foreign person that is party to the transaction, if the foreign person has no rights to exploit any technology contributed by the U.S. person other than to supply the procured goods or services; and Any contribution and associated support by a U.S. person that is a party to the transaction to an industry organization related to a standard or specification, whether in development or declared, including any license or commitment to license intellectual property in compliance with the rules of any standards organization. Third, for several transaction types, the bill now shifts to the Department of Commerce the obligation to gather and consider the kinds of information on foreign ownership that would normally be included in CFIUS submissions.  If a proposed transaction involves joint venture, joint development agreement, or similar collaborative arrangement, the bill suggests that the Secretary of Commerce “require the applicant to identify, in addition to any foreign person participating in the arrangement, any foreign person with significant ownership interest in a foreign person participating in the arrangement.”[5] For those exporters operating in sectors that are identified as involving foundational or emerging technologies, such requirements could significantly increase the diligence they will need to conduct on counterparties, and at least some counterparties are likely to walk away from proposed transactions to avoid having to provide sensitive information regarding their ownership.  In addition, the new information gathered on foreign person participation and ownership is likely to lead Commerce to block transactions by denying license applications. b.         Addition of Defense Industrial Base Policy Considerations to Export Control Regulation and Licensing The ECRA also introduces two new policy considerations to the mix of policies the Department of Commerce is obligated to consider in its regulation of exports.  Historically, the EAA required the Department of Commerce to restrict the export of goods or technology that would significantly contribute to the military potential of other countries and to limit export controls to only those items that were militarily critical goods and technologies.[6]  Through these and other expressed policy objectives, Congress sought to promote export activity and to restrict it only when necessary.  In the ECRA, Congress introduces two new policy considerations that arguably shift U.S. export policy toward a more protectionist stance.  First, Congress directs the Secretary of Commerce to regulate exports so as to help preserve the qualitative military superiority of the United States.  Second, Congress directs the Secretary to regulate exports in ways that build and maintain the U.S. defense industrial base.[7] Congress provides the Secretary with specific direction on how to implement these new policy mandates.  In particular, the Secretary is to create a licensing procedure that will enable it to gather information to assess the impact of a proposed export on the U.S. defense industrial base.  To inform this assessment, the Secretary is to require applicants to provide information that would enable Commerce to determine whether the purpose or effect of the export would be to allow for the production of items relevant for the defense industrial base outside of the United States.[8]  ECRA further directs the Secretary to deny license applications when the proposed export would have a “significant negative impact” on the defense industrial base of the U.S. The Secretary can determine a proposed export would have a “significant negative impact” if it meets any one of three criteria: Whether the export would have the effect of reducing the availability or production of an item in the United States that is likely to be required by the Department of Defense (“DoD”) or other Federal department or agency for the advancement of national security; Whether the export would lead to a reduction in the production of an item in the United States that is the result of research and development carried out, or funded by the DoD or other Federal department or agency, or a federally funded research and development center; and Whether the export would lead to a reduction in the employment of U.S. persons whose knowledge and skills are necessary for the continued production in the U.S. of an item that is likely to be acquired by the DoD or other Federal department or agency for the advancement of national security.[9] These criteria are familiar ones to CFIUS and to CFIUS practitioners but are less so for many of those charged with administering the Department of Commerce’s export controls, and even lesser still for the many companies that rely on BIS export licensing to conduct business.  While it is unclear how BIS will specifically implement these new policy and licensing directives, we predict it will be difficult for many license applicants to gather and present the kind of information BIS will need to make its licensing determinations.  We also believe that the introduction of these defense industrial base considerations could make it more difficult for companies to obtain authorization to export their technologies generally. Final Thought Critically, most of the substantial changes mandated by FIRRMA will not take effect until the Committee has issued new regulations.  As a result, the true impact of the legislation will not be clear for some time.      [1]   CFIUS operates pursuant to section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (FINSA) (section 721) and as implemented by Executive Order 11858, as amended, and regulations at 31 C.F.R. Part 800.    [2]   U.S. Dep’t of the Treasury, FIRRMA FAQs, (Aug. 13, 2018) available at https://home.treasury.gov/sites/default/files/2018-08/FIRRMA-FAQs-8-13-18-v2-CLEAN.pdf.    [3]   31 C.F.R. §§ 800.401(a)-(b), 800.402(c).    [4]   31 C.F.R. § 800.506.    [5]   ECRA § 1758(a)(3)(C).    [6]   Export Administration Act of 1979, § §  3(2)(A) and 5(d).    [7]   ECRA, Section 1752(2)(B) and (C).    [8]   ECRA, Section 1756(d)(1) and (2).    [9]   ECRA, Section 1756(d)(3)(A)-(C).   The following Gibson Dunn lawyers assisted in the preparation of this client update:  Judith Lee, Jose Fernandez, Christopher Timura, Stephanie L. Connor and R.L. Pratt. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm's International Trade Group: United States: Judith Alison Lee - Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk - Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez - New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae - Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith - Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura - Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair - Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown - Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole - Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor - Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway - Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart - Washington, D.C. (+1 202-887-3706, whart@gibsondunn.com) Henry C. Phillips - Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt - Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint - Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis - Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos - Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris - London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden - London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz - Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther - Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder - Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 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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August 9, 2018

The “New” Iran E.O. and the “New” EU Blocking Statute – Navigating the Divide for International Business

Click for PDF On August 6, 2018, President Donald Trump issued a new executive order (the “New Iran E.O.”) authorizing the re-imposition of certain Iran-related sanctions.[1] As previously announced on May 8, 2018, and discussed in detail by Gibson Dunn here, the Trump administration opted to abandon the 2015 Iran nuclear deal—the Joint Comprehensive Plan of Action (the “JCPOA”)—and re-impose U.S. nuclear-related sanctions on the Iranian regime over the course of several months. The re-imposition of sanctions was subject to 90- and 180-day “wind-down” periods, the first of which expired on August 6, 2018. Accordingly, the New Iran E.O. authorizes the roll-back of certain types of sanctions relief provided under the JCPOA by terminating several Obama-era executive orders and formally effectuates the U.S. withdrawal from the JCPOA. In the words of President Trump, from here on out anyone doing business with Iran “will NOT be doing business with the United States.”[2] Simultaneous with the New Iran E.O., as foreshadowed in our May 21, 2018 client alert, the EU enacted Commission Delegated Regulation (EU) 2018/1100 (the “Re-imposed Iran Sanctions Blocking Regulation”), which supplements Council Regulation (EC) No 2271/96 (as amended, the “EU Blocking Statute”).  The combined effect of the EU Blocking Statute and the Re-imposed Iran Sanctions Blocking Regulation is to prohibit compliance by EU entities with U.S. sanctions on Iran which have been re-imposed following the U.S. withdrawal from the JCPOA.  The EU matched President Trump’s strident language with one senior EU official stating that “if EU companies abide by U.S. . . . sanctions they will, in turn, be sanctioned by the EU.”[3] These two actions appear to place multinational companies in an impossible bind between the inconsistent demands (and rhetoric) of powerful regulators. However, depending upon how Washington and EU Member States choose actually to implement their respective authorities this bind may prove navigable. As we have discussed in May and July of this year, the sanctions relief the United States offered under the JCPOA was limited. The “primary sanctions” that limit U.S. companies and persons from engaging with Iran have on the whole never been lifted. The principal sanctions relief provided by the United States have been of “secondary sanctions” that focus on non-U.S. companies’ transactions with Iran. These measures are designed to force non-U.S. firms to choose to either engage with Iran or the United States. In most cases, pursuant to the August 6 announcements these measures have or soon will return to the level they were prior to the implementation of JCPOA in January 2016. In some cases, the new regulations will broaden the scope of those sanctions to levels beyond those that existed prior to the JCPOA. In both the U.S. and European cases the language of the new regulations is broad and the statements from political leaders absolute. However, much as it was prior to the JCPOA the true impact of the U.S. sanctions and the EU counter-measures will be a function of the political and diplomatic appetite regulators on both sides of the Atlantic have for actually enforcing these measures. All of the sanctions and counter-sanctions are in large part discretionary. In pre-JCPOA times, the Obama Administration had similarly broad authorities to impose “secondary sanctions” on companies around the world for transactions with Iran – however, with the Administration’s clear goal of compelling Iran to the negotiating table and its concern about maintaining core diplomatic alliances, the Obama Administration actually imposed such sanctions only very sparingly. Similarly, the EU’s Blocking Statute has been in place in some form for nearly twenty years. In that time the EU and its member states – concerned about maintaining its relationships with Washington and not wanting to impose a lose-lose choice on its major corporations – have actually enforced these rules infrequently. The question going forward is whether the Trump Administration, the EU, and its various Member States will more forcefully and consistently enforce these discretionary and contradictory authorities. Early indications are that despite the language of the new regulations and the rhetoric of senior officials, there may be more flexibility on both sides of the Atlantic than it may seem. This does not remove the challenges from multinational companies eager to avoid angering either European or U.S. regulators, but it may provide a way forward. Background to the New Iran E.O. The publication of the New Iran E.O. is the latest in a series of steps the Trump administration has taken to fulfill President Trump’s campaign promise to withdraw from the JCPOA and re-impose sanctions on Iran. Following the administration’s announcement on May 8, 2018 that the U.S. would abandon the JCPOA, OFAC issued guidance indicating that the administration would allow certain activities authorized under the JCPOA to continue for specified “wind-down” periods, rather than immediately re-impose sanctions.[4] Further to this guidance, on June 27, 2018, OFAC announced that it was terminating authorizations issued pursuant to the JCPOA that had permitted limited engagement by U.S. persons and their foreign subsidiaries to undertake certain Iran-related activities.[5] As we noted in prior guidance, these authorizations were replaced with limited licenses permitting only the wind-down of previously permissible activities. The issuance of the New Iran E.O. marks the termination of the first wind-down period provided by these earlier actions. Pursuant to its provisions, OFAC is authorized to begin re-imposing the first tranche of secondary sanctions on or after August 7, 2018. In addition, as of August 7, 2018, the authorizations issued on June 28, 2018 permitting U.S. persons to wind-down their participation in contingent contracts for Iranian commercial passenger aviation and transactions involving Iranian-origin foodstuffs and carpets have been terminated.[6]U.S. persons are again prohibited from engaging in these activities. U.S. Sanctions Authorized for Re-imposition The New Iran E.O. authorizes the re-imposition of secondary sanctions previously rolled back under the JCPOA. This is a uniquely omnibus Executive Order and includes the framework for the reimposed sanctions that were reinstated as of August 7 as well as those that will be reinstated as of November 5. Applicable exceptions and conditions to these sanctions are also incorporated in the E.O. Sections of the New Iran E.O. implement provisions of various Iran-related legislation passed by Congress and revoke other executive orders from which the relevant sanctions-related provisions have been incorporated. In this regard, the New Iran E.O. attempts to consolidate the relevant secondary sanctions authorities into a single legal source, creating an unusually comprehensive executive order. The secondary sanctions available for imposition for these activities and for those sanctionable activities undertaken on or after November 5 include three general types of sanctions to be discretionarily imposed against entities for different activities and behaviors. First, the Order provides for blocking sanctions, such as those imposed against persons placed on the List of Specially Designated Nationals and Blocking Persons (the “SDN List”). Second, the Order provides for correspondent and payable-through account sanctions which prohibit or restrict U.S. banks from opening or maintaining U.S. accounts for designated foreign financial institutions, effectively cutting these foreign banks off from the U.S. financial system (and in some cases ostracizing them from U.S. dollar-based trade in general). Finally, the Order provides for menu-based sanctions permitting OFAC to select from several sanctions—from visa limitations to blocking sanctions—to impose against designated entities. Sanctions Applicable on or after August 7, 2018 The New Iran E.O. authorizes the imposition of secondary sanctions against foreign persons engaged in the activities described below on or after August 7, 2018: Blocking sanctions on non-U.S. persons who materially assist, sponsor, or provide support for or goods or services in support of the purchase or acquisition of U.S. dollars or precious metals by the Government of Iran;[7] Correspondent and payable-through account sanctions on foreign financial institutions that engage in significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;[8] Menu-based sanctions on non-U.S. persons who knowingly engage in: significant transactions to provide significant goods or services to Iran’s automotive sector;[9] the sale, supply, or transfer to or from Iran of certain materials, including graphite, raw, or semi-finished metals such as aluminum and steel, coal, and software for integrating industrial processes;[10]or the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt;[11] Correspondent and payable-through account sanctions on foreign financial institutions that conduct or facilitate significant transactions related to the provision of significant goods or services to Iran’s automotive sector.[12]  Depending upon the seriousness of the conduct these sanctions could prohibit the opening of such accounts, strictly condition the maintenance of such accounts, or even require that such accounts be closed. Sanctions Applicable on or after November 5, 2018 The New Iran E.O. also authorizes the imposition of several types of secondary sanctions against foreign persons who engage in the activities described below on or after November 5, 2018: Blocking sanctions on non-U.S. persons who materially assist, sponsor, or provide support for or goods or services in support of: the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”), or the Central Bank of Iran;[13] Iranian SDNs;[14]or any other person included on the SDN List pursuant to Section 1(a) of the New Iran E.O. or Executive Order 13599 (i.e., the Government of Iran and certain Iranian financial entities);[15] Blocking sanctions on non-U.S. persons who: are part of the Iranian energy, shipping, or shipbuilding sectors;[16] operate Iranian ports;[17]or provide significant support to or goods or service in support of persons that are part of Iran’s energy, shipping, or shipbuilding sectors; Iranian port operators; or Iranian SDNs (excluding certain Iranian financial institutions);[18] Menu-based sanctions on non-U.S. persons who: knowingly engage in significant transactions in Iranian petroleum, petroleum products, or petrochemical products;[19] are successors, subsidiaries, parents, or affiliates of persons who have knowingly engaged in significant transactions in Iranian petroleum, petroleum products, or petrochemical products or in Iran’s automotive sector;[20] provide underwriting services, insurance, or reinsurance for sanctionable activities with or involving Iran;[21]or provide specialized financial messaging services to the Central Bank of Iran;[22] Correspondent and payable-through account sanctions on foreign financial institutions that conduct or facilitate significant transactions on behalf of Iranian SDNs or other SDNs (as described above);[23] with NIOC or NICO;[24]or for transactions in Iranian petroleum, petroleum products, or petrochemical products.[25] As above, depending upon the seriousness of the conduct these correspondent and payable-through account sanctions could prohibit the opening of such accounts, strictly condition the maintenance of such accounts, or even require that such accounts be closed. On November 5, in addition to the imposition of these sanctions provided in the New Iran E.O., OFAC will again prohibit non-U.S. entities owned or controlled by U.S. persons (e.g., foreign subsidiaries of U.S. companies) from generally engaging in business operations in and with respect to Iran. As we have noted in prior guidance, on June 28, 2018, OFAC revoked General License H, which permitted such activity, and replaced it with narrower authorizations permitting only the wind-down of the previously authorized transactions.  This wind-down authority expires on November 5, 2018. Broader Scope of Sanctions Authorities with Continued Discretion and Exemptions Included among the provisions described above are new or expanded sanctions authorities. OFAC indicates that these changes are designed to provide “greater consistency in the administration of Iran-related sanctions.”[26] The broadened scope of these provisions is also consistent with the Trump administration’s promise to impose the “strongest sanctions in history” on Iran and indicates that the administration may go beyond the comparatively narrower application of these authorities by the Obama administration.[27] Specifically, new authorities, listed above, allow the imposition of blocking sanctions or correspondent and payable-through account sanctions on foreign persons engaging on or after November 5 in transactions with persons sanctioned under the New Iran E.O.[28] Other sections of the E.O. expand the menu of sanctions available for imposition against persons designated for engaging in transactions involving Iranian petroleum, petroleum products, or petrochemical products. Potential sanctions now include, among other restrictions, blocking sanctions and visa restrictions on the executive officers of entities sanctioned for engaging in such transactions.[29] The New Iran E.O. also expands the restrictions applicable to U.S.-owned or –controlled foreign entities. Among other applicable restrictions, such entities are also prohibited from engaging in transactions with persons blocked for providing material support to Iranian SDNs or for being part of Iran’s energy, shipping, or shipbuilding sectors or an Iranian port operator.[30]As noted above, U.S.-owned or –controlled foreign entities continue to be generally permitted to wind-down their business operations with or involving Iran, notwithstanding these new restrictions. Importantly, these expanded sanctions authorities and the broad re-authorization of secondary sanctions provided in the New Iran E.O. do not immediately result in the designation of additional persons or otherwise necessarily expand the sanctions imposed. As we have seen in the context of the secondary sanctions authorized in the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), expansive secondary sanctions authorities that are not imposed may have limited direct impact. Moreover, lost in the midst of the rhetoric and the regulations is that the Trump Administration appears willing to continue certain, arguably forgiving policies and exemptions that the Obama Administration supported. The Administration could have, but did not, revoke certain exemptions that shaped Obama-era policy. For instance, according to the terms of the New Iran E.O., the sanctions listed above targeting transactions in Iranian petroleum and petroleum products will not apply to entities in countries that the President determines have “significantly reduced their Iranian crude oil imports.”[31] The Trump Administration had initially stated that the Administration would only apply this exception if countries eliminated their Iranian oil imports.[32] However, officials later indicated that the U.S. government may work on a “case-by-case” basis with certain countries committed to reducing their imports from Iran and may consider whether to grant this exception.[33] Other exceptions, including for transactions related to the Shah Deniz gas field (which is partly owned by the Government of Iran) and for transactions involving the export of agricultural commodities, food, medicine, or medical devices to Iran, continue to apply.[34]  Additionally, General License D-1 – which allows for the export of certain telecommunications goods and services to Iran remains in force, as does General License J – which permits temporary visits to Iran by U.S.-origin aircraft (thus allowing international carriers to continue flying to Iran). The Trump Administration has even kept some of the even more explicitly lenient regulatory interpretations that the Obama team had. For instance, OFAC FAQ 613 notes that despite the secondary sanctions on Iran’s automotive sector, the shipment by non-U.S. parties of after-market parts for use in maintaining finished cars (rather than building new cars) would not generally be viewed as prohibited.