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This update provides an overview of China’s major antitrust developments during 2023.

In 2023, China introduced a flurry of new regulations to help implement and clarify the amended Anti-Monopoly Law (“AML”), which came into effect in 2022 (see our 2022 Review). These refreshed rules provide valuable insights and guidance on the interpretation and application of the amended AML. On the merger control side, we have seen lengthy reviews involving semiconductors and other sensitive technologies where geopolitical factors might come into play. Meanwhile, authorities are continuing their enforcement efforts in industries that are close to people’s livelihood, with a focus on pharmaceuticals and cartels organized by trade associations. Lastly, there have been a number of high-profile litigation cases, including the largest damage award ever issued in the history of private antitrust litigation in China.

I. Legislative and Regulatory Developments

Amendments to the implementing rules of the AML. Following the amended AML, the State Administration for Market Regulation (“SAMR”) finalized a series of implementing rules and guidelines in 2023 to better facilitate the interpretation and enforcement of the amended AML. SAMR also revised or introduced some regulations to further develop China’s antitrust framework. These include:

Provisions on Review of Concentration of Undertakings (the “Merger Provisions”)
Regulations on Filing Thresholds for Concentration of Undertakings (the “Merger Notification Thresholds Regulations”)
Guidelines for Anti-Monopoly Compliance for Concentration of Undertakings (the “Merger Control Compliance Guidelines”)
Provisions on Prohibition of Monopoly Agreements (the “Monopoly Agreements Provisions”)
Provisions on Prohibition of Abuse of Dominance (the “Abuse of Dominance Provisions”)
Provisions on Prohibition of Elimination and Restriction of Competition Through Abuse of Administrative Powers
Provisions on Prohibition of Elimination and Restriction of Competition Through Intellectual Property Rights (the “IP Provisions”)

Key regulatory highlights include the following.

The Merger Provisions. These provisions importantly provide more clarity on what constitutes “control” for the purposes of merger control, including factors such as historical shareholder or board meeting attendance and voting patterns. In addition, the provisions provide further guidance on turnover calculations, as well as the procedures for “stopping the clock” and reviewing below-threshold transactions, which are both issues that arose prominently in two conditional merger clearance cases in 2023 (discussed further below).

Revised merger notification thresholds. In addition, SAMR also issued the revised Regulations on Filing Thresholds for Concentrations of Undertakings, which came into effect on 26 January 2024. This is the first amendment to the turnover thresholds since the introduction of the AML in 2008. Specifically, the filing thresholds are increased to reflect economic growth, such that undertakings must obtain merger clearance from SAMR if:

The undertakings’ combined worldwide turnover is more than RMB 12 billion (~USD 1.7 billion) (an increase from RMB 10 billion (~USD 1.4 billion)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (~USD 113.5 million) (an increase from RMB 400 million (~USD 57 million)); or
The undertakings’ combined Chinese turnover is more than RMB 4 billion (~USD 568 million) (an increase from RMB 2 billion (~USD 284 million)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (an increase from RMB 400 million).

Note that the alternative threshold (aimed at capturing “killer acquisitions”) as suggested in the draft amendments in 2022 is not included in the final version of the revised thresholds.

The Merger Control Compliance Guidelines. SAMR introduced these guidelines predominantly to encourage undertakings to implement antitrust compliance systems, in particular, systems to prevent gun-jumping and other violations of China’s merger control regime. The guidelines clarify the sanctions for gun-jumping, which can be up to 10% of the undertaking’s revenue in the prior year for cases that have the effect of restricting competition (that can be multiplied by two to five times for particularly serious cases) or up to RMB 5 million (~ USD 700,000) for cases that do not restrict competition. The guidelines further provide detailed guidance on SAMR’s expectations in relation to antitrust compliance systems, and “strongly encourage” undertakings with more than RMB 400 million revenue in China (~ USD 66 million) to implement such systems. Most notably, the guidelines indicate that an anti-gun-jumping compliance system may be considered a mitigating factor for gun-jumping enforcement actions.

The Monopoly Agreements Provisions. In the draft version published in 2022, SAMR clarified that vertical agreements would come within the “safe harbour” in the amended AML if the parties could show, among other things, that they did not exceed a 15% market share threshold. Unfortunately, the welcome clarification was dropped in the final version. Nevertheless, SAMR introduced greater clarity in other areas by explaining that an undertaking may be in breach of the AML for coordinating/facilitating others to enter into monopoly agreements if it: (i) has “decisive influence” over the content of the agreement (even if it is not a party to the agreement); or (ii) acts as the conduit for others to communicate and reach a horizontal agreement (i.e., a hub-and-spoke arrangement). SAMR also clearly signaled its continued focus on the platform economy by adding a specific provision banning undertakings from using data, algorithms and technology to effectively exchange information or coordinate conduct in order to conclude a monopoly agreement. The provisions also provide for an ostensibly broad leniency regime that appears to apply to any undertaking that voluntarily reports the conclusion of a monopoly agreement to the authorities.

The Abuse of Dominance Provisions. In addition to providing general guidance on how to determine market dominance, SAMR added guidance indicating that a refusal to trade can be indirectly inferred from a dominant entity imposing unreasonable prices against trading counterparties, and included a new provision stipulating that a refusal to trade may be justified in the platform economy context if a dominant undertaking has refused to trade on the grounds that the counterparty has failed to comply with rules on fairness, reasonableness and non-discrimination in the platform economy (which appears to be a reference to SAMR’s 2021 platform economy regulations). Further, the final Abuse of Dominance Provisions (unlike the draft) expressly designate national security, cybersecurity and data security as factors to be considered when determining whether there are justifications for certain forms of abusive conduct (e.g. restrictions of trade), which aligns with the growing importance of those issues in China in general.

The IP Provisions. SAMR’s 2023 revisions to the IP Provisions confirmed that there will be a safe harbour for IP-related vertical agreements (e.g. an exclusive IP licensing agreement) where the parties have less than 30% share in any relevant markets and there are at least four substitutes to the relevant intellectual property. In addition, the revised provisions specifically prohibit “excessive pricing” in IP licensing transactions, and introduce a new rule that prohibits an IP licensor from unreasonably requiring an IP licensee to cross-license its own IP rights to the licensor without the licensor providing “reasonable consideration”.

Further Legislative Efforts. In addition to the various finalized regulations discussed above, SAMR introduced several draft regulations in 2023, including the Draft Anti-Monopoly Guidelines for Industry Associations and Draft Anti-Monopoly Guidelines for Standard Essential Patents. Indeed