Client Alert Archives

This client alert provides an overview of shareholder proposals submitted to public companies during the 2023 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.

I. Summary of Top Shareholder Proposal Takeaways from the 2023 Proxy Season

As discussed in further detail below, based on the results of the 2023 proxy season, there are several key takeaways to consider for the coming year:

Shareholder proposal submissions rose yet again. For the third year in a row, the number of proposals submitted increased. In 2023, the number of proposals increased by 2% to 889—the highest number of shareholder proposal submissions since 2016.
The number of executive compensation proposals significantly increased, along with a continued increase in environmental and social proposals. Executive compensation proposals increased notably, up 108% from 2022, with the increase largely attributable to proposals seeking shareholder approval of certain executive severance agreements. The number of both environmental and social proposals also increased, up 11% and 3% respectively, compared to 2022 and 68% and 24% respectively, compared to 2021. In contrast, governance proposals declined 14%, and civic engagement proposals declined 6%. The five most popular proposal topics in 2023, representing 43% of all shareholder proposal submissions, were (i) climate change, (ii) independent chair, (iii) nondiscrimination and diversity-related, (iv) shareholder approval of certain severance agreements, and (v) special meetings. Of the five most popular topics in 2023, all but one (shareholder approval of certain severance agreements replacing lobbying spending and political contributions) were also in the top five in 2022.
While the number of no-action requests dropped significantly, the percentage of proposals excluded pursuant to a no-action request rebounded from 2022’s historic low. Only 175 no-action requests were submitted to the Staff in 2023, representing a submission rate of 20%, down from a submission rate of 29% in 2022 and 34% in 2021. The overall success rate for no-action requests, after plummeting to only 38% in 2022, rebounded to 58% in 2023, but was still well below the 71% success rate in 2021, and marked the second lowest success rate since 2012. Success rates in 2023 improved for duplicate proposals (100% in 2023, up from 31% in 2022), procedural (80% in 2023, up from 68% in 2022), ordinary business (50% in 2023, up from 26% in 2022), and substantial implementation grounds (26% in 2023, up from with 15% in 2022), while success rates declined for resubmissions (43% in 2023, compared with 56% in 2022) and violation of law (33% in 2023, compared with 40% in 2022).
The number of proposals voted on increased yet again, but overall voting support decreased significantly, and less than 3% of proposals submitted received majority support. In 2023, over 54% of all proposals submitted were voted on, compared with 50% of submitted proposals voted on in 2022. Despite this increase, average support for all shareholder proposals plummeted to 23.3% in 2023, down from 30.4% in 2022. The decrease in average support was primarily driven by decreased support for both social and environmental proposals, with support for social (non-environmental) proposals decreasing to 17.2% in 2023 from 23.2% in 2022 and support for environmental proposals decreasing to 21.3% in 2023 from 33.8% in 2022. And in line with lower support overall, only 25 shareholder proposals received majority support in 2023, down from 55 in 2022.
More change is in store for the shareholder proposal process, as the SEC considers further amendments to Rule 14a-8, Congress homes in on reform of Rule 14a-8, and stakeholders challenge the SEC’s role in the process. In July 2022, the SEC proposed amendments to Rule 14a-8 that, if adopted, would make it significantly more challenging for companies to exclude shareholder proposals on substantial implementation, duplication, and resubmission grounds. The SEC targeted approval of these amendments by October 2023, which means the 2024 proxy season could see further changes in how companies approach no-action requests. Additionally, the Financial Services Committee of the U.S. House of Representatives recently formed a Republican ESG Working Group, which has identified reforming the Rule 14a-8 no-action request process as a key priority of the Working Group’s focus on reforming the proxy voting system for retail investors. And, as discussed below, legal action by two stakeholder groups, the National Center for Public Policy Research and the National Association of Manufacturers, could disrupt the shareholder proposal process altogether.
Proponents’ use of exempt solicitations grows again, and now others are joining the game. Exempt solicitation filings continued to proliferate, with the number of filings reaching a record high again this year and increasing almost 22% over last year and 64% compared to 2021. As in prior years, the vast majority of exempt solicitations filed in 2023 were filed by shareholder proponents on a voluntary basis—i.e., outside of the intended scope of the SEC’s rules—in order to draw attention and publicity to pending shareholder proposals. Interestingly, third parties have begun intervening in the shareholder proposal process by using exempt solicitation filings to provide their views on shareholder proposals submitted by unaffiliated shareholder proponents.

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The following Gibson Dunn attorneys assisted in preparing this update: Elizabeth Ising, Thomas J. Kim, Julia Lapitskaya, Ronald O. Mueller. Michael Titera, Lori Zyskowski, Geoffrey Walter, Victor Twu, Natalie Abshez, Meghan Sherley, Michael Svedman*, and Nicholas Whetstone.

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

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

*Michael Svedman is an associate practicing in the firm’s Washington, D.C. office who currently is admitted to practice only in New York.

Texas is known for its business-friendly environment, with low taxes and minimal government regulation. But the state has faced criticism for years about its legal system being slow, unpredictable, and costly, hindering economic growth and development. While nearly thirty other states have created specialized business courts, Texas has not updated its judicial system since the late 1960s. Consequently, elected judges who may never have been exposed to large-scale commercial litigation are called upon to preside over such complex cases alongside run-of-the-mill family law disputes and personal injury claims. And, unlike their federal colleagues, they usually do so without the benefit of full-time clerks to work through what can be mountains of paper.

The predictable result of this combination of bet-the-company cases with small-dollar disputes is that state trial judges’ dockets can become overwhelmed when faced with a complex, large-scale mergers-and-acquisitions or securities issue. These cases often require in-depth research by the judge, lengthy judicial consideration of complex motions, and extremely detailed parsing of complex commercial agreements, all of which are time-consuming and resource-intensive, taking time from their regular dockets. Consequently, these cases can be subject to significant processing delays at the state trial court level. Similarly, the lack of a requirement for written opinions in all cases and the comparatively rare nature of complex commercial cases in state trial courts—for many state trial court judges the first of these massive cases heard in their courtroom may also be the last—has led to a lack of certainty and stability around these types of cases in Texas business law.

Thus, despite its world-class economy, Texas’s judicial system has sometimes led corporations and other business entities to incorporate and litigate in other states, such as Delaware or New York, which have specialized business courts where the timeline for dispute resolution is more certain.

However, following the recently concluded legislative session, specialized business courts are coming to Texas. Last month, Texas enacted House Bill 19 (HB 19), which will create a specialized business trial court: the Texas Business Court (TBC)[1].

The TBC’s stated primary objective is to provide a faster, more efficient, and more cost-effective dispute resolution mechanism for businesses. It will be a specialized trial court designed to handle complex commercial disputes and streamline the litigation process. In this way, the new court will change the procedures for commercial litigation in Texas, with significant implications for businesses and individuals.

Supporters argue that the TBC will provide a more specialized and tailored approach to handling commercial disputes. The new court will also have the power to hear cases from other jurisdictions, potentially making Texas more attractive for businesses seeking a more predictable and efficient legal system.

Specialization

The TBC will oversee cases concerning corporate governance disputes, certain contract and commercial transactions, and actions seeking declaratory or injunctive relief. The TBC will have jurisdiction over matters in which the amount in controversy exceeds $5 million in some cases and $10 million in others, excluding interest, statutory damages, exemplary damages, penalties, attorney’s fees, and court costs.

The specialized nature of the court is intended to streamline the litigation process, reducing the time and cost associated with resolving disputes. Currently, businesses must navigate a court system that may not have the same level of specialization in commercial litigation, resulting in additional costs and delays.

As the enacting legislation is currently written, the court will start with only five divisions that oversee major metropolitan areas. The governor would appoint judges to the business court for a two-year term, and judges can be re-appointed multiple times. As time goes on, additional divisions will come online until the TBC covers all 11 existing judicial administrative regions.

Judges

Like probate or criminal courts, the TBC will be a specialized court and have specialized judges with expertise in business law and commercial litigation. Instead of being elected like other Texas district judges, business court judges will be appointed by the governor. And instead of being open to any attorney who meets the minimum legal requirement to stand for election—just four years of legal practice—business court judges appointed to the TBC by the governor must meet a set of requirements designed to ensure they have the knowledge, skills, and ability to handle complex commercial cases smoothly and efficiently. As currently written, business court judges must have ten years of experience practicing complex civil business litigation, practicing business transaction law, or serving as a judge of a Texas state court with civil jurisdiction (or any combination thereof). These requirements are designed to ensure a baseline level of business law experience and expertise for complex commercial cases being adjudicated in the new TBC.

Importantly, judges on the TBC will have access to more resources and information, allowing them to make more informed decisions on cases. For example, they may have access to technical experts or business consultants who can provide specialized knowledge on a particular issue. This can speed up the decision-making process and ensure that the court’s rulings are accurate and informed.

TBC judges will also be required to issue written opinions in their cases. This requirement should go far towards building up a stable and predictable body of precedent for Texas business law and put businesses on notice as to how Texas judges actually apply that precedent.

Efficiency

The TBC will aim to provide a more efficient dispute resolution mechanism, which is critical for businesses looking to resolve disputes quickly and cost-effectively. The TBC will also allow for more streamlined discovery, which is a process of gathering evidence before trial. Currently, discovery in commercial cases can be extensive and costly, taking up valuable time and resources. This is especially true when there are no prior written opinions from the judges outlining their approach to discovery in large-scale, complex cases. The TBC will limit discovery to only what is necessary, reducing the time and cost of the litigation process.

Removal and Transfer

Under HB 19, businesses will have the opportunity to remove cases to the TBC within 30 days of receiving the initial notice of summons that named the party in state court. Removing the case to the TBC will not waive a defect in venue or constitute an appearance to determine personal jurisdiction. Similarly, a transfer provision in HB 19 allows for the judge of a court in which an action was initially filed to request the transfer of the case to the business court if it was within the business court’s jurisdiction.

These provisions will help prevent businesses from being hauled into state court for disputes which fall under the more specialized jurisdiction of the business court and will ensure fair and equal access to the TBC for all businesses and disputes which fall under its specialized jurisdiction.

Appeals

HB 19 also provides that the new statewide 15th Court of Appeals, created by additional legislation from the Texas Legislature last session, will have exclusive jurisdiction over all appeals from an order or judgment of the business court, or an original proceeding related to an action or order of the business court. The 15th Court of Appeals will be composed of judges elected in statewide elections. The creation of this new appellate court, in conjunction with the creation of the TBC, means that Texas business law will have consistent precedents generated at both the district and appellate levels.

Predictions

It is difficult to predict exactly what will happen to the number of lawsuits filed after the TBC is enacted, as there are several factors that could influence those numbers. However, it is likely that the TBC’s creation will increase the filings of commercial and business suits in Texas as business grow more confident in the revamped Texas judicial system.

First, it is likely that the establishment of the TBC will lead to more businesses choosing Texas as the preferred jurisdiction for their commercial disputes due to the TBC’s specialization, efficiency, and predictability. Such a result will naturally attract more lawsuits to Texas. Based on anecdotal evidence, it appears that many Texas companies will adopt mandatory venue clauses that will place their commercial lawsuits in the TBC. This could lead to an increase in the number of lawsuits filed in Texas, particularly from businesses based outside of the state.

Second, it is likely that the TBC’s specialization in business disputes could lead to a virtuous cycle of an ever-increasing number of disputes being resolved through the TBC. If businesses have confidence in the TBC’s ability to handle complex commercial disputes and see a body of strong precedent and caselaw being built up by the TBC and the 15th Court of Appeals, they may be more willing to initiate disputes in the TBC, or remove existing disputes to the TBC. As time goes on, this may lead to an increase in the number of lawsuits filed in Texas.

Third, the certainty offered by the TBC for business law issues moving forward will, over time, likely result in more businesses choosing to incorporate in Texas and more individuals choosing to start businesses in Texas. It is an unfortunate reality that some of these businesses eventually will become embroiled in litigation, and when they do they will likely take their cases to the TBC. This too probably will lead to an increase in the number of lawsuits filed in Texas.

Overall, the impact of the TBC on the number of lawsuits filed in Texas will depend on a variety of factors, including the court’s effectiveness in handling commercial disputes, the degree to which businesses trust the TBC, and the willingness of litigants to pursue lawsuits in a court with strict timelines and streamlined procedures. But the establishment of the TBC is a major change in Texas law that will affect businesses and litigants for decades to come.

__________________________

[1] Please see the enacted bill and Texas House Research Organization analysis for additional details.

The following Gibson Dunn attorneys assisted in preparing this client update: Trey Cox and John Daniel Rimann.

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

Gregg J. Costa – Co-Chair, Trials Group, Houston (+1 346-718-6649, gcosta@gibsondunn.com)
Collin J. Cox – Houston (+1 346-718-6604, ccox@gibsondunn.com)
Trey Cox – Dallas (+1 214-698-3256, tcox@gibsondunn.com)
Allyson N. Ho – Co-Chair, Appellate & Constitutional Law Group, Dallas
(+1 214-698-3233, aho@gibsondunn.com)
John Daniel Rimann – Dallas (+1 214-698-3178 , jdrimann@gibsondunn.com)

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.

On July 19, 2023, a federal district court held in Ultima Servs. Corp. v. United States Dep’t. of Agriculture, No. 2:20-CV-00041 (E.D. Tenn.), that certain racial preferences in government contracting violate constitutional guarantees of equal protection. The case appears to be the first federal decision that extends Students for Fair Admissions v. Harvard and Students for Fair Admissions v. University of North Carolina (“SFFA”) to the government contracting context. Although the case has no precedential effect and does not address the legality of private entities’ use of racial preferences in procurement decisions or otherwise, future courts might apply Ultima’s reasoning to Section 1981 cases that challenge private companies’ efforts to diversify their supply chains.

A. Background

Section 8(a) of the Small Business Act instructs the Small Business Administration (the “Administration”) to contract with other agencies “to furnish articles, equipment, supplies, services, or materials to the Government, or to perform construction work for the Government.” 15 U.S.C. § 637(a)(1)(A) (the “8(a) program”). The Administration is further authorized to “arrange for the performance of such procurement contracts by negotiating or otherwise letting subcontracts to socially and economically disadvantaged small business concerns.” 15 U.S.C. § 637(a)(1)(B). A “socially and economically disadvantaged small business concern” is one that is majority-owned by “socially disadvantaged individuals”—”those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.” Id. § 637(a)(4)-(5). The Act vests the Administration with authority to determine “whether a group has been subjected to prejudice or bias.” Id. § 637(a)(8).

Acting pursuant to this authority, the Administration adopted a regulation, creating a “rebuttable presumption” that “Black Americans; Hispanic Americans; Native Americans … Asian Pacific Americans … [and] Subcontinent Asian Americans” are “socially disadvantaged.” 13 C.F.R. § 124.103(b)(1). Thus, businesses owned by members of these racial minorities are presumptively entitled to participate in the 8(a) program. Plaintiff Ultima, a small business owned by a white woman, filed suit, alleging that it was able and willing to perform on contracts set aside for the 8(a) Program, but was ineligible to do so because of the race of its owner.

B. Analysis

1. The District Court’s opinion

The court held that the 8(a) program violates the equal-protection component of the Fifth Amendment. The court determined that Ultima had standing “because in equal protection cases, the injury-in-fact is the denial of equal treatment resulting from the imposition of the barrier, not the ultimate inability to obtain the benefit.” This injury was redressable because a ruling prohibiting the Administration “from using the rebuttable presumption based on race would remove the race-based barrier that injures Ultima.”

The court then held that the 8(a) program failed to satisfy strict scrutiny. First, the Administration did not assert a compelling interest supporting the program’s racial classification. Quoting SFFA, the court reasoned that while the government “has a compelling interest in remediating specific, identified instances of past discrimination that violated the Constitution or a statute,” it also “must present goals that are sufficiently coherent for purposes of strict scrutiny.” But according to the court, “[t]he 8(a) program suffered a fatal lack of any stated goals.” For example, the Administration did “not identify a specific instance of discrimination” that it sought to remedy via the rebuttable presumption. Although the government argued that the rebuttable presumption was necessary “to remedy the effects of past racial discrimination in government contracting,” the court held that the government was just a “passive participant in such discrimination in the relevant industries in which Ultima operates” and did not “allow[] discrimination to occur in the industries relevant to Ultima.” Additionally, the Administration did “not examine whether any racial group is underrepresented in a particular industry relevant to a specific contract in the 8(a) program” and therefore could not “measure the utility of the rebuttable presumption in remedying the effects of past racial discrimination,” as the court believed to be required by SFFA.

Second, the court held that even if the Administration had a compelling interest in remediating specific past discrimination, the 8(a) program was not narrowly tailored to combatting discrimination. The court reasoned that SFFA “reaffirms that racially conscious government programs must have ‘a logical end point,’” but that the 8(a) program “has no termination date.” Further, the court believed the 8(a) program to be both underinclusive and overinclusive. It was underinclusive, the court reasoned, because it used what SFFA referred to as “imprecise” racial categories to determine “who qualifies for the rebuttable presumption”; the program excluded “Central Asian Americans and Arab Americans [who] have faced significant discrimination,” and viewed “Hasidic Jews who have faced similarly appalling discrimination [as] ineligible for the rebuttable presumption.” The court perceived the program to be overinclusive because it “swe[pt] broadly by including anyone from the specified minority groups, regardless of the industry in which they operate.” The court therefore enjoined the Government from using the rebuttable presumption of social disadvantage in administering the SBA’s 8(a) program.

2. Existing law governing contracting-discrimination claims against private companies

42 U.S.C. § 1981 (“Section 1981”) prohibits racial discrimination in making and enforcing contracts. To prevail on a Section 1981 claim, a plaintiff must satisfy three elements. First, he must show that the defendant intended to discriminate on the basis of race. Second, he must demonstrate that the racial discrimination “interfered with a contractual interest,” Denny v. Elizabeth Arden Salons, Inc., 456 F.3d 427, 435 (4th Cir. 2006)—for example, that there was a “refusal to enter into a contract with someone” on the basis of race, or an “offer to make a contract only on discriminatory terms,” Patterson v. McLean Credit Union, 491 U.S. 164, 176–77 (1989). See also, e.g., Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470, 476 (2006) (Section 1981 “offers relief when racial discrimination blocks the creation of a contractual relationship, as well as when racial discrimination impairs an existing contractual relationship.”). Third, a plaintiff must establish that race discrimination was a “but-for” cause of his injury. Comcast Corp. v. Nat’l Ass’n of African Am.-Owned Media, 140 S. Ct. 1009, 1019 (2020).