[35] Moreover, OFAC FAQ 315 provides that rather than shutting down the entire Iranian port sector (and thus eliminating all shipments to the country) by imposing sanctions on any non-U.S. person who calls at an Iranian port, “to the extent that a shipping company transacts with port operators in Iran” that are not sanctioned, the payment of “routine fees” and the loading and unloading of cargo would not generally be prohibited.[36]  Neither of these allowances were required by legislation. Despite this flexibility – which will be very helpful to certain industries active in the implicated sectors (such as telecommunications, auto parts, airlines, and shipping) – it is important to remember that these exceptions are on the margin. In the main, the secondary sanctions in the New Iran E.O. were issued by an Administration eager to robustly and clearly fulfill a key campaign pledge in an election year and an Administration that appears comfortable engaging in unilateral action even at the cost of potentially weakening relationships with key allies. Administration officials have already signaled plans for strict enforcement[37] and the broadening of the sanctions authorities described above may be the first steps towards doing so. The European Response Almost immediately after President Trump announced his intention to withdraw from the JCPOA on May 8, 2018, the European Union and senior leaders in several major EU Member States announced their intention to remain compliant with the JCPOA and to reinvigorate the “EU Blocking Statute” so as to continue to promote the sanctions relief that the bloc views as central to the JCPOA. While some Member States moved to update their domestic legislation in this regard prior to the end of the first wind-down period, the EU had not formalized any changes until August 7. The EU Blocking Statute was designed as a counter-measure to what the EU considers to be the unlawful effects of third-country (primarily, but not exclusively, U.S.) extra-territorial sanctions on “EU operators.”  Its purpose is first and foremost to protect EU operators engaging in international trade, in a manner wholly compliant with EU law, but in breach of sanctions imposed by other countries.  At a political level, it is also designed to display the EU’s disapproval of sanctions regimes implemented by third countries which the EU considers to be abusive or unreasonable.  The EU Blocking Statute sets out a series of requirements relating to offending overseas sanctions (explained below), and then lists the overseas sanctions regimes to which it applies in an Annex. The Re-imposed Iran Sanctions Blocking Regulation is accompanied by an Implementing Regulation (EU) 2018/1101 (the “Implementing Regulation”), relating to the process for EU operators to apply for authorization from the European Commission to comply with Blocked U.S. Sanctions (as defined below).  The European Commission has also prepared a Guidance Note Questions and Answers: adoption of update of the Blocking Statute (the “Guidance”) to help EU operators understand these various instruments. The EU Blocking Statute applies to a wide range of actors including: any natural person being a resident in the EU and a national of an EU Member State; any legal person incorporated within the EU; any national of an EU Member State established outside the EU and any shipping company established outside the EU and controlled by nationals of an EU member state, if their vessels are registered in that EU member state in accordance with its legislation; any other natural person being a resident in the EU, unless that person is in the country of which he is a national; and any other natural person within the EU, including its territorial waters and air space and in any aircraft or on any vessel under the jurisdiction or control of an EU member state, acting in a professional capacity.[38] The EU’s guidance note emphasizes that when EU subsidiaries of U.S. companies are formed in accordance with the law of an EU Member State and have their registered office, central administration or principal place of business within the EU they are subject to the EU Blocking Statute. However, branches of U.S. companies in the EU are not subject to the EU Blocking Statute. From Rhetoric and Regulation… The EU Blocking Statute prohibits EU operators from complying with a set of specific extra-territorial laws or any decisions, rulings or awards based on those laws.[39]  The laws are explicitly listed and include six different U.S. sanctions laws and one set of U.S. regulations (OFAC’s Iranian Transactions and Sanctions Regulations). The EU Blocking Statute applies to all EU operators from August 7, 2018 and does not allow for any grandfathering of pre-existing contracts or agreements. Notably, the EU Guidance indicates that EU operators are prohibited from even requesting a license from the United States to maintain compliance with U.S. sanctions. Requesting such permission—without first gaining authorization from the EU or a competent authority in a Member State to do so— is tantamount to complying with U.S. sanctions.[40] In addition to prohibiting compliance with the various U.S. laws and regulations, the EU Blocking Statute requires EU operators to report to the European Commission within 30 days of any circumstances arising from the extraterritorial laws that affect their economic or financial interests. [40a] The EU Blocking Statute also holds that any decision rendered in the United States or elsewhere made due to the extraterritorial measures cannot be implemented in the European Union. [40b] This means, for instance, that any court decision made in light of the extraterritorial measures cannot be executed in the European Union, presumably even under existing mutual recognition agreements. Finally, the EU Blocking Statute allows EU operators to recover damages arising from the application of the extraterritorial measures. Though it is unclear how this would work in practice, it appears to allow an EU operator to exercise a private right of action and to be indemnified by companies that do comply with the U.S. laws if in so doing those companies injure the EU operator. For instance, if a European company has a contract to provide certain goods to Iran the European company is not allowed to break that contract due to their desire to comply with U.S. sanctions. However, if some of those goods are derived in part from other companies that have decided to comply with U.S. measures and to cease supplying any material destined for Iran the European company may be compelled to cease its transactions with Iran. In such case the Iranian company could sue the European company for breach of contract – the European operator could in turn sue its supplier for the damages caused due to the supplier’s compliance with the extra-territorial U.S. sanctions. Similarly, this provision allows Member States to sue companies who comply with the U.S. rules to the detriment of an EU operator (which has been done once before under the existing EU Blocking Statute). [40c] …To Reality As noted in our May 21, 2018 client alert , the competent authorities of the EU Member States are responsible for the implementation at national level of the EU Blocking Statute, including the adoption and implementation in national legal orders of penalties for possible breaches.  Such penalties are laid down in national legislation and vary by Member State. The United Kingdom has in place a law, the Extraterritorial US Legislation (Sanctions against Cuba, Iran and Libya) (Protection of Trading Interests) Order 1996, which broadly makes compliance with Blocked U.S. Sanctions a criminal offence. That Order does not provide for custodial sentences, but it does provide for a potentially unlimited fine. Certain other Member States have also opted for the creation of criminal offences, including Ireland, the Netherlands and Sweden. Other Member States, including Germany, Italy and Spain, have devised administrative penalties for non-compliance.  Meanwhile some Member States, including France, Belgium and Luxembourg, do not appear ever to have even implemented the EU Blocking Statute, notwithstanding the obligation on them as a matter of general EU law to prescribe penalties for breach of EU law which are effective, proportionate and dissuasive. Despite the breadth of the EU Blocking Statute language, the enforcement language and posture noted above, and the absolute nature of some of the rhetoric emanating from Brussels and certain Member State capitals as indicated by the lack of universal implementation of the existing EU Blocking Statute by Member States there has clearly been uneven application of existing rules.  We expect the same going forward with the updated EU Blocking Statute. Additionally, the EU Blocking Statute appears to include sufficient flexibility to provide multinational companies a potential path to navigate between Washington and Brussels.  (This is even before assessing the potentially low likelihood of enforcement.  We recognize that given the political and diplomatic environment in 2018 the past’s limited enforcement environment may not be prologue). In this regard, there are two key flexibilities written into the EU regulations. First, the Guidance allows EU operators to request authorization to comply with U.S. sanctions if not doing so would cause “serious harm to their interests or the interests of the European Union.” [40d] The European Commission has an existing template for making such a request which includes thirteen potential criteria that applicants can call upon when making their application.[41]These include whether there exists “a substantial connecting link” between the EU operator and the United States, whether not complying with U.S. measures could have “adverse effect on the conduct of [a company’s] economic activity,” or whether the “applicant’s activity would be rendered excessively difficult due to a loss of essential inputs or resources, which cannot be reasonably replaced.” Given the centrality of the U.S. financial system, and in some cases U.S. supply chains, many European companies could likely be able to make such claims. Under Article 3(2) and 3(3) of the Implementing Regulation, EU operators requesting an authorization must, at a minimum, explain with which provisions of the Blocked U.S. Sanctions they wish to be authorized to comply, and the acts they would be required to carry out.  EU operators seeking an authorization must also demonstrate how non-compliance with the Blocked U.S. Sanctions would cause serious damage to their interests or to the interests of the EU.  While potentially broad, it is uncertain what standard Brussels or the Member States will use in assessing whether to grant such authorizations. The second element of flexibility in the EU Blocking Statute is that EU operators will not be forced to continue business with Iran. Rather, the Guidance notes that EU operators are still free to conduct their business as they see fit – including “whether to engage or not in an economic sector on the basis of their assessment of the economic situation.”[42]  As such, we expect to see an increasing number of European firms to cease engaging in Iran, following in the wake of dozens of major European companies and financial institutions who have already announced their departure (and an even larger number who chose never to enter even under the JCPOA). This is a key flexibility as there are many reasons—apart from sanctions—that could cause a company in the prudent exercise of its fiduciary duties to decide to suspend Iranian operations and remain compliant with the EU Blocking Statute.  Indeed there is significant momentum behind European companies leaving Iran or otherwise indicating their plans to limit engagement.  Notably, this activity has included not just major private European companies leaving or announcing their intention to do so, but also actions by publicly-owned firms and even regulators.  For instance, the President of the European Investment Bank (an institution owned by the EU’s Member States) has publicly stated that the institution’s global operations would be put at risk if it continued its Iranian activities in light of U.S. sanctions.[43]  Though the EIB’s President has not indicated what this means for the EIB’s future Iran-related business it suggests a potential way out of engaging in Iran consistent with the EU regulations. Similarly – though not formally related to the new EU measures – the German Bundesbank recently quietly decided to revise its terms and conditions on cash withdrawals applicable to German financial institutions to include a provision that allowed the Bundesbank to reject a request from Tehran to withdraw EUR 300 million in cash from the German-regulated Europäisch-Iranische Handelsbank, an Iranian-owned bank based in Hamburg, Germany. The Bundesbank’s terms and conditions now inter alia state that such transactions could be refused in cases in which the transaction would threaten the Bundesbank’s relationships with other central banks or financial institutions in third countries. [44]  The principal “third country” in question is likely the United States. Next Steps and the Way Ahead We expect that the next steps in either enhancing sanctions on Iran (from the U.S. side) or protecting trade with Iran (from the EU side) will be regulatory. In line with past practices we think it possible that U.S. regulators will provide further guidance in the form of FAQs or even General Licenses to calibrate their policies. EU regulators, and Member States could do the same.  Actual enforcement on either side of the Atlantic is likely to be slow in coming. The Trump Administration has followed the Obama Administration’s playbook and sent senior officials to major foreign companies and countries thought to be the most likely source of non-compliance with U.S. measures. In the Obama era such outreach led to significant compliance enhancements in the companies and countries visited and thereby reduced the Obama Administration’s need to actually impose extra-territorial measures (secondary sanctions). In the current circumstance, the diplomatic situation for the United States is more uncertain. European governments, stung by the Administration’s withdrawal from the JCPOA and the continuing trade war, will clearly be unwilling to publicly go along with U.S. measures even if European companies choose to comply (either explicitly or implicitly in order to stay compliant with the EU Blocking Statute). The Turkish government, still smarting from recent U.S. sanctions unrelated to Iran imposed on their Ministers of Justice and Interior[45] (and the recent Iran sanctions-related conviction in U.S. federal court of a senior bank executive from Turkey’s Halk Bank[46]) may also prove less willing to assist. Moreover, while the UAE may be more able and willing to tamp down the traditional flows to Iran out of Dubai than was the case during the Bush and Obama Administrations, major Iranian oil importers such as India and China remain potential wildcards. Provided they receive substantial reduction exemptions to allow continued purchase of Iranian crude, we assess that other major Iranian oil importers such as South Korea, Japan, and Taiwan will likely on the whole opt to comply with U.S. measures.  Seoul, Tokyo, and Taipei would be unlikely to risk angering Washington given their broader needs for U.S. support in the region and their financial institutions will be similarly loathe to alienate their U.S. partners and risk their access to the American market and the U.S. dollar. There is much that remains unknown about the way ahead. The Trump Administration has not clearly articulated its goals with respect to the reimposed sanctions and in the lead up to the U.S. midterm elections in November could decide to become even more aggressive so as to gain support from its base. Similarly, as the Iranian government deals with the reimposed sanctions alongside mounting domestic protests it may also lash out aggressively, perhaps going as far as fulfilling its pledge to block the Straits of Hormuz or otherwise interfere with global trade or other core regional security interests. If either of these external factors come to bear, the situation would quickly become more challenging and the sanctions realities faced by global companies and governments could change radically.     [1] Executive Order, “Reimposing Certain Sanctions with Respect to Iran,” (Aug. 6, 2017), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/08062018_iran_eo.pdf. [2] Babak Dehghanpisheh and Peter Graff, “Trump Says Firms doing Business in Iran to be Barred from U.S as Sanctions Hit,” Reuters (Aug. 7, 2018), available at https://www.reuters.com/article/us-iran-nuclear/trump-says-firms-doing-business-in-iran-to-be-barred-from-us-as-sanctions-hit-idUSKBN1KS13I. [3] Nathalie Tocci, Aide to Federica Mogherini, quoted in Jacqueline Thomsen, “EU Issues Warning to European Companies that Comply with new U.S. Sanctions on Iran,” The Hill, (Aug. 7, 2018), available at http://thehill.com/policy/international/europe/400704-eu-threatens-to-sanction-european-companies-that-comply-with-new. [4] Press Release, White House, Remarks by President Trump on the Joint Comprehensive Plan of Action (May 8, 2018), available at https://www.whitehouse.gov/briefings-statements/remarkspresident-trump-joint-comprehensive-plan-action; U.S. Dep’t of Treasury, Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018 National Security Presidential Memorandum Relating to the Joint Comprehensive Plan of Action (JCPOA) (May 8, 2018). [5] U.S. Dep’t of the Treasury, Revocation of JCPOA-Related General Licenses; Amendment of the Iranian Transactions and Sanctions Regulations; Publication of Updated FAQs (Jun. 27, 2018), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20180627.aspx. [6] 31 C.F.R. §§ 560.534-356. [7] Section 1(a)(i). [8] Section 6. [9] Section 3(a)(i). [10] Section 5. [11] Id. [12] Section 2(a)(i). [13] Section 1(a)(ii). [14] Section 1(a)(iii). [15] Id. [16] Section 1(a)(iv). [17] Id. [18] Id. [19] Section 3(a)(ii)-(iii). [20] Section 3(a)(iv)-(vi). [21] Section 5. [22] Id. This provision refers to the electronic messaging provided principally by the SWIFT inter-bank messaging system. [23] Section 2(a)(ii). [24] Section 2(a)(iii). [25] Section 2(a)(iv)-(v). [26] OFAC FAQ No. 601. [27] See, e.g., Press Release, U.S. Dep’t. of State, After the Iran Deal: A New Iran Strategy (May 21, 2018), available at https://www.state.gov/secretary/remarks/2018/05/282301.htm. [28] Including, inter alia, persons sanctioned for engaging in transactions involving U.S. bank notes or precious metals, NIOC, NICO, the Central Bank of Iran, Iran’s energy, shipping, or shipbuilding sectors, Iranian port operators, or Iranian SDNs. See OFAC FAQ 601 for a complete list. [29] Sections 4(e) and 5(a)(vii). [30] Section 8(a). [31] Sections 2(c)(i) and 3(b)(i) [32] Special Briefing, U.S. Dep’t. of State, Senior State Department Official on U.S. Efforts to Discuss the Re-Imposition of Sanctions on Iran With Partners Around The World (Jun. 26, 2018), available at https://www.state.gov/r/pa/prs/ps/2018/06/283512.htm. [33] Brian Hook, Director of Policy Planning, U.S. State Department, Press Briefing, July 2, 2018. [34] See, e.g., Section 2(d)-(e) [35] OFAC FAQ No. 613. [36] OFAC FAQ No. 315. [37] See, e.g., Press Release, U.S. Dep’t. of State, After the Iran Deal: A New Iran Strategy (May 21, 2018), available at https://www.state.gov/secretary/remarks/2018/05/282301.htm. [38] We note that the scope of the EU Blocking Statute slightly differs from EU financial and economic sanctions, specifically as in that “business done in part or in whole in the EU” is not automatically covered. [39] The listed extra-territorial legislation are the: National Defense Authorization Act for Fiscal Year 1993, Title XVII “Cuban Democracy Act 1992”, sections 1704 and 1706; Cuban Liberty and Democratic Solidarity Act of 1996; Iran Sanctions Act of 1996; Iran Freedom and Counter-Proliferation Act of 2012; National Defense Authorization Act for Fiscal Year 2012; Iran Threat Reduction and Syria Human Rights Act of 2012; and the Iran Transactions and Sanctions Regulations (31 CFR Part 560). [40] Guidance Note – Questions and Answers: Adoption of Update of the EU Blocking Statute (2018/C 277I/03) (hereinafter “Guidance Note”), Question 23. [40a] Article 2, paragraph 1 of the EU Blocking Statute [40b] Article 4 of the EU Blocking Statute [40c] In 2007, Austria brought charges for breach of Regulation (EC) 2271/96 against an Austrian bank, at the time the fifth-largest Austrian bank. The charges were based on the Austrian Federal Law on the Punishment of Offences against the Provisions of EC Regulation (EC) No 2271/96. The bank had closed the accounts of 100 Cuban nationals. Having Cuban clients would have prevented the acquisition of the bank by a U.S. investor at a time when U.S. Cuban sanctions made it illegal for U.S. companies to deal with Cuba. Following a public uproar, and after U.S. authorities agreed to grant the bank an exemption, the bank reinstated the accounts held by Cuban nationals. The acquisition of the bank went ahead as planned and the investigation against the bank for breach of Regulation (EC) 2271/96 was discontinued, available online at https://www.bmeia.gv.at/en/the-ministry/press/announcements/2007/foreign-ministry-ceases-investigations-against-bawag-bank/, last checked August 9, 2018. [40d] Article 5, paragraph 2 of the EU Blocking Statute [41] Template for Applications for Authorisations under Article 5 paragraph 2 of Council Regulation (EC) No 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting thereon (‘Regulation’). [42] Guidance Note, Question 5. [43] Robin Emmott and Alissa de Carbonnel, “European Investment Bank Casts Doubt on EU Plan to Salvage Nuclear Deal,” Reuters, (July 18, 2018), available at https://www.reuters.com/article/us-iran-nuclear-eu/european-investment-bank-casts-doubt-on-eu-plan-to-salvage-nuclear-deal-idUSKBN1K81BD. [44] Claire Jones and Guy Chazan, “Bundesbank Rule Change hits €300m Iran Bank Transfer,” Financial Times, (August 6, 2018). [45] Adam Goldman and Gardiner Harris, “U.S. Imposes Sanctions on Turkish Officials over Detained American Pastor,” N.Y. Times (Aug. 1, 2018). [46] Benjamin Weiser, “Turkish Banker in Iran Sanctions-Busting Case Sentenced to 21 Months,” N.Y. Times (May 16, 2018).   The following Gibson Dunn lawyers assisted in the preparation of this client update: Adam Smith, Judith Lee, R.L. Pratt, Richard Roeder, Patrick Doris, Christopher Timura, Stephanie Connor, and Peter Alexiadis. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm's International Trade Group: United States: Judith Alison Lee - Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) Ronald Kirk - Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Jose W. Fernandez - New York (+1 212-351-2376, jfernandez@gibsondunn.com) Marcellus A. McRae - Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com) Adam M. Smith - Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com) Christopher T. Timura - Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com) Ben K. Belair - Washington, D.C. (+1 202-887-3743, bbelair@gibsondunn.com) Courtney M. Brown - Washington, D.C. (+1 202-955-8685, cmbrown@gibsondunn.com) Laura R. Cole - Washington, D.C. (+1 202-887-3787, lcole@gibsondunn.com) Stephanie L. Connor - Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com) Helen L. Galloway - Los Angeles (+1 213-229-7342, hgalloway@gibsondunn.com) William Hart - Washington, D.C. (+1 202-887-3706, whart@gibsondunn.com) Henry C. Phillips - Washington, D.C. (+1 202-955-8535, hphillips@gibsondunn.com) R.L. Pratt - Washington, D.C. (+1 202-887-3785, rpratt@gibsondunn.com) Scott R. Toussaint - Palo Alto (+1 650-849-5320, stoussaint@gibsondunn.com) Europe: Peter Alexiadis - Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com) Attila Borsos - Brussels (+32 2 554 72 10, aborsos@gibsondunn.com) Patrick Doris - London (+44 (0)207 071 4276, pdoris@gibsondunn.com) Penny Madden - London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Benno Schwarz - Munich (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther - Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Richard W. Roeder - Munich (+49 89 189 33-160, rroeder@gibsondunn.com) © 2018 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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August 9, 2018