A defendant can defeat a Section 1981 claim by demonstrating that it acted pursuant to a valid affirmative-action plan. See, e.g., Johnson v. Transportation Agency, Santa Clara County, California, 480 U.S. 616, 626–27 (1987); see also, e.g., Doe v. Kamehameha Sch./Bernice Pauahi Bishop Estate, 470 F.3d 827, 836–40 (9th Cir. 2006) (en banc) (applying Johnson in Section 1981 case). A valid affirmative-action plan must be remedial in nature, and must rest “on an adequate factual predicate justifying its adoption, such as a ‘manifest imbalance’ in a ‘traditionally segregated job category.’” Shea v. Kerry, 796 F.3d 42, 57 (D.C. Cir. 2015) (quoting Johnson, 480 U.S. at 631) (alteration omitted).

C. Implications for Section 1981 cases

Ultima was not a Section 1981 case. Indeed, in Ultima, the court dismissed the plaintiff’s Section 1981 claim because the statute does not apply to the federal government. As a result, Ultima does not change existing law governing private actors’ use of racial preferences in awarding contracts. Nevertheless, the case suggests that some federal courts will be receptive to challenges to other uses of racial preferences in government contracting, like state and local set-aside programs and requirements that contractors employ a certain number of minority employees. In addition, courts have held that “purposeful discrimination that violates the Equal Protection Clause also will violate § 1981.” Anderson v. City of Boston, 375 F.3d 71, 78 n.7 (1st Cir. 2004); see also Dunnet Bay Const. Co. v. Borggren, 799 F.3d 676, 696 (7th Cir. 2015) (“Racial discrimination by a recipient of federal funds that violates the Equal Protection Clause also violates Title VI and § 1981.”). Ultima therefore suggests that some future courts could hold that Section 1981 prohibits private companies that seek to diversify their supply chains from implementing plans similar to the 8(a) program.

Additionally, Ultima includes a footnote, in which the court observes that while “[t]he facts in Students for Fair Admissions, Inc. concerned college admissions programs … its reasoning is not limited to just those programs.” Ultima applied SFFA to a government contracting program, and a future court could apply the same reasoning to bring challenges to employer or corporate programs under Section 1981, Title VII, and other anti-discrimination statutes. That said, the precedential effect of Ultima is limited, and the decision could be overturned on appeal. In the meantime, Ultima could represent another sign of an increasing trend towards reverse-discrimination claims in employment and contracting.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Molly Senger, Zakiyyah Salim-Williams, Mylan Denerstein, Dhananjay Manthripragada, Lindsay Paulin, Matt Gregory, and Josh Zuckerman.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Labor and Employment or Government Contracts practice groups, the authors, or the following practice leaders and partners:

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group, New York
(+1 212-351-3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer, Washington, D.C.
(+1 202-955-8503, zswilliams@gibsondunn.com)

Molly T. Senger – Partner, Labor & Employment Group, Washington, D.C.
(+1 202-955-8571, msenger@gibsondunn.com)

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, ksmith@gibsondunn.com)

Dhananjay S. Manthripragada – Partner & Co-Chair, Government Contracts Group, Los Angeles
(+1 213-229-366, dmanthripragada@gibsondunn.com)

Lindsay M. Paulin – Partner & Co-Chair, Government Contracts Group, Washington, D.C.
(+1 202-887-3701, lpaulin@gibsondunn.com)

On 13 June 2023, the European Parliament published a draft report[1] (the “Parliament Proposal”) on the proposal made by the European Commission on 7 December 2022[2] (the “Commission Proposal”) which sets out contemplated amendments to the European Market Infrastructure Regulation (“EMIR”).

The Commission Proposal resulted from a targeted review of EMIR, relating in particular to the supervisory arrangements for central counterparties (“CCPs”), which the Commission was required to carry out by 2 January 2023.[3] As part of the standard EU legislative process, it was then up to the Parliament to be involved, which led to the Parliament Proposal.

The primary aim of the changes contemplated by the Commission and the Parliament, referred to as EMIR 3, is to improve the attractiveness and resilience of the EU clearing system and reduce the exposure of EU entities to third-country CCPs. EMIR 3 also draws lessons from some specific issues that became apparent during the recent energy crisis, and includes other targeted modifications of EMIR.

In this context, the Parliament Proposal does entail some key divergences from the Commission Proposal, which this alert outlines.

I. The active account requirement

This is arguably the most impactful and debated provision considered by EMIR 3.

The Commission Proposal included an obligation for financial counterparties (“FCs”) and non-financial counterparties (“NFCs”) subject to the clearing obligation (such NFCs being often referred to as “NFC+s”) to hold active accounts at CCPs established in the EU. It also required these counterparties to clear in such accounts at least a certain proportion of specific systemic derivative contracts, namely:

interest rate derivatives denominated in euro and Polish zloty;
credit default swaps (“CDS”) denominated in euro; and
short-term interest rate derivatives denominated in euro.

The relevant proportion to be cleared at EU CCPs was to be determined by ESMA through regulatory technical standards.[4]

This approach, known as the “quantitative” approach, has been criticized by various market participants, including ISDA,[5] on the grounds that it would prove costly and jeopardize the competitiveness of EU firms.

Taking these concerns into account, the Parliament Proposal maintains the active account requirement, but provides for it to be gradually phased-in with a two-step approach.

During the first phase, the quantitative approach would be replaced with a qualitative one. EU counterparties would be required to exchange initial and variation margins in an account at a EU CCP, and to regularly enter into new positions on that account. ESMA would be charged with establishing the frequency of trading needed for it to be considered “regular”, which could vary depending on the type of entity considered.[6] Eighteen months after the entry into force of EMIR 3, ESMA and the Joint Monitoring Mechanism[7] would produce a report assessing whether such qualitative approach proves sufficient to relocate clearing activities to the EU clearing system and thus protect the stability of the EU financial system.[8]
If, at the end of the first phase, the qualitative approach proves not to have been sufficient, then the second, quantitative phase would be implemented and ESMA would determine the proportion of derivative contracts to be cleared in the EU CCPs’ active accounts.[9]

In addition, the Parliament Proposal removes euro-denominated CDS from the list of derivatives subject to the active account requirement and instead refers to other categories of derivative contracts pertaining to clearing services to be identified by ESMA as being of substantial systemic importance.[10]

II. Exemption from reporting obligation for NFC intragroup transactions

In 2019,[11] EMIR was amended to include an exemption from the reporting obligation for over-the-counter derivatives between counterparties within a group, where at least one of the counterparties is a non-financial counterparty and the parent undertaking is established in the EU[12]. The rationale for such exemption was that NFC intragroup transactions were not seen as a posing a significant systemic risk. However, in light of some of the difficulties revealed during the energy crisis, the Commission Proposal removed this exemption to ensure more visibility on NFC intragroup transactions.[13]

The Parliament Proposal considers that such removal of the exemption could be premature, as it would lead to additional burdens for corporate end-users of derivatives, without the potential supervisory upside having been established. Consequently, the Parliament Proposal reinstates the exemption and encourages ESMA to prepare a cost-benefit analysis, before reassessing whether to remove the exemption.[14] We note that other jurisdictions, such as the United States, provide relief for non-financial companies from the reporting of intragroup transactions and that in the UK, any intragroup transaction where at least one counterparty is a non-financial counterparty (or would be qualified as a non-financial counterparty if it were established in the UK) may be exempt from the reporting obligation provided that specific circumstances are met.

III. Margining exemption for single-stock and equity index options

To ensure a level playing field for EU firms and avoid regulatory arbitrage with other jurisdictions where they are exempted from margining requirements (e.g., the United States), temporary exemptions for single-stock and equity index options have been repeatedly extended, so that they would not be subject to initial margin and variation margin requirements under EMIR. The exemption is now set to expire on 4 January 2024. We note that the UK regulators are consulting on extending the UK exemption further until 4 January 2026.

The Parliament Proposal contemplates including in EMIR 3 a phase-in approach in respect of these transactions. The exemption, which would now be directly included in the Level 1 text, would be of a temporary nature. ESMA would monitor the regulatory developments in other jurisdictions and report on them every two years. On the basis of the report, the Commission would determine whether maintaining the exemption is justified. If the Commission concludes that it is not, it will specify the adaptation period at the end of which parties will need to comply with margin requirements in respect of their single-stock and equity index options, such period not to exceed 30 months.[15]

IV. Clearing exemption for transactions resulting from PTRR services

The Parliament Proposal contemplates an exemption to the clearing obligation in respect of transactions resulting from post-trade risk reduction (“PTRR”) services. Such services, which include portfolio compression, portfolio optimisation and rebalancing services, are deemed by the Parliament to reduce systemic and operational risk.[16] To encourage the use of PTRR services, it is thus proposed to exempt from the clearing obligation transactions which result from them (as opposed to the original trades which are the subject of the PTRR services and which would remain subject to the clearing obligation to the extent applicable). However, strict conditions would need to be complied with for the exemption to apply. In particular, the PTRR services must be performed by a provider independent of the market participants, and be a market risk neutral exercise not contributing to price formation. In addition, parties intending to benefit from the exemption must notify their competent authorities thereof.[17]

V. Centralization with ESMA of the supervision of EU CCPs

The Parliament Proposal would empower ESMA with a direct supervisory role with respect to EU CCPs, transferring decision-making authority on many matters from national authorities to ESMA. The aim is, through such centralized supervision, to better monitor clearing services in an increasingly cross-border and interconnected context and reduce the potential differences in the interpretation of EMIR between the Member States.[18]

VI. Equivalence approach in respect of margining requirements

The Commission Proposal removed the equivalence mechanism set out in Article 13 of EMIR in respect of reporting, clearing and margining obligations. This mechanism provided that counterparties were deemed to comply with such obligations as set out in EMIR to the extent that they were already subject to equivalent requirements in the jurisdiction in which they were established. This dealt with duplicative or conflicting rules applicable in different jurisdictions, and thus avoided excessive burdens on participants.

Noting that it had proven useful for market participants, the Parliament Proposal reinstates such equivalence mechanism in respect of the sole risk-mitigation techniques set out in Article 11 of EMIR, in particular the margining obligation.[19]

VII. Reporting by counterparties established outside the EU

The Parliament Proposal extends to counterparties established outside the EU, but belonging to a group subject to consolidated supervision in the EU, the requirement to report to trade repositories the conclusion (i.e. the execution), modification or termination of their derivatives. The stated intention of such change is to cover the offshore activities of EU supervised groups.[20]

VIII. Transparency in respect of clearing costs of CCPs

Under the Parliament Proposal, clearing services providers (whether clearing members or clients) would be required to inform their clients of the costs associated with the clearing services of the different CCPs where clearing of the relevant position is possible.[21]

IX. Transparency and control in respect of risk-mitigation techniques

In this respect, the Parliament Proposal entails two new requirements.

FCs and NFCs shall be required to notify the European Banking Authority (“EBA”) and their competent authorities of their initial margin calculation models, at the latest 60 working days prior to first using them. If they find such models not to comply with the applicable conditions, such authorities may object to their use, in which case the relevant entities will be required to cease using them and instead use another model within a year.
FCs shall be required to report information on their risk-management procedures (including, where applicable, in relation to the initial margin models used) to the EBA and their competent authorities and disclose key information therein.[22]

X. No prior authorization for CCPs’ “business as usual” changes

Taking one step further the “non-objection procedure” put forward in the Commission Proposal, the Parliament Proposal would create a new subset of “business as usual” changes, which CCPs could make without prior authorization. The changes would, however, be reviewed and reported on by ESMA on a regular basis.[23]

XI. Next steps

As illustrated above, the revisions that may result from EMIR 3 may have broad impacts for EU market participants (and their affiliates), including for non-financial corporates. However, there are still a number of points which require further discussions for a compromise to be reached. The Council, Commission and Parliament will need to engage in further exchanges to ultimately produce an agreed text.

___________________________

[1] https://www.europarl.europa.eu/doceo/document/ECON-PR-749908_EN.pdf.

[2] Available here.

[3] Article 85(7) of EMIR.

[4] Article (I) (4) of the Commission Proposal.

[5] https://www.isda.org/a/a6ygE/ISDA-commentary-EMIR-3.pdf

[6] Amendments 30 to 32 of the Parliament Proposal.

[7] This new mechanism, introduced by the Commission Proposal, is intended to bring together the various bodies involved in the supervision of EU CCPs, clearing members and clients.

[8] Amendment 38 of the Parliament Proposal.

[9] Amendment 38 of the Parliament Proposal.

[10] Amendment 35 of the Parliament Proposal.

[11] Article 1(7) of Regulation (EU) 2019/834.

[12] This need for the parent undertaking to be established in the EU in order to benefit from the exemption has been clarified by the Commission (TR answer 51(m) in ESMA’s Q&A relating to EMIR – available here).

[13] Article (I)(5) of the Commission Proposal.

[14] Amendment 50 of the Parliament Proposal.

[15] Amendment 60 of the Parliament Proposal. It is worth noting that, on 13 June 2023, the EBA, EIOPA and ESMA sent a letter to the Commission, Parliament and Council seeking for a permanent treatment of single-stock and equity index options with respect to margin requirements, indicating that EMIR 3 provides a good opportunity to clarify this issue (available here).

[16] Amendment 3 of the Parliament Proposal.

[17] Amendment 29 of the Parliament Proposal.

[18] Explanatory statement included in the Parliament Proposal.

[19] Amendment 64 of the Parliament Proposal.

[20] Amendment 49 of the Parliament Proposal.

[21] Amendment 42 of the Parliament Proposal.

[22] Amendment 59 of the Parliament Proposal.

[23] Amendment 101 of the Parliament Proposal.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Global Financial Regulatory, Financial Institutions or Derivatives practice groups, or any of the following:

Paris:
Vincent Poilleux (+33 (0) 1 56 43 13 00, vpoilleux@gibsondunn.com)
Farida Ouriachi (+33 (0) 1 56 43 13 00, fouriachi@gibsondunn.com)
Emma Lavaysse di Battista (+33 (0) 1 56 43 13 00, elavaysse@gibsondunn.com)

United Kingdom:
Michelle M. Kirschner (+44 (0) 20 7071 4212, mkirschner@gibsondunn.com)
Martin Coombes (+44 (0) 20 7071 4258, mcoombes@gibsondunn.com)

United States:
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
Adam Lapidus – New York (+1 212-351-3869, alapidus@gibsondunn.com)

We are pleased to provide you with Gibson Dunn’s Accounting Firm Quarterly Update for Q2 2023. The Update is available in .pdf format at the below link, and addresses news on the following topics that we hope are of interest to you:

ALI CLE Holds Annual Accountants’ Liability Conference
PCAOB Proposes Expansive NOCLAR Auditing Standard
Supreme Court Holds Section 11 Plaintiffs Must Show They Bought Registered Shares
Supreme Court Holds States Can Require Corporate Consent to General Jurisdiction
Australian Government Investigating Accounting Partnerships
PCAOB Continues China Inspections
PCAOB Issues Spotlight Report on Professional Skepticism
Supreme Court Grants Certiorari in Challenge to SEC Administrative Proceedings
Other Recent SEC and PCAOB Regulatory Developments

Please let us know if there are topics that you would be interested in seeing covered in future editions of the Update.

Read More

Accounting Firm Advisory and Defense Group:

James J. Farrell – Co-Chair, New York (+1 212-351-5326, jfarrell@gibsondunn.com)

Ron Hauben – Co-Chair, New York (+1 212-351-6293, rhauben@gibsondunn.com)

Monica K. Loseman – Co-Chair, Denver (+1 303-298-5784, mloseman@gibsondunn.com)

Michael Scanlon – Co-Chair, Washington, D.C.(+1 202-887-3668, mscanlon@gibsondunn.com)

In addition to the Accounting Firm Advisory and Defense Practice Group Chairs listed above, this Update was prepared by David Ware, Timothy Zimmerman, Benjamin Belair, Monica Limeng Woolley, John Harrison, and Nicholas Whetstone.

Gibson Dunn’s Supreme Court Round-Up provides an overview of cases decided during the October 2022 Term and other key developments on the Court’s docket. This past Term, the Court heard argument in 59 cases, released 58 opinions, and dismissed one case as improvidently granted.

Spearheaded by former Solicitor General Theodore B. Olson, the Supreme Court Round-Up keeps clients apprised of the Court’s most recent actions. The Round-Up previews cases scheduled for argument, tracks the actions of the Office of the Solicitor General, and recaps recent opinions. The Round-Up provides a concise, substantive analysis of the Court’s actions. Its easy-to-use format allows the reader to identify what is on the Court’s docket at any given time, and to see what issues the Court will be taking up next. The Round-Up is the ideal resource for busy practitioners seeking an in-depth, timely, and objective report on the Court’s actions.

To view the Round-Up, click here.

Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States, appearing numerous times in the past decade in a variety of cases. During the Supreme Court’s seven most recent Terms, 11 different Gibson Dunn partners have presented oral argument; the firm has argued a total of 17 cases in the Supreme Court during that period, including closely watched cases with far-reaching significance in the areas of intellectual property, securities, separation of powers, and federalism. Moreover, although the grant rate for petitions for certiorari is below 1%, Gibson Dunn’s petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 34 petitions for certiorari since 2006.

* * * *

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following attorneys in the firm’s Washington, D.C. office, or any member of the Appellate and Constitutional Law Practice Group.

Theodore B. Olson (+1 202.955.8668, tolson@gibsondunn.com)
Amir C. Tayrani (+1 202.887.3692, atayrani@gibsondunn.com)
Kate Meeks (+1 202.955.8258, kmeeks@gibsondunn.com)
Jessica L. Wagner (+1 202.955.8652, jwagner@gibsondunn.com)

On July 19, 2023, the U.S. Federal Trade Commission (FTC) and Department of Justice (DOJ) (collectively, the Agencies) jointly released updated draft Merger Guidelines (Proposed Guidelines) for public comment.[1] The Proposed Guidelines address horizontal and vertical mergers and reflect the Biden Administration’s competition policy and existing enforcement priorities[2] while providing guidance about the Agencies’ recent efforts to expand the reach of antitrust and fair competition laws.[3] The Proposed Guidelines will not be formally effective for several months, but, in practice, they already reflect current enforcement policy in reality, and as such are a window into the Agencies’ thinking on competition analysis.

Notable provisions in the Proposed Guidelines that reflect changes from prior agency guidance include: (A) lower market share and concentration thresholds necessary to trigger the structural presumption that a transaction is anticompetitive, (B) de-prioritizing market definition as the starting place for analysis, (C) close scrutiny of transactions that may eliminate potential competition, (D) a framework for analyzing mergers involving multi-sided platforms, (E) a focus on potential harm to rivals, (F) attention to serial or “roll-up” acquisitions, (G) enhanced focus on labor market effects, and (H) expanded use of the FTC’s Section 5 authority.