Amendments to the Prevention of Corruption Act, 1988: Implications for Commercial Organizations Doing Business in India

Click for PDF The Indian Parliament recently passed the Prevention of Corruption Act (Amendment) Act, 2018 (the "2018 Amendment"), amending the Prevention of Corruption Act, 1988 (the "PCA"). The PCA is the primary Indian legislation tackling corruption and bribery involving public officials in India. The 2018 Amendment has been in the works for several years and marks the most significant set of amendments made to the PCA since its inception. The 2018 Amendment—which came into force on July 26, 2018[1]--effects critical changes to the PCA, including direct liability for commercial organizations involved in bribery in India. This update provides an overview of the key changes effected by the 2018 Amendment and its impact on commercial organizations doing business in India.[1a] A. Supply Side of Bribery Prior to the  2018 Amendment, the primary focus of the PCA had been to deal with the demand side of corruption.  The main charging sections of the PCA deal with the acceptance of bribes by public servants. Prior to the 2018 Amendment, Section 7 of the PCA penalized a public servant who accepted or obtained gratification other than legal remuneration in respect of an official act.  Section 11 made it an offence for a public servant, among other things, to accept or obtain for himself or for any other person, "any valuable thing without consideration or for a consideration which he knows to be inadequate", from any person who may have an interest in a proceeding or business transacted by the public servant, or some connection with the official function of the public servant or his subordinates. The PCA covered the supply side of bribery only indirectly. The abetment of an offence under Sections 7 or 11 of the historical PCA was punishable under Section 12.  A person offering a bribe or giving a valuable item to a public servant could have been prosecuted for abetting an offence under Sections 7 or 11 of the PCA. The 2018 Amendment overhauls these charging sections of the PCA and includes a distinct offence dealing with the supply side of bribery. Section 8 of the amended PCA prohibits the giving or promising to give an undue advantage (which includes any kind of gratification) other than legal remuneration to a public servant with the intention of inducing or rewarding a public servant for the improper performance of any public function.  Whether the offer or promise is ultimately accepted by the public servant is immaterial.   Punishment for the offence may include imprisonment for a period not exceeding seven years and/or a fine. At this juncture, it is important to note the import of the term "public servant" under the PCA. The general understanding was that the term referred to employees of different branches of the state (executive, legislature, judiciary) or employees of public sector undertakings and institutions.  As a result of the broad manner in which the term 'public servant' has been defined in the PCA, however, it is not just persons associated with an Indian governmental institution who come under PCA purview. For example, as the PCA's definition of the term 'public servant' includes any person who discharges a duty in "which the State, the public or the community at large has an interest"[2], the Supreme Court of India ruled in 2016 that the term also includes employees of private banks.[3] B. Removal of Immunity to Bribe Giver Under Section 24 of the PCA (in its unamended form), bribe givers received immunity from prosecution if they reported the acceptance of a bribe by a public servant or became a witness in the prosecution of a bribery offence. The 2018 Amendment significantly limits this protection for bribe givers, and instead increases the burden on bribe givers to report the occurrence of an offence. Those seeking immunity must now prove that they were "compelled" to provide an undue advantage (such as a bribe) to a public servant and must report the provision of the undue advantage to Indian enforcement or investigating agencies within a period of seven days.[4]  It is currently unclear as to what evidence would be needed to establish that a person was compelled to provide a bribe by a public servant. C. Bribery by Commercial Organizations The 2018 Amendment has introduced provisions that will have a far-reaching impact on commercial organizations operating in India. While these amendments are intended to improve integrity levels within the Indian business community, they will also significantly increase the compliance burden for companies doing business in India. Under Section 9 of the amended PCA, a commercial organization can be held liable "if any person associated with the commercial organisation gives or promises to give any undue advantage to a public servant" with an intent to obtain or retain business or any advantage for that commercial organizations. This provision covers all types of entities (including domestic companies, foreign companies and partnerships) doing business in India, but does not include charitable organizations. Commercial organizations operating in India will therefore be vicariously liable for any bribes provided to public servants by persons associated with such organizations. In order to cast a wide net on intermediaries who provide bribes on behalf of commercial organizations, the 2018 Amendment considers anyone "who performs services for or on behalf of the commercial organisation" to be a person associated with such organization. Consequently, commercial organizations can be held liable for the actions of their employees, agents, service providers and professional advisers. Further, a parent company (including a foreign parent company) can be held liable under the PCA for the actions of its Indian subsidiary. Commercial organizations can avoid liability for a bribe provided by a person associated with them by demonstrating that the bribe was provided to the public servant despite the organization putting in place "adequate procedures designed to prevent" it. While the 2018 Amendment does not delineate what are considered to be "adequate procedures", it requires the Indian Government to prescribe guidelines in this regard.[5] The requirement to install adequate safeguards is the latest in a legislative trend mandating robust compliance programs.  For example, the [Indian] Companies Act, 2013 requires directors of Indian companies to annually certify that they have "taken proper and sufficient care for the maintenance of adequate accounting records… for preventing and detecting fraud and other irregularities".[6] More stringent obligations apply to companies that are listed on Indian stock exchanges. Foreign parent companies should be mindful of the increased liability under the amended PCA. As parent entities may now be held liable in India for wrong-doing committed by their Indian subsidiaries, such parent companies should ensure that their Indian subsidiaries have adequate procedures to prevent bribe-giving to Indian public servants. Until such time as the Indian Government stipulates guidelines regarding the "adequate procedures", commercial organizations doing business in India would do well to adhere to established international standards for compliance programs, such as those expected under the U.S. Foreign Corrupt Practices Act ("FCPA") and the U.K. Bribery Act ("UKBA"). D. Managerial Liability In addition to imposing liability on individuals providing bribes to public servants and commercial organizations deriving business or an advantage from such bribes, the 2018 Amendment also imposes liability on directors, managers, secretaries and other officers of a commercial organization. Under Section 10 of the amended PCA, managerial personnel of a commercial organization will be liable if the prosecution is able to establish that such personnel consented to or connived with the person committing the offence under the PCA. Managerial personnel can face imprisonment for up to seven years and/or fines if found guilty. Even though managers of commercial organizations will not be held liable for bribes that are provided without their knowledge or participation, it is more important than ever for management to set the right tone at the top of their organizations to avoid personal liability and ensure that their organizations do not fall afoul of the amended PCA. E. Conclusion The 2018 Amendment makes significant changes to a law that has been in place for over three decades and has seen uneven enforcement.  The investigative and prosecutorial burden required to successfully enforce the provisions of the PCA against errant public servants appears to have increased[7] as a result of the 2018 Amendment.  However, the new law also brings with it a promise of more speedy trials in bribery cases.  Under the amended PCA, trials are required to be completed within two years from the date on which the case is filed.  While this amendment does not address delays that generally plague the investigative process, it is expected to expedite cases once filed.[8] For commercial organizations doing business in India, the 2018 Amendment is an opportunity to revisit their anti-bribery policies, compliance programmes, and processes,  especially for frameworks that have been focused on ensuring compliance with legislation like the FCPA or the UKBA. With commercial organizations and managerial personnel now directly under scrutiny for violations of the PCA, multinational organizations need to ensure that their India operations rise up to the heightened compliance standards ushered in by the 2018 Amendment. [1]      Gazette Notification No. S.O. 3664(E) dated 26 July 2018. [1a]      This update is based on the text of the 2018 Amendment as passed by the upper house of the Indian Parliament on the 19th of July, 2018. [2]      Section 2(c)(viii) of the PCA. [3]      See Central Bureau of Investigation v. Ramesh Gelli and others, Criminal Appeal Nos. 1077-1081 of 2013 and Writ Petition (Crl.) no. 167 of 2015. The Supreme Court of India came to include private bankers within the definition of a public servant also as a result of provisions of the [Indian] Banking Regulation Act, 1949. [4]      Parliament passes bill to punish bribe-givers, Deccan Herald, at: https://www.deccanherald.com/national/parliament-passes-bill-punish-683401.html (25 July 2018). [5]      The Institute of Company Secretaries of India (ICSI) formulated a Corporate Anti-Bribery Code in October 2017 that can be adopted by Indian commercial organizations on a voluntary basis. However, there is no statutory backing for this code and nothing to suggest that policies and stipulations contained therein would satisfy the requirements of the amended PCA. [6]      Section 134(5)(c) of the Companies Act, 2013. [7]      Section 17A is a new provision requiring the prior sanction of the relevant federal or state government with whom the public servant is employed. [8]      Under Section 4(5) of the amended PCA, the trial period can be extended until a maximum of four years from the date of filing of the case provided that the judge hearing the case records reasons for any extension beyond the initial two year period. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these issues.  We have more than 110 attorneys with FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm's domestic and international offices.  Please contact the Gibson Dunn attorney in the firm's FCPA group with whom you work, or the authors: Kelly Austin - Hong Kong (+852 2214 3788, kaustin@gibsondunn.com) Karthik Ashwin Thiagarajan - Singapore (+65 6507 3636, kthiagarajan@gibsondunn.com) Oliver D. Welch - Hong Kong (+852 2214 3716, owelch@gibsondunn.com) Please also feel free to contact any of the following leaders and members of the FCPA group: Washington, D.C. F. Joseph Warin - Co-Chair (+1 202-887-3609, fwarin@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) David Debold (+1 202-955-8551, ddebold@gibsondunn.com) Michael S. Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stephanie Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) M. Kendall Day (+1 202-955-8220, kday@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com) Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com) Christopher W.H. Sullivan (+1 202-887-3625, csullivan@gibsondunn.com) Courtney M. Brown (+1 202-955-8685, cmbrown@gibsondunn.com) Jason H. Smith (+1 202-887-3576, jsmith@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Pedro G. Soto (+1 202-955-8661, psoto@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Mark A. Kirsch (+1 212-351-2662, mkirsch@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Daniel P. Harris (+1 212-351-2632, dpharris@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Laura M. Sturges (+1 303-298-5929, lsturges@gibsondunn.com) Los Angeles Debra Wong Yang - Co-Chair (+1 213-229-7472, dwongyang@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Michael M. 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Stevens - Co-Chair (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8333, mwong@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charlie Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Sacha Harber-Kelly (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Paris Benoît Fleury (+33 1 56 43 13 00, bfleury@gibsondunn.com) Bernard Grinspan (+33 1 56 43 13 00, bgrinspan@gibsondunn.com) Jean-Philippe Robé (+33 1 56 43 13 00, jrobe@gibsondunn.com) Audrey Obadia-Zerbib (+33 1 56 43 13 00, aobadia-zerbib@gibsondunn.com) Munich Benno Schwarz (+49 89 189 33-110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33-130, mzimmer@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Oliver D. Welch (+852 2214 3716, owelch@gibsondunn.com) São Paulo Lisa A. Alfaro - Co-Chair (+55 (11) 3521-7160, lalfaro@gibsondunn.com) Fernando Almeida (+55 (11) 3521-7095, falmeida@gibsondunn.com) © 2018 Gibson, Dunn &amp Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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August 8, 2018

Media, Entertainment and Technology Group – 2018 Mid-Year Update

Click for PDF For our latest semi-annual update, Gibson Dunn's Media, Entertainment and Technology practice group is taking stock of another active period of deals, regulatory developments, and litigation. The first half of 2018 has been marked by landmark M&A, esports growth, precedent-setting copyright cases, an end to the "Blurred Lines" saga, and some clarity from California and New York courts in anticipated right of publicity cases. And we have seen courts wrestling with twenty-first century legal issues raised by terms like geoblocking, top-level domains, Simpsonizing, and embedded Tweets. Here, then, is our latest round-up to bring you current on the deals and decisions that will hold lessons for the months and years to come. I.    Transaction Overview A.    M&A 1.    AT&T and Time Warner Prevail in Antitrust Suit and Complete Merger On June 12, 2018, in a 172-page decision following a six-week trial, U.S. District Judge Richard J. Leon denied the government's request to enjoin the proposed merger between AT&T and Time Warner, and the companies completed the merger two days later, bringing together the content produced by Warner Bros., HBO and Turner with AT&T's mobile, broadband, video and other communications services.[1] "Our merger brings together the elements to fulfill our vision for the future of media and entertainment," AT&T said in a press release.[2] On July 12, the government filed a notice of appeal.[3] (Disclosure: Gibson Dunn represents AT&T and DirecTV in the case.) 2.    Comcast Ends Pursuit of 21st Century Fox, Clearing Path for Disney The back-and-forth bidding between The Walt Disney Company and Comcast for Twenty-First Century Fox, Inc. appears to have ended, as on July 19, 2018, Comcast announced it would not pursue the acquisition any further, paving the way for Disney to close the deal.[4] Previously, on June 20, 2018, Disney and Fox announced that they had entered into an amended and restated merger agreement, providing for Disney's acquisition of Fox's film and television businesses for more than $71.3 billion in cash and stock, surpassing Disney's original offer of $52.4 billion in Disney stock and made one week after Comcast's unsolicited offer of approximately $65 billion in cash.[5] Under the amended and restated agreement, Fox's shareholders can elect to receive their consideration in the form of cash or Disney stock, subject to 50/50 proration.[6] On June 27, 2018, Disney announced that the Antitrust Division of the Department of Justice had entered into a consent decree with Disney and Fox, clearing the way for the pending acquisition to close.[7] The consent decree requires the sale of the Fox Sports Regional Networks within 90 days of closing the Fox acquisition, subject to possible extension by the DOJ, and is subject to court approval.[8] On July 27, 2018, Disney's and Fox's shareholders voted to approve the acquisition.[9] 3.    Suitors Continue to Vie for Sky In abandoning its bid for Disney, Comcast turned its focus to acquiring Sky PLC, but Disney has its sights set on the European broadcaster as well.[10] At the moment, Comcast has the higher offer, currently valued at $34 billion, 5% higher than the latest bid from Fox, which owns 39% of Sky (a stake that will be sold to Disney as part of the Fox acquisition). Disney may then decide to pursue the remainder of Sky by topping Comcast's bid or may look to sell Fox's stake.[11] These latest developments follow Fox's year-long battle with U.K. regulators regarding its proposed acquisition of Sky. The U.K. culture secretary, Matt Hancock, announced that the most recent terms offered by Fox are likely sufficient to allay concerns over media plurality.[12] Fox's proposed acquisition, which we previously reported has been the subject of British antitrust regulatory scrutiny, caused the U.K.'s Office of Communications to raise red flags, which led to the U.K.'s Competition and Markets Authority to oppose the transaction, noting the proposal would give Rupert Murdoch's family too much control over U.K. media.[13] Mr. Hancock noted that a sale of Sky News, the news outlet controlled by Sky PLC, to a suitable third party such as Disney (in connection with Disney's proposal to acquire Twenty-First Century Fox) could alleviate regulatory concerns associated with the deal. Comcast's bid for Sky was also given the green light by U.K. regulators.[14] 4.    CBS Fights for Control in Midst of Viacom Merger Negotiations Following months during which Shari Redstone, the controlling shareholder of both CBS and Viacom, actively participated in discussions between the companies regarding a potential merger,[15] tension regarding control came to a head on May 14, 2018 when CBS's board of directors, led by CBS Chairman-CEO Leslie Moonves, sued to dilute Redstone's preferred shares and those of her holding company National Amusements to prevent her from replacing board members to complete the deal.[16] Redstone and National Amusements returned suit on May 29, 2018, alleging that CBS's board was overstepping its authority by attempting to dilute her preferred shares.[17] Two days later, a group of CBS's non-voting Class B shareholders also filed suit against Redstone and National Amusements, claiming Redstone had improperly amended the bylaws to require a 90% board approval for special dividends that would give Class B stockholders the right to vote on the potential merger.[18] 5.    The Weinstein Company's Bankruptcy Sale In the wake of the sexual assault accusations against Harvey Weinstein, his eponymous production company, The Weinstein Company, filed for bankruptcy in March 2018, listing between $500 million and $1 billion in assets and the same amount in total liabilities. Lantern Capital purchased the production company in the bankruptcy sale for $289 million.[19] On July 16, 2018, The Yucaipa Companies brought suit against Lantern Capital (its former partner in a bid to buy The Weinstein Company), alleging that Lantern failed to reimburse Yucaipa for costs related to the sale and a related purchase fee.[20] B.    SVOD Update 1.    Netflix, Hulu, and Amazon Each Ink High-Profile Creative Deals Netflix has continued to balance both its retention of creative talent and attraction of new talent. The company closed out December 2017 by entering into a four-year, seven-figure overall deal with Stranger Things producer Shawn Levy and his production company 21 Lapps Entertainment.[21] And on February 13, 2018, Netflix announced a five-year overall deal with Ryan Murphy, moving the showrunner and producer from his longtime home of Twentieth Century Fox TV.[22] Under the deal, valued between $250 million and $300 million, Murphy will produce new series and films exclusively for Netflix.[23] Less than a week after releasing the second season of its critically acclaimed original series The Handmaid's Tale, Hulu announced an overall deal with its showrunner Bruce Miller, on April 30, 2018.[24] Under the deal, made in conjunction with The Handmaid's Tale producer MGM Television, Miller will create and develop new projects for both Hulu and MGM Television.[25] Amazon has also continued to pursue lucrative creative deals, and on June 5, 2018, it announced that it signed a first-look deal with Jordan Peele, writer and director of the film Get Out, and his production company Monkeypaw Productions.[26] 2.    WndrCo Raises $1 Billion for NewTV WndrCo announced on August 7, 2018, that it had closed a $1 billion funding round for a project with the working title "NewTV", a mobile-first media platform, led by Meg Whitman and Jeffrey Katzenberg.[27] The initial raise included investments by all of the major Hollywood studios, a number of independent television studios, and major technology companies. The round was led by Madrone Capital. Incubated at WndrCo, NewTV aims to build a user-friendly mobile platform to deliver short-form premium content, allowing users to make the most of every moment of their day. (Disclosure: Gibson Dunn represents WndrCo and NewTV.) 3.    Streaming Industry Expands Through Strategic Partnerships Through the first half of 2018, Netflix has continued to push for partnerships with U.S. cable companies, entering into a partnership with Altice USA, on January 31, 2018, under which Netflix is made available to Altice customers directly through Altice One,[28] and expanding its existing partnership with Comcast to provide Comcast the ability to include a Netflix subscription in new and existing Xfinity packages.[29] In early 2018, YouTube TV entered into strategic partnerships with several sports leagues in an effort to expand its reach, including with MLB and the NBA to become the presenting sponsor of the 2018 World Series and the 2018 NBA Finals, respectively.[30] Despite experiencing a service outage during a World Cup semifinal match,[31] YouTube TV stands to see further expansion in the sports league space throughout the remainder of 2018. On January 5, 2018, CBS became the first Amazon partner to offer a live stream of local broadcast TV by entering into a partnership that allows Amazon Prime U.S. members to access CBS All-Access as an add-on channel.[32] Amazon has increasingly stepped into the role of distributor and portal for companies with over-the-top streaming channels such as CBS, and Amazon's Prime Video Channels program also has add-ons for programmers such as HBO, Showtime, and Starz.[33] 4.    Chinese Streaming Companies Go Public Often called the "Netflix of China," iQiyi Inc. in mid-March 2018 launched an estimated $2.3 billion initial public offering.[34] iQiyi intends to use the IPO proceeds to extend its reach into China's online entertainment industry and continue to provide "blockbuster original content" through its collaborations with Hollywood and Netflix.[35] Not long after, Bilibili Inc., a Chinese online platform used to primarily stream Japanese animation, launched its own IPO, priced at $438 million.[36] In its registration statement, Bilibili noted that it "believe[s] China will become the world's largest online entertainment market in the future and [its] brand recognition and market leadership among the young generations in China position[s it] well to capture the significant opportunities."[37] C.    China Partnerships 1.    Blumhouse and Tang Media Partners Partner to Bring Horror Films to China In June 2018, it was announced that Blumhouse Productions, known for its horror movies, partnered with Tang Media Partners, the Shanghai and Los Angeles-based entertainment company, to co-develop and co-finance a slate of Chinese language horror and thriller films.[38] Blumhouse Productions only recently had released its first movie in China in February with Happy Death Day.[39] One possible motivation for this partnership is the booming box office in China, which surpassed the U.S. in the first three months of this year.[40] In the first quarter of 2018, China's box office took in $3.17 billion in revenues, compared to $2.85 billion in the United States.[41] As the Chinese box office continues to grow, it remains an attractive and unique opportunity for Hollywood and the U.S. entertainment industry. 2.    The Wanda Group Sees New Investments and Consolidation On January 29, 2018, Wanda revealed that Tencent Holdings entered into an agreement to purchase $5.4 billion worth of shares in Dalian Wanda Commercial Management, equaling a 14% interest in the company.[42] Days later on February 5, 2018, it was announced that Alibaba Group Holding Ltd. and Beijing Cultural Investment Holdings, a Chinese government-backed company, agreed to purchase a $1.2 billion stake in Wanda Film Holding Co., The Wanda Group's domestic film and movie division, which includes the group's Chinese movie theater.[43] As of the transaction, Alibaba became the second biggest shareholder in Wanda Film Holding Co., with a 7.66% holding.[44] These investments by China's largest and well-known tech companies came at a time when The Wanda Group was under scrutiny by the Chinese government for its overseas investments and was in the process of selling off its overseas real estate assets to reduce its debt.[45] Then, on June 25, 2018, Wanda Film Holding Co. unveiled plans to acquire a 96.8% stake in Wanda Media (the group's content-production business), in order to strengthen and consolidate the business's film and entertainment divisions beyond its cinema division (Wanda Film), with a price tag of $1.78 billion to be paid via cash and equity.[46] The proposed deal would increase content production and afford The Wanda Group the opportunity to produce, distribute and exhibit its content under one roof.[47] AMC Entertainment and Legendary Entertainment—U.S. companies acquired by Wanda in 2016—are not included in the proposed restructuring.[48] The deal is pending authorization by the Shenzhen Stock Exchange.[49] D.    Esports 1.    Fortnite Brings Esports to Center Stage Fortnite, developed and published by Epic Games, has quickly become a phenomenon, and in doing so has helped propel domestic esports—the fast-growing industry of competitive spectator video-gaming—into the mainstream quicker than any game in recent memory. A testament to the game's widespread adoption, a Fortnite Celebrity Pro-Am charity tournament was recently held at the Banc of California Stadium in Los Angeles during the annual E3 Expo. The tournament played host to 50 celebrities and 50 professional gamers competing for a $3 million cash prize pool.[50] Aside from the Pro-Am tournament, celebrities such as Drake and Travis Scott have taken part in livestreamed gameplay with professional gamers, including the famous Tyler "Ninja" Blevins, with some streams attracting more than 500,000 simultaneous live viewers.[51] Like other game developers, including League of Legends developer Riot Games and Overwatch developer Activision Blizzard, Epic Games has announced its first venture into organized esports via the Fortnite World Cup, which will take place in 2019 with a $100 million total cash purse for winners.[52] However, unlike Riot's and Activision Blizzard's esports leagues, which require that teams buy into the league (which generally restricts admission to franchises), Epic has opted for strictly merit-based qualifiers with no spots reserved for organized teams or franchises.[53] Fortnite's success and the potential for its esports league have also garnered the interest of investors. Tencent, which currently owns 40% of Epic Games, has doubled down on its investment by contributing an additional ¥100 million, half of which will be used to support game development and video content creators, and the other half being used to bring Fortnite to China and develop it as a Chinese esport.[54] 2.    ICM Inks Joint Venture with Esports Agency Evolved ICM Partners and esports talent agency Evolved have announced a joint venture that will give Evolved's roster of professional gamers, live streamers and internet personalities access to ICM's full-service offerings.[55] The joint venture will be supervised by ICM's Bennett Sherman and Peter Trinh, reporting directly to Managing Director Chris Silbermann, who sees esports as a growth opportunity for ICM Partners.[56] 3.    High School Esports Is on Its Way Los Angeles-based startup PlayVS recently closed a $15 million Series A funding round led by New Enterprise Associates with participation from the San Francisco 49ers, Science, CrossCut Ventures, Coatue Management, Cross Culture Ventures, rapper Nas, Dollar Shave Club founder Michael Dubin, and Twitch Cofounder Kevin Lin, among others.[57] PlayVS has worked closely with the NFHS, the high school equivalent of the NCAA, to develop an infrastructure for esports competition at the high school level.[58] PlayVS will be launching its first season in October 2018, bringing esports play to 5,000 high schools.[59]   II.    Regulatory Updates A.    FCC Repeals "Net Neutrality" Rules, Congressional Efforts Stall, and Attention Turns to Litigation and Statehouses In June 2018, the Federal Communications Commission ("FCC") formally repealed rules concerning the regulation of internet service providers ("ISPs") (popularly known as "net neutrality") and no longer considers broadband service a "utility" under Title II of the Communications Act.[60] The FCC erased rules mandating that ISPs treat all web traffic equally and overturned prohibitions on blocking, throttling, and paid prioritization. The agency also included language meant to prevent states from enacting their own consumer protection laws concerning ISPs. Weeks prior to this repeal, the Senate approved a resolution with a 52-47 vote to nullify the FCC's rollback, but the effort stalled in the House of Representatives.[61] Months before the repeal was enacted, 21 states and the District of Columbia filed suit against the FCC, alleging violation of the Administrative Procedure Act in repealing the "net neutrality" rules.[62] These cases were assigned to the Ninth Circuit via a judicial lottery. In March 2018, the Ninth Circuit granted petitioners' unopposed request to move the suits to the D.C. Circuit given the court's experience in presiding over net neutrality cases.[63] The first briefs are due on August 20, 2018, and we anticipate that this litigation will be closely watched over the next year. In addition, a number of states have seen bills introduced (California) or enacted (Washington) to provide net neutrality-type protections.[64] Such bills are sure to be the subject of upcoming challenges and litigation. B.    The European Union's General Data Protection Regulation Goes into Effect The European Union ("EU") enacted the General Data Protection Regulation ("GDPR") in 2016 to unify the patchwork of data privacy laws across all EU member countries into one regulation.[65] The GDPR strengthens the protection of personal data by making clear that location data and online identifiers, such as IP addresses, are considered personal data. European authorities already had taken a more stringent view than U.S. regulators as to what constitutes personally identifiable information subject to protection, including emails and contact information. The GDPR also prohibits the use of lengthy terms and conditions seeking consent; instead, any request for consent must be presented clearly and concisely, and without ambiguity of meaning. The GDPR further provides individuals with the right to, in certain circumstances, require that a business erase personal data about them, obtain a restriction on the processing of personal data, and receive a copy of the personal data provided to the business. It permits individuals to file a class-action style complaint for any breach of personal data. The regulation went into effect on May 25, 2018, and will be applicable to every citizen of the EU and any business entity that transacts with them, regardless of the location of business. Penalties for violating the GDPR are severe. Liable parties could be fined up to four percent of annual global turnover or 20 million Euros, whichever is greater. While many businesses who transact in the EU have updated their privacy policies in light of the GDPR, we strongly urge those who have not done so to review their policies and update them to reflect the new regulation. One immediate consequence of the GDPR has been that ICANN, the not-for-profit company that manages domain names, has already begun removing from its public "WhoIs" database the contact information for domain name registrants in the EU.[66] We are also watching to see whether privacy groups file lawsuits on behalf of groups of individuals seeking to enforce provisions of the GDPR. C.    Hollywood Dealmakers Can No Longer Inquire About Salary History Effective January 1, 2018, California joined a growing number of states, including New York, that restrict an employer's inquiries into an applicant's salary history. Under California Labor Code Section 432.3, employers in the state will be prohibited from asking about an applicant's prior compensation and benefits. The law was enacted to help remedy the gender pay gap. The new law is likely to have a significant impact on how deals are made in the entertainment industry. Going forward, when studios negotiate salaries for talent with agents, they will not be allowed to ask agents for recent quotes unless the talent provides written consent.[67] If consent is provided, agents can volunteer salary history, but studio executives are prohibited from asking for it or using other methods, like calling business affairs executives at previous places of employment to verify it. Should an employer violate this statute, the penalties could be more severe than the $250,000 fine under comparable New York law. In California, applicants will be able to file a lawsuit alleging damages, and remedies may include California's Private Attorney General Act.[68] III.    Recent Litigation Highlights A.    Antitrust Litigation 1.    Ozzy Osbourne Challenging AEG over Tying Arrangement Regarding Los Angeles and London Venues On March 21, 2018, entertainer Ozzy Osbourne filed a federal antitrust suit in Los Angeles against live entertainment promoter AEG and its subsidiaries and affiliates.[69] The putative class action alleges that AEG is violating the Sherman Act by enforcing an anticompetitive tying arrangement purportedly barring musicians from playing the O2 Arena—"London's most essential large concert venue"—unless they agree to play Staples Center on the Los Angeles leg of their tour.[70] According to the complaint, AEG—which owns the O2 Arena and Staples Center—effectively forces artists playing the O2 to forego playing certain venues in Los Angeles, like the Forum.[71] Osbourne claims this "Staples Center Commitment" deprives artists like Osbourne from "enjoy[ing] the benefits of competition between Staples and the Forum," which recently underwent a $100 million renovation.[72] Osbourne seeks an injunction to prohibit AEG from imposing the alleged "illegal tying practice" on him and other musicians.[73] In a recently filed motion to dismiss, AEG argues the lawsuit "is a poorly-disguised attempt by Ozzy's promoter, Live Nation (represented by the same lawyers), to pressure Defendants to abandon their lawful efforts to compete for bookings in Los Angeles and counteract Live Nation's tactics to steer business away from venues that AEG owns."[74] According to AEG, the lawsuit is flawed because the agreement Osbourne seeks to strike down is between AEG and Live Nation, and does not prevent Osbourne from playing at the Forum.[75] Rather, it merely prevents Live Nation from promoting Osbourne's Los Angeles shows.[76] On August 1, 2018, Judge Dale S. Fischer denied AEG's motion to dismiss. 2.    Coachella Owner AEG Faces Antitrust Suit over Restrictions on Musicians' Ability to Play Competing Events On April 9, 2018, Portland music festival promoter Soul'd Out Productions filed suit in federal court in U.S. District Court for the District of Oregon against AEG, owner of the Coachella Valley Music and Arts Festival, accusing it of anticompetitive behavior by barring Coachella musicians from playing other events within 1,300 miles in the months surrounding the festival.[77] According to the complaint, AEG's invocation of a "radius clause" in its contracts blocks competition in ways that violate federal antitrust laws as well as Oregon and California state laws.[78] Specifically, the suit alleges that AEG and its co-defendants use their "substantial market power" to "coerce artists into agreeing to these unlawful restrictions on trade."[79] The plaintiff asserts that AEG's purported "strong-arming and leveraging tactics" have had "an anticompetitive effect on the consumer, music venues and festivals on the West Coast, and promoters of such events."[80] The suit accordingly seeks treble damages, a declaration that the "radius clause" is unenforceable, and injunctive relief.[81] AEG's motion to dismiss the suit is currently pending. B.    Profit Participation Suits 1.    Disney to Face Trial in Turner & Hooch Royalty Fraud Claim Disney has been unable to chase off a lawsuit contending it concealed profits from the 1989 Tom Hanks comedy Turner & Hooch.[82] The suit, filed by Christine Wagner, whose late husband, Raymond Wagner, produced the film, alleges that Turner & Hooch, which grossed $71 million at the box office and more than $167 million in worldwide gross receipts, was profitable as early as 1991, but that "Disney reported that the film is not in profits" and sent no statement of accounting in the years since the film was made.[83] Wagner asserts she should be seeing more royalties.[84] In a decision in early May that sets the stage for a trial, a Los Angeles state court judge ruled that Wagner's fraud claim can move forward.[85] The court found that Disney had presented no evidence on summary adjudication to counter Wagner's assertion that it was Disney's misrepresentations—in royalty statements indicating there were no profits to share—that kept the producer or his wife from discovering they had a claim.[86] Therefore, the court found that as it relates to the statute of limitations, Disney may not limit the royalties at issue to only the four years prior to the filing of the 2015 suit.[87] 2.    No, CBS Isn't Paying Judge Judy Too Much In April 2018, a Los Angeles judge dismissed a claim that Judy Sheindlin's (pka Judge Judy) compensation was purposely structured to wipe out profits on the hit television show.[88] Talent agency Rebel Entertainment Partners had filed a lawsuit in March 2016 against CBS and Big Ticket Television, alleging that it was entitled to a five percent share of net profits, but that the show had been running a deficit since February 2010 because Sheindlin's massive salary was deducted as an expense.[89] CBS argued in response that the salary was a necessary expense to keep Judge Judy on the air.[90] In its ruling, the court accepted CBS's determination that it was doing what it considered to be best for the show, and, moreover, that plaintiffs had not presented sufficient evidence that Sheindlin's salary ran counter to industry custom.[91] Rather, the court found that "[h]er present salary was the result of arms-length negotiation and Sheindlin's final 'take-it-or-leave-it offer.'"[92] 3.    Columbo Producers File Claim Against TV Studio, 45 Years After Show Airs In February 2018, a Los Angeles Superior Court judge held that the creators of the 1970s show Columbo can proceed with their contract and fraud claims against Universal City Studios.[93] Producers William Link and the heirs of Richard Levinson claim that Universal never issued a profit participation statement to them.[94] They alleged that shortly after filing their complaint in November 2017, an accounting statement arrived with a check for $2.3 million.[95] Universal City Studios moved to dismiss the claim, arguing that plaintiffs "lacked specificity" on how they were allegedly underpaid, but the judge has allowed the case to proceed past demurrer.[96] C.    Copyright Litigation 1.    Embedding Tweets Violates the Exclusive Display Right In February 2018, U.S. District Judge Katherine B. Forrest determined on summary judgment that embedding a photo on a social media platform constitutes a "display" of work under Section 106(5) of the Copyright Act of 1976.[97] The plaintiff snapped a candid photo of Tom Brady, the Patriots' quarterback, and Danny Ainge, the Boston Celtics' general manager, walking in the Hamptons that quickly went viral, "rapidly moving from Snapchat to Reddit to Twitter—and finally . . . onto the websites of the defendants, who embedded the Tweet alongside articles they wrote about Tom Brady actively helping the Boston Celtics recruit basketball player Kevin Durant."[98] The court noted that copyright law has "developed in response to significant changes in technology,"[99] and that Congress "cast a very wide net" in considering the display right.[100] Congress did "not intend to freeze the scope of copyrightable subject matter at the present stage of communications technology" when it passed the Copyright Act, and that its drafters intended it to broadly encompass new, not yet developed, technologies.[101] After framing the case as requiring the "the Court [to] construe how images shown on one website but stored on another website's server implicate an owner's exclusive display right,"[102] the court rejected application of and criticized the "Server Test," a test deployed by the Ninth Circuit in Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146 (2007), noting that it has not been widely used outside of the Ninth Circuit.[103] The Court noted that under the Server Test, direct liability for infringement turns "entirely on whether the image is hosted on the publisher's own server, or is embedded or linked from a third-party server."[104] Here, however, the court focused on the fact that the defendants "actively took steps to 'display' the image."[105] The court found support in the Supreme Court's decision in American Broadcasting Cos., Inc. v. Aereo Inc. for the proposition that "liability should not hinge on invisible, technical processes imperceptible to the viewer."[106] But, the case isn't over yet. The court explained: In this case, there are genuine questions about whether plaintiff effectively released his image into the public domain when he posted it to his Snapchat account. Indeed, in many cases there are likely to be factual questions as to licensing and authorization. There is also a very serious and strong fair use defense, a defense under the Digital Millennium and Copyright Act, and limitations on damages from innocent infringement.[107] Following its ruling, and recognizing that this is a "high-profile, high-impact copyright case" with possible precedential effects, Judge Forrest certified the ruling for interlocutory appeal to the Second Circuit.[108] However, on July 17, 2018, the Second Circuit denied defendants' request to take up the ruling.[109] 2.    TVEyes Video Clip Search Engine Is Not Fair Use In February 2018, the Second Circuit held that TVEyes's service could not be justified as fair use, reversing a summary judgment ruling.[110] As we wrote in our 2016 Mid-Year Update reporting on the summary judgment rulings, TVEyes provides a service that continuously records television programming and indexes it into a text-searchable database, "allowing its clients to search for and watch (up to) ten-minute video clips that mention terms of interest to the clients."[111] The district court had issued two summary judgment rulings, deeming a fair use TVEyes's "functions enabling clients of TVEyes to search for videos by term, to watch the resulting videos, and to archive the videos on the TVEyes servers" a fair use, but holding that functions "enabling TVEyes's clients to download videos to their computers, to freely e-mail videos to others, or to watch videos after searching for them by date, time, and channel (rather than by keyword)" were not fair use.[112] While the Second Circuit found that TVEyes's service served a modest transformative purpose, isolating relevant television programing and allowing it to be accessed in a convenient manner, it further found that the fact that the service makes available, in its original form, almost all of Fox's content undermines its transformative value.[113] The court also found that TVEyes's service deprives Fox of licensing revenues and/or an ability to exploit the market itself.[114] On balance, therefore, the court concluded that "TVEyes's service is not justifiable as a fair use" because "[a]t bottom, TVEyes is unlawfully profiting off the work of others by commercially re-distributing all of that work that a viewer wishes to use, without payment of license."[115] On May 14, 2018, the Second Circuit denied TVEyes's petition for rehearing en banc.[116] 3.    In Suit for Infringement Based on Foreign Broadcast, Geoblocking Thwarts Personal Jurisdiction In November, The Carsey-Werner Company filed a lawsuit in a California federal court against the British Broadcasting Company ("BBC") and Sugar Films, alleging copyright infringement for the use and airing on the BBC of The Cosby Show clips in a documentary entitled Bill Cosby: Fall of an American Icon.[117] BBC moved for dismissal, arguing that no actionable infringement took place within a California federal court's jurisdiction, as the documentary was only broadcast in the United Kingdom.[118] Afterward, it was available for 30 days on BBC's iPlayer website, which, because of geoblocking, meant that the program was only available to those located in the United Kingdom.[119] However, unauthorized viewers could access the content by using virtual private networks ("VPNs") and proxy servers.[120] Judge Percy Anderson held that "[u]nauthorized viewers outside of the United Kingdom do not provide a basis for personal jurisdiction; rather, Defendant's relationship with California must arise out of contacts that they themselves created with the state."[121] The court therefore held it lacked specific jurisdiction over BBC and Sugar Films.[122] 4.    Who Owns VFX Software Output? As we first wrote in our 2017 Year-End Update, in July 2017, Rearden LLC, a computer-generated imagery (CGI) software company, accused The Walt Disney Co., Marvel Studios, Paramount, and Fox of using without a license its intellectual property to animate characters in some of its highest-grossing productions of the last few years, as well as to advertise and promote the films.