Overall, the Proposed Guidelines reflect the Agencies’ increased skepticism of the benefits of mergers and acquisitions and a greater willingness to pursue new or revive older theories of competitive harm.

I. Background: The Proposed Guidelines reflect major policy changes.

Historically, the Agencies have jointly issued Guidelines to explain their enforcement policy, most recently in the 2010 Horizontal Merger Guidelines[4] and the 2020 Vertical Merger Guidelines.[5] In September 2021, the FTC withdrew the Vertical Merger Guidelines in favor of a new set of guidance to be developed with DOJ.[6] The new Proposed Guidelines touch on both vertical and horizontal merger enforcement.

II. The Proposed Guidelines reflect the Agencies’ current policy of enhanced scrutiny in merger analysis and pursuit of broader enforcement priorities.

The Proposed Guidelines reflect recent trends in merger review, including enhanced Agency scrutiny and expanded theories. The Proposed Guidelines seek to further these priorities by articulating a range of frameworks that the Agencies may use for assessing a merger’s legality.

A. Lower thresholds to trigger a structural presumption.

The lowering of the quantitative thresholds of market concentration necessary to trigger the presumption that a merger is anticompetitive is one of the most impactful policy changes articulated in the Proposed Guidelines. As a result of this change, the agencies may use the Proposed Guidelines as grounds to investigate more deeply transactions previously considered low-risk, and to discount pro-competitive features of the industry, regardless of the deal specifics. To apply a structural presumption, however, the Agencies would need to define the relevant market in which to evaluate the competitive effects of a proposed transaction.

While the Agencies have long used market concentration thresholds to guide antitrust analysis in merger review, the Proposed Guidelines utilize lower thresholds and ascribe greater weight to the attendant anticompetitive inferences.[7] Whereas the 2010 Horizontal Merger Guidelines characterize concentrations of seven competitors of equal share or more (utilizing the Herfindahl-Hirschman Index (HHI) index) as “unconcentrated”, the Proposed Guidelines would seek to label as “concentrated” any market with more concentration than, for example, 10 equal players. The specific proposed interplay of concentration and market shares is illustrated below.

B. Decreased focus on market definition in favor of competitive effects and other evidence.

While the 2010 Horizontal Merger Guidelines relied on market definition to focus the inquiry on the relevant competitive dynamics, the Proposed Guidelines eschew this approach. Instead, the Agencies may avoid defining markets and rely instead on non-traditional evidence, including evidence of competition between the merging parties (irrespective of alternative competitive threats), prior industry coordination (regardless of the parties’ participation), or recent mergers in the same market (regardless of whether prior transactions increased competition).

C. Close scrutiny of transactions that may eliminate potential competition.

Consistent with the Biden administration’s enforcement program, the Proposed Guidelines endorse an expansive view of the so-called “potential competition” doctrine, which describes transactions that may violate the antitrust laws by eliminating an “actual” or “perceived” potential competitor rather than a current market participant.[8] Under the Proposed Guidelines, a merger may be illegal where it eliminates “actual” potential competition, i.e., “the possibility that entry or expansion by one or both firms would have resulted in new or increased competition in the market in the future.”[9] The agencies may also investigate mergers that eliminate “perceived” potential competition, i.e., “current competitive pressure exerted on other market participants by the mere perception that one of the firms might enter.”[10]

The 2010 Horizontal Merger Guidelines neither distinguish between “actual” or “perceived” potential competition nor devote significant time to discussing them as an Agency priority, and the Agencies have found split Circuit opinions on frameworks for “actual” and “perceived” potential competition claims. The Proposed Guidelines set out a detailed framework under the most Agency-favorable Circuit views for analyzing potential competition issues. For example, the Proposed Guidelines suggest that, in challenging a deal that threatens to eliminate an “actual” potential entrant, the Agencies need only show whether one of the merging firms had a “reasonable probability” of entering the relevant market absent the merger.[11] This standard, while endorsed by some district courts, has been rejected by others (and at one time even the FTC itself) in favor of a more demanding showing of “clear proof.” Both here and elsewhere in the Proposed Guidelines, the Agencies rely on a generous and often selective reading of the relevant case law.

D. Framework for analyzing platform mergers.

The Proposed Guidelines set forth a framework for analyzing and challenging mergers involving competition between, on and to displace platform businesses (businesses that provide different products or services to two or more different groups or “sides” who may benefit from each other’s participation). The Proposed Guidelines provide that transactions involving platforms may attract scrutiny if 1) two platform operators are combining; 2) a platform operator acquires a platform participant; 3) it involves the acquisition of a company that facilitates participation on multiple platforms, or 4) it involves the acquisition by a platform operator of a company that provides important inputs for platform services (such as data enabling matching, sorting, or prediction).

E. Focus on potential harm to rivals.

Historically, the Agencies followed the Brown Shoe rule that antitrust law protections “competition, not competitors”, but the Proposed Guidelines highlight mergers’ potential to harm competitors. Where discussion of harm to competitors previously occurred primarily in a vertical context, the Agencies have expanded potential harms via potential foreclosure of products or services in “related” markets that could impact competition in an overlap product market. Most notably, the Proposed Guidelines indicate potential concerns may arise for related products rivals do not currently use but may in the future, and for circumstances where related products are or could be complementary to rivals’ competitive products and thus increase their value to customers.[12] Through the Proposed Guidelines, the Agencies have expanded theories of harm to include current and potential 3rd party competitors.

F. Investigations of serial or “roll-up” acquisitions.

The Proposed Guidelines also announce a new approach to analyzing multiple acquisitions by the same company. Traditionally, the Agencies have assessed a merger’s potential competitive effects independent of prior acquisitions, with an eye towards how future conduct will change because of the current merger. The Agencies now intend to investigate “pattern[s] or strateg[ies] of multiple small acquisitions, even if no single acquisition on its own would risk substantially lessening competition or tending to create a monopoly.”[13] This follows previously stated goals by the Agencies to bring enforcement actions against “roll-up” acquisitions, particularly in technology, pharmaceuticals, healthcare, and private equity investment.[14]

G. Enhanced focus on labor market effects.

The Proposed Guidelines expand the Agencies’ recent focus of mergers’ competitive effects in labor markets. In her recent Statement on the Proposed Guidelines, FTC Chair Lina Khan noted that “although antitrust law from its founding has been concerned about the effects of monopoly power on workers, merger analysis in recent decades has neglected to focus on labor markets.”[15] The Proposed Guidelines emphasize “labor markets are important buyer markets” that are separately subject to review, and downplay potential efficiencies created by firms combining operations.[16] The Agencies are already inquiring into potential labor market overlaps in Second Request investigations, as well as reviewing documents produced in merger investigations for evidence of wage fixing or no-poach agreements.

H. Expanded use of FTC Section 5 authority.

The Proposed Guidelines note several potential scenarios (and suggest more exist) where the FTC might exercise enforcement powers beyond the scope of the Sherman and Clayton Acts, reflecting Chair Khan’s often articulated intent to expand the FTC’s authority under Section 5 of the FTC Act.[17] The Proposed Guidelines leave the scope of this expanded enforcement authority open but note examples, such as otherwise lawful transactions whose acquisition structures, regulatory jurisdictions, or procurement processes might lessen competition.[18] As a result, the FTC may probe more widely into the acquisition dynamics and acquiring parties’ business structure during investigations and probe deeper into documents and interviews to root out potentially unique industry competitive conditions.

III. Practically, the Proposed Guidelines would bring greater antitrust scrutiny earlier in the regulatory review process and less certainty to merging parties.

Companies considering transactions should take note of the Proposed Guidelines and consider what changes to existing processes may be required. Companies should review due diligence templates with an eye toward early identification of items that may be the subject of regulatory scrutiny, including new and expanded areas of focus including labor markets, inputs to rivals, and past acquisitions. Companies may also want to proactively develop strong and persuasive advocacy that demonstrates the procompetitive aspects of a transaction and meets potential theories of competitive harm head-on. Finally, document creation and retention guidance continues to be of paramount importance as the number and types of documents that could be a focus item in merger investigations continues to grow, with potential changes to the HSR filing guidelines that may require submission of many additional documents related to the transaction.[19]

IV. Conclusion & Takeaways

The Proposed Guidelines are the latest in a larger trend of expanded and more aggressive antitrust enforcement by the Agencies in the current Administration, as we have noted in our prior Client Alerts regarding changes to the HSR merger notification form, FTC’s enforcement authority under Section 5 of the FTC Act, and interlocking directorates.[20] As with other efforts to expand the reach of the antitrust laws, the enforcement policies articulated in these Proposed Guidelines will be subject to review by federal courts. And, although prior Merger Guidelines have garnered widespread acceptance in the case law, to challenge proposed transactions based on novel theories articulated in these Proposed Guidelines, the Agencies will ultimately need to persuade federal courts that these theories are supported by legal precedent.

In light of this increasingly aggressive and unpredictable merger enforcement environment, firms considering transactions should continue to proactively consult with antitrust counsel to develop appropriate antitrust risk mitigation strategies. While the draft merger guidelines are simply guidance and may yet evolve in response to public comments, they are indicative of the theories that enforcers may study during a merger investigation.

Gibson Dunn attorneys are closely monitoring these developments and are available to discuss these issues as applied to your particular business.

___________________________

[1] Merger Guidelines (Draft for Public Comment), U.S. Dep’t of Justice & Fed. Trade Comm’n (July 19, 2023) (non-final draft for public comment purposes) (“Proposed Guidelines”).

[2] See, e.g., Exec. Order No. 14,036, 86 Fed. Reg. 36,987 (July 9, 2021). See also Fact Sheet: Executive Order on Promoting Competition in the American Economy, The White House (July 9, 2021).

[3] See Gibson Dunn Client Alerts: DOJ Signals Increased Scrutiny on Information Sharing (Feb. 10, 2023); FTC Proposes Rule to Ban Non-Compete Clauses (Jan. 5, 2023); FTC Announces Broader Vision of Its Section 5 Authority to Address Unfair Methods of Competition (Nov. 14, 2023); DOJ Antitrust Secures Conviction for Criminal Monopolization (Nov. 9, 2022); DOJ Antitrust Division Head Promises Litigation to Break Up Director Interlocks (May 2, 2022).

[4] Horizontal Merger Guidelines, U.S. Dep’t of Justice & Fed. Trade Comm’n (August 19, 2010).

[5] Vertical Merger Guidelines, U.S. Dep’t of Justice & Fed. Trade Comm’n (June 30, 2020).

[6] Press Release, Federal Trade Commission Withdraws Vertical Merger Guidelines and Commentary, Fed. Trade Comm’n, (Sept. 15, 2021).

[7] See Proposed Guidelines at 7 n.29 (“The first merger guidelines to reference an HHI threshold were the merger guidelines issued in 1982, which used the 1,800 HHI threshold for a highly concentrated market, and 100 HHI for a significant increase. Each subsequent iteration until 2010 maintained those thresholds. . . . . In practice, the Agencies tended to challenge mergers that greatly exceeded these thresholds to focus their limited resources on the most problematic transactions. The more permissive thresholds included in the 2010 Horizontal Merger Guidelines reflected that agency practice, rather than a judgment of the appropriate thresholds for competitive concem or the requirements of the law. The Agencies consider a threshold of a post-merger 1,800 HHI and an increase in HHI of 100 to better reflect both the law and the risks of competitive harm and have therefore returned to those thresholds here.”)

[8] See id. at 11–13.

[9] Id. at 13.

[10] Id. at 11.

[11] Id. at 11–12.

[12] See Proposed Guidelines at 14 (Section II. Guideline 5. Subsection A. “The Ability and Incentive to Weaken or Exclude Rivals”).

[13] Proposed Guidelines at 22 (Section II. Guideline 9. “When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series.”).

[14] See, e.g., Statement of Commissioner Rohit Chopra Regarding Private Equity Roll-ups and the Hart-Scott Rodino Annual Report to Congress, Fed. Trade Comm’n (July 8, 2020); Deputy Assistant Attorney General Andrew Forman, The Importance of Vigorous Antitrust Enforcement in Healthcare (June 3, 2022).

[15] Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya Regarding FTC-DOJ Proposed Merger Guidelines, Fed. Trade Comm’n (July 19, 2023).

[16] See Proposed Guidelines at 26 (Section II. Guideline 11. “When A Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers.”).

[17] Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya On the Adoption of the Statement of Enforcement Policy Regarding Unfair Methods of Competition Under Section 5 of the FTC Act, Fed. Trade Comm’n (Nov. 10. 2022); Statement of Chair Lina M. Khan Joined by Commissioner Rohit Chopra and Commissioner Rebecca Kelly Slaughter on the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, Fed. Trade Comm’n (July 1, 2021).

[18] Proposed Guidelines at 28 (Section II. Guideline 13. “Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly.”).

[19] See Gibson Dunn Client Alert: FTC Proposes Dramatic Expansion and Revision of HSR Merger Notification Form (June 29, 2023).

[20] See Gibson Dunn Client Alerts: DOJ Signals Increased Scrutiny on Information Sharing (Feb. 10, 2023); FTC Proposes Rule to Ban Non-Compete Clauses (Jan. 5, 2023); FTC Announces Broader Vision of Its Section 5 Authority to Address Unfair Methods of Competition (Nov. 14, 2023); DOJ Antitrust Secures Conviction for Criminal Monopolization (Nov. 9, 2022); DOJ Antitrust Division Head Promises Litigation to Break Up Director Interlocks (May 2, 2022).

The following Gibson Dunn lawyers prepared this client alert: Sophie Hansell, Kristen Limarzi, Josh Lipton, Michael Perry, Chris Wilson, Jamie France, Logan Billman, Zoë Hutchinson, Connor Leydecker, and Steve Pet.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition, Mergers and Acquisitions, or Private Equity practice groups, or the following practice leaders:

Antitrust and Competition Group:
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, criis@gibsondunn.com)

Mergers and Acquisitions Group:
Robert B. Little – Co-Chair, Dallas (+1 214-698-3260, rlittle@gibsondunn.com)
Saee Muzumdar – Co-Chair, New York (+1 212-351-3966, smuzumdar@gibsondunn.com)

Private Equity Group:
Richard J. Birns – Co-Chair, New York (+1 212-351-4032, rbirns@gibsondunn.com)
Ari Lanin – Co-Chair, Los Angeles (+1 310-552-8581, alanin@gibsondunn.com)
Michael Piazza – Co-Chair, Houston (+1 346-718-6670, mpiazza@gibsondunn.com)

Decided July 17, 2023

California Medical Association v. Aetna Health of California, Inc., S269212

This week, the California Supreme Court held that organizations have standing to sue for violations of California’s Unfair Competition Law if they spent resources fighting the business practice they challenge as unfair.

Background: The California Medical Association (“CMA”), a nonprofit organization that advocates on behalf of member physicians, sued Aetna Health of California over Aetna’s implementation of a “Network Intervention Policy,” which limited in-network providers’ ability to refer patients to out-of-network providers. The CMA alleged that the policy violated California’s Unfair Competition Law (“UCL”).

Under the UCL, private plaintiffs have standing to sue only if they have “suffered injury in fact” and “lost money or property as a result of” the business practice they challenge as unlawful or unfair. (Bus. & Prof. Code, § 17204.) CMA argued that it met this standard because it had diverted more than 200 hours of staff time to responding to Aetna’s Network Intervention Policy. CMA alleged that, among other things, it prepared a letter to California regulators and advised affected physicians about the policy.

Aetna argued that CMA lacked statutory standing because it had not lost money or property as a result of the policy. The trial court agreed that the diversion of organizational resources is not the same as the loss of money or property and entered summary judgment for Aetna. The Court of Appeal affirmed.

Issue: California’s Unfair Competition Law requires private plaintiffs to have “suffered injury in fact” and “lost money or property as a result of the unfair competition” the plaintiffs challenge. Can plaintiffs satisfy this requirement by pointing to the costs they incurred in responding to the challenged business practice?

Court’s Holding:

Yes. When an organization incurs costs responding to perceived unfair competition that threatens its bona fide, preexisting mission, and those costs were not incurred through litigating or preparing to litigate the organization’s UCL claims, the organization has satisfied the UCL’s standing requirements.

“[T]he UCL’s standing requirements are satisfied when an organization … incurs costs to respond to perceived unfair competition that threatens [its] mission…”

Justice Evans, writing for the Court

What It Means:

The opinion gives organizational plaintiffs, such as nonprofits and unions, a new way to establish standing to bring claims under the UCL. Because these types of membership organizations are unlikely to suffer a direct economic injury aside from the diversion of resources, the decision potentially opens the door to lawsuits that would previously have been barred.
Even so, the Court imposed significant limitations on the circumstances that may give rise to standing. Organizations may not manufacture standing by relying on expenditures made “in the course of UCL litigation, or to prepare for UCL litigation.” And the organization’s diversion of resources must occur through its sincere pursuit of “missions separate from the planned UCL litigation,” and not through a “brief stint of advocacy.”
The Court clarified that its decision was “limited to organizational standing; we say nothing about individual standing.” Thus, an individual plaintiff cannot establish standing under the UCL by pointing to her own expenditure of “personal, uncompensated time responding to the alleged unfair competition.”
In a footnote, the Court indicated that organizational plaintiffs with standing may seek injunctive relief that would primarily benefit the public—and that such actions would not be considered “representative” actions.

The Court’s opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the California Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Blaine H. Evanson +1 949.451.3805 bevanson@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Michael J. Holecek +1 213.229.7018 mholecek@gibsondunn.com

Related Practice: Class Actions

Christopher Chorba
+1 213.229.7396
cchorba@gibsondunn.com

Kahn A. Scolnick
+1 213.229.7656
kscolnick@gibsondunn.com

Related Practice: Litigation

Theodore J. Boutrous, Jr.
+1 213.229.7804
tboutrous@gibsondunn.com

Theane Evangelis
+1 213.229.7726
tevangelis@gibsondunn.com

As many companies prepare their quarterly reports on Form 10-Q for the quarter ended June 30, 2023, we offer the following observations and reminders regarding new disclosure requirements taking effect for this reporting period, as well as risk factor considerations that may be relevant to upcoming Form 10-Q reporting. For convenience, this publication also includes a summary of certain upcoming compliance dates for public companies.

Rule 10b5-1 Trading Arrangement Disclosures

Beginning with the filing that covers the first full fiscal period that begins on or after April 1, 2023 (i.e., Q2 2023 Form 10-Q for calendar year companies), the “Other Information” section of each periodic report (i.e., Part II, Item 5 of Form 10-Q and Part II, Item 9B of Form 10-K) must disclose whether any director or Section 16 officer adopted or terminated a trading arrangement intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or a “non-Rule 10b5–1 trading arrangement.” By its terms, the disclosure requirement (Item 408(a) of Regulation S-K) is triggered when a trading arrangement is “adopted or terminated”; however, the SEC deems certain modifications to a trading arrangement to be the termination of one arrangement and entry into another.

The disclosure must identify whether the arrangement is a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, and provide a brief description of the material terms (other than price), including (i) the name and title of the director or officer, (ii) the date of adoption or termination of the trading arrangement, (iii) the duration of the trading arrangement, and (iv) the aggregate number of securities to be sold or purchased under the trading arrangement (including pursuant to the exercise of any options).

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Originally published on Gibson Dunn’s Securities Regulation and Corporate Governance Monitor. The following Gibson Dunn attorneys assisted in preparing this update: Mike Titera, Ronald Mueller, Thomas Kim, Lori Zyskowski, Elizabeth Ising, James Moloney, Julia Lapitskaya, Aaron K. Briggs, Chris Ayers, and Lauren Assaf-Holmes.

In a July 13, 2023 letter, Attorneys General of 13 states (Alabama, Arkansas, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, Montana, Nebraska, South Carolina, Tennessee, and West Virginia) issued a warning to the CEOs of Fortune 100 companies, threatening “serious legal consequences” over race-based employment preferences and diversity policies. The letter refers to the recent Supreme Court decision in Students for Fair Admissions v. Harvard and Students for Fair Admissions v. UNC, in which the Supreme Court held that two colleges’ use of race in their admissions policies was unlawful, and warns that race-based employment decisions likewise violate federal and state laws prohibiting employment discrimination. While the Supreme Court’s holding addressed only college and university admissions and not private-sector employers, this letter confirms that the Court’s decision may have broader implications that could accelerate an existing trend of challenges to private employers’ workplace diversity, equity and inclusion efforts. The group emphasized the Court’s statement that “[e]liminating racial discrimination means eliminating all of it,” suggesting that this language in the Court’s opinion could be used as ammunition to challenge various private-sector diversity policies, including in actions by certain Attorneys General who have enforcement authority under the anti-discrimination laws of their respective states.

In their letter, the group of Attorneys General stated their view that “racial discrimination in employment and contracting is all too common among Fortune 100 companies and other large businesses.” They warned that if a company “previously resorted to racial preferences or naked quotas to offset its bigotry, that discriminatory path is now definitively closed” as a result of the Supreme Court’s decision in SFFA v. Harvard, and that those companies must “overcome [their] underlying bias and treat all employees, all applicants, and all contractors equally, without regard for race.” The letter provides specific examples of the ways in which employers allegedly engage in unlawful discrimination, such as “explicit racial hiring quota[s]” and preferences to contractors with diverse staff or minority leadership. The letter does not address federal and state government contracting requirements, including for the certification of minority and women-owned business enterprises (MWBEs). The Attorneys General further criticized pledges by several major companies to foster diversity and support minority-owned businesses during racial justice protests in 2020.

The letter indicates that challenges to employers’ diversity programs could stem from a comparison of the legal framework under Title VI (which governs race discrimination in government-funded programs) and Title VII (which governs race discrimination in employment). Specifically, the letter refers to Justice Gorsuch’s concurrence in the Harvard/UNC decision, where Justice Gorsuch reasoned that principles of Title VI “apply equally to Title VII and other laws restricting race-based discrimination in employment and contracting.” The letter also notes that courts “routinely interpret Title VI and Title VII in conjunction with each other, adopting the same principles and interpretation for both statutes.”

Democrat and Republican appointees to the EEOC have stated that the Supreme Court’s decision should not affect employers’ diversity programs, although they have widely divergent views on the implications of the decision in practice. The Chair of the EEOC, Charlotte A. Burrows, released an official statement, taking the view that the Court’s decision does “not address employer efforts to foster diverse and inclusive workforces,” and that “[i]t remains lawful for employers to implement diversity, equity, inclusion, and accessibility programs that seek to ensure workers of all backgrounds are afforded equal opportunity in the workplace.” Chair Burrows will preside over a Democrat majority at the EEOC with the confirmation last week of Commissioner Kalpana Kotagal. Although EEOC Commissioner Andrea Lucas similarly stated that the decision does not alter federal employment law, she noted that race-based decision-making by employers is already presumptively illegal under Title VII, and expressed her view that many employers’ programs already run afoul of existing law.

The AG’s letter serves as an important reminder that employers should carefully evaluate whether any of their diversity and inclusion policies could face additional scrutiny or threats of litigation. Please refer to our previous client alert for an analysis of the Court’s opinion, as well as a discussion of some potential implications for private employers.

Please note that the purpose of this alert is to summarize the letter by the Attorneys General, and not to opine on the accuracy of its contents. Gibson Dunn has formed a Workplace DEI Task Force, bringing to bear the Firm’s expertise in employment, appellate and Constitutional law, DEI programs, securities and corporate governance, and government contracts to help our clients conduct legally privileged audits of their DEI programs (including for employees, applicants, suppliers, directors and other constituents), assess litigation risk, develop creative and practical approaches to accomplish their DEI objectives in a lawful manner, and defend those programs in private litigation and government enforcement actions as needed.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Angela Reid, and Emily Lamm.

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

Mylan L. Denerstein – Partner & Co-Chair, Public Policy Group, New York
(+1 212-351-3850, mdenerstein@gibsondunn.com)

Zakiyyah T. Salim-Williams – Partner & Chief Diversity Officer, Washington, D.C.
(+1 202-955-8503, zswilliams@gibsondunn.com)

Jason C. Schwartz – Partner & Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Partner & Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, ksmith@gibsondunn.com)

Gibson, Dunn & Crutcher LLP is pleased to announce with Global Legal Group the release of the International Comparative Legal Guide to: Anti-Money Laundering 2023. Gibson Dunn partners Stephanie L. Brooker and M. Kendall Day were contributing editors to the publication which covers issues including criminal enforcement, regulatory and administrative enforcement and requirements for financial institutions and other designated businesses. The Guide, comprised of 10 expert analysis chapters and 23 jurisdictions, is live and FREE to access HERE.

Ms. Brooker, senior associate Chris Jones, and Managing Director and Associate General Counsel at the Securities Industry and Financial Markets Association Bernard Canepa co-authored “Key BSA/AML Compliance Trends in the Securities Industry.” Sandy Moss and Ben Belair provided invaluable assistance with the article.

In addition, Mr. Day and Gibson Dunn of counsels Ella Capone and Linda Noonan co-authored the jurisdiction chapter on “USA: Anti-Money Laundering 2023.”

You can view these informative and comprehensive chapters via the links below:

CLICK HERE to view Key BSA/AML Compliance Trends in the Securities Industry

CLICK HERE to view USA: Anti-Money Laundering 2023

About Gibson Dunn’s Anti-Money Laundering and White Collar Practices:

Gibson Dunn’s Anti-Money Laundering practice provides legal and regulatory advice to all types of financial institutions and nonfinancial businesses with respect to compliance with federal and state anti-money laundering laws and regulations, including the U.S. Bank Secrecy Act. We represent clients in criminal and regulatory government investigations and enforcement actions. We also conduct internal investigations involving money laundering and Bank Secrecy Act violations for a wide range of clients in the financial services industry and companies with multinational operations. For further information, please visit our practice page and feel free to contact Stephanie L. Brooker (+1 202.887.3502, sbrooker@gibsondunn.com) or M. Kendall Day (+1 202.955.8220, kday@gibsondunn.com) in Washington, D.C.

The White Collar Defense and Investigations Practice Group defends businesses, senior executives, public officials and other individuals in a wide range of investigations and prosecutions. The group is composed of more than 250 lawyers practicing across our U.S. and international offices and draws on the expertise of more than 75 of its members with extensive government experience. We provide white collar client services around the world, with certain of our non-U.S. locations offering particular capabilities. For example, our Hong Kong office leads Gibson Dunn’s anti-corruption and compliance practice for Asia and our London disputes lawyers work regularly with complex internal and regulatory investigations, with particular familiarity in cross-border investigations in the financial services sector.

About the Authors:

Stephanie Brooker is Co-Chair of Gibson Dunn’s White Collar Defense and Investigations and Financial Institutions Practice Groups. She also co-leads the firm’s Anti-Money Laundering practice. She is the former Director of the Enforcement Division at FinCEN, and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a DOJ trial attorney for several years. Ms. Brooker’s practice focuses on internal investigations, regulatory enforcement defense, white-collar criminal defense, and compliance counseling. She handles a wide range of white collar matters, including representing financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving sanctions; anti-corruption; anti-money laundering (AML)/Bank Secrecy Act (BSA); securities, tax, and wire fraud; foreign influence; “me-too;” cryptocurrency; and other legal issues. Ms. Brooker’s practice also includes BSA/AML and FCPA compliance counseling and deal due diligence and asset forfeiture matters. Ms. Brooker has been consistently recognized as a leading practitioner in the areas of white collar criminal defense and anti-money laundering compliance and enforcement defense. Chambers USA has ranked her and described her as an “excellent attorney,” who clients rely on for “important and complex” matters, and noted that she provides “excellent service and terrific lawyering.” Ms. Brooker has also been named a National Law Journal White Collar Trailblazer, a Global Investigations Review Top 100 Women in Investigations, and an NLJ Awards Finalist for Professional Excellence—Crisis Management & Government Oversight.

Kendall Day is Co-Chair of Gibson Dunn’s Financial Institutions Practice Group, co-leads the firm’s Anti-Money Laundering practice, and is a member of the White Collar Defense and Investigations Practice Group. Prior to joining Gibson Dunn, Mr. Day was a white collar prosecutor for 15 years, eventually rising to become an Acting Deputy Assistant Attorney General, the highest level of career official in the Criminal Division at DOJ. He represents financial institutions; fintech, crypto-currency, and multi-national companies; and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, FCPA and other anti-corruption, securities, tax, wire and mail fraud, unlicensed money transmitter, false claims act, and sensitive employee matters. Mr. Day’s practice also includes BSA/AML compliance counseling and due diligence, and the defense of forfeiture matters. Mr. Day is consistently recognized as a leading White Collar attorney in the District of Columbia by Chambers USA – America’s Leading Business Lawyers. Most recently, Mr. Day was recognized in Best Lawyers 2023 for white-collar criminal defense.

Ella Alves Capone is Of Counsel in the Washington, D.C. office, where she is a member of the White Collar Defense and Investigations and Anti-Money Laundering practice groups. Her practice focuses in the areas of white collar investigations and advising clients on regulatory compliance and the effectiveness of their internal controls and compliance programs. Ms. Capone routinely advises multinational companies and financial institutions, including cryptocurrency and other digital asset businesses, gaming businesses, fintechs, and payment processors, on BSA/AML and sanctions compliance matters. She also has extensive experience representing clients before DOJ, SEC, OFAC, FinCEN, and federal banking regulators on a variety of white collar matters, including those involving BSA/AML, sanctions, anti-corruption, securities, and fraud matters.

Linda Noonan is Of Counsel in the Washington, D.C. office and a member of the firm’s Financial Institutions and White Collar Defense and Investigations Practice Groups. She joined the firm from the U.S. Department of the Treasury, Office of General Counsel, where she had been Senior Counsel for Financial Enforcement. In that capacity, she was the principal legal advisor to Treasury officials on domestic and international money laundering and related financial enforcement issues. She specializes in BSA/AML enforcement and compliance issues for financial institutions and non-financial businesses.

Chris Jones is a senior associate in the Los Angeles office of Gibson, Dunn & Crutcher. He is a member of the White Collar Defense and Investigations, Litigation, Anti-Money Laundering, and National Security Practice Groups, among others. His practice focuses primarily on internal investigations and enforcement defense, regulatory and compliance counselling, and complex civil litigation. Mr. Jones has experience representing clients in a wide range of anti-corruption, anti-money laundering, litigation, sanctions, securities, and tax matters. He has represented various client in investigations by the DOJ, SEC, FinCEN, and OFAC, including a number of AML-related investigations.

We are pleased to provide you with Gibson Dunn’s ESG monthly updates for June 2023. This month, our update covers the following key developments. Please click on the links below for further details.

I. International

1. ISSB publishes first two IFRS Sustainability Disclosure Standards

In June 2023, the International Sustainability Standards Board (“ISSB”) issued its IFRS Sustainability Disclosure Standards based on the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). IFRS S1 relates to the General Requirements for Disclosure of Sustainability-related Financial Information. It is effective for annual reporting period beginning on or after January 1, 2024 – earlier application is permitted if IFRS S2 is also applied. IFRS S2 relates to Climate-related Disclosures. It is effective for annual reporting period beginning on or after January 1, 2024 – earlier application is permitted if IFRS S2 is also applied. The ISSB is continuing to seek feedback on its future priorities for its next two-year work plan, which consultation closes on September 1, 2023.

2. ICMA announces updates to the Climate Transition Finance Handbook and Sustainability Principles

On June 22, 2023, the International Capital Markets Association (“ICMA”) announced that the Green, Social, Sustainability and Sustainability-Linked Bond Principles (the “Principles”) published revised 2023 editions of: (i) the Climate Transition Finance Handbook, which was originally launched in 2020 – the revisions include the progress made on climate transition guidance and disclosures; (ii) the Sustainability-Linked Bond Principles – the revisions include language for sovereign issuers together with revisions to the accompanying Key Performance Indicator registry; (iii) the Social Bond Principles – the revisions reflect the need to identify target populations and separately provide specific guidance for impact reporting for Social Bonds; and (iv) additional Q&As for green, social and sustainable bond securitisation, among other updates.

3. New reporting window open for signatories of the UN PRI and guidance published

Our May 2023 Update included an update on the release by the United Nations Principles for Responsible Investment (“PRI”) of a report on “Minimum Requirements for PRI Investor Signatories.” On June 14, 2023, the new reporting window for signatories of the PRI opened – this closes on September 6, 2023. PRI also published guidance on net zero and climate reporting in PRI’s Investor Reporting Framework, including (a) guidance to assist signatories of the Net Zero Asset Owner Alliance (“NZAOA”) who choose to report on their NZAOA requirements through PRI’s Investor Reporting Framework; (b) guidance to assist signatories of the Net Zero Asset Managers (“NZAM”) initiative to report on their NZAM commitments; and (c) guidance for all PRI signatories on climate reporting, based on TCFD-aligned indicators.

4. OECD updates its Guidelines for Multinational Enterprises on Responsible Business Conduct

On June 8, 2023, the Organisation for Economic Co-operation and Development (“OECD”) published an updated version of the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct. Key updates include recommendations for enterprises to align with internationally agreed goals on climate change and biodiversity, recommendations on risk-based due diligence, and specific environmental responsibilities.

5. IEA-IFC issue a special joint report calling for ramping up clean energy investments in emerging and developing countries

On June 21, 2023, the International Energy Agency (“IEA”) and the International Finance Corporation (“IFC”) published a special joint report. The report examines how to scale up private finance for clean energy transitions, identifies key barriers and how to remove them, and sets out policy actions and financial instruments to deliver acceleration in private capital flows for energy transition.

6. Climate Action 100+ announces its second phase

On June 8, 2023, Climate Action 100+ announced the launch of its second phase. The second phase will run until 2030 and intends to drive greater corporate climate action, by shifting the focus from corporate climate-related disclosure to the implementation of climate transition plans.

7. Nature Action 100 releases investor expectations to support urgent corporate action on nature loss

Nature Action 100, which is a global investor engagement initiative to address biodiversity and nature loss, and its impact on shareholder value, has released a set of corporate actions intended to protect and restore nature and ecosystems. The Investor Expectation for Companies outlines six key focus areas for action: ambition, assessment, targets, implementation, governance and engagement. Among other expectations, target companies will be expected to publicly commit to minimising contributions to key drivers of nature loss and to conserve and restore ecosystems at the operational level and throughout value chains by 2030. The eight key sectors identified for action are: biotechnology and pharmaceuticals; chemicals, such as agricultural chemicals; household and personal goods; consumer goods retail, including e-commerce and speciality retailers and distributors; food, ranging from meat and dairy producers to processed foods; food and beverage retail; forestry and paper, including forest management and pulp and paper products; metals and mining.

II. United Kingdom

1. FCA outlines concerns about sustainability-linked loans market

The Financial Conduct Authority (“FCA”) has outlined its concerns about the sustainability-linked loans (“SLLs”) market by way of a letter to interested stakeholders and parties on June 29, 2023. Concerns have been raised around credibility (including increased transparency), market integrity, greenwashing, conflicts of interest and potentially weak incentives to issue SLLs. The FCA has noted that some of these concerns have been addressed by the recently published revision of the Loan Market Association’s Sustainability-Linked Loan Principles, which the FCA believes should be more broadly adopted to drive further growth. The FCA does not currently plan to introduce regulatory standards or a code of conduct for the SLLs market, but has stated that it may reconsider this if the market needs it.

2. Climate Change Committee criticises UK’s slow efforts to scale up climate action

The Climate Change Committee (“CCC”) is an independent statutory body established under the UK Climate Change Act 2008 to advise the UK and devolved Governments on emissions targets, to report on progress and to prepare for the impacts of climate change. On June 28, 2023, the CCC issued its statutory progress report providing an overview of the Government’s progress to date in reducing emissions. The report includes criticism of the Government’s progress as slow and notes that the CCC’s confidence in the UK’s 2030 target has markedly declined since 2022.

3. CMA’s enforcement powers to combat greenwashing under the UK Digital Markets, Competition and Consumers Bill

The UK Digital Markets, Competition and Consumers Bill was introduced to Parliament on April 25, 2023. It is presently in the Committee Stage with Committee debates having taken place through the month of June 2023. If adopted in its current form, it will give the UK Competition Markets Authority (“CMA”) the power to, without a court process, impose directions or fines for the breach of consumer law protections which could extend to greenwashing.

4. FRC publishes report on influence of proxy voting advisors and ESG rating agencies and HMT consultation on regulation of ESG ratings providers ends

On June 15, 2023, the Financial Reporting Council (“FRC”) published its report commissioned to look into the influence of proxy voting advisors and ESG rating agencies on actions and reporting by FTSE350 companies and investor voting decisions. This report was published during a period when His Majesty’s Treasury had been consulting on a proposed regulatory regime for ESG ratings providers, which consultation period ended on June 30, 2023.

5. Consultation on UK non-financial reporting requirements

On June 8, 2023, the UK Department of Business and Trade (“DBT”) and the FRC opened consultation in relation to a review of the non-financial reporting requirements UK companies need to comply with in their annual report filings and to meet requirements broader than the UK Companies Act (e.g. gender pay gap and modern slavery reporting). The review will also consider if certain matters remain fit for purpose, such as the current company size thresholds that determine certain non-financial reporting requirements, and the preparation and filing of accounts with Companies House. The consultation closes on August 16, 2023.