[123] Rearden alleged trademark, copyright, and patent infringement claims relating to Oscar-winning visual effects technology called MOVA Contour Reality Capture ("MOVA"). Rearden claims that Disney knowingly contracted with parties who stole and falsely claimed ownership of the MOVA system and related IP assets to create film productions such as Beauty and the Beast and Guardians of the Galaxy. Rearden separately pursued relief against the company providing these services, a Chinese company called Shenzhenshi Haitiecheng Science and Technology. In the lawsuits against Disney and the other studios, Rearden claims the studios knowingly used an unauthorized version of the MOVA software. With respect to the copyright claims, Rearden initially asserted a novel theory of copyright infringement, arguing that because its software program performs the "lion's share" of the creativity involved in the computer art program, the end user fails to meet the minimum threshold for originality, and therefore Rearden, not the end user, should be deemed the legal author of the final product of the program.[124] The defendants moved to dismiss, pointing to film directors and other artists as indispensable creative elements to the artistic expression embodied in the files output by the program.[125] In February, the court sided with the defendants and rejected Rearden's copyright claims, explaining that "[t]he Court does not find it plausible that the MOVA Contour output is created by the program without any substantial contribution by the actors or directors."[126] The court thus dismissed the copyright claims without prejudice, and Rearden subsequently amended its complaint to allege copyright claims under a new contributory theory of infringement.[127] This time, Rearden argues that MOVA is an original literary work of authorship fixed in a tangible medium of expression when stored on computer hard drives. When the program is run, Rearden claims that the temporary copies that are made in the random access memory of the end user's computer violate its copyright. The defendants again moved to dismiss Rearden's copyright claims.[128] On June 19, 2018, the court denied defendants' motion to dismiss, holding that Rearden plausibly alleged the defendants either induced or materially contributed to infringing conduct.[129] In light of this ruling, Rearden's copyright claims will proceed against the studios. 5.    Disney and Redbox Tussle over Resale Rights On November 30, 2017, Disney, Lucasfilm, and Marvel filed suit in the District Court for the Central District of California, arguing that Redbox's practice of reselling the digital download codes packaged with plaintiffs' movie "Combo Packs" violates the user license terms and constitutes copyright infringement.[130] Disney moved for a preliminary injunction, which the court denied, finding that the license restriction constituted copyright misuse.[131] Specifically, licensing language on the website where Disney's digital movie downloads are redeemed states that the downloader must be the owner of "the physical product that accompanied the digital code at the time of purchase."[132] According to Judge Pregerson, this constitutes an "improper leveraging of Disney's copyright" and "conflicts with public policy enshrined in the Copyright Act" because it forces users to "forego their statutorily-guaranteed right to distribute their physical copies of that same movie as they see fit."[133] Disney subsequently updated the license terms, amended its complaint, and renewed its motion for a preliminary injunction.[134] Disney asserts that the new language, which instead requires the digital downloader to have received the code as part of the Combo Pack, rather than to be the current owner of the physical copies, satisfies the court's concerns regarding copyright misuse.[135] Redbox counters that this change does not cure the misuse because it forces the preceding owner of the Combo pack to "forgo[] the first sale rights associated with the DVD and Blu-ray discs" or otherwise render the digital code "worthless."[136] A hearing for the preliminary injunction motion was held on June 27, 2018, and Redbox filed a supplemental opposition brief on July 11, 2018, addressing additional changes to Disney's licensing language.[137] 6.    Playboy's Centerfold Copyright Suit Folds In February 2018, a District Judge in Los Angeles dismissed with leave to amend Playboy's copyright infringement suit against the owner of the website BoingBoing.[138] Back in November 2017, Playboy had accused Happy Mutants, LLC—the owner of BoingBoing—of using the magazine's centerfold photos without permission. The lawsuit pointed to a February 2016 post by BoingBoing that contained a link that directed viewers to a slideshow on a photo website that, at the time, contained the centerfold photos (it has since been taken down). BoingBoing responded that it did not create the offending content, and did not control the images or contribute to the infringement, and that if anything, its link constituted non-infringing fair use. Playboy responded that BoingBoing should not be permitted to knowingly link to copyright-infringing materials.[139] In his decision, the Judge Olguin stated that he was "skeptical" that Playboy had alleged facts to support its inducement or material contribution theories of copyright infringement, and cited the Ninth Circuit's inducement theory as set forth in Perfect 10, Inc. v. Giganews, Inc.[140] The judge noted that BoingBoing's fair use argument was premature at this early stage.[141] Rather than amend their complaint, in early March 2018, Playboy voluntarily dismissed its claim without prejudice.[142] D.    DMCA Developments 1.    Safe Harbor from Unfair Competition Claims In March 2018, the District Court for the Southern District of New York dismissed most of Capital Records' state-law unfair competition claims against video-hosting website Vimeo, claims based on users' posts to Vimeo's site that are alleged to infringe pre-1972 copyrighted works. Previously, in June 2016, on an interlocutory appeal from a summary judgment order in the Southern District of New York, the Second Circuit held that the safe harbor provisions of the DMCA protect internet service providers from claims of infringement when users post works protected by state copyright law.[143] After the Supreme Court denied plaintiffs' petition for a writ of certiorari in March 2017,[144] the district court considered Vimeo's motion to dismiss and found that Capital Records' unfair competition claims, which are based on Vimeo's alleged infringement, were also foreclosed by the safe harbor of the DMCA.[145] The court reasoned that "[a]pplying the DMCA safe harbor to unfair-competition claims founded on copyright infringement ensures that service providers are aware of the infringing activity that forms the basis for the claims brought against them."[146] The court denied the motion to dismiss as to the instances in which Capital Records alleges that Vimeo had "red-flag knowledge" of the underlying infringement that would negate the protections of the DMCA safe harbor.[147] Motions for summary judgement are still pending. 2.    DMCA May Protect ISPs Without a Written Takedown Policy In March 2018, a Ninth Circuit panel ruled that a website hosting user-uploaded pornography was protected by the Digital Millennium Copyright Act's safe harbor provisions, even though it lacked a written policy to terminate users who repeatedly infringed copyrights.[148] Back in 2011, pornography producer Ventura Content sued Motherless, alleging claims of direct, vicarious and contributory copyright infringement and of unlawful, unfair and fraudulent business practices in violation of California Business and Professions Code for allowing its users to upload clips of movies that Ventura Content had created and had not licensed to Motherless.[149] In response, Motherless claimed that it qualified for protection under the DMCA's § 512 safe harbor provision, even though it did not have a written policy to terminate users who repeatedly infringed copyrights.[150] Motherless is owned and operated by a single person who reviewed videos individually for infringement, and described his policy as a "gut decision."[151] The divided panel found that Motherless did adhere to a policy, even if it was unwritten, to get rid of users who repeatedly uploaded infringing copyright of porn producers, and therefore qualified for the safe harbor provision of the DMCA.[152] Ventura has sought rehearing en banc.[153] E.    First Amendment 1.    Right of Publicity a.    Court of Appeals Resolves Legal Feud in FX's Favor On March 26, 2018, a California appeals court ruled that Olivia de Havilland's suit against FX Network and co-defendants is barred by the First Amendment.[154] In March 2017, FX aired a docudrama, Feud: Bette and Joan, in which Catherine Zeta-Jones portrays de Havilland.[155] De Havilland sued FX in June 2017, alleging misappropriation, violation of her right of publicity, false light invasion of privacy, and "unjust enrichment."[156] In September 2017, the trial court denied FX's anti-SLAPP motion, and FX (supported by a number of media organizations) appealed. Now, the appeal court has reversed the lower court's order on the motion to strike.[157] Applying the anti-SLAPP law's two-step test, the Court of Appeal reversed, finding that the now-102-year-old de Havilland failed to present evidence to establish that she is likely to prevail on her claims at trial.[158] The court explained that the First Amendment protects expressive works, regardless of whether they are fact, fiction, or a combination thereof.[159] The court concluded that Feud's portrayal of de Havilland was transformative because its "'marketability and economic value' does not 'derive primarily from [de Havilland's] fame' but rather 'comes principally from . . . the creativity, skill, and reputation' of Feud's creators and actors."[160] The court also rejected de Havilland's false light and unjust enrichment claims.[161] On July 11, 2018, the California Supreme Court denied de Havilland's petition for review; the docket entry noted that Justice Cuéllar would have granted the petition. b.    Lohan v. Take-Two Interactive Software In March 2018, the Court of Appeals of New York affirmed the dismissal of a lawsuit filed by Lindsay Lohan, claiming that Take-Two violated her right of privacy by featuring a "look-a-like" character in Grand Theft Auto without her permission.[162] The court concluded that while an avatar may be a "portrait" for purposes of New York's right of publicity statute, the avatar featured in Grand Theft Auto was not recognizable as Lohan.[163] In doing so, the court sidestepped larger First Amendment issues, including whether or not individuals featured in video games are subject to the state's right of publicity law, which "makes it a misdemeanor to use a living person's name, portrait or picture for advertising or trade purposes . . ."[164] The intermediate appellate court had confronted that issue, in 2016, finding that works of fiction or satire (like the video game) are not of "advertising" or "trade," in the language of the statute.[165] But the state's high court specifically declined to address the issue, ruling for Take-Two on the narrower ground that the woman in the video game was simply not recognizable as Lohan. c.    "Simpsonized" Character Is Not Actionable In February 2018, a California appeals court affirmed the dismissal of a lawsuit filed by Frank Sivero against Twentieth Century Fox for misappropriation of his name and likeness in The Simpsons.[166] On October 21, 2014, Sivero filed the complaint, alleging common law infringement of right of publicity, misappropriation of name and likeness, misappropriation of ideas, interference with prospective economic advantage, and unjust enrichment.[167] Fox moved to strike the complaint under California's anti-SLAPP statute.[168] The appeals court found that the cause of action arose from protected activity within the meaning of the anti-SLAPP statute, and that Sivero then failed to carry his burden to prove the merits of his claim.[169] Here, the court found that Sivero's character had been "Simpsonized," and thus contained "significant transformative content," insulating it against a right of publicity claim[170] The court explained: Louie, the alleged look-a-like, "is a cartoon character with yellow skin, a large overbite, no chin, and no eyebrows. Louie has a distinctive high-pitched voice which, as the trial court pointed out, has 'no points of resemblance to [Sivero].'"[171] The court concluded that this was not a "trivial variation," but rather, the creators had created something "recognizably [their] own."[172] Like in Lohan's case, the California court gave weight to the difference between the depicted character and the plaintiff alleging misappropriation. 2.    Defamation a.    HBO & John Oliver Prevail over Coal CEO In June 2017, coal CEO Robert Murray brought suit against John Oliver, Partially Important Productions, HBO, and Time Warner claiming that on Oliver's show "Last Week Tonight," the comedian defamed the coal magnate by depicting a "villainous" portrait of him.[173] The segment at issue was critical of the coal industry, referring to Murray as a "geriatric Dr. Evil."[174] Oliver's segment stated that a mining accident that killed nine people was at least partially the result of improper mining practices rather than an earthquake, as Murray's company had claimed.[175] Murray filed the suit for defamation, false light invasion of privacy, and intentional infliction of emotional distress. Following remand, and in a single-page order, West Virginia state judge Jeffrey Cramer dismissed the action, agreeing entirely with HBO's argument that Murray failed to state a claim for defamation.[176] The critical portions of Oliver's segment that alleged facts were based on judicial opinions and government reports. Oliver's more "personal" jabs at Murray—including the Austin Powers-inspired name-calling—qualified as satire protected under the First Amendment.[177] b.    Did Cosby's Lawyer's Statements Defame Accuser? Even after his criminal trial ended in a conviction in April 2018, Bill Cosby's reckoning with the #metoo movement continues in the courts. The actor is defending a defamation action arising from his alleged sexual misconduct with the former supermodel Janice Dickinson, one of several women who has accused Cosby of drugging and raping her in the 1980s. Dickinson alleges that a 2014 press statement by Cosby's former attorney calling her story "fabricated" and "an outrageous lie," constitutes defamation.[178] In November 2017, a California appeals court allowed Dickinson's suit to move forward, rejecting Cosby's contention that his attorney's statement was non-actionable opinion.[179] The court held that based on the totality of the circumstances, "a reasonable fact finder could conclude that the demand letter states or implies a provably false assertion of fact—specifically, that Cosby did not rape Dickinson, and she is lying when she said that he did."[180] However, several courts examined nearly the same factual claims in other actions to reach different results. The First[181] and Third Circuits[182] dismissed actions brought by two other Cosby accusers on the grounds that Cosby's lawyer's statements constituted non-actionable opinions protected by the First Amendment. On July 12, 2018, in considering Cosby's and Singer's anti-SLAPP motions to strike following remand, Los Angeles Superior Court Judge Randolf Hammock dismissed the defamation claims against Singer, holding that actual malice could not be established regarding Singer's statements without invading the attorney-client privilege.[183] That same day, Cosby filed his petition for writ of certiorari with the U.S. Supreme Court, asking the high court to determine whether Singer's statement qualifies as an opinion under the Supreme Court's 1990 holding in Milkovich v. Lorain Journal Co., 497 U.S. 1 (1990).[184] 3.    Public Fora in the 21st Century a.    @RealDonaldTrump Ruled a Public Forum President Trump's use of Twitter as his favored communication platform is well known, and his tweets invariably lead to strong and diverse responses from other Twitter users. In a May 2018 ruling in Knight First Amendment Institute v. Trump, U.S. District Judge Naomi Reice Buchwald examined whether Trump's and several of Trump's close aides' use of Twitter's "blocking" feature—which prevents blocked users from viewing or replying to the blocker's Tweets—violated the First Amendment rights of the seven plaintiffs, all of whom had been blocked by the President's @realDonaldTrump's account. The court ruled in plaintiffs' favor, finding that the President's account is a "designated" public forum operated by the government.[185] Thus, the President is prohibited from blocking other users because of their viewpoints—namely, in this case, for their criticisms of him. The decision does not hold, contrary to the criticisms leveled against it, that Twitter is public property or that a user violates the First Amendment every time he or she blocks a "troll" on the platform. Rather, commentators observed that "Twitter is how the president speaks to the people; replies on Twitter are how the people speak to each other, in a 'place' the government uses for expression and has opened to the public for expression as well,"[186] adapting First Amendment precedent to the political and technological realities of 2018. The 75-page ruling rejected the Justice Department's argument that Trump was largely acting in a personal capacity and thus as a private individual, much like, as the DOJ argued, "giving a toast at a wedding or giving a speech at a fundraiser."[187] In contrast, Judge Buchwald reasoned, through his Twitter "bio" and his use of the medium to comment on public policy, Trump portrays his account as presidential "and, more importantly, uses the account to take actions that can be taken only by the President as President," referring to his use of the platform to propagate executive-order like decrees.[188] Furthermore, Buchwald said, the space below Trump's tweets that show the public's replies is a public forum, because it is "generally accessible to the public" and anyone with a Twitter account is able to view those responses, assuming that the user has not been blocked.[189] b.    Conservative Institution's Lawsuit Against YouTube Fails In March 2018, U.S. District Judge Lucy Koh dismissed a censorship claim against YouTube and its parent company, Google, ruling that the online video-sharing platform is not a public forum subject to the First Amendment.[190] Plaintiff Prager University, a conservative media company owned by Dennis Prager, claimed that YouTube's restricted mode, which filters out inappropriate content to protect young or sensitive viewers, was restricting access to Prager University videos about topics such as gun control and Islam while permitting access to left-leaning videos by liberal commentators like Bill Maher on the same topics.[191] Amongst other claims, PragerU's complaint alleged that Google and YouTube's practice of selectively restricting PragerU's videos—and thus the group's speech—violates the U.S. and California constitutions. In response, Google claimed its own First Amendment protection, arguing that because YouTube is a private company, it is not subject to laws prohibiting governmental restrictions on free speech. In dismissing the case, Judge Koh ruled that YouTube is not a "state actor" required to provide free speech protection merely because the company operates its private property as a forum for expression of diverse perspectives. Rather, "[Google and YouTube] are private entities who created their own video-sharing social media website and make decisions about whether and how to regulate content that has been uploaded on that website."[192] Additionally, Plaintiff failed to show "that defendants have engaged in one of the very few public functions that were traditionally exclusively reserved to the state."[193] 4.    California's IMDB-Targeted Age Discrimination Law Declared Unconstitutional In February 2017, Judge Chhabria of the Northern District of California issued a preliminary injunction enjoining California from enforcing AB 1687—a law enacted to address age discrimination in Hollywood that would have prevented in certain instances the popular industry website IMDB.com from posting actors' ages—writing that "it's difficult to imagine how AB 1687 could not violate the First Amendment."[194] In February 2018, Judge Chhabria made the injunction permanent.[195] The court held that the law "singles out specific, non-commercial—age-related information—for differential treatment."[196] Applying strict scrutiny, the court held that California did not prove that the measure was "actually necessary" to combat age discrimination.[197] Judge Chhabria noted that "the record provides no evidence that California explored less-speech-restrictive alternatives," such as better enforcement of preexisting anti-discrimination laws.[198] He also explained that the law was both under- and over-inclusive, and therefore not narrowly tailored.[199] The law only bans one speaker from sharing age-related information and only requires IMDb to remove some age-related information.[200] Moreover, the law is not restricted to age-related information of those individuals protected by age discrimination laws.[201] F.    Trademark Litigation 1.    No TRO Against Movie Trailer for The Happytime Murders Sesame Workshop, the makers of Sesame Street, brought suit in the Southern District of New York against STX Entertainment over its upcoming film The Happytime Murders. The film, a raunchy comedy starring Melissa McCarthy, follows two detectives—McCarthy and her partner, a puppet named Phil Phillips—as they work to solve the murders of the former cast of a classic puppet television show. Sesame Workshop sued the film's backers, seeking a restraining order to block the production companies from using the phrase "No Sesame, All Street" in trailers and promotions for the film, alleging that the tagline seeded "confusion in the mind of the public as to the association between the movie, Sesame Street, and its beloved Muppets."[202] STX Entertainment responded that the phrase "No Sesame, All Street" actually distinguished its film from Sesame Street. The court sided with STX Entertainment, denying Sesame Workshop's bid for a restraining order on May 31, 2018.[203] Sesame Workshop dismissed the suit shortly thereafter. 2.     Generic TDLs Receive Protection After All? In August 2017, a federal district court in Virginia reversed a decision of the Trademark Trial and Appeal Board ("TTAB") that "Booking.com" could not be registered as a trademark, ruling that the addition of ".com" to a generic term makes it potentially protectable under the Lanham Act.[204] The ruling specifically split from precedents in the Federal Circuit that have found the addition of a top-level domain to a generic word does not render it protectable, including the domain names Mattress.com and Hotels.com, finding that precedent unpersuasive.[205] Even though it was successful in that TTAB appeal, the court ordered Booking.com to pay the U.S. Patent and Trademark Office $76,000 in attorneys' fees under the PTO's new legal interpretation that the agency must be reimbursed such fees after certain types of patent and trademark appeals, regardless of the outcome. On April 11, 2018, Booking.com asked the Fourth Circuit to strike down that new policy, arguing that it violates the First Amendment right to "petition the government for redress of grievances."[206] A separate case challenging the same PTO policy is currently pending en banc before the Federal Circuit. As of the date of this writing, neither the Fourth Circuit nor the Federal Circuit has ruled on this issue. 3.    