III. Europe

1. New Sustainable Finance Package published and crackdown on ESG rating providers

Our May 2023 Update included an update on the impending publication of the EU sustainable finance package as part of the EU’s long-term vision to make Europe climate-neutral by 2050. On June 13, 2023, the European Commission published the new sustainable finance package with a view to encouraging private funding of transition projects and technologies and facilitating sustainable investments. The European Commission has added additional activities to the EU Taxonomy and, to mitigate the risk of greenwashing, proposed new rules for ESG rating providers to improve integrity, reliability and transparency in the sustainable investments market. If the rules are approved, ESG rating providers offering ratings in the EU will be required to seek prior authorisation from the European Securities and Markets Authority and to divest from conflicting activities (e.g. offering insurance to businesses that they rate).

2. European Commission consults on the first set of European Sustainability Reporting Standards

On June 9, 2023, the European Commission proposed for consultation the first set of European Sustainability Reporting Standards (“ESRS”) under the Corporate Sustainability Reporting Directive (“CSRD”). This consultation closes on July 7, 2023. The ESRS will apply from January 1, 2024 (for financial years beginning on or after January 1, 2024). The first set of ESRS are sector-agnostic, with sector-specific standards to be adopted by June 2024.

3. European Parliament adopts position on Corporate Sustainability Due Diligence Directive

On June 1, 2023, the European Parliament adopted its position on the proposal for a directive on Corporate Sustainability Due Diligence and amending Directive (“CSDDD”). In April 2023, the European Parliament’s committee on legal affairs adopted a draft report setting out a suite of amendments to the CSDDD as proposed by the European Commission, which the European Parliament has now adopted. Inter-institutional negotiations between the European Commission, the European Parliament and EU Member States on the CSDDD will now commence. Following formal adoption of the CSDDD, EU Member States will have two years to implement it into national legislation. The subject matter relates to rules to integrate (prevent, identify and mitigate) human rights and environmental impact into companies’ governance and along their value chain, including pollution, environmental degradation and biodiversity loss.

4. EU Deforestation Regulation enters into force

Our May 2023 Update included an update on the adoption by the European Parliament of the final text of the EU Regulation aimed at tackling deforestation and forest degradation (the “EU Deforestation Regulation”). The EU Deforestation Regulation entered into force on June 29, 2023. Please refer to our earlier update in relation to the scope, purpose and applicability.

IV. United States

1. SEC delays climate change disclosure rulemaking once again

On June 13, 2023, in its updated rulemaking agenda for Spring 2023, the U.S. Securities and Exchange Commission (“SEC”) indicated a goal of October 2023 for the adoption of proposed climate change rules. Although the “Reg Flex” agenda is not binding and target dates frequently are missed or further delayed, the Spring agenda indicates that these remain a near-term priority for the SEC. If adopted, the proposed rules will require a registrant to provide information regarding: (a) climate-related risks that are reasonably likely to have a material impact on its business, results of operations or financial condition; (b) greenhouse gas emissions; and (c) certain climate-related financial metrics in its audited financial statements.

2. PCAOB proposes an expansive non-compliance standard

On June 6, 2023, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment a draft auditing standard, A Company’s Noncompliance with Laws and Regulations, PCAOB Release 2023-003, that could significantly expand the scope of audits and potentially alter the relationship between auditors and their SEC-registered clients. The standard would require auditors to identify all laws and regulations applicable to the company and from that set determine those laws and regulations “with which noncompliance could reasonably have a material effect on the financial statements”; incorporate potential noncompliance into the auditor’s risk assessment; and identify whether noncompliance may have occurred through enhanced procedures and testing. If potential noncompliance is identified, the auditor must perform procedures to understand the nature of the matter and “determine” if noncompliance in fact occurred. This standard would mean, for example, that auditors would need to assess whether any climate change or other ESG-related regulations issued at the federal, state, local, international level could have a material effect on a company’s financial statements and, if so, assess noncompliance. Our client alert on this proposal is available here.

3. North Carolina passes anti-ESG bill

In our May 2023 Update, we provided an update on various U.S. states that remained split on their approach to ESG matters. An anti-ESG bill has become law in North Carolina, after legislators voted to override the Governor’s veto. The legislation bars state entities from considering ESG criteria when making investment and employment decisions.

4. House Appropriations Committee releases FY24 Financial Services and General Government Appropriations Bill prohibiting SEC funding for climate disclosure rules

The House Appropriations Committee released the Financial Services and General Government Bill for the fiscal year 2024 and approved the bill with riders that would prohibit the SEC from spending on various proposals, including the climate disclosure rules. The next step is for the legislation to be introduced in the Senate (where it may face resistance given the Democratic-majority).

5. July rumoured to be “ESG month” and Republican ESG Working Group releases interim report

Plans are rumoured to be afoot for the House Financial Services Committee’s flagship “ESG month,” with a full committee hearing on ESG on July 12 and subcommittee hearings to follow thereafter. The Republican ESG Working Group, which was formed in February 2023, released an interim report highlighting anti-ESG concerns on June 23, 2023.

6. ISS responds to State Treasurers’ letter

On June 29, 2023, the Institutional Shareholder Services Inc. (“ISS”) issued its response to a group of U.S. state treasurers and financial officers to address issues they raised in a letter dated May 15, 2023 to proxy advisory firms, including ISS. The response emphasises that ISS tailors its proxy voting advice, including on ESG, based on a client’s needs and preferences, such that it may offer two different clients opposing recommendations about the same ballot measure. It further notes that many investors believe that incorporating material ESG factors into fundamental investment analysis can be consistent with their duty to manage the long-term financial prospects of their investment portfolios and a growing number of investors consider ESG factors as material to their proxy voting determinations as well. ISS has developed Special Voting Policies, such as a Climate Policy (based on the TCFD), Socially Responsible Investor Policy, Sustainability Policy, among others.

V. APAC

1. Updated ASEAN Taxonomy Version 2 released

On June 9, 2023, the ASEAN Taxonomy Board released the updated ASEAN Taxonomy for Sustainable Finance Version 2. The ASEAN Taxonomy has a multi-tiered approach which allows for different levels of adoption based on the individual member states’ readiness. Version 2 provides the methodology that will be applied in setting the technical screening criteria for the Plus Standard and contains the technical screening criteria for all four environmental objectives for the energy sector, as well as the carbon storage, utilisation and storage enabling sector. Alongside the “Do No Significant Harm” and “Remedial Measures to Transition” criteria, Version 2 also introduces a third essential criteria – “Social Aspects.” Three key social aspects are to be considered as part of the assessment: Respect Human Rights, Prevention of Forced and Child Labour and Impact on People Living Close to Investments.

2. Thailand issues Phase One of its green taxonomy

The Bank of Thailand and Thailand’s Securities and Exchange Commission, together with the Climate Bonds Initiative, published the Thailand Taxonomy Phase One on June 30, 2023. Phase One of the Taxonomy focuses on economic activities relating to the energy and transportation sectors, and may be used as a reference for access to financial tools and services that support transition activities to address climate change. Phase Two of the Thailand Taxonomy will focus on the manufacturing, agriculture, real estate, construction and waste management sectors. The Thailand Taxonomy will employ the traffic light system, which is also employed in the ASEAN Taxonomy.

3. Malaysia rolls out new mandatory sustainability onboarding programme for PLC directors

The Securities Commission of Malaysia and the Malaysian stock exchange, Bursa Malaysia, have rolled out a new mandatory sustainability programme for onboarding directors of public listed companies. The “Mandatory Accreditation Programme (MAP) Part II: Leading for Impact (LIP)” is the second part of Bursa Malaysia’s listing requirements and will take effect on August 1, 2023, requiring first-time directors and directors of listing and transfer applicants to complete the sustainability programme within 18 months from appointment/admission. Existing PLC directors will have up to 24 months to complete the programme.

4. Singapore consults on ESG data and ratings code of conduct, to digitise basic ESG credentials for MSMEs, and to strengthen access to climate transition data

On June 28, 2023, the Monetary Authority of Singapore (“MAS”) launched a public consultation on a voluntary industry governance framework / code of conduct for providers of ESG ratings and ESG data products, which is modelled after the International Organization of Securities Commissions’ recommendations of good practices set out in its global call for action in November 2022. The regime is proposed to be voluntary, where providers would ratify the code of conduct and explain why they are unable to comply. The consultation closes on August 22, 2023. MAS is also seeking feedback on its proposed criteria for the early phase-out of coal-fired power plants under its draft green taxonomy (which is to be named the Singapore-Asia Taxonomy). This consultation closes on July 28, 2023. On June 22, 2023, MAS, the United Nations Development Programme and the Global Legal Entity Identifier Foundation executed a statement of intent for “Project Savannah,” to develop digital ESG credentials for micro, small and medium-sized enterprises (MSMEs). On June 27, 2023, MAS, the Secretariat of the Climate Data Steering Committee and Singapore Exchange executed a memorandum of understanding to strengthen access by stakeholders to key climate transition-related data.

5. UAE Independent Climate Change Accelerators launches UAE Carbon Alliance

The UAE Independent Climate Change Accelerators (“UICCA”) has launched the UAE Carbon Alliance, a new coalition to advance the development and scaling of a carbon market ecosystem in the UAE and to facilitate the transition to a green economy in line with the UAE’s Net Zero by 2050 Strategic Initiative. Founding members of the UAE Carbon Alliance include the UICCA, AirCarbon Exchange, First Abu Dhabi Bank, Mubadala Investment Company, TAQA, and Masdar.

Please let us know if there are other topics that you would be interested in seeing covered in future editions of the monthly update.

Warmest regards,

Susy Bullock
Elizabeth Ising
Perlette M. Jura
Ronald Kirk
Michael K. Murphy
Selina S. Sagayam

Environmental, Social and Governance Practice Group Leaders, Gibson, Dunn & Crutcher LLP

The following Gibson Dunn lawyers prepared this client update: Mitasha Chandok, Grace Chong, Elizabeth Ising, Patricia Tan Openshaw, Selina Sagayam, and David Woodcock.

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

Environmental, Social and Governance (ESG) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
Perlette M. Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)
Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, mmurphy@gibsondunn.com)
Patricia Tan Openshaw – Hong Kong (+852 2214-3868, popenshaw@gibsondunn.com)
Selina S. Sagayam – London (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)
David Woodcock – Dallas (+1 214-698-3211, dwoodcock@gibsondunn.com)

Gibson Dunn’s summary of director education opportunities has been updated as of July 2023. A copy is available at this link. Boards of Directors of public and private companies find this a useful resource as they look for high quality education opportunities.

This quarter’s update includes a number of new opportunities as well as updates to the programs offered by organizations that have been included in our prior updates. Some of the new opportunities include unique events for members of private boards.

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The following Gibson Dunn attorneys assisted in preparing this update: Hillary Holmes, Lori Zyskowski, Ronald Mueller, and Elizabeth Ising, with assistance from Mason Gauch and To Nhu Huynh from the firm’s Houston office.

On June 30, 2023, the New York City Department of Consumer and Worker Protection (the “DCWP”) released Frequently Asked Questions (“FAQ”)[1] regarding New York City’s Local Law 144,[2] which went into effect on July 5, 2023.

Local Law 144 restricts employers and employment agencies from using an automated employment decision tool (“AEDT”) in hiring and promotion decisions unless it has been subject to an annual bias audit conducted by an “independent auditor.” The law also imposes posting and notice requirements to New York City applicants and employees subject to the use of AEDTs. The FAQs provide insight into how the DCWP will approach enforcing Local Law 144, including its penalty schedule, which imposes penalties ranging from $375 to $1500 for each violation of the bias audit, notice, and posting requirements.[3]

As summarized at a high-level below, the FAQs provide some helpful guidance for covered employers but questions remain regarding the law’s scope and audit requirements.

1. NYC Office Location Is Key.

The FAQs clarify that Local Law 144 only applies to employers with a physical office in New York City that use an AEDT for (i) jobs located in New York City, at least part-time or (ii) for remote positions, if the location “associated with [such remote position]” is an office in New York City.

2. Covered Employment Decisions Need Not Be Final.

The DCWP previously emphasized during May 2023 roundtable events that Local Law 144 covers employment decisions “at any point in the process.” Otherwise stated, the analysis of whether Local Law 144 applies is not limited to the ultimate employment decision.[4]

The FAQs echo this position and emphasize that the law defines “employment decisions” to include screening for hire or promotion. However, the FAQs also make clear that conducting outreach or sending invitations to potential job or promotion candidates falls outside the scope of the law.

3. Compliance Responsibility Rests With Employers, Not Vendors.

The FAQs state that a vendor of an AEDT is not responsible for conducting a bias audit of its tool. Instead, in the DCWP’s view, covered employers and employment agencies are responsible for complying with Local Law 144’s bias audit requirements.

4. Demographic Information May Not Be Inferred.

The FAQs expressly state that employers and employment agencies may not infer or impute data about an applicant’s demographic information. This differs from other areas of law, such as the EEO-1 Component 1 Report, which permits observer identification to be used to determine an employee’s race or ethnicity.[5]

Accordingly, bias audits may only be conducted using historical or test data, and cannot be run on demographic information inferred by an algorithm or otherwise.

5. No Set Threshold For Statistical Significance.

The DCWP has chosen not to set a specific standard for determining statistical significance, thereby leaving the determination to the independent auditor. If test data is used in lieu of historical data because the auditor determined that the historical data was not statistically significant, the public summary of the bias audit results must explain this decision.

6. No Specific Test Data Requirements.

The DCWP previously stated that Local Law 144’s bias audit requirement provides flexibility regarding what data is used and who (e.g., the vendor or employer) may provide data to the independent auditor.[6] The FAQs likewise provide that the DCWP has not set requirements for test data to allow for the “development of best practices in this rapidly developing field.”

Notwithstanding this apparent flexibility and flux, the FAQs state that the summary of the bias audit must include the source of the data and an explanation of the data used. For example, if the test data is limited to a specific region or time period, the public summary is expected to explain why and/or how.

7. Bias Audit Need Not Be Position Specific.

Employers that hire for an array of different positions may rely on a bias audit that is based on the historical data of multiple employers if it is either (a) their first time using the AEDT or (b) they provide historical data from their use of the AEDT to the independent auditor. To that end, the FAQs state that there is no requirement that the employers providing historical data for a bias audit use the AEDT to hire or promote for the same type of position. The FAQs therefore suggest that the data used for the bias audit can be aggregated from an assortment of different positions—though whether doing so may be accurate or prudent will vary case-by-case.

8. Notice Need Not Be Position Specific.

The notice posted in the employment section of an employer’s website for job applicants or in a written policy or procedure for candidates for promotion need not be position specific. The FAQs therefore appear to indicate that a notice’s description of the job qualifications and characteristics assessed by the AEDT may be categorical.

9. Discrimination Claims Will Be Referred To The City Commission On Human Rights.

The FAQs state that any claims of discrimination involving AEDTs that are sent to the DCWP will be automatically referred to the New York City Commission on Human Rights. The DCWP will enforce only Local Law 144’s prohibition on the use of AEDTs without a bias audit and the required notice and posting.

10. Numerous Questions And Ambiguities Remain.

Despite committing to address many unanswered questions raised during the DCWP’s roundtable events, the FAQs leave a number of open questions.

For example, there is still no clarification regarding the statute’s ill-fitting definition of an employment agency.[7] The final rules implementing Local Law 144 defined an “employment agency” as “all persons who, for a fee, render vocational guidance or counseling services, and who directly or indirectly represent” that they perform one of the enumerated functions such as arranging interviews or having knowledge of job openings or positions that cannot be obtained from other sources with a reasonable effort.[8] Since Local Law 144 is limited to applicants who have applied for a position (and not potential applicants), it is unclear how a definition focused on employment agencies attracting or assisting prospective applicants will be reconciled with the apparently narrower scope of the law.

The FAQs state that test data can be used to conduct a bias audit if demographic data is not available or collected, but it remains unclear whether covered employers could (let alone must) artificially create test data to conduct a bias audit, especially since the FAQs state that demographic data should not be inferred.

Finally, the FAQs state that a remote position “associated” with a New York City office is within the scope of the law, but the DCWP does not clarify or explain how a remote position may be “associated” with a New York City office. For example, it remains unclear if an “association” will be found if a remote employee reports to a manager in New York City, must occasionally come into the New York City office, or if their paycheck is issued from the employer’s New York City office.

Conclusion

To date, New York City’s Local Law 144 is the most expansive effort in the United States to attempt to regulate the use of automated decision tools in employment. Its impact will undoubtedly be closely watched (and scrutinized) by legal commentators and other states and cities. In the wake of the law’s passage and throughout the subsequent rulemaking process, employers in New York City have been grappling with various questions about the law’s scope and requirements. The FAQs are helpful in answering some of these questions. But many remain. As such, effective July 5, employers are faced with the unsettling prospect of attempting to comply with Local Law 144 without clear and comprehensive guidance.

______________________________

[1] DCWP, Automated Employment Decision Tools: Frequently Asked Questions (June 2023), https://www.nyc.gov/assets/dca/downloads/pdf/about/DCWP-AEDT-FAQ.pdf.

[2] NYC Int 1894-2020, Local Law 144 (enacted December 11, 2021), https://legistar.council.nyc.gov/LegislationDetail.aspx?ID=4344524&GUID=B051915D-A9AC-451E-81F8-6596032FA3F9.

[3] RCNY, tit. 6, ch. 6, § 6-81, Automated Employment Decision Tools Penalty Schedule (effective Aug. 5, 2022), https://codelibrary.amlegal.com/codes/newyorkcity/latest/NYCrules/0-0-0-134007.

[4] DCWP, Local Law 144 of 2021 Automated Employment Decision Tool Roundtable with Business Advocates/Employers (May 2023), https://www.nyc.gov/assets/dca/downloads/pdf/about/DCWP-AEDT-Educational-Roundtable-with-Business-Advocates-Employers.pdf.

[5] U.S. EEOC, 2021 EEO-1 Component 1 Frequently Asked Questions (FAQs), https://www.eeocdata.org/pdfs/2021_EEO_1_Component_1_FAQs.pdf.

[6] Id.

[7] See Harris Mufson, Danielle Moss, and Emily Lamm, 10 Ways NYC AI Discrimination Rules May Affect Employers, Law360 (Apr. 19, 2023) (discussing the definition of “employment agency” under the final rules implementing Local Law 144).

[8] DCWP, Notice of Adoption of Final Rule, https://rules.cityofnewyork.us/wp-content/uploads/2023/04/DCWP-NOA-for-Use-of-Automated-Employment-Decisionmaking-Tools-2.pdf.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Harris Mufson, Danielle Moss, and Emily Lamm.

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

Harris M. Mufson – New York (+1 212-351-3805, hmufson@gibsondunn.com)

Danielle J. Moss – New York (+1 212-351-6338, dmoss@gibsondunn.com)

Emily M. Lamm – Washington, D.C. (+1 202-955-8255, elamm@gibsondunn.com)

Jason C. Schwartz – Co-Chair, Labor & Employment Group, Washington, D.C.
(+1 202-955-8242, jschwartz@gibsondunn.com)

Katherine V.A. Smith – Co-Chair, Labor & Employment Group, Los Angeles
(+1 213-229-7107, ksmith@gibsondunn.com)

This edition of Gibson Dunn’s Federal Circuit Update summarizes the current status of several petitions pending before the Supreme Court, provides an update on a proceeding by the Judicial Council of the Federal Circuit, and summarizes recent Federal Circuit decisions concerning secondary considerations, inventorship, inherency, and enablement.

Federal Circuit News

Noteworthy Petitions for a Writ of Certiorari:

A new potentially impactful petition was filed before the Supreme Court in June 2023:

Killian v. Vidal (US No. 22-1220): The petition raises the questions (1) whether the Federal Circuit’s “departures of the Supreme Court’s Alice/Mayo jurisprudence . . . enabled the USPTO to violate the” Administrative Procedure Act (“APA”) and the Due Process Clause of the Fifth Amendment; and (2) whether the exceptions created by Article III courts to 35 U.S.C. § 101 exceeds the courts’ constitutional authority.

As we summarized in our May 2023 update, there are several other petitions pending before the Supreme Court. We provide an update below:

In CareDx Inc. v. Natera, Inc. (US No. 22-1066), after the respondents waived their right to file a response, retired Federal Circuit Judge Paul R. Michel and Professor John F. Duffy filed an amici curiae brief in support of Petitioners. The Court thereafter requested a response, which is now due on July 31, 2023.

The Court denied the petitions in Nike, Inc. v. Adidas AG (US No. 22-927) and NST Global, LLC v. Sig Sauer Inc. (US No. 22-1001). A response has been filed in Ingenio, Inc. v. Click-to-Call Technologies, LP (US No. 22-873).

Noteworthy Federal Circuit En Banc Petitions:

On June 30, 2023, the Federal Circuit granted the en banc petition filed in LKQ Corp. v. GM Global Technology Operations LLC, No. 21-2348 (Fed. Cir. June 30, 2023). The Court requested that the parties file new briefs to address questions related to the obviousness inquiry for design patents.

Other Federal Circuit News:

Release of Materials in Ongoing Judicial Investigation. As we summarized in our May 2023 update, there is an ongoing proceeding by the Judicial Council of the Federal Circuit under the Judicial Conduct and Disability Act and the implementing Rules involving Judge Pauline Newman. Last month, the Court approved and released public versions of all prior orders of the Special Committee and the Judicial Council, as well as Judge Newman’s letter responses to date. On June 20, 2023, the Court released additional materials in the ongoing investigation. The orders may be accessed here.

Upcoming Oral Argument Calendar

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

Key Case Summaries (June 2023)

Yita LLC v. MacNeil IP LLC, No. 22-1383 (Fed. Cir. June 6, 2023): The Patent Trial and Appeal Board (“Board”) determined as part of an inter partes review (“IPR”) that the challenged claims of one of MacNeil’s patents directed to constructing a vehicle floor tray based on digital scans would not have been obvious. Despite determining that the claims would have been obvious over the asserted prior art, the Board found MacNeil’s evidence of secondary considerations “compelling” enough to overcome this determination of obviousness.

The Federal Circuit (Taranto, J., joined by Chen and Stoll, JJ.) reversed. The Court stated that under the Court’s precedent, objective evidence of nonobviousness lacks a nexus to the claimed invention if the evidence exclusively relates to a “known” feature in the prior art. The Court held that the Board therefore erred in concluding that because the feature was not “well known” in the prior art, that MacNeil’s secondary considerations evidence was sufficient to overcome its prior art based obviousness determination.

Blue Gentian, LLC v. Tristar Products, Inc., Nos. 21-2316, 21-2317 (Fed. Cir. June 9, 2023): Blue Gentian sued Tristar for infringement of its patents generally related to an expandable hose. Tristar counterclaimed that each of the asserted patents were invalid for failing to name a co-inventor, Gary Ragner. The district court agreed and concluded that Mr. Ragner contributed three key features of the invention and should have been named an inventor on the patents.

The Federal Circuit (Prost, J., joined by Chen and Stark, JJ.) affirmed. The Court first rejected Blue Gentian’s argument that the district court erred by not engaging in claim construction, holding that there must be a material dispute about claim scope to require claim construction prior to an inventorship determination. Here, Blue Gentian failed to identify “a dispute about claim scope that was material, or even related to, inventorship.” Additionally, because the patent owner argued during prosecution that the three key features at issue distinguished the invention over the prior art, the Court held that it follows that these features are not insignificant in quality and amounted to a significant contribution to conception that met the requirements needed to be considered a joint inventor.

Parus Holdings, Inc., v. Google LLC, Nos. 2022-1269, 2022-1270 (Fed. Cir. June 12, 2023): Google filed an IPR petition concerning Parus’s patents directed to an interactive voice system that allowed a user to request information from a voice web browser. Google asserted that certain claims of these patents would have been obvious over a number of prior art references, including Kovatch. Parus argued that Kovatch did not qualify as prior art because the claimed inventions were conceived of and reduced to practice before the earliest possible priority date for Kovatch. In support of its arguments, Parus submitted over 1,400 pages of material, but only cited small portions of that material in its briefs without meaningful explanation. The Board declined to consider these arguments because Parus failed to comply with 37 C.F.R. § 42.6(a)(3), which prohibits incorporation by reference.

The Federal Circuit (Lourie, J., joined by Bryson and Reyna, JJ.) affirmed. The Court held that the Board did not violate the APA. The Board had determined that Parus failed to cite to the relevant record evidence with specificity and explain the significance of the produced materials in its briefing, and incorporated its arguments by reference in violation of 37 C.F.R. § 42.6(a)(3), and thus, the Court determined that the Board’s disregard of Parus’s arguments cannot be an abuse of discretion.

In re Couvaras, No. 22-1489 (Fed. Cir. June 14, 2023): The pending claims of the patent application at issue are directed to a method of increasing prostacyclin release to improve vasodilation, which decreases blood pressure. The increased prostacyclin is achieved by co-administering two well-known antihypertensive agents. The examiner finally rejected the claims finding that the claimed results of the compounds’ administration naturally flowed from administration of the known antihypertensive agents. Couvaras then appealed to the Board. The Board agreed with the examiner and found that the increase in prostacyclin release was “inherent in the obvious administration of the two known antihypertension agents.”

The Federal Circuit (Lourie, J., joined by Dyk and Stoll, JJ.) affirmed. Courvaras argued that even if the recited mechanism of action (the increased release of prostacyclin) was inherent, the Board erred in dismissing it as having no patentable weight, because the mechanism was unexpected. The Court rejected this argument holding that “[r]eciting the mechanism for known compounds to yield a known result cannot overcome a prima facie case of obviousness, even if the nature of that mechanism is unexpected.”

Medytox v. Galderma, No. 22-1165 (Fed. Cir. June 27, 2023): Galderma filed a post-grant petition of Medytox’s patent directed to a method for treating frown lines using an animal-protein-free botulinum toxin composition, which allegedly displayed an increased sustained effect compared to BOTOX^®. Medytox filed a motion to amend seeking to cancel the challenged claims and file substitute claims. In a final written decision, the Board found in part that the substitute claims were unpatentable for lack of enablement, because the specification only disclosed three responder rates: 52%, 61%, and 62%, and a skilled artisan would not have been able to achieve higher responder rates included in the claimed ranges without undue experimentation.

The Federal Circuit (Reyna, J., joined by Dyk and Stark, JJ.) affirmed. Citing the Supreme Court’s recent opinion in Amgen Inc. v. Sanofi, 143 S. Ct. 1243 (2023), the Federal Circuit determined that the Board did not err in concluding that the substitute claims were not enabled because a skilled artisan would not have been able to achieve responder rates higher than the limited examples disclosed in the specification.

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

Blaine H. Evanson – Orange County (+1 949-451-3805, bevanson@gibsondunn.com)
Audrey Yang – Dallas (+1 214-698-3215, ayang@gibsondunn.com)

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

Appellate and Constitutional Law Group:
Thomas H. Dupree Jr. – Washington, D.C. (+1 202-955-8547, tdupree@gibsondunn.com)
Allyson N. Ho – Dallas (+1 214-698-3233, aho@gibsondunn.com)
Julian W. Poon – Los Angeles (+ 213-229-7758, jpoon@gibsondunn.com)

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

On June 30, 2023, Sacramento Superior Court Judge James Arguelles held that the California Privacy Protection Agency (CPPA) cannot enforce its regulations issued on March 29, 2023, until March 29, 2024—about nine months later than the date the California Privacy Rights Act (CPRA) permitted enforcement of any provisions added or amended by the law.[1] This development provides helpful breathing room for businesses seeking to comply. It is important to note that this reprieve only exists for the new regulations issued under the CPRA on March 29, 2023, not all aspects of the CPRA, as explained below.

Delay Begets Delay

The saga of the CCPA, which ultimately led to the California privacy regulations saga, began in 2017. An advocacy group, Californians for Consumer Privacy, began collecting signatures and by 2018, was in position to successfully submit a ballot initiative for consideration by California voters in the November 2018 election titled the “California Consumer Privacy Act,” or CCPA. State legislators negotiated a compromise with key stakeholders, including Californians for Consumer Privacy, and enacted a last-minute compromise draft through the legislative process in exchange for pulling the initiative off of the November 2018 ballot.[2] The state legislature passed the California Consumer Privacy Act (CCPA) as AB 375 and it was signed into law on June 28, 2018, with provisions becoming operative January 1, 2020.

After the passage of the CCPA, but even before it came into effect, Californians for Consumer Privacy remained dissatisfied with the state of California privacy law and began a second ballot initiative, the California Privacy Rights Act (CPRA). Voters approved the initiative (Proposition 24) in November 2020. The CPRA amended the CCPA by, among other things, adding additional consumer rights, including the right to correct inaccurate personal information, the right to opt out of certain “sharing” of data (rather than just the right to opt out of “sale” of data), and the right to limit the use and disclosure of sensitive personal information.

The CPRA also created the California Privacy Protection Agency (CPPA) and charged it with promulgating final regulations under the law and, along with the Attorney General, enforcing the law and those regulations. The CPRA specified that “[t]he timeline for adopting final regulations required by the act … shall be July 1, 2022” and “[n]otwithstanding any other law, civil and administrative enforcement … shall not commence until July 1, 2023[.]”[3]

The CPPA, however, failed to finalize regulations by July 1, 2022, and businesses seeking to comply with the new requirements were left to wonder about both the ultimate content of the regulations and their potential enforcement exposure and liability. On March 29, 2023, nine months after the deadline, the CPPA issued final regulations relating to twelve of the fifteen topics contemplated by the CPRA—leaving businesses just three months to comply. Today, there are still no regulations concerning three key elements of the CPRA, that the CPPA is tasked with tackling, namely cybersecurity audits, risk assessments, and automated decision-making technology.[4] Further, the CPPA has publicly discussed other specific topics of consideration that it intends to address (on a much longer timeline), including employment-related data issues, and social media API access. The CPPA has not indicated a clear timeline to promulgate regulations or enforce the law in any of the remaining areas, despite consideration that certain of them are more difficult than others, and undergoing a diligence process.[5]

The Chamber of Commerce’s Lawsuit

The California Chamber of Commerce sued, seeking a delay of the CPRA for a period of one year after all required regulations were issued.[6]

Following a hearing on June 30, 2023, the California Superior Court, Sacramento County issued a Minute Order considering this request, applying rules of statutory interpretation to determine the voters’ intent in passing the CPRA and the appropriate resultant timeline for enforcement.[7] The court held that “the plain language of the statute indicates the [CPPA] was required to have final regulations in place by July 1, 2022” and “the [CPPA] should be prohibited from enforcing the Act on July 1, 2023 when it failed to pass final regulations by the July 1, 2022 deadline.”[8] “The very inclusion of [the timeline prescribed by subdivision (d)] indicates the voters intended there to be a gap between the passing of final regulations and enforcement of those regulations.”[9] The court also disagreed with the CPPA’s argument that the delayed regulations did not prejudice businesses seeking to comply with the law.[10]

Yet the court did not agree that enforcement of the entire regulatory scheme should be delayed. “[T]he Court agrees with the [CPPA] that delaying the [CPPA]’s ability to enforce any violation of the Act for 12 months after the last regulation in a single area has been implemented would likewise thwart the voters’ intent to protect the privacy of Californians as contemplated by Proposition 24.”[11]

The court struck a balance between the Chamber’s and the CPPA’s arguments, allowing enforcement of the regulations on a piecemeal basis, one year after they are finalized: “the Court hereby stays the Agency’s enforcement of any Agency regulation implemented pursuant to Subdivision (d) for 12 months after that individual regulation is implemented.”[12] “By way of example, if an Agency regulation passes regarding Section 1798.185 subdivision (a), subsection (16) (requiring the Agency issue regulations governing automated decision-making technology) on October 1, 2023, the Agency will be prohibited from enforcing a violation of said regulation until October 1, 2024. The Agency may begin enforcing those regulations that became final on March 29, 2023 on March 29, 2024.”[13]

The order is good news for businesses subject to the law, which will have an extra nine months to comply with the CPRA regulations that were finalized on March 29, 2023. The order also provides a clear timeline for enforcement of forthcoming CPRA regulations, including in the three areas mentioned above. The CPRA is only permitted to enforce these new regulations twelve months after they have been finalized by the Office of Administrative Law.

Other California Privacy Regulations—and the Underlying Laws—Are in Force

It is important to note that the court’s ruling focuses regulations promulgated under the CPRA. To the extent the statutory basis for existing CCPA regulations remained unchanged by the CPRA, those regulations may continue to be enforced. In addition, to the extent the CPPA intends to bring enforcement actions for a business’s failure to comply with requirements set out in the CPRA’s statutory text, itself, the court’s ruling is not likely to prevent it from doing so. But enforcement may be muddied by questions as to whether any compliance failures are the result of actual non-compliance or whether they were caused by a good-faith misunderstanding based on lack of insights from the regulations. In any case, the CPPA remains able to bring enforcement actions for failure to comply with provisions of the CCPA that were left unamended when the CPRA was enacted.

Viewed through that lens, though the ruling provides relief for businesses rushing to comply with the delayed CPRA regulations, the impact of the court’s ruling may be considered somewhat limited: only enforcement of the March 29, 2023 regulations are delayed until March 29, 2024 (and enforcement of any forthcoming regulations will begin one year after they are finalized). Enforceable regulations concern a host of topics relating to the seven core consumer rights under the CCPA and related topics.[14]

The CPPA May Continue the Fight

The CPPA may appeal the Superior Court order. The default California rules provide an automatic stay of trial court proceedings and of enforcement of the Superior Court’s order.[15] This means that the Superior Court’s order to delay the enforcement of the CPRA regulations could be put on pause. If that happens, the CPPA’s regulations could be enforceable, pending the CPPA’s appeal. If appealed, the Chamber could seek to maintain the status quo of the Superior Court’s order, allowing the delay of enforcement of the CPRA regulations to continue. In assessing such a request, the Court of Appeal would balance hardships and benefits, likely weighing the public’s and state’s interests in earlier enforcement of privacy regulations against the interests of businesses in having the time that voters’ prescribed to comply with the law.[16]

The CPPA Will Speak

The CPPA has scheduled a public meeting for July 14, 2023. The proposed agenda confirms that the CPPA Board will publicly discuss key updates, including enforcement. In addition, “the Board will meet in closed session to confer and receive advice from legal counsel regarding” the Chamber lawsuit.[17] We will continue to monitor the development of the CPPA, CCPA, CPRA, and other notable state privacy laws and regulations.

__________________________

[1] California Chamber Of Commerce vs. California Privacy Protection Agency (June 30, 2023) 34-2023-80004106-CU-WM-GDS (J. Arguelles order); Cal. Civ. Code § 1798.185, subd. (d) (“Notwithstanding any other law, civil and administrative enforcement of the provisions of law added or amended by this act shall not commence until July 1, 2023, and shall only apply to violations occurring on or after that date.”).

[2] The California legislature generally cannot repeal voter initiatives, once passed. These compromises are a common way for the legislature to refine voter initiatives. California Constitution, Article II, Section 10 (c); California Election Code, Section 9034.

[3] Cal. Civ. Code § 1798.185, subd. (d).

[4] Id. § 1798.185, subd. (a).

[5] The CPPA has invited and received pre-rulemaking comments on the three remaining topics. California Privacy Protection Agency, Preliminary Rulemaking Activities on Cybersecurity Audits, Risk Assessments, and Automated Decisionmaking (Feb. 10, 2023), available at https://cppa.ca.gov/regulations/pre_rulemaking_activities_pr_02-2023.html

[6] California Chamber of Commerce vs. California Privacy Protection Agency (March 30, 2023) 34-2023-80004106-CU-WM-GDS (complaint).

[7] Order at 3-5.

[8] Id. at 4.

[9] Id.

[10] Id. at 5.

[11] Id. at 4-5.

[12] Id.

[13] Id.

[14] For additional reading concerning the scope of the enforceable regulations, please review our Privacy, Cybersecurity and Data Innovation Practice Group’s publications.

[15] Cal. Cod Civ. Proc. § 916. The Superior Court’s order proceeded on the Chamber’s petition for writ of mandate (dismissing other causes of action for declaratory and injunctive relief as moot). Order at 5. In traditional mandamus, perfecting appeal automatically stays effect of the writ. Johnston v. Jones (1925) 74 Cal.App. 272; Cal. Code Civ. Proc. § 1094.5.

[16] See Building Code Action v. Energy Resources Conservation & Dev. Com. (1979) 88 Cal.App.3d 913, 922.

[17] California Privacy Protection Agency Board, Meeting Notice and Agenda (June, 30, 2023), available at https://www.cppa.ca.gov/meetings/agendas/20230714.pdf.

The following Gibson Dunn lawyers assisted in preparing this alert: Cassandra Gaedt-Sheckter, Jane Horvath, Vivek Mohan, Eric Vandevelde, Benjamin Wagner, Christopher Rosina, and Tony Bedel.