Suit Over Seussian Trekkie Book Dismissed ComicMix LLC created a book entitled Oh, the Places You'll Boldly Go! that combines creative elements from the Star Trek science fiction franchise with the underlying Dr. Seuss classic Oh, the Places You'll Go! ("OTPYG"). Dr. Seuss Enterprises brought a trademark, copyright infringement, and unfair competition action against ComicMix for the unauthorized exploitation of Dr. Seuss's works. Dr. Seuss Enterprises alleges that the new book misappropriates key protected elements of OTPYG, including its trademarks. On December 7, 2017, the district court denied ComicMix's motion to dismiss the amended complaint on the basis that the book is protected by fair use and nominative fair use doctrines. But on May 21, 2018, the court granted ComicMix's motion for judgment on the pleadings with respect to the trademark claims.[207] ComicMix had argued that its work merited First Amendment protection under Rogers v. Grimaldi, which tasks judges with determining whether the use of a mark has artistic relevance, and if so, whether the work is explicitly misleading.[208] Previously, the court had held that a potential exception to the First Amendment protection provided in Rogers for misleading titles that are confusingly similar to other titles perhaps applied to ComicMix's work. But in light of the Ninth Circuit's recent decision in the Empire case, which treated the Rogers test similarly to the likelihood-of-confusion test, the court held that this exception from Rogers did not apply, dismissing Dr. Seuss Enterprises' trademark claims.[209] G.    Music 1.    "Blurred Lines" and a Narrow Ruling at 9th Circuit In March 2018, in a hotly awaited decision, the Ninth Circuit upheld on narrow grounds a 2015 jury's finding that Robin Thicke and Pharrell Williams's song "Blurred Lines" infringed the copyright of Marvin Gaye's "Got to Give It Up."[210] In the appeals court's 2-1 decision, the majority focused largely on questions of procedure and trial strategy in declining to review a summary judgment motion, noting a full jury trial had taken place and Thicke and Williams' lawyers had not preserved the issue by filing a motion.[211] The majority explained that after a jury trial, a court must measure the verdict against the weight of the evidence and such verdict may only be overturned in "an absolute absence of evidence supporting the jury's verdict."[212] With this, the majority upheld the damages award of $5.3 million. In dissent, Judge Jacqueline Nguyen sharply criticized the majority and did not hesitate to engage with the substantive legal issues and industry concerns that the trial court result created, writing that, "[t]he majority allows the Gayes to accomplish what no one else has before: copyright a musical style."[213] In doing so, she wrote, "[t]he majority establishes a dangerous precedent that strikes a devastating blow to future musicians and composers everywhere."[214] Judge Nguyen concluded that the two songs differ in melody, harmony, and rhythm, and Gaye's expert witness ". . . identified four similar elements, none of which is protectable: (a) each phrase begins with repeated notes; (b) the phrases have three identical pitches in a row in the first measure and two in the second measure; (c) each phrase begins with the same rhythm; and (d) each phrase ends on a melisma (one word sung over multiple pitches)."[215] She would have concluded that such evidence is not appropriate to support an infringement verdict.[216] Nguyen seemed to encourage courts to appoint their own experts when the parties' experts seem to have "starkly different" assessments of the works' similarity.[217] The majority, in rebutting Nguyen's dissent, stated that "[t]he dissent's position violates every controlling procedural rule involved in this case" and "improperly tries, after a full jury trial has concluded, to act as judge, jury and executioner."[218] On July 11, the Ninth Circuit declined to rehear the case en banc and issued an amended opinion.[219] 2.    Wolfgang's Vault Found Liable for Streaming Recordings of Live Performances In April 2018, U.S. District Judge Edgardo Ramos found that Wolfgang's Vault, a collection of thousands of live concert performances, and its owners had committed a large-scale copyright infringement by streaming its collection to the public, but stopped short of issuing an injunction, finding that the availability of the recordings is in the public interest, while suggesting a licensing deal could remedy the injury to plaintiffs.[220] In 2015, plaintiffs (music publishers and other rights holders) alleged that Wolfgang's Vault lacked the requisite mechanical licenses to stream a collection of works.[221] Judge Ramos held that Defendants had failed to properly license 206 concert videos, pursuant to Section 115 of the U.S. Copyright Act.[222] Judge Ramos rejected the Defendants' argument that certain contracts entered into with three major record labels were proof of the necessary consent needed.[223] To this same point, Judge Ramos underscored the fact that Defendants could not produce a single performance agreement.[224] A pending trial will explore whether the copyright infringement was willful, meaning that Plaintiffs could be entitled to statutory damages of up to $150,000 per work.[225] 3.    No Moral Rights for Foreign "Big Pimpin" Sample Holder On May 31, 2018, after years of legal action regarding Jay-Z's 1999 hit, "Big Pimpin," the Ninth Circuit Court of Appeals affirmed a win for Shawn "Jay-Z" Carter and other defendants by refusing to allow the Egyptian plaintiff the ability to enforce moral rights over a sample used in the song.[226] Judge Bea wrote that "[s]ince our federal law does not accord protection of moral rights to American copyright holders as to non-visual art, neither does it recognize [Plaintiff's] claim to moral rights," and "[t]hat [Plaintiff] retains moral rights in Egypt does him no good here."[227] The case involved the hook of "Big Pimpin," which came from a song titled "Khosara Khosara," composed by Baligh Hamday for a 1960 Egyptian film.[228] Shortly after Jay-Z's song came out in 1999, its producer, Timbaland paid EMI for a license to use the song.[229] Plaintiff, an heir of the composer Hamday, sought to enforce moral rights by alleging his uncle's song had been "mutilated" (a term of art that moral rights, common in foreign countries, may protect against). The District Court first found the suit barred due to delay, but the case was revived following the Supreme Court's Petrella decision and went to trial in 2015—with the main issue being whether Hamday's heirs retained an inalienable moral right under Egyptian law—although District Judge Christina Snyder cut the suit short, granting Jay-Z's motion for a judgment as a matter of law.[230] Judge Snyder held that Plaintiff lacked standing to pursue the copyright infringement claim. The Ninth Circuit upheld that ruling and further held that the foreign plaintiff's moral rights are not enforceable in the United States.       [1]        United States v. AT&T Inc., No. CV 17-2511 (RJL), 2018 WL 2930849 (D.D.C. June 12, 2018); Press Release, AT&T Inc., AT&T Completes Acquisition of Time Warner Inc. (June 14, 2018), http://about.att.com/story/att_completes_acquisition_of_time_warner_inc.html.       [2]        Press Release, AT&T Inc., AT&T Debuts "WatchTV" With 2 New Unlimited Wireless Plans (June 21, 2018), http://about.att.com/newsroom/watchtv_app_with_unlimited_wireless.html.       [3]        Brent Kendall & Drew FitzGerald, Justice Department Appeals Ruling Allowing AT&T-Time Warner Merger, The Wall Street Journal (July 12, 2018), https://www.wsj.com/articles/justice-department-to-appeal-court-ruling-allowing-at-t-time-warner-merger-1531427031.       [4]        Liz Moyer, Comcast drops pursuit of 21st Century Fox assets, ending bidding war with Disney, CNBC (July 19, 2018), https://www.cnbc.com/2018/07/18/comcast-drops-pursuit-of-its-bid-for-21st-century-fox-assets.html.       [5]        Keach Hagey and Erich Schwartzel, 21st Century Fox Agrees to Higher Offer from Disney, The Wall Street Journal (June 20, 2018), https://www.wsj.com/articles/fox-disney-announce-new-deal-1529496937.       [6]        Id.       [7]        Press Release, The Walt Disney Company, U.S. Department of Justice Clears Disney Acquisition of 21st Century Fox (June 27, 2018), https://www.wsj.com/articles/PR-CO-20180627-911016.       [8]        Id.       [9]        Edmund Lee and Brooks Barnes, Disney and Fox Shareholders Approve Deal, Ending Corporate Duel, N.Y. Times (July 27, 2018), https://www.nytimes.com/2018/07/27/business/media/disney-fox-merger-vote.html.      [10]        Shalini Ramachandran, Comcast Drops Bid for Fox Assets, Will Focus on Pursuit of Sky, The Wall Street Journal (July 19, 2018), https://www.wsj.com/articles/comcast-drops-bid-for-fox-assets-will-pursue-sky-1532004447/.      [11]        Id.      [12]        Andria Calatayud, Fox's Sky News Plan Meets Criteria: U.K. Official, Marketwatch (June 19, 2018), https://www.marketwatch.com/story/foxs-sky-news-plan-meets-criteria-uk-official-2018-06-19.      [13]        Adam Rhodes, Sky Brushes Off Fox As $41B Comcast Offer Rolls In, Law360 (Apr. 25, 2018), https://www.law360.com/media/articles/1037029/sky-brushes-off-fox-as-41b-comcast-offer-rolls-in.      [14]        Calatayud, supra note 12.      [15]        Jessica Toonkel, Viacom, CBS CEOs discuss potential merger – sources, Reuters (Jan. 25, 2018), https://ca.reuters.com/article/businessNews/idCAKBN1FE2XT-OCABS; Cynthia Littleton, CBS and Viacom Merger Discussions Set to Accelerate, but Valuation Remains a Big Hurdle, Variety (Mar. 23 2018), Variety (May 14, 2018), https://variety.com/2018/tv/news/cbs-viacom-merger-talks-deal-1202735168/.      [16]        Cynthia Littleton, CBS Sues Share Redstone and National Amusements in Bid to Block Viacom Merger, Variety (May 14, 2018), https://variety.com/2018/biz/news/cbs-sues-shari-redstone-national-amusements-in-bid-to-block-viacom-merger-1202809526/.      [17]        Meg James, Shari Redstone sues CBS, taking aim at Leslie Moonves, L.A. Times (May 29, 2018), http://www.latimes.com/business/hollywood/la-fi-ct-nai-redstone-sues-cbs-20180529-story.html.      [18]        Meg James, CBS shareholders sue Shari Redstone, National Amusements, L.A. Times (May 31, 2018), http://www.latimes.com/business/hollywood/la-fi-ct-redstone-shareholder-lawsuit-20180531-story.html.      [19]        Gene Maddaus, Ron Burkle Sues Lantern Capital Over Weinstein Co. Costs, Variety (July 16, 2018), https://variety.com/2018/biz/news/ron-burkle-lantern-suit-1202874814/.      [20]        Id.      [21]        Elise Sandberg, 'Stranger Things' Producer Inks Massive Overall Deal With Netflix, Hollywood Reporter (Dec. 6, 2017), https://www.hollywoodreporter.com/live-feed/netflix-inks-deal-shawn-levys-21-laps-1064839.      [22]        Debra Birnbaum and Cynthia Littleton, Ryan Murphy Inks Mammoth Overall deal with Netflix, Variety (Feb. 13, 2018), https://variety.com/2018/tv/news/ryan-murphy-netflix-overall-deal-fox-1202698305/.      [23]        Id.      [24]        Natalie Jarvey and Lesley Goldberg, 'Handmaid's Tale' Showrunner Bruce Miller Inks Overall Deal at Hulu, The Hollywood Rep. (Apr. 30, 2018), https://www.hollywoodreporter.com/live-feed/handmaids-tale-showrunner-bruce-miller-inks-deal-at-hulu-1106790.      [25]        Id.      [26]        John Koblin, Jordan Peele Signs TV Deal With Amazon, N.Y. Times (June 5, 2018), https://www.nytimes.com/2018/06/05/business/media/amazon-jordan-peele.html.      [27]        Press Release, WndrCo, WndrCo Announces Initial Capital Raise of $1 Billion for New Media Platform (Aug. 7, 2018), https://www.businesswire.com/news/home/20180807005288/en/WndrCo-Announces-Initial-Capital-Raise-1-Billion.      [28]        Kevin Tran, Netflix furthers US cable partnership push, Business Insider (Jan. 31, 2018), http://www.businessinsider.com/netflix-furthers-us-cable-partnership-push-2018-1.      [29]        Bruce Haring, Comcast, Netflix Expand Partnership In Xfinity Packages, Deadline (Apr.13, 2018), https://deadline.com/2018/04/comcast-netflix-expand-partnership-in-xfinity-packages-1202363637/.      [30]        Sarah Perez, YouTube TV becomes first-ever presenting partner for the NBA Finals, following similar deal with MLB, TechCrunch (Mar. 26, 2018), https://techcrunch.com/2018/03/26/youtube-tv-becomes-first-ever-presenting-partner-for-the-nba-finals-following-similar-deal-with-mlb/.      [31]        Todd Spangler, YouTube TV Offers One-Week Credit After World Cup Outage, Variety (July 12, 2018), https://variety.com/2018/digital/news/youtube-tv-outage-one-week-credit-world-cup-1202872304/.      [32]        Todd Spangler, CBS All Access Available to Amazon Prime Members in U.S. as Add-On Channel, Variety (Jan. 5, 2018), https://variety.com/2018/digital/news/cbs-all-access-amazon-prime-channel-1202654346/.      [33]        Sahil Patel, Amazon has become an important distributor for over-the-top networks, Digiday (June 4, 2018), https://digiday.com/media/amazon-has-become-an-important-middle-man-for-over-the-top-networks/.      [34]        Tom Zanki, 'China's Netflix' Leads 6 IPO Launches Exceeding $3B Total, LAW360 (March 19, 2018), https://www.law360.com/articles/1023526.      [35]        Id.      [36]        Tom Zanki, Chinese Streaming Co Leads 4 IPOs Netting $828M, LAW360 (March 28, 2018), https://www.law360.com/articles/1027175/chinese-streaming-co-leads-4-ipos-netting-828m.      [37]        Id.      [38]        Patrick Brzeski, Blumhouse Teams with Tang Media Partners to Make Horror Movies in China, The Hollywood Reporter (June 18, 2018), https://www.hollywoodreporter.com/news/blumhouse-teams-tang-media-partners-make-horror-movies-china-1120827.      [39]        Nancy Tartaglione, Blumhouse Partners With Tang Media On Chinese Horror/Thriller Pics, Deadline (June 18, 2018), https://deadline.com/2018/06/blumhouse-tang-media-chinese-horror-thriller-movies-deal-american-nightmare-1202412372/.      [40]        Cheang Ming, China's Box Office Recently Beat The US, And Is Now On The Cusp Of A 'New Growth Cycle,' CNBC (May 24, 2018), https://www.cnbc.com/2018/05/24/china-beats-us-box-office-in-q1-and-is-entering-new-growth-cycle-hsbc.html.      [41]        Id.      [42]        J. DeMorel, Alibaba Buys State in Wanda Film in 41.2 Billion Share Sale, Bloomberg (February 5, 2018), https://www.bloomberg.com/news/articles/2018-02-05/alibaba-takes-stake-in-wanda-film-as-part-of-1-2-billion-sale.      [43]        Id.      [44]        Id.      [45]        Jason Raish, Can China's Tech Giants Restore Confidence in Wanda?, The Hollywood Reporter (February 16, 2018), https://www.hollywoodreporter.com/news/can-chinas-tech-giants-restore-confidence-wanda-1084151.      [46]        Patrick Brzeski, China's Wanda Plans $1.78B Consolidation of Film Assets, The Hollywood Reporter (June 25, 2018), https://www.hollywoodreporter.com/news/chinas-wanda-plans-178b-consolidation-film-assets-1123282.      [47]        Vivienne Chow, Wanda Unveils $1.77 Billion Plan to Consolidate Film Units, Variety (June 26, 2018), https://variety.com/2018/film/news/dalian-wanda-consolidate-film-units-china-1202857977/.      [48]        Brzeski, supra note 46.      [49]        Id.      [50]        Press Release, Epic Games, Fortnite Pro Am 2018, https://www.epicgames.com/fortnite/en-US/pro-am2018.      [51]        Justin Kirkland, 10 Celebrities Who Play Fortnite, Ranked, Esquire (May 11, 2018), https://www.esquire.com/entertainment/g20139550/celebrities-playing-fortnite/; Paul Tassi, Twitch Comments on the Record-Breaking Drake-Ninja 'Fortnite' Stream, Forbes (Mar. 15, 2018), https://www.forbes.com/sites/insertcoin/2018/03/15/twitch-comments-on-the-record-breaking-drake-ninja-fortnite-stream/#4a4bbb5f46c6.      [52]        Max Miceli, Epic Games Unveils Esports Plans With Fortnite World Cup Coming in 2019, The Esports Observer (June 25, 2018), https://esportsobserver.com/epic-games-fortnite-world-cup/.      [53]        Id.      [54]        Blake Hester, Tencent Invests $15 Million to Bring 'Fortnite' to China, Variety (Apr. 24, 2018), https://variety.com/2018/gaming/news/fortnite-tencent-china-1202785279/.      [55]        Patrick Hipes, ICM Partners Inks Partnership With Esports Talent Agency Evolved, Deadline Hollywood (June 14, 2018), https://deadline.com/2018/06/icm-partners-esports-evolved-joint-venture-1202410240/.      [56]        Id.      [57]        Jordan Crook, PlayVS, Bringing Esports Infrastructure to High Schools, Picks Up $15 Million, Techcrunch (June 4, 2018), https://techcrunch.com/2018/06/04/playvs-bringing-esports-infrastructure-to-high-schools-picks-up-15-million/.      [58]        Id.      [59]        Id.      [60]        Keith Collins, Net Neutrality Has Officially Been Repealed. Here's How That Could Affect You., N.Y. TIMES (June 11, 2018), https://www.nytimes.com/2018/06/11/technology/net-neutrality-repeal.html.      [61]        Cecilia Kang, Senate Democrats Win Vote on Net Neutrality, a Centerpiece of 2018 Strategy, N.Y. TIMES (May 16, 2018), https://www.nytimes.com/2018/05/16/technology/net-neutrality-senate.html.      [62]        Cecilia Kang, Flurry of Lawsuits Filed to Fight Repeal of Net Neutrality, N.Y. Times (Jan. 16, 2018), https://www.nytimes.com/2018/01/16/technology/net-neutrality-lawsuit-attorneys-general.html.      [63]        Kelcee Griffis, 9th Cir. Hands Net Neutrality Litigation to DC Circ., Law360 (Mar. 28, 2018), https://www.law360.com/media/articles/1027383.      [64]        Klint Finley, New California Bill Restores Strong Net Neutrality Protection, Wired (July 5, 2018), https://www.wired.com/story/new-california-bill-restores-strong-net-neutrality-protections/; Klint Finley, Washington State Enacts Net Neutrality Law, In Clash With FCC, Wired (Mar. 5, 2018), https://www.wired.com/story/washington-state-enacts-net-neutrality-law-in-clash-with-fcc/.      [65]        Adam Satariano, What the G.D.P.R., Europe's Tough New Data Law, Means For You, N.Y. Times (May 6, 2018), https://www.nytimes.com/2018/05/06/technology/gdpr-european-privacy-law.html.      [66]        Kieren McCarthy, US government weighs in on GDPR-Whois debacle, orders ICANN to go probe GoDaddy, The Register (Apr. 17, 2018),  https://www.theregister.co.uk/2018/04/17/us_government_whois_debacle/.      [67]        Mike Fleming Jr., It Will Soon Be Illegal For Studios To Verify Salary Quotes: Hollywood Dealmakers Brace For California Labor Code 432.3, Deadline (Dec. 13, 2017), https://deadline.com/2017/12/hollywood-dealmaking-california-labor-code-432-3-salary-quotes-1202225985/.      [68]        Philip Bonoli, Studios And Agencies Prepare For The Labor Code 432.3 Earthquake, Forbes (Dec. 13, 2017), https://www.forbes.com/sites/legalentertainment/2017/12/13/studios-and-agencies-prepare-for-the-labor-code-432-3-earthquake/#221350426509.      [69]        Eriq Gardner, Ozzy Osbourne Brings Antitrust Lawsuit Against AEG for Tying London and L.A. Venues, The Hollywood Rep. (Mar. 21, 2018), http://www.hollywoodreporter.com/thr-esq/ozzy-osbourne-brings-antitrust-lawsuit-aeg-tying-london-la-venues-1096448.      [70]        Id.      [71]        Id.      [72]        Id.      [73]        Id.      [74]        Eriq Gardner, AEG Says Ozzy Osbourne Lawsuit Isn't What It Pretends to Be, The Hollywood Rep. (Jun. 4, 2018), http://www.hollywoodreporter.com/thr-esq/aeg-says-ozzy-osbourne-lawsuit-isnt-what-it-pretends-be-1116729.      [75]        Id.      [76]        Id.      [77]        Bonnie Eslinger, Coachella Owner Faces Antitrust Suit Over Artist Controls, Law360 (Apr. 9, 2018), http://www.law360.com/articles/1031313/coachella-owner-faces-antitrust-suit-over-artist-controls.      [78]        Eriq Gardner, AEG Faces Antitrust Lawsuit over Territorial Restrictions for Coachella Artists, The Hollywood Rep. (Apr. 10, 2018), http://www.hollywoodreporter.com/thr-esq/aeg-faces-antitrust-lawsuit-territorial-restrictions-coachella-artists-1101313.      [79]        Id.      [80]        Id.      [81]        Id.      [82]        Eriq Gardner, Disney Headed to Trial Over 'Turner & Hooch' Profits, The Hollywood Rep. (May 7, 2018), https://www.hollywoodreporter.com/thr-esq/disney-headed-trial-turner-hooch-profits-1109326.      [83]        Daniel Siegal, Disney Must Face 'Turner & Hooch' Royalty Fraud Claim, Law360 (May 4, 2018), https://www.law360.com/articles/1040685/disney-must-face-turner-hooch-royalty-fraud-claim.      [84]        Id.      [85]        Id.; Gardner, supra note 82.      [86]        Id.      [87]        Id.     [88]       Eriq Gardner, Judge Judy's $47 Million Salary Isn't Too Much, Rules Real Judge, The Hollywood Rep. (April 5, 2018), https://www.hollywoodreporter.com/thr-esq/judge-judys-47-million-salary-isnt-rules-real-judge-1100081.      [89]        Id.      [90]        Id.      [91]        Id.      [92]        Id.      [93]        Eriq Gardner, Judge Allows 'Columbo' Fraud Lawsuit Against Universal, The Hollywood Rep. (Feb. 9, 2018), https://www.hollywoodreporter.com/thr-esq/judge-allows-columbo-fraud-lawsuit-universal-1083344.      [94]        Id.      [95]        Id.      [96]        Id.      [97]        Goldman v. Breitbart News Network, LLC, No. 17-CV-3144, 2018 WL 911340, at *1 (S.D.N.Y. Feb. 15, 2018).      [98]        Id. at *2.      [99]        Id. at *3 (quoting Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 430 (1984)).    [100]        Id. at *4.    [101]        Id. at *3 (quoting H.R. Rep. 94–1476, 47, 51 (1976)).    [102]        Id. at *1.    [103]        Id. at *5.    [104]        Id.    [105]        Id. at *8.    [106]        Id. at *9.    [107]        Id. at *10.    [108]        Bill Donahue, Embedded Tweet Copyright Case Sent To 2nd Circ., Law360 (Mar. 20, 2018), https://www.law360.com/articles/1024012.    [109]        Heavy, Inc. v. Goldman, Case No. 18-910, Dkt. 35 (2d Cir. July 17, 2018).    [110]        Fox News Network, LLC v. TVEyes, Inc., 883 F.3d 169, 174 (2d Cir. 2018). See also Bill Donahue, Siding With Fox 2nd Circ. Says TVEyes Is Not Fair Use, Law360 (Feb. 27, 2108), https://www.law360.com/media/articles/1016495.    [111]        TVEyes, 883 F.3d at 173–74.    [112]        Id. at 174    [113]        Id. at 174, 176–79.    [114]        Id. at 174, 180.    [115]        Id. at 180, 181.    [116]        Bill Donahue, 2nd Circ. Won't Rehear TVEyes Fair Use Case, Law360 (May 15, 2018), https://www.law360.com/articles/1043784/2nd-circ-won-t-rehear-tveyes-fair-use-case.    [117]        Eriq Gardner, 'Cosby Show' Producer Sues BBC for Using Clips in Bill Cosby Doc, The Hollywood Rep. (Nov. 6, 2017), https://www.hollywoodreporter.com/thr-esq/cosby-show-producer-sues-bbc-using-clips-bill-cosby-doc-1055167.    [118]        Eriq Gardner, BBC Points to Geoblocking in Bid To Defeat Lawsuit Over Use of 'Cosby Show' Clips, The Hollywood Rep. (Jan. 12, 2018), https://www.hollywoodreporter.com/thr-esq/bbc-points-geoblocking-bid-defeat-lawsuit-use-cosby-show-clips-1074282; The Carsey-Werner Co., LLC v. British Broad. Corp., No. CV 17-8041 PA (ASX), 2018 WL 1083550, at *1 (C.D. Cal. Feb. 23, 2018).    [119]        Id.; see also Eriq Gardner, BBC Points to Geoblocking in Bid To Defeat Lawsuit Over Use of 'Cosby Show' Clips, The Hollywood Rep. (Jan. 12, 2018), https://www.hollywoodreporter.com/thr-esq/bbc-points-geoblocking-bid-defeat-lawsuit-use-cosby-show-clips-1074282.    [120]        Carsey-Werner Co., 2018 WL 1083550, at *1.    [121]        Id. at *6.    [122]        Id. at *7.    [123]        See Complaint, Rearden LLC, et al. v. The Walt Disney Co., et al., No. 17-cv-04006, 2017 WL 3015899 (N.D. Cal. July 17, 2017).    [124]        See id.    [125]        See Reply in Support of Defendants' Motion to Dismiss, Rearden LLC, et al. v. The Walt Disney Co., et al., No. 17-cv-04006, 2017 WL 7716172 (N.D. Cal. Nov. 9, 2017).    [126]        Rearden LLC v. Walt Disney Co., 293 F. Supp. 3d 963, 970 (N.D. Cal. 2018).    [127]        See First Amended Complaint, Rearden LLC, et al. v. The Walt Disney Co., et al., No. 17-cv-04006, 2018 WL 2948187 (N.D. Cal. Mar. 6, 2018).    [128]        See Notice of Motions and Motions for Partial Dismissal of First Amended Complaints, Rearden LLC, et al. v. The Walt Disney Co., et al., No. 17-cv-04006, 2018 WL 29498109 (N.D. Cal. Apr. 5, 2018).    [129]        See Bill Donahue, Hollywood Giants Must Face Copyright Claims Over Digital FX, Law360 (June 19, 2018), https://www.law360.com/articles/1054886/hollywood-giants-must-face-copyright-claims-over-digital-fx.    [130]        Disney Enterprises, Inc. v. Redbox Automated Retail, LLC, No. 2:17-cv-08655, Dkt. 1 (C.D. Cal. Nov. 30, 2017).    [131]        Disney Enterprises, Inc. v. Redbox Automated Retail, LLC, No. 2:17-cv-08655, Dkt. 74 (C.D. Cal. Feb. 20, 2018).    [132]        Id. at 17.    [133]        Id. at 18.    [134]        Dave Simpson, Term Changes Don't Fix Disney's Copyright Misuse: Redbox¸ Law360 (May 10, 2018), https://www.law360.com/articles/1042340/term-changes-don-t-fix-disney-s-copyright-misuse-redbox.    [135]        Disney Enterprises, Inc. v. Redbox Automated Retail, LLC, No. 2:17-cv-08655, Dkt. 86 at 2 (C.D. Cal. Apr. 9, 2018).    [136]        Disney Enterprises, Inc. v. Redbox Automated Retail, LLC, No. 2:17-cv-08655, Dkt. 94 at 12 (C.D. Cal. May 7, 2018).    [137]        Disney Enterprises, Inc. v. Redbox Automated Retail, LLC, No. 2:17-cv-08655, Dkt. 113 (C.D. Cal. Jul. 11, 2018).    [138]        Kat Greene, Playboy May Amend Centerfold Copyright Suit, Judge Rules, Law360 (February 15, 2018), https://www.law360.com/articles/1012972.    [139]        Id.    [140]        Playboy Entm't Grp. Inc. v. Happy Mutants, LLC, No. CV-178140, 2018 WL 2315936, at *1 (C.D. Cal. Feb. 14, 2018).    [141]        Id. at *1, n.1.    [142]        See Response to Order to Show Cause, Playboy Entertainment Group, Inc. v. Happy Mutants, LLC, Case No. 2:17-cv-08140-FMO-PLA (March 12, 2018).    [143]        Capitol Records, LLC v. Vimeo, LLC, 826 F.3d 78 (2d Cir. 2016).    [144]        Capitol Records, LLC v. Vimeo, LLC, 137 S. Ct. 1374 (2017).    [145]        Capitol Records, LLC v. Vimeo, LLC, No. 09-CV-10101, 2018 WL 1634123, at *6 (S.D.N.Y. Mar. 31, 2018).    [146]        Id. at *4.    [147]        Id. at *6.    [148]        Dave Simpson, Split 9th Circ. Tosses Porn Co. Copyright Suit, Law360 (March 14, 2018), https://www.law360.com/media/articles/1022316.    [149]        Id.    [150]        Id.    [151]        Id.    [152]        Id.    [153]        Id.    [154]        de Havilland v. FX Networks, LLC, 21 Cal. App. 5th 845 (2018), review filed (May 4, 2018).    [155]        Id. at 851.    [156]        Id.    [157]        de Havilland, 21 Cal. App. 5th at 845.    [158]        Id. at 856, 870–71.    [159]        Id. at 849.    [160]        Id. at 864.    [161]        Id. at 864–67.    [162]        Lohan v. Take-Two Interactive Software, Inc., 97 N.E.3d 389, 392–93 (2018).    [163]        Id. at 122.    [164]        Id. at 119 (internal quotations omitted).    [165]        Bill Donahue, NY Top Court Says 'Game Over' For Lohan's 'GTA V' Suit, Law360 (Mar. 29, 2018), https://www.law360.com/media/articles/1027785/ny-top-court-says-game-over-for-lohan-s-gta-v-suit.    [166]        Sivero v. Twentieth Century Fox Film Corp., No. B266469, 2018 WL 833696 (Cal. Ct. App. Feb. 13, 2018), reh'g denied (Mar. 2, 2018), review denied (May 23, 2018); see also Eriq Gardner, Appeals Court Won't Let 'Goodfellas' Actor Have Another Shot at 'Simpsons' Mob Character, The Hollywood Rep. (Feb. 13, 2018), https://www.hollywoodreporter.com/thr-esq/appeals-court-wont-let-goodfellas-actor-have-shot-at-simpsons-mob-character-1084379.    [167]        Sivero, 2018 WL 833696, at *1.    [168]        Id. at 2.    [169]        Id.    [170]        Id. at 10.    [171]        Id.    [172]        Id.    [173]        Ashley Cullins, John Oliver, HBO Beat Coal Executive's Defamation Lawsuit, The Hollywood Rep. (Feb. 24, 2018), https://www.hollywoodreporter.com/thr-esq/john-oliver-hbo-beat-coal-executives-defamation-lawsuit-1088133.    [174]        See id.    [175]        See id.    [176]        See Marshall Cty. Coal Co. v. Oliver, No. 17-C-124, 2018 WL 1082525, at *1 (W. Va. Cir. Ct. 2018).    [177]        See Amy B. Wang, A coal exec sued John Oliver for calling him a 'geriatric Dr. Evil.' A judge tossed the case, The Washington Post (Feb. 26, 2018), https://www.washingtonpost.com/news/arts-and-entertainment/wp/2018/02/26/a-coal-exec-sued-john-oliver-for-calling-him-a-geriatric-dr-evil-a-judge-tossed-the-case/.    [178]        See Eriq Gardner, Bill Cosby Asking Supreme Court to Review Janice Dickinson Defamation Lawsuit, The Hollywood Rep. (June 4, 2018), https://www.hollywoodreporter.com/thr-esq/bill-cosby-asking-supreme-court-review-janice-dickinson-defamation-lawsuit-1116912.    [179]        See Dickinson v. Cosby, 17 Cal. App. 5th 655, 660-61 (2017).    [180]        See id. at 687.    [181]        See McKee v. Cosby, 874 F.3d 54, 62 (1st Cir. 2017).    [182]        See Hill v. Cosby, 665 F. App'x 169, 177 (3d Cir. 2016).    [183]        Eriq Gardner, Bill Cosby's Ex-Lawyer Marty Singer Escapes Janice Dickinson Lawsuit, The Hollywood Rep. (July 16, 2018), https://www.hollywoodreporter.com/thr-esq/bill-cosbys-lawyer-marty-singer-escapes-janice-dickinson-lawsuit-1127509.    [184]        Petition for Writ of Certiorari, Cosby v. Dickinson, No. 18-70.    [185]        Knight First Amendment Inst. at Columbia Univ. v. Trump, 302 F. Supp. 3d 541, 574-75 (S.D.N.Y. 2018).    [186]        Garrett Epps, What the @RealDonaldTrump Ruling Actually Means, The Atlantic (May 24, 2018), https://www.theatlantic.com/technology/archive/2018/05/what-the-realdonaldtrump-ruling-actually-means/561146/.    [187]        Bryan Fung and Hamza Shaban, Trump violated the Constitution when he blocked his critics on Twitter, a federal judge rules, The Washington Post (May 23, 2018), https://www.washingtonpost.com/news/the-switch/wp/2018/05/23/trump-cannot-block-twitter-users-for-their-political-views-court-rules/.    [188]        Knight First Amendment Inst., 302 F. Supp. 3d at 567.    [189]        Id. at 574.    [190]        See Prager Univ. v. Google LLC, No. 17-CV-06064-LHK, 2018 WL 1471939, at *8 (N.D. Cal. Mar. 26, 2018).    [191]        Eriq Gardner, Why Won't Google Comment on a Lawsuit Accusing YouTube of Censoring Conservatives?, The Hollywood Rep. (Oct. 27, 2017), https://www.hollywoodreporter.com/thr-esq/why-wont-google-discuss-a-lawsuit-accusing-youtube-censoring-conservatives-1052497.    [192]        Prager Univ., 2018 WL 1471939, at *8.    [193]        Id. [194] IMDb.com, Inc. v. Becerra, No. 16-CV-06535-VC, 2017 WL 772346, at *1–2 (N.D. Cal. Feb. 22, 2017). [195] IMDb.com, Inc. v. Becerra, No. 16-CV-06535-VC, 2018 WL 979031, at *3 (N.D. Cal. Feb. 20, 2018). See also Eriq Gardner, California's IMDb Age Censorship Law Declared Unconstitutional, The Hollywood Rep. (Feb. 20, 2018), https://www.hollywoodreporter.com/thr-esq/californias-imdb-age-censorship-law-declared-unconstitutional-1086540.    [196]        IMDb.com, 2018 WL 979031, at *2.    [197]        Id.    [198]        Id.    [199]        Id. at *3.    [200]        Id.    [201]        Id.    [202]        See RJ Vogt, Sesame Street Can't Block Raunchy Movie Tagline In TM Row, Law360 (May 31, 2018), https://www.law360.com/articles/1048982/sesame-street-can-t-block-raunchy-movie-tagline-in-tm-row.    [203]        See id.    [204]        See Bill Donahue, Overturning TTAB, Judge Rules 'Booking.com' Not Generic, Law360 (Aug. 10, 2017), https://www.law360.com/articles/952925/overturning-ttab-judge-rules-booking-com-not-generic.    [205]        Id.    [206]        See Bill Donahue, Booking.com Asks Full 4th Cir. To Nix USPTO Atty Fee Rule, Law360 (Apr. 12, 2018), https://www.law360.com/articles/1032794/booking-com-asks-full-4th-circ-to-nix-uspto-atty-fee-rule.    [207]        See Eriq Gardner, 'Star Trek'/Dr. Suess Mashup Creator Beats Trademark Claims, The Hollywood Rep. (May 22, 2018), https://www.hollywoodreporter.com/thr-esq/star-trek-dr-seuss-mashup-creator-beats-trademark-claims-1113911.    [208]        See id.; Rogers v. Grimaldi, 875 F.2d 994 (2d Cir. 1989).    [209]        See Gardner, supra note 207.    [210]        Ben Sisario, "Blurred Lines" Verdict Upheld by Appeals Court, The New York Times (Mar. 21, 2018), https://www.nytimes.com/2018/03/21/business/media/blurred-lines-marvin-gaye-copyright.html.    [211]        Bill Donahue, "Blurred Lines" Ruling Leaves Big Questions Unanswered, Law360 (Mar. 21, 2018), https://www.law360.com/articles/1024899/.    [212]        Williams et al. v. Gaye et al., No. 15-56880, 2018 WL 3382875, at *21 (9th Cir. Mar. 21, 2018) (Amend. Op.).    [213]        Williams, 2018 WL 3382875, at *23.    [214]        Id.    [215]        Id. at *27.    [216]        Id. at *31-32.    [217]        Id. at *33, n.14.    [218]        Id. at *19.    [219]        Eriq Gardner, Appeals Court Won't Rehear "Blurred Lines" Case, The Hollywood Rep., July 11, 2018, https://www.hollywoodreporter.com/thr-esq/appeals-court-wont-rehear-blurred-lines-case-1126253.    [220]        Eriq Gardner, Music Publishers Win Major Copyright Fight Over Streaming of Legendary Rock Concerts, The Hollywood Rep. (Apr. 10, 2018), https://www.hollywoodreporter.com/thr-esq/music-publishers-win-major-copyright-fight-streaming-legendary-rock-concerts-1101359.    [221]        Id.    [222]        Abkco Music, Inc., et al. v. William Sagan, et al., 2018 WL 1746564, at *12 (S.D.N.Y. Apr. 9, 2018).    [223]        Id. at *12-15; see also Gardner, supra note 220.    [224]        Gardner, supra note 220.    [225]        Id.    [226]        Eriq Gardner, Jay-Z Triumphs in "Big Pimpin" Appeal as Egyptians Can't Enforce Moral Rights, The Hollywood Rep. (May 31, 2018), https://www.hollywoodreporter.com/thr-esq/jay-z-triumphs-big-pimpin-appeal-as-egyptians-cant-enforce-moral-rights-1116131.    [227]        Fahmy v. Jay-Z, 891 F.3d 823, 823, 831 (9th Cir. 2018).    [228]        Id. at 826.    [229]        Id.    [230]        Id. at 829. The following Gibson Dunn lawyers assisted in the preparation of this client update: Scott Edelman, Howard Hogan, Ben Ross, Nathaniel Bach, Corey Singer, Jonathan Soleimani, Sara Ciccolari-Micaldi, Michael Policastro, Aaron Frumkin, Andrew Blythe, Rachil Davids, Lauryn Togioka, Harrison Korn, Brittany Schmeltz, Sarah Graham, and Sean O’Neill. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or the following leaders and members of the firm's Media, Entertainment & Technology Practice Group: Scott A. Edelman - Co-Chair, Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com) Kevin Masuda - Co-Chair, Los Angeles (+1 213-229-7872, kmasuda@gibsondunn.com) Orin Snyder- Co-Chair, New York (+1 212-351-2400, osnyder@gibsondunn.com) Ruth E. Fisher - Los Angeles (+1 310-557-8057, rfisher@gibsondunn.com) Howard S. Hogan - Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Ari Lanin - Los Angeles (+1 310-552-8581, alanin@gibsondunn.com) Benyamin S. Ross - Los Angeles (+1 213-229-7048, bross@gibsondunn.com) Helgi C. Walker - Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com) Nathaniel L. Bach - Los Angeles (+1 213-229-7241,nbach@gibsondunn.com) © 2018 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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August 6, 2018

SEC Proposes Streamlined Financial Disclosures for Certain Guaranteed Debt Securities and Affiliates Whose Securities Are Pledged to Secure a Series o

Click for PDF On July 24, 2018, the Securities and Exchange Commission (the "Commission") proposed amendments to Rules 3-10 and 3-16 of Regulation S-X (available here) (the "Proposal") in an effort to "simplify and streamline" the financial disclosures required in offerings of certain guaranteed debt and debt-like securities (collectively referred to as "debt securities"), as well as offerings of securities collateralized by securities of an affiliate of the registrant, registered under the Securities Act of 1933, as amended (the "Securities Act"). These proposed changes would, if implemented, facilitate greater speed to market for such public offerings, significantly reducing the Securities Act disclosure burdens for such registrants, as well as reducing the registrant's disclosure obligations in its subsequent annual and interim reports required under Securities Exchange Act of 1934, as amended (the "Exchange Act"). Background Current Alternative Disclosure Regime for Certain Guaranteed Debt Securities.  For purposes of the Securities Act and the Exchange Act, guarantees of securities are deemed separate securities from the underlying security that is guaranteed.  As a result, absent a regulatory exception or exemption, a prospectus prepared for a public offering of guaranteed debt securities registered under the Securities Act is required to include the full separate financial statements of (and disclosure regarding) each guarantor (in addition to those of the issuer of the guaranteed debt security) in the form and for the periods required for registrants under Regulation S-X, and each such guarantor (like the issuer of the guaranteed debt security) is also required to be registered under the Exchange Act and thereafter file annual and interim reports under that Act just as any other registrant.  Recognizing the substantial burdens of such disclosures that would otherwise be imposed in connection with registered public offerings of certain guaranteed debt securities involving parent companies and their wholly-owned subsidiaries, much of which would be duplicative, the SEC has embraced exceptions (as currently set out in Regulation S-X Rule 3-10 ("S-X 3-10")) to instead permit the parent company in a qualifying offering of such guaranteed debt securities to file only its consolidated financial statements, together with certain condensed consolidating financial information ("Consolidating Financial Information") intended to allow investors to distinguish between the obligor and non-obligor components of the consolidated group of companies represented in the parent's consolidated financial statements.  S-X 3-10 also requires the registrant to include specified textual disclosure, where applicable,  about the limited nature of the assets and operations of the issuer, guarantor(s) or non-guaranteeing subsidiaries, as the case may be, and describing any material limitations on the ability of the parent or any guarantor to obtain funds (whether by dividend, loan or otherwise) from its subsidiaries and any other relevant limitations on any subsidiary's use of its fund (together with the Consolidating Financial Information, the "Alternative Disclosure").  The Alternative Disclosure is required to be included in a note to the parent's consolidated audited financial statements and must cover the same periods for which the parent is required to include its consolidated financial statements.  The parent company is required to include the Alternative Disclosure in its annual and quarterly Exchange Act reports filed after the guaranteed debt securities are issued and to continue to do so as long as the securities remain outstanding, even for periods in which the issuer(s) and guarantors have no Exchange Act reporting obligation with respect to such securities.  In addition, for certain significant recently-acquired subsidiary guarantors, S-X 3-10 currently requires that the registration statement for the offering include the separate audited financial statements for such subsidiaries' most recent fiscal year and unaudited financial statements for any interim period for which the parent is required to include its interim financial statements. Pursuant to Rule 12h-5, each guarantor or issuer subsidiary in any such qualifying transaction is exempt from the separate ongoing Exchange Act reporting obligations otherwise applicable to a registrant. Notwithstanding the advantages offered by the exception provided by S-X 3-10, the conditions to the current regulation, including that the subsidiaries be 100% owned by the parent and that all guarantees be full and unconditional, the often time-consuming process of producing and auditing the Consolidating Financial Information, as well as the requirement that the parent continue to include the Alternative Disclosure for as long as any of the guaranteed debt securities remain outstanding, have limited the range of subsidiaries that are used as guarantors, delayed offerings and/or led to reliance on Rule 144A for life offer structures for some guaranteed debt offerings to avoid registration. Current Disclosure Requirements for Securities Collateralized by Affiliate Securities.  Current Regulation S-X Rule 3-16 ("S-X 3-16") requires a registrant to provide separate audited annual financial statements, as well as unaudited interim financial statements, for each affiliate whose securities constitute a "substantial portion"[1] of the collateral pledged for such registrant's registered securities as though such affiliate were itself a registrant, and thereafter file annual and interim reports under the Exchange Act for such affiliate.  The production of the financial statements required by S-X 3-16 is often time consuming and costly to the issuer and the requirement is triggered entirely by the outcome of the substantial portion test, without regard to the comparative importance of the relevant affiliate to the registrant's business and operations as a whole or the materiality of such financial statements to an investment decision.  To avoid the burden of preparing separate full financial statements for each affiliate whose securities are pledged as collateral, issuers often reduce collateral packages or structure collateralized securities as unregistered offerings.  Additionally, debt agreements are sometimes structured to specifically release collateral if and when such collateral may trigger the S-X 3-16 financial statement requirements. Proposed Amendments In the SEC's effort to streamline the disclosure requirements in connection with certain guaranteed debt securities offered and sold in public offerings registered under the Securities Act, as well as simplify the current number of myriad offer structures entitled to disclosure relief, the amendments proposed to S-X 3-10 would: replace the current detailed list of offer structures permitted relief under S-X 3-10 with a more simple requirement that the debt securities be either: issued by the parent or co-issued by the parent, jointly and severally, with one or more of its consolidated subsidiaries; or issued by a consolidated subsidiary of the parent (or co-issued with one or more other consolidated subsidiaries of the parent) and fully and unconditionally guaranteed by the parent; replace the condition currently included in S-X 3-10 that a subsidiary issuer or guarantor be 100% owned by the parent company, requiring instead that the subsidiary merely be consolidated in the parent company's consolidated financial statements in accordance with U.S. GAAP or, in the case of foreign private issuer, IFRS (as promulgated by the IASB).  As a result, in addition to 100% owned subsidiaries, controlled subsidiaries and joint ventures which are consolidated in the parent's financial consolidated financial statements could be added as issuers or guarantors in such offerings and take advantage of the reduced disclosure permitted under the Proposal, provided the other conditions of the revised regulation are met; modify the requirement that all guarantees be full and unconditional, requiring only that the parent guarantee (in the case of a subsidiary issuer) be full and unconditional.  The proposal would thereby allow greater flexibility with the extent and nature of guarantees to be given by subsidiary guarantors, provided the terms and limitations of such guarantees are adequately disclosed; eliminate the Consolidating Financial Information currently required to be included in the registration statement and the parent's Exchange Act annual and (where applicable) quarterly reports under S-X 3-10, and, in lieu thereof, add a new Rule 13-01 of Regulation S-X requiring such parent companies to include (i) certain summary financial information (the "Summary Financial Information") for the parent and guarantors (the "Obligor Group") on a combined basis (after eliminating intercompany transactions among members of this Obligor Group), and (ii) certain non-financial disclosures, including expanded qualitative disclosures about the guarantees and factors which could limit recovery thereunder, and any other quantitative or qualitative information that would be material to making an investment decision about the guaranteed debt securities (the Summary Financial Information and such non-financial disclosures, the "Proposed Alternative Disclosure"); require that the Summary Financial Information conform to the current provisions of Regulation S-X Rule 1-02(bb) and include summarized information as to the assets, liabilities and results of operations of the Obligor Group only; reduce the periods for which the Summary Financial Information must be provided, requiring such information for only the most recent fiscal year and any interim period for which consolidated financial statements of the parent are otherwise required to be included; permit the parent flexibility as to the location of the Summary Financial Information and other Proposed Alternative Disclosures, including in the notes to it consolidated financial statements, in the "management's discussion and analysis of financial condition and results of operations" or immediately following "risk factors" (if any") or the pricing information in the Securities Act registration statement and related prospectus and in Exchange Act reports on Forms 10-K, 20-F and 10-Q required to be filed during the fiscal year in which the first bona fide sale of the guaranteed debt securities is completed.  By permitting such flexibility, the parent issuers may realize greater speed to market for such offering as the Summary Financial Information would not be required to be audited if located outside the notes to its consolidated financial statements; by allowing a parent company the option to exclude the Summary Financial Information from the notes to its audited financial statements, such parent may realize greater speed to market for such offerings as the Summary Financial Information would not be required to be audited as part of the offer process; such Summary Financial Information would, however, be required to be included in a footnote to the parent's annual and (where applicable) quarterly reports (and thus audited), beginning with its annual report filed on Form 10-K or 20-F for the fiscal year during which the first bona fide sale of the guaranteed debt securities is completed.  Thus, for example, for guaranteed debt securities issued in the second quarter of fiscal 2018, the Summary Financial Information would first be required to be included in the notes to the parent's financial statements filed in its annual report filed on Form 10-K for its fiscal year 2019; eliminate the current requirement that, for so long as the guaranteed debt securities remain outstanding, a parent company continue to include the Consolidating Financial Information within its annual and interim reports (including for periods in which the Obligor Group is not then  subject to the reporting requirements of the Exchange Act).  Under the Proposal, the Summary Financial Information and other Proposed Alternative Disclosures would not be required to be included in the parent's annual and quarterly reports for such periods in which the Obligor Group is not then subject to the reporting requirements of the Exchange Act.  Nonetheless, some parent companies with an Obligor Group that issues guaranteed debt securities on a regular basis may elect to continue to prepare and include the Revised Alternative Disclosure in its Exchange Act reports to ensure a more rapid access to the market for future transactions; and eliminate, with respect to recently-acquired subsidiary guarantors or issuers, the current requirement under S-X 3-10 that the parent include in the registration statement for the offering separate audited financial statements for the most recent fiscal year of the recently-acquired subsidiary (as well as separate unaudited interim financial statements for any relevant interim periods).  