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

United States
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Jane C. Horvath – Co-Chair, PCDI Practice, Washington, D.C. (+1 202-955-8505, jhorvath@gibsondunn.com)
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Gustav W. Eyler – Washington, D.C. (+1 202-955-8610, geyler@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, sgans@gibsondunn.com)
Lauren R. Goldman – New York (+1 212-351-2375, lgoldman@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, shandler@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
Vivek Mohan – Palo Alto (+1 650-849-5345, vmohan@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Rosemarie T. Ring – San Francisco (+1 415-393-8247, rring@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
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Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)

Europe
Ahmed Baladi – Co-Chair, PCDI Practice, Paris (+33 (0) 1 56 43 13 00, abaladi@gibsondunn.com)
Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com)
Joel Harrison – London (+44(0) 20 7071 4289, jharrison@gibsondunn.com)
Vera Lukic – Paris (+33 (0) 1 56 43 13 00, vlukic@gibsondunn.com)

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

Decided July 6, 2023

Kuciemba v. Victory Woodworks, Inc., S274191

The California Supreme Court held today that employers owe no duty of care, under state tort law, to nonemployees (including employees’ family members) to prevent the spread of COVID-19.

Background:
Robert Kuciemba worked for Victory Woodworks in San Francisco. He contracted COVID-19 while at work, allegedly because Victory transferred workers from a job site where there were many infections to his site. He brought the virus home and transmitted it to his wife, whose age and ill health made her especially vulnerable to COVID. She was hospitalized for over a month as a result.

The Kuciembas sued Victory in California court, raising a variety of state-law tort claims. After Victory removed the case to federal court, the district court dismissed the complaint. It first ruled that Mrs. Kuciemba’s claims against Victory were barred by the derivative-injury doctrine—namely, that California’s Workers Compensation Act provides the exclusive remedy for work-related injuries and third-party claims that are “collateral to or derivative of” work-related injuries. The court also ruled in the alternative that Victory had no duty of care to prevent the spread of COVID to Mrs. Kuciemba.

The Kuciembas appealed to the Ninth Circuit, which—noting the lack of clear precedent addressing the scope of the derivative-injury doctrine or the duty of care in a case like the Kuciembas’—certified both issues to the California Supreme Court. The Supreme Court accepted certification and heard argument in May 2023.

Issues:
1. If an employee gets COVID-19 at work and transmits the virus to his spouse, does the derivative-injury doctrine bar the spouse’s claim against the employer?

2. Does an employer owe a duty to the households of employees to exercise ordinary care to prevent the spread of COVID-19?

Court’s Holding:
1. No. Third-party claims are barred by the derivative-injury doctrine only when they are “legally dependent on the employee’s injury,” such as with an heir’s wrongful-death or spouse’s loss-of-consortium claim. The derivative-injury doctrine does not bar “a family member’s claim for her own independent injury,” even if the injury was “caused by the same negligent conduct of the employer” that injured the employee.

2. No. Although it is generally “foreseeable that an employer’s negligence in permitting workplace spread of COVID-19 will cause members of employees’ households to contract the disease,” “the significant and unpredictable burden that recognizing a duty of care would impose on California businesses, the court system, and the community at large counsels in favor of” declining to impose such a duty on employers.

What It Means:

The opinion acknowledges that “there is only so much an employer can do” to prevent the spread of viruses such as COVID-19: “Employers have little to no control over the safety precautions taken by employees or their household members outside the workplace,” and they cannot control whether individual employees comply with precautions such as “mask wearing and social distancing.”
The Court’s opinion clarifies the scope of California’s “analytically challenging” derivative-injury doctrine, explaining that it bars a plaintiff’s claim only if she must “prove injury to the employee as at least part of a legal element” of her claim. It is not enough that the third party’s injury would not have occurred but for the employee’s injury.
Even where foreseeability factors weigh in favor of recognizing a duty, courts will decline to impose a duty of care that would “alter employers’ behavior in ways that are harmful to society.”
The Court declined to address “[w]hether a local measure enacted on an emergency basis could appropriately impose a tort duty extending to employees’ household members,” which was beyond the scope of the questions certified from the Ninth Circuit.

The Court’s opinion is available here.

Appellate and Constitutional Law Practice

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We are pleased to provide you with the first edition of Gibson Dunn’s digital assets regular update. This update will cover recent legal news regarding all types of digital assets, including cryptocurrencies, stablecoins, CBDCs, and NFTs, as well as other blockchain and Web3 technologies. Thank you for your interest.

Enforcement Actions

United States

SEC Sues Binance, Binance.US, and Founder Changpeng Zhao
On June 5, the SEC filed a 13-claim complaint against Binance, Binance.US, and Binance founder Changpeng Zhao in D.C. federal court, alleging they engaged in unregistered offers and sales of crypto asset securities, including the Binance branded, fiat-backed stablecoin BUSD. The SEC claims Binance and Binance.US were acting as an exchange, broker-dealer, and clearing agency, and intentionally chose not to register with the SEC. Binance and Binance.US dispute these allegations. The SEC subsequently filed a motion for a TRO, seeking to freeze Binance.US’s assets. On June 13, after a hearing, Judge Amy Berman Jackson ordered the parties to mediation to attempt to negotiate a resolution to the SEC’s requested TRO. On June 19, the parties submitted and Judge Jackson signed a consent order. Complaint; Law360; Law360 2; Law360 3; Rolling Stone; Order.
SEC Sues Coinbase
On June 6, the SEC filed a 5-count complaint against Coinbase and its parent company Coinbase Global in the Southern District of New York. The SEC alleges that Coinbase violated securities laws since 2019 by failing to register as an exchange, broker, or clearing agency despite facilitating trading and settlement of several digital assets that the SEC alleges are securities, including ADA, SOL, MATIC, and others. The SEC also alleges that Coinbase has operated as an unregistered broker by offering its Coinbase Prime and Coinbase Wallet services, and that Coinbase’s staking service for several digital assets, including Ethereum, constitutes unregistered securities offerings. On June 28, Coinbase filed a 177-page answer to the SEC’s complaint, calling the suit an “extraordinary abuse of process” that “offends due process and the constitutional separation of powers.” In a separate letter to the Court, Coinbase said that it intended to file a motion for judgment on the pleadings on the ground that the SEC lacks jurisdiction over the subject matter of the suit because the tokens at issue are not securities. Complaint; CoinDesk; CoinDesk 2; Rolling Stone.
Crypto Exchange Bittrex Moves to Dismiss SEC Enforcement Action
On June 30, crypto exchange Bittrex moved to dismiss an SEC enforcement action alleging that the exchange operated as an unregistered securities exchange, broker, and clearing agency. Echoing arguments made by others in the industry, Bittrex argues that the major questions doctrine bars the SEC’s efforts to regulate tokens as securities, that secondary market transactions in tokens do not involve “investment contracts,” and that the SEC’s lawsuit deprives Bittrex of constitutionally required fair notice. The case is pending in the U.S. District Court for the Western District of Washington. CoinTelegraph; Motion.
Judge Severs Bankman-Fried Criminal Charges, Declines to Dismiss Them
On May 8, FTX’s founder and former CEO filed motions to dismiss most of the criminal charges against him, marking Bankman-Fried’s first detailed defense in his U.S. federal criminal case. Among other things, Bankman-Fried argued that under the U.S.-Bahamas extradition treaty the Bahamas needs to “consent” to the additional charges brought after the extradition. On May 30, prosecutors responded to these motions. Among other things, the government argued it has sought the consent of the Bahamian government to proceed with the charges brought post-extradition and will drop those charges if the Bahamas does not consent. On June 15, District Judge Lewis Kaplan severed the post-extradition charges against Bankman-Fried and ordered a second trial on those charges in March 2024. On June 30, Judge Kaplan denied Bankman-Fried’s motions to dismiss. CoinTelegraph 1; CoinDesk; New York Times; Law360; Docket; CoinTelegraph 2.
CoinEx Agrees to Settle Registration Charges for $1.8 Million
On June 14, global cryptocurrency exchange CoinEx agreed to settle charges that it had failed to register as a broker-dealer with the New York Attorney General for $1.8 million. The company also terminated its U.S. users’ accounts and blocked them from creating new accounts. Law360; Stipulation.
Wahi Brothers Settle Insider Trading Charges with the SEC
On May 30, the SEC settled charges with a former Coinbase product manager, Ishan Wahi, and his brother Nikhil. The two were arrested last year on charges of wire fraud conspiracy and “wire fraud in connection with a scheme to commit insider trading.” Both brothers pleaded guilty. Ishan Wahi was sentenced to 24 months in prison and ordered to forfeit 10.97 ether and 9,440 Tether, and Nikhil was sentenced to 10 months in prison and ordered to forfeit $892,500—with more than half as restitution to Coinbase as a victim of the Wahi defendants’ misconduct. The court has since held the restitution order in abeyance while the brothers contest the amount of attorneys’ fees awarded to Coinbase. On June 29, Coinbase asked the court to again grant its restitution request. The SEC announced that because of the brother’s prison sentences, it will not seek any other penalties. The settlement puts an end to the case brought by the SEC which was set to answer the question of whether cryptocurrencies at the heart of the case were indeed securities, as the SEC has argued and Coinbase, as amicus, forcefully disputed. SEC; CoinDesk; Law360.
Judge Torres Denies SEC’s Motion to Seal Hinman Documents
On May 16, United States District Judge Analisa Torres denied the SEC’s motion to seal records of its internal deliberations regarding a speech by former director William Hinman. In the June 2018 speech, the former SEC corporation finance director stated that ether is not a security. The SEC filed the motion on December 22, 2022 to seal the internal emails, text messages, and expert reports that followed Hinman’s speech. Judge Torres found that these documents “are not protected by the deliberative process privilege because they do not relate to an agency position, decision or policy.” Ripple has considered the speech a key piece of evidence in its ongoing legal battle with the SEC, which alleges that sales of Ripple’s XRP violated U.S. securities laws. Order; CoinTelegraph.
Gemini Moves to Dismiss SEC Suit
On May 29, Gemini filed a motion to dismiss the SEC’s lawsuit claiming that the operation of Gemini’s now defunct crypto lending program, called Gemini Earn, was a sale of unregistered securities. Gemini argued that the contracts involved were “simple lending arrangements” and that the SEC case is complicating the process of returning funds to investors. Law360; CoinTelegraph.
Green United Executives Argue SEC Has No Authority Over Crypto
On May 19, Wright Thurston and Kristoffer Krohn filed motions to dismiss an SEC enforcement action in the U.S. District Court for the District of Utah. The SEC sued the defendants in March 2023, alleging that the defendants fraudulently offered securities by selling “Green Boxes” and “Green nodes” marketed as miners for the GREEN token on the “Green Blockchain.” The SEC claimed the hardware sold didn’t mine GREEN as it was an Ethereum-based ERC-20 token that could not be mined and the Green Blockchain didn’t exist. The defendants in their motions to dismiss argue, among other things, that the SEC has no authority over the digital asset ecosystem, claiming that Congress “considered and rejected” the SEC’s authority over crypto. They also argue that the SEC has been “unclear and inconsistent” in defining digital assets and criticize the agency’s regulation-by-enforcement approach in the crypto space. CoinTelegraph; Thurston’s Motion; Krohn’s Motion.

International

Do Kwon Wins Bail Request, Upends Montenegrin Elections with Campaign Funding Claim, Is Sentenced to Four Months
On June 5, a Montenegro high court again approved $428,000 bail forDo Kwon subject to house arrest pending an extradition request from South Korea. Only days before a June 11 election in Montenegro, Do Kwon claimed in a letter from custody that “crypto friends” had provided campaign funding to a leading candidate, upending the election’s anticipated results. In March, Kwon, along with former Terraform Labs executive Han Chang-joon, was arrested in Montenegro for allegedly attempting to travel with falsified documents. South Korean authorities had been searching for Kwon since Terraform Labs collapsed in May last year. The two South Korean nationals were back in court on June 16 for a hearing in which Kwon’s lawyers said their client denied having funded the leading candidate’s campaign. Kwon and Han were subsequently sentenced to four months for falsifying official documents. Since his arrest, both South Korea and the U.S. have requested Kwon’s extradition to face criminal charges following his trial in Montenegro. CoinDesk 1; CoinTelegraph 1; CoinDesk 2; New York Times; CoinTelegraph 2; TechCrunch.

Regulation and Legislation

United States

Republicans Release Digital Asset Market Structure Proposal
On June 2, Chairman McHenry of the House Financial Services Committee and Chairman Thompson of the House Committee on Agriculture released a discussion draft of legislation providing a statutory framework for digital asset regulation. The discussion draft represents a “common approach to digital asset regulation that would bring existing consumer and investor protections to digital asset-related activities and intermediaries.” The House Financial Services Committee plans to vote on the proposed legislation in the second week of July. Press Release; Discussion Draft; The Block.
House Proposed a Comprehensive Regulatory Framework for Stablecoins
On June 13, the House Financial Services Committee released a discussion draft of a proposed statutory framework for stablecoins. During a June 21 oversight hearing, Chairman McHenry indicated that the committee will debate the bill during the July session. Press Release; Discussion Draft; The Block.
New NFA Regulation Takes Effect
On May 31, a new rule issued by the National Futures Association—the self-regulatory organization for the U.S. derivatives industry—takes effect. Compliance Rule 2-51 is applicable to NFA member firms and associated persons engaging in activities involving bitcoin and ether, including spot or cash market activities. The rule imposes anti-fraud, just and equitable principles of trade, and supervision requirements on members and associates, and codifies members’ existing disclosure obligations under NFA Interpretative Notice 9073. Law360.
Prometheum Congressional Testimony Attracts Industry Criticism
On June 13, Aaron Kaplan, the founder and co-CEO of crypto exchange Prometheum, testified before the House Financial Services Committee that the SEC has laid out a compliant path for crypto in the United States. Prometheum recently received a first-of-its-kind FINRA approval to operate as a special purpose broker-dealer for digital assets in anticipation of listing digital assets for trading. Kaplan’s remarks provoked some controversy across the industry and on Twitter, with certain competitors criticizing the company and Kaplan’s remarks. The Blockchain Association submitted FOIA requests for more information about the company. Hearing; CoinTelegraph 1; CoinTelegraph 2.
CFTC Warns Clearing Agencies to Monitor Crypto Risks
On May 30, the CFTC’s Division of Clearing and Risk issued a staff advisory warning clearing agencies that provide services for crypto products that they must contain risks associated with digital assets through mitigation strategies, or they will face the agency’s scrutiny. The advisory also notes that, given increased cybersecurity risks and other perceived dangers involving digital assets, the CFTC’s division will emphasize compliance regarding its “core principles” of system safeguards, conflicts of interest, and physical delivery.” Law360.
Proposed Tax on Crypto Mining Removed from Spending Bill
On May 28, in the lead up to legislation to raise the U.S. debt ceiling, lawmakers released a draft bill that did not include the previously proposed Digital Assets Mining Energy (DAME) 30% excise tax on electricity used by crypto miners. The tax would have increased by 10% each year over three years on electricity generated starting in 2024. CoinTelegraph.
Filecoin Sponsor Receives SEC Comment Letter
On May 17, Grayscale announced that it received a comment letter from the SEC asking it to withdraw the registration of a trust investing in Filecoin, because the SEC believes Filecoin meets the definition of a security. On May 31, crypto trading firm Cumberland announced that it would halt over-the-counter trading in the token used by the decentralized storage platform Filecoin, citing regulatory environment concerns. GlobeNewswire; The Block.
Federal Bank Regulatory Agencies Release Interagency Guidance on Third-Party Risk Management
On June 6, the Federal Reserve, FDIC and OCC released final interagency guidance designed to aid banking organizations in managing risks associated with third-party relationships, including those with FinTechs and companies in the digital assets space. The interagency guidance replaces prior guidance of the agencies and details risk management strategies at various stages of third-party relationships, such as planning, due diligence, contract negotiation, ongoing monitoring, and termination. The agencies underscore that the interagency guidance does not have the force and effect of law and does not impose any new requirements on banking organizations. Nonetheless, third-party risk management will remain an area of heightened focus and scrutiny by supervisors and examiners, particularly with respect to third parties that are: FinTechs; digital assets providers; critical to bank operations or organizational business continuity and resiliency; customer-facing; subject to heightened consumer compliance and other prudential requirements; or represent concentration risk. As such, FinTechs and other companies and service providers that partner with banks to deliver regulated financial services should expect potential additional scrutiny from both their bank partners and their bank partners’ regulators. Interagency Press Release; Interagency Guidance on Third-Party Relationships: Risk Management; Federal Reserve Board Memo; Federal Reserve SR 23-4: Interagency Guidance on Third-Party Relationships: Risk Management; FDIC Financial Institution Letter (FIL-29-2023); OCC Bulletin 2023-17.
Federal Deposit Insurance Corporation Continues Focus on Deposit Insurance Representations
On June 15, the FDIC issued advisory letters demanding three companies cease and desist from making false and misleading statements about FDIC deposit insurance. The advisory letters highlight the FDIC’s continuing efforts to review companies’ public statements, disclosures and other marketing materials for compliance with Section 18(a)(4) of the Federal Deposit Insurance Act (12 U.S.C. § 1828(a)(4)) and the FDIC’s 2022 final rule regarding advertising or other representations about FDIC deposit insurance (12 C.F.R. Part 328, Subpart B). To ensure compliance, banks and bank partners should, at a minimum, ensure subject materials: (a) clearly disclose that the nonbank company offering the service is not an insured bank; (b) identify the insured bank(s) where any customer funds may be held on deposit; (c) communicate that FDIC deposit insurance is not available in the event of the bankruptcy of the nonbank company and is only available should the FDIC-insured bank at which deposits are properly held fail; and (d) communicate that non-deposit products are not FDIC-insured products and may lose value. FDIC’s Letter to Bodega Importadora de Pallets; FDIC’s Letter to Money Avenue, LLC; FDIC’s Letter to OKCoin USA, Inc.

International

EU Formally Adopts Markets in Crypto-Assets Regulation (MiCA)
On May 31, the EU formally adopted MiCA, the first EU legal framework expressly regulating crypto assets. MiCA aims to protect investors by increasing transparency and putting in place a comprehensive framework for issuers and service providers such as trading venue and crypto asset wallets, including compliance with anti-money laundering rules. MiCA was published in the EU’s official journal on June 9, 2023, and entered into force on June 29, 2023, the 20th day following the date of its publication. Stablecoin issuers, which will face much stricter regulations under the new law, will have 12 months to ensure they are in compliance with the law, while other crypto issuers and so-called crypto asset service providers (CASPs) will have 18 months to prepare. CoinDesk; European Council.
EU Countries, Lawmakers Reach Deal on Data Act
On June 27, legislative negotiators from the European Union reached an agreement on the Data Act, a set of new rules governing fair access and use of data on internet-connected devices. The Act, which was passed by the European Parliament on March 14, has been criticized by the crypto industry for imposing requirements on smart contracts, including requiring them to include a kill switch. There are conflicting reports about whether the final draft, which has not yet been released, will assuage these concerns. The Data Act now awaits voting by the European Parliament and Council before it can become law. CoinDesk.

UK Crypto, Stablecoin Legislation Formally Approved
On June 29, King Charles formally approved the Financial Services and Markets Act, which gives UK regulators authority to supervise cryptocurrencies and stablecoins. The bill treats all crypto as a regulated activity, supervises crypto promotions, and incorporates stablecoins into payment rules. The U.K.’s Treasury, Financial Conduct Authority, the Bank of England, and Payments Systems Regulator will have the power to introduce and enforce regulations for the sector. Specific rules for the crypto sector could be implemented within a year. CoinDesk.

ESMA Calls on EU Investment Firms to Clearly State That Crypto Is Unregulated
On May 25, the European Securities and Markets Authority (ESMA), EU’s securities regulator, issued a public statement highlighting the risks arising from the provision of unregulated products and/or services by investment firms in the EU. ESMA expressed its concerns that where “investment firms engage in providing both regulated and unregulated products and/or services there is a significant risk that investors may misunderstand the protections they are afforded when investing in those unregulated products and/or services.” In such situations, ESMA recommended few steps for the investment firms, including noting in all marketing communications whether a given product is regulated or not, or clearly explaining “what investor protections are lost/not applicable when investing in a product.” ESMA.
UAE Issues New AML Rules for Digital Assets
On May 31, the Central Bank of the United Arab Emirates published guidance for licensed financial institutions on risks “related to virtual assets and virtual assets service providers.” The guidance specifies new rules on anti-money laundering and combating the financing of terrorism for banking institutions engaging with crypto in the UAE, including requiring licensed financial institutions to verify the identities of all customers. CoinTelegraph.
Hong Kong and UAE Central Banks Coordinate on Crypto Regulations
On May 29, the Central Bank of the UAE and the Hong Kong Monetary Authority held a bilateral meeting in which they agreed to cooperate on regulating virtual assets by implementing financial infrastructure and cross-border trade settlements. Decrypt.
Singapore Releases New Crypto Regulations
On July 3, the Monetary Authority of Singapore (MAS) announced new regulations for Digital Payment Token (DPT) service providers to safekeep customer assets under a statutory trust before the end of the year. The statutory trust is intended to mitigate the risk of loss or misuse of customers’ assets, and facilitate the recovery of customers’ assets in the event of a DPT service provider’s insolvency. MAS will also restrict DPT service providers from facilitating lending and staking of DPT tokens by their retail customers. These measures were introduced following an October 2022 public consultation on regulatory measures to enhance investor protection and market integrity in DPT services. Among other things, the MAS also issued a new consultation paper proposing requirements for DPT service providers to address unfair trading practices. Consultation Feedback; Consultation Paper on Proposed Amendments; Consultation Paper on Market Integrity

Civil Litigation

United States

Court Rules Bankman-Fried Cannot Subpoena Former FTX Counsel
On June 23, Judge Kaplan of the Southern District of New York denied FTX founder and former CEO Sam Bankman-Fried’s request to subpoena documents from Fenwick & West related to their earlier legal work for FTX, finding that the requested subpoena was “a fishing expedition.” Judge Kaplan also rejected Bankman-Fried’s argument that FTX was “so enmeshed in the government’s investigation that [it] must be considered part of the ‘prosecution team’ for purposes of the government’s discovery obligations,” holding that documents held by FTX are not in the government’s “possession, custody, or control.” CoinDesk; Law360; Order.
Third Circuit Retains Jurisdiction over Coinbase Mandamus Petition
On June 20, the U.S. Court of Appeals for the Third Circuit ruled that the SEC must provide an update on its progress in deciding Coinbase’s petition for rulemaking by October 11, 2023. The Court will maintain jurisdiction over Coinbase’s rulemaking petition in the interim. Coinbase’s rulemaking petition asks the SEC to explain, among other things, which digital assets the SEC believes to be securities and how industry players should go about registering them. CoinGeek.
Supreme Court Rules in Favor of Coinbase in Arbitration Lawsuit
On June 23, the U.S. Supreme Court held that a lawsuit against Coinbase should have been automatically stayed when the company appealed the federal district court’s denial of its motion to compel arbitration of a putative class action. Although the decision does not touch on issues specific to the crypto industry, the ruling is the first by the Supreme Court involving a crypto industry participant. Client Alert; Law360; Opinion.
Proposed Class Action Suit Filed Against Shaq for NFT Promotion
On May 23, a proposed class action was filed against basketball player Shaquille O’Neal, alleging that his promotion of Astrals Project NFTs violated securities laws by marketing unregistered digital assets. Law360.
MDL Created for FTX Investor Actions
On May 25, FTX investors asked the Judicial Panel on Multidistrict Litigation (JPML) to consolidate investor litigation actions relating to the demise of FTX before one federal judge in the Southern District of Florida. On June 5, the panel granted the motion and ordered the creation of a multi-district litigation before U.S. District Judge K. Michael Moore in Miami. Law360; Bloomberg.

Speaker’s Corner

United States

Senator Elizabeth Warren Calls for Crypto Legislation to Stop Fentanyl Trade
On May 31, Elizabeth Warren stated during a Senate hearing that she aims to combat cryptocurrency’s role in the illegal Chinese fentanyl trade. Warren suggested her Digital Asset Anti-Money Laundering Act may help cut off the crypto payments, and she said the bill will be reintroduced in this Congress.CoinDesk.

DeSantis Urges to ‘Protect’ Bitcoin in His Campaign Launch
On May 24, in announcing a bid for President in an interview on Twitter with Elon Musk, Ron DeSantis said that “as president, we’ll protect the ability to do things like Bitcoin.” DeSantis called those on Capitol Hill “central planners” who “want to have control over society.” DeSantis also mentioned that Congress has never specifically addressed cryptocurrency, and instead the regulation was created by “the bureaucracy” and made it so “that people cannot operate in that space.”CoinTelegraph.

International

Chief of G-7’s Financial Action Task Force Calls for Stronger Global Collaboration to Target Crime and Terrorism Financing
On May 18, T. Raja Kumar, President of FATF, an intergovernmental organization that sets money laundering and terrorist financing standards, urged G-7 leaders to “effectively” implement FATF’s crypto anti-money laundering norms ahead of the May G-7 summit in Hiroshima. Kumar said that “countries need to take urgent action to shut down lawless spaces, which allow criminals, terrorists and rogue states to use crypto assets.” In particular, he called on the implementation of the ‘travel rule,’ which requires virtual assets service providers to identify the sender and receiver of the transaction. His recommendations were echoed by the G-7 finance ministers and central bank governors meeting on May 13 in Japan. Global Governance Project; G7 Finance Ministers and Central Bank Governors Meeting Communiqué.

Other Notable News

BlackRock Applies for Spot Bitcoin ETF
On June 15, BlackRock filed an S-1 with the SEC for the iShares Bitcoin Trust, whose assets would consist primarily of Bitcoin held by Coinbase and which would reflect the spot price of Bitcoin. The move was seen as an indication of continued institutional support for crypto and was quickly followed by a number of similar filings, including by Fidelity Investments. According to a June 30 Wall Street Journal report, the SEC informed Nasdaq and Cboe Global Markets, the exchanges that filed on behalf of Blackrock and Fidelity, that their applications are not sufficiently clear and comprehensive. Cboe updated and re-filed its applications on June 30. On July 3, BlackRock resubmitted its filing through Nasdaq with new details. CoinDesk 1; S-1; CoinDesk 2; Wall Street Journal; MarketWatch.
Crypto Custodian Prime Trust Faces Nevada Receivership, Asset Freeze
On June 27, Nevada’s Financial Institutions Division filed a request to take crypto custodian Prime Trust into receivership and freeze its operations due to alleged insolvency. The request for receivership states that Prime Trust owes clients around $150 million in fiat currency and cryptocurrencies and that part of this shortfall resulted from the company losing its ability to access “legacy wallets.” CoinDesk.
NY Fed and Singapore Monetary Authority Publish Joint CBDC Study Results
On May 18, the Federal Reserve Bank of New York’s New York Innovation Center and the Monetary Authority of Singapore published a research report detailing the results of a joint study, with findings that distributed ledger technology could be used to improve the efficiency of cross-border wholesale payments and settlements involving multiple currencies. Report; CoinTelegraph.

The following Gibson Dunn lawyers prepared this client alert: Ashlie Beringer, Stephanie Brooker, Jason Cabral, M. Kendall Day, Jeffrey Steiner, Sara Weed, Ella Capone, Grace Chong, Chris Jones, Jay Minga, Nick Harper, Alfie Lim, Bart Jordan, Andrea Lattanzio, and Jan Przerwa.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s FinTech and Digital Assets practice group, or the following:

FinTech and Digital Assets Group:

Ashlie Beringer, Palo Alto (650.849.5327, aberinger@gibsondunn.com)

Michael D. Bopp, Washington, D.C. (202.955.8256, mbopp@gibsondunn.com

Stephanie L. Brooker, Washington, D.C. (202.887.3502, sbrooker@gibsondunn.com)

Jason J. Cabral, New York (212.351.6267, jcabral@gibsondunn.com)

M. Kendall Day, Washington, D.C. (202.955.8220, kday@gibsondunn.com)

Michael J. Desmond, Los Angeles/Washington, D.C. (213.229.7531, mdesmond@gibsondunn.com)

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

William R. Hallatt, Hong Kong (+852 2214 3836, whallatt@gibsondunn.com)

Martin A. Hewett, Washington, D.C. (202.955.8207, mhewett@gibsondunn.com)

Michelle M. Kirschner, London (+44 (0)20 7071.4212, mkirschner@gibsondunn.com)

Stewart McDowell, San Francisco (415.393.8322, smcdowell@gibsondunn.com)

Mark K. Schonfeld, New York (212.351.2433, mschonfeld@gibsondunn.com)

Orin Snyder, New York (212.351.2400, osnyder@gibsondunn.com)

Jeffrey L. Steiner, Washington, D.C. (202.887.3632, jsteiner@gibsondunn.com)

Eric D. Vandevelde, Los Angeles (213.229.7186, evandevelde@gibsondunn.com)

Benjamin Wagner, Palo Alto (650.849.5395, bwagner@gibsondunn.com)

Sara K. Weed, Washington, D.C. (202.955.8507, sweed@gibsondunn.com)

Decided June 30, 2023

Biden, et al. v. Nebraska, et al., No. 21-869; Department of Education, et al., v. Brown, et al., No. 22-535

Today, the Supreme Court held 6-3 that the HEROES Act does not authorize the Secretary of Education to cancel hundreds of billions of dollars in student loan balances.

Background: Under the Higher Education Relief Opportunities for Students Act of 2003 (“HEROES Act”), the Secretary of Education may “waive or modify any statutory or regulatory provision” governing student loans in times of “national emergency” to ensure no borrower is “placed in a worse position financially” because of the emergency. During the COVID-19 pandemic, the Secretary exercised that authority to defer student loan repayments. When lifting the deferment in August 2022, however, the Secretary purported to exercise the same authority to cancel up to $20,000 in student loan principal for approximately 43 million qualifying individuals.

Six states that service or hold federally backed student loans sued in Missouri—and two individuals who were denied loan cancellation sued in Texas—to challenge the Secretary’s loan-cancellation program. The plaintiffs argued that the Secretary exceeded his power under the HEROES Act by cancelling debts, and that the program violated the Administrative Procedure Act both because it was arbitrary and capricious and because it was adopted without following the proper procedures.

Both the Eighth Circuit and a Texas district court barred enforcement of the Secretary’s loan-cancellation program. In both cases the Secretary sought stays from the U.S. Supreme Court, and the Supreme Court treated the Secretary’s stay applications as petitions for a writ of certiorari before judgment and granted review of both decisions.

Issues:

(1) Does at least one plaintiff have standing to challenge the Secretary’s loan-cancellation program?

(2) Does the loan-cancellation program exceed the Secretary’s authority under the HEROES Act?

Court’s Holding:

(1) At a minimum, the state of Missouri had standing because it suffered an injury in fact to a state-created government corporation that would lose servicing fees for the cancelled loans.

(2) On the merits, the Secretary exceeded his statutory authority under the HEROES Act.

“The Secretary asserts that the HEROES Act grants him the authority to cancel $430 billion of student loan principal. It does not.”

Chief Justice Roberts, writing for the Court in Biden v. Nebraska

What It Means:

The Court’s decision rested primarily on statutory interpretation of the HEROES Act. The Court interpreted the Secretary’s authority to “waive or modify” any statutory or regulatory provision applying to federal student-loan programs to allow only “modest adjustments” to existing provisions. Slip op. 13. That power did not include authority to “draft a new section of the [Higher] Education Act from scratch.” Id. at 17.
The Court also found support for its holding in the major-questions doctrine. Under that doctrine, courts will require a clear statement from Congress before presuming that Congress entrusted questions of deep “economic and political significance” to agencies. The Court rejected the government’s argument that the major-questions doctrine should apply only to government’s power to regulate, not to the provision of government benefits, remarking that the Court had “never drawn that line” because one of “Congress’s most important authorities is its control of the purse.” Slip op. 24.
Justice Barrett, who joined the Court’s opinion, penned a separate concurrence to elaborate on her view that the major-questions doctrine “is a tool for discerning—not departing from—the text’s most natural interpretation.” Justice Barrett explained that the doctrine reflects “common sense as to the manner in which Congress is likely to delegate a policy decision of such economic and political magnitude to an administrative agency.” Slip. op. 2, 5.
Today’s decision represents the second time the Supreme Court has applied the “major questions doctrine” since first acknowledging the doctrine by name in West Virginia v. EPA, 142 S. Ct. 2587 (2022). This case also continues the Court’s trend in recent years of reining in the administrative state as well as granting certiorari before judgment to resolve high-profile cases.

The Court’s opinion in Biden v. Nebraska is available here and its opinion in Department of Education v. Brown is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com	Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com	Julian W. Poon +1 213.229.7758 jpoon@gibsondunn.com
Lucas C. Townsend +1 202.887.3731 ltownsend@gibsondunn.com	Bradley J. Hamburger +1 213.229.7658 bhamburger@gibsondunn.com	Brad G. Hubbard +1 214.698.3326 bhubbard@gibsondunn.com
James L. Zelenay Jr. +1 213.229.7449 jzelenay@gibsondunn.com

Related Practice: Administrative Law and Regulatory Practice

Eugene Scalia
+1 202-955-8210
escalia@gibsondunn.com

Helgi C. Walker
+1 202.887.3599
hwalker@gibsondunn.com

On June 13, 2023, in its updated rulemaking agenda for Spring 2023, the Securities and Exchange Commission (“SEC”) indicated a goal of October 2023 for the adoption of proposed cybersecurity rules applicable to public companies and registered investment advisers and funds. The two rule proposals were issued by the SEC at the beginning of 2022 to address cybersecurity governance and cybersecurity incident disclosure, and the SEC had previously targeted adoption by no later than April 2023. Although the “Reg Flex” agenda is not binding and target dates frequently are missed or further delayed, the Spring agenda indicates that cybersecurity rulemakings remain a top, near-term priority for the SEC.

The Proposed Rules

Publicly Traded Companies

In March 2022, the SEC proposed new rules under the Securities Exchange Act of 1934 (the “Exchange Act”), titled Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure (the “Exchange Act Proposal”). If adopted in its proposed form, the Exchange Act Proposal would require standardized disclosures regarding specific aspects of a company’s cybersecurity risk management, strategy, and governance. The Exchange Act Proposal also would require reporting on material cybersecurity incidents within four business days of a company’s materiality determination and periodic disclosures regarding, among other things, a company’s policies and procedures to identify and manage cybersecurity risk, oversight of cybersecurity by the board of directors and management, and updates to previously disclosed cybersecurity incidents.

Registered Investment Advisers and Funds

In February 2022, the SEC proposed new rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, titled “Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies“ (the “RIA Proposal”). If adopted in its proposed form, the RIA Proposal would require both registered investment advisers and investment companies to adopt and implement written cybersecurity policies and procedures to address cybersecurity risk. The RIA Proposal would also require registered investment advisers to report significant cybersecurity incidents affecting the investment adviser or the funds it advises to the SEC, and would impose a new recordkeeping policy and internal review requirements related to cybersecurity.

In addition to the two proposals described above, the SEC has also proposed a cybersecurity rule for broker-dealers, clearing agencies, and other security market participants, but final action on this rule proposal is not expected until April 2024.

As discussed in our prior client alert on the Exchange Act Proposal, the SEC’s proposals were controversial, and many of the comments submitted on the proposals were critical of both the prompt incident reporting standard and prescriptive disclosures on board oversight and director cybersecurity expertise. Since that time, the SEC has adopted a number of rules substantially as proposed, but has significantly revised other rule initiatives in response to commenter concerns, and has also taken varied approaches with respect to new rules’ effective dates. As a result, it is difficult to predict what form the SEC’s final rules will take, and how soon companies will need to adapt their disclosures. Our prior client alert lists a number of actions companies can take in preparation for the final rules, and our recent article offers additional practical guidance given the SEC’s increased enforcement focus on cyber disclosures.

The following Gibson Dunn attorneys assisted in preparing this update: Cody Poplin, Matthew Dolloff, Sheldon Nagesh, Nicholas Whetstone, Stephenie Gosnell Handler, Vivek Mohan, Elizabeth Ising, Ronald Mueller, and Lori Zyskowski.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, 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 Privacy, Cybersecurity and Data Innovation or Securities Regulation and Corporate Governance practice groups:

Privacy, Cybersecurity and Data Innovation Group:
S. Ashlie Beringer – Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Jane C. Horvath – Washington, D.C. (+1 202-955-8505, jhorvath@gibsondunn.com)
Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, shandler@gibsondunn.com)
Vivek Mohan – Palo Alto (+1 650-849-5345, vmohan@gibsondunn.com)

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
James J. Moloney – Orange County (+1 949-451-4343, jmoloney@gibsondunn.com)
Ron Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)

Investment Funds Group:
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, jbellah@gibsondunn.com)
Shukie Grossman – New York (+1 212-351-2369, sgrossman@gibsondunn.com)
Edward D. Sopher – New York (+1 212-351-3918, esopher@gibsondunn.com)