Note, however, that other provisions of Regulation S-X regarding the impact of recent material acquisitions and the potential requirement thereunder to include separate financial statements of the acquired entity (and, in some cases, pro forma consolidated financial information regarding the acquisition) remain unchanged by the Proposal. The proposed amendments to S-X 3-16 would: replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with a requirement to include the Summary Financial Information and any additional non-financial information material to investment decisions about the affiliate(s) (if more than one affiliate, such information could be provided on a combined basis) and the collateral arrangement(s).  The elimination of the requirement to include the affiliate's separate audited financial statements would significantly decrease the cost and burden of an offering secured by the securities of an affiliate of the registrant; permit the proposed financial and non-financial affiliate disclosures to be located in filings in the same manner (and for reports for the same corresponding periods) as described above for the disclosures related to guarantors and guaranteed securities, which would bring the level and type of disclosure for collateralized securities in line with other forms of credit enhancement; and replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the securities registered or being registered with a requirement to provide the applicable disclosures in all cases, unless they are immaterial to holders of the collateralized security, which would replace the arbitrary numerical cutoff with a consideration of materiality to investors. Set forth below, we summarizing the current requirements, and proposed changes to such requirements, for the use of abbreviated disclosure for subsidiary issuer/guarantors of certain guaranteed debt securities and for issuers of securities collateralized by securities of affiliates. Guaranteed Debt Securities:  Summary of Current Requirements for Abbreviated Disclosure and Proposed Revisions Current Provisions of S-X 3-10: Proposed Provisions: Offer Structures Permitted Disclosure Relief Finance subsidiary issuer of debt securities guaranteed by  parent; Operating subsidiary issuer of debt securities guaranteed by parent; Subsidiary issuer of debt securities guaranteed by  parent and one or more other subsidiaries; Single subsidiary guarantor of debt securities issued by parent; or Multiple subsidiary guarantors of debt securities issued by parent Debt securities: Issued by parent or co-issued by parent, jointly and severally, with one or more of its consolidated subsidiaries; or Issued by a consolidated subsidiary of parent (or co-issued with one or more other consolidated subsidiaries) and fully and unconditionally guaranteed by parent Conditions to Relief Each subsidiary issuer or guarantor must be 100% owned by parent; and All guarantees must be full and unconditional Subsidiary issuer/guarantors must be consolidated in the parent's consolidated financial statements Only the parent guarantee, if any, must be full and unconditional Alternative Disclosure Condensed Consolidating Financial  Information, and certain textual disclosure Summary Financial Information for Obligor Group on a combined basis (after eliminating transactions between Obligors) and certain textual disclosure Periods for which Disclosure Required in Registration Statement For each year and any interim periods for which parent is required to include financial statements The most recent fiscal year and any interim period for which the parent is required to include financial statements Locations of Disclosure The Alternative Disclosure must be included in the notes to the parent's audited consolidated financial statements (and in its unaudited interim financial statements where such financial statements are required to be included) In the Registration Statement and in Exchange Act reports filed during the fiscal year in which the debt securities are first bona fide offered to the public, the parent has the choice of including them in the notes to its consolidated financial statements or elsewhere, including within "management's discussion and analysis of financial condition and results of operations" or immediately following "risk factors" For the parent's annual report for the fiscal year in which the debt securities were first offered to the public, and all Exchange Act reports required to be filed thereafter, the Proposed Alternative Disclosures must be included in the notes to the parent's consolidated financial statements How Long is Exchange Act Disclosure Required For so long as any of the debt securities remain outstanding Only for periods in which the Obligors are required to file Exchange Act reports in respect of the debt securities Additional Requirements For Recently Acquired Subsidiary Guarantor/Issuers Parent must include separate audited financial statements of the recently acquired subsidiary issuer/guarantor for the most recent fiscal and any interim period for which the parent is required to include financial statements No separate financial statements of a recently acquired subsidiary issuer/guarantor is required for relief under the Proposal Summary of Current Disclosure Requirements for Securities Collateralized by Securities of Affiliates and the Proposed Revisions Current Provisions of S-X 3-16: Proposed Provisions: Offer Structure Triggering Disclosure Requirement Securities issued by a registrant and collateralized with the securities of its affiliates where such collateral constitutes a "substantial portion" of the collateral for any class of securities Securities issued by a registrant and collateralized with the securities of its affiliates, unless such collateral is immaterial to making an investment decision about the registrant's securities Additional Disclosure Required If the pledged securities of an affiliate constitute a "substantial portion" of the collateral for the secured class of securities, separate audited annual financial statements, as well as unaudited interim financial statements, for such affiliate as though such affiliate were itself a registrant Summary Financial Information with respect to any affiliate whose securities are pledged to secure a class of securities, and any additional non-financial information material to investment decisions about the affiliate(s) and the collateral arrangement Basis of Presentation Separate financial statements for each affiliate whose securities constitute a "substantial portion" of the collateral Summary Financial Information of affiliates consolidated in the registrant's financial statements can be presented on combined basis If information is applicable to a subset of affiliates (but not all) separate Summary Financial Information required for such affiliates Periods for which Disclosure Required in Registration Statement For each year and any interim period as if affiliate were a registrant The most recent fiscal year and any interim period for which the registrant is required to include consolidated financial statements Locations of Disclosure Separate financial statements required to be included in the registration statement in the registrant's annual report on Form 10-K or 20-F Disclosure not required in quarterly reports of the registrant In the Registration Statement and in Exchange Act reports filed during the fiscal year in which the first bona fide sale is completed, the registrant has the choice of including them in the notes to its consolidated financial statements or elsewhere, including within "management's discussion and analysis of financial condition and results of operations" or immediately following "risk factors" For the registrant's annual report for the fiscal year in which the first sale was completed, and all Exchange Act reports required to be filed thereafter, the required information must be included in the notes to the registrant's consolidated financial statements   The SEC is seeking public comments on its proposal for a period of 60 days from July 24, 2018. Comments can be submitted on the internet at http://www.sec.gov/rules/other.shtml; via email to  rule-comments@sec.gov (File Number S7-19-18 should be included on the subject line); or via mail to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.    [1]   E.g., if the aggregate principal amount, par value or book value of the pledged securities as carried by the issuer of the collateralized securities, or market value, equals 20% or more of the aggregate principal amount of the secured class of securities offered. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm's Capital Markets or Securities Regulation and Corporate Governance practice groups, or the authors: J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) Andrew L. Fabens - New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes - Houston (+1 346-718-6602, hholmes@gibsondunn.com) Alina E. Iarve - New York (+1 212-351-2406, aiarve@gibsondunn.com) Michael J. Scanlon - Washington, D.C. (+1 202-887-3668, mscanlon@gibsondunn.com) Peter W. Wardle - Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) © 2018 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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August 6, 2018

The U.S. Office of the Comptroller of the Currency Will Permit Special Purpose National Bank Charters for Fintech Firms

Click for PDF Last week, the Office of the Comptroller of the Currency (OCC) announced that it would begin accepting proposals from Fintech firms to charter special purpose national banks (SPNBs).  This decision comes over 18 months after the White Paper proposing such charters was issued under President Obama's Comptroller, Thomas Curry, in his last month in that position.  The OCC accompanied this announcement with a policy statement (Policy Statement) and a supplement to its licensing manual for national banks (Licensing Manual Supplement). This announcement, while expected, is an extremely significant development in federal banking law, and one almost assuredly to be legally challenged, at a time when the Chevron doctrine of administrative agency deference is receiving a fresh look. The OCC's decision, when considered with its historical approach to preemption under the National Bank Act, could expand the scope of federal banking regulation considerably and provide substantial opportunities.  These opportunities could benefit not merely Fintech firms but investors in many such firms, who would appear to be able to control certain SPNBs and still avoid regulation under the Bank Holding Company Act (BHC Act), including the Volcker Rule. Powers of a Fintech SPNB When former Comptroller Curry introduced his Fintech national bank proposal in December 2016, he noted that "the number of Fintech companies in the United States and United Kingdom has ballooned to more than 4,000, and in just five years investment in this sector has grown from $1.8 billion to $24 billion worldwide."[1]  The Policy Statement – consistent with the OCC's traditional approach to the "business of banking" under the National Bank Act – makes clear that the special purpose charter is a response to this development, noting: The OCC recognizes that the business of banking evolves over time, as do the institutions that provide banking services. As the banking industry changes, companies that engage in the business of banking in new and innovative ways should have the same opportunity to obtain a national bank charter as companies that provide banking services through more traditional means.[2] Consistent with its existing regulations, the Policy Statement takes an expansive view of the National Bank Act's powers provision, 12 U.S.C. § 24(SEVENTH).  Under this provision, a national bank is permitted, when a charter is issued, to: [E]xercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes . . .[3] Prior to issuing the Policy Statement, the OCC had interpreted this provision to permit it to grant a charter to an institution that engaged in "any of the three core banking functions of receiving deposits, paying checks, or lending money."[4]  Consistent with this existing regulation, a Fintech firm seeking a SPNB charter must conduct "at least one of these three core banking functions."[5]  The Licensing Manual Supplement, however, provides greater elasticity to this requirement, as it states that "[t]he OCC views the National Bank Act as sufficiently adaptable to permit national banks to engage in traditional activities like paying checks and lending money in new ways. For example, facilitating payments electronically may be considered the modern equivalent of paying checks."[6] Depending on the OCC's ultimate position on "modern equivalence," a Fintech SPNB charter could be available not only to Fintech firms engaged in lending activities without taking deposits (such as peer-to-peer lending companies), but also to companies engaged in payments broadly understood – including traditional money transmitters, and, in addition, virtual currency exchanges, because such exchanges also engage in money transmission, and indeed many have been licensed by the states as such.  It is noteworthy that the Licensing Manual Supplement states that: Beyond those core activities [deposits, lending, paying checks], the activities of an SPNB are limited to those that are permissible for national banks under a statute, regulation, or federal judicial precedent, or that the OCC has determined to be permissible. See e.g. 12 USC 24(Seventh); 12 CFR 7.5002; NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251 (1995).[7] In the NationsBank case cited, the Supreme Court, per Justice Ginsburg, "expressly h[e]ld" that "the 'business of banking' is not limited to the enumerated powers in § 24 Seventh and that the Comptroller therefore has discretion to authorize activities beyond those specifically enumerated."[8] OCC Expectations As it indicated in its 2016 White Paper, the OCC is not proposing a "bank-lite" approach to Fintech SPNBs. The OCC expects any charter proposal to have a comprehensive business plan covering at a minimum three years.  The plan should include comprehensive alternative business strategies to address various best-case and worst-case scenarios.  In keeping with its post-Financial Crisis approach to corporate governance, the OCC emphasized the role of an SPNB's board of directors, who must have a prominent role in the overall governance framework, actively oversee management, provide "credible challenge," and exercise independent judgment.[9] The OCC also emphasized the importance of capital, minimum and ongoing levels of which need to be commensurate with the risk and complexity of the proposed activities (including on- and off-balance sheet activities).[10]  Where a SPNB's business activities are principally off-balance sheet, traditional minimum capital requirements may not adequately reflect all risks, and the OCC could therefore require applicants in such circumstances to propose a minimum level of capital that the proposed SPNB would meet or exceed at all times.  In this regard, the OCC noted that other types of limited charter banks often hold capital that "exceeds the capital requirements for other types of banks."[11]  The OCC would expect a similarly granular presentation with respect to a SPNB's liquidity, including consideration of planned and unplanned balance sheet changes, varying interest ratio scenarios, and market conditions. Charter applicants would also be expected to demonstrate appropriate systems and programs to identify, assess, manage and monitor risk, including policies and procedures, practices, training, internal control and audit.  Of particular importance is a compliance program for anti-money laundering and OFAC sanctions, as well as a consumer compliance program designed to ensure fair treatment of customers. Two very important criteria for receiving an SPNB charter are financial inclusion and contingency planning.  As to the first, the OCC states: Consistent with the agency's mission to ensure fair treatment of customers and fair access to financial services, the OCC expects any entity seeking an SPNB charter to demonstrate a commitment to financial inclusion that includes providing or supporting fair access to financial services and fair treatment of customers.  The nature of that commitment will depend on the proposed bank's business model, and the types of products, services, or activities it intends to provide. An SPNB applicant should describe the proposed bank's commitment to financial inclusion in its application. The description should include the proposed goals, approaches, activities, milestones, commitment measures, and metrics for serving the anticipated market and community consistent with the bank's activities, business model, and product and service offerings.[12] On the second, because many SPNBs are likely not to be FDIC-insured, the OCC will be such institutions' receiver in insolvency.  As a result, the OCC will insist on a detailed contingency plan to be prepared: Before receiving final approval for a charter, an SPNB will be required to develop a contingency plan to address significant financial stress that could threaten the viability of the bank. The contingency plan should outline strategies for restoring the bank's financial strength and options for selling, merging, or liquidating the bank in the event the recovery strategies are not effective. The format and content of the plan are flexible and should be tailored to the bank's specific business and reviewed and updated as the bank's business evolves. As a condition for preliminary approval of a charter, an SPNB will be required to develop the contingency plan during the bank's organization phase. The OCC's final approval will require the bank to implement and adhere to the plan. The bank will be expected to review the contingency plan annually and update it as needed. Any significant changes to the contingency plan will require the non-objection of the appropriate supervisory office.[13] As a national banking association, a Fintech SPNB would be subject to the federal statutes applicable to other national banks, such as lending limits, limits on real estate and securities investments, the Bank Secrecy Act and other anti-money laundering laws, OFAC sanctions requirements, and, where applicable, such as with respect to lending, federal consumer law.  A Fintech SPNB would be required to become a member bank in the Federal Reserve System and subscribe for stock in its applicable Federal Reserve Bank in an amount equal to six percent of the bank's paid-up capital and surplus. Benefits of a Special Purpose Charter to Fintech Firms The principal benefits of the special purpose charter to Fintech firms are national licensing and federal preemption.  Currently, peer-to-peer lending firms, money transmission companies, and virtual currency exchanges are all licensed by the states.  For such firms to carry out a national business, licensing on a state-by-state basis, and ongoing state examination processes, can be burdensome.  The SPNB charter will provide a federal alternative – and one regulator – to the state-by-state approach for qualifying firms. Second, an SPNB will benefit from federal preemption under the National Bank Act.  Such federal preemption is still broad, notwithstanding the Dodd-Frank Act's attempt to narrow it.  After the Dodd-Frank Act, the OCC may preempt "state financial consumer law" if its application would have a discriminatory effect on national banks in comparison with its effect on state-chartered banks; the state consumer financial law prevents or significantly interferes with the execution by a national bank of its powers (the Barnett standard); or the state law is preempted by a federal consumer financial law other than Dodd-Frank.[14] Significantly, Dodd-Frank left unchanged the ability of a national bank to export interest rates of its home state nationally without regard to state law usury limitations; such interest rate exportation will be a significant benefit to SPNBs engaged in lending activities. Benefits of a Special Purpose Charter to Fintech Investors The SPNB charter may also provide benefits to Fintech investors, who would appear to be able to make controlling investments in certain SPNBs without becoming subject to the BHC Act, including the Volcker Rule.  The BHC Act defines a "bank" as either an FDIC-insured bank or as an institution that both accepts demand deposits and is engaged in the business of making commercial loans.[15]  Under the Policy Statement, the OCC can charter a SPNB that does not accept deposit funding – that is, one that is engaged in making loans or paying checks, or both such activities, as its core banking functions; such a SPNB would not be a BHC Act "bank."  As a result, such an SPNB may be "controlled" by an investor without that investor becoming a bank holding company. This means that there is now another alternative to the state industrial bank charter available for investors such as private equity firms that wish to obtain the benefits of controlling a banking entity without the burdens of regulation by the Board of Governors of the Federal Reserve System.  In addition, although the OCC can be expected to require some form of capital support from a controlling investor of a non-deposit-taking SPNB, the explicit "source of strength" requirement added by the Dodd-Frank Act for a controlling investor will not apply, because that requirement applies only to controlling shareholders of insured depository institutions.[16] As a result, a Fintech firm that seeks a non-depository SPNB charter may find itself attractive to a wide range of investors. ________________________ It seems highly likely that certain state regulators will challenge the OCC's Fintech SPNB determination, given its potential to shift a wide variety of firms to federal supervision and examination and preempt areas of state regulation.  Earlier such suits filed after the OCC's December 2016 White Paper were dismissed as unripe; however, once the chartering process begins, litigation by state regulators could well be expected.  If the OCC's interpretation of the National Bank Act is upheld by a reviewing court, the Fintech SPNB charter could be the most revolutionary development of regulatory reform in the Trump era, for both Fintech firms and their investors.    [1]   OCC, Exploring Special Purpose National Bank Charters for Fintech Companies (December 2016), at 3-4.    [2]   OCC, Policy Statement on Financial Technology Companies' Eligibility to Apply for National Bank Charters (July 31, 2018), at 1.    [3]   12 U.S.C. § 24(SEVENTH).    [4]   12 C.F.R. § 5.20.    [5]   OCC, Policy Statement, at 2.    [6]   OCC, Licensing Manual Supplement:  Considering Charter Applications from Financial Technology Companies, at 2 n.5.    [7]   Id. at n.4.    [8]   513 U.S. 251, 258 n.2 (1995).  Given the Valic holding, the OCC would appear to have substantial discretion regarding permissible activities for SPNBs, as long as one core banking function was present.  The degree to which the OCC will exercise such discretion is currently unknown.    [9]   OCC Licensing Manual Supplement, at 16. [10]   Id. at 8. [11]   Id. at 9, n.26. [12]   Id. at 10. [13]  Id. [14]   12 U.S.C. § 25b(b)(1). [15]   Id. § 1841(c)(1). [16]   Id. § 1831o-1. The following Gibson Dunn lawyers assisted in preparing this client update: Arthur Long, Jeffrey Steiner and James Springer. Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm's Financial Institutions practice group, or any of the following: Financial Institutions Group: 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) Carl E. Kennedy - New York (+1 212-351-3951, ckennedy@gibsondunn.com) James O. Springer - Washington, D.C. (+1 202-887-3516, jspringer@gibsondunn.com) © 2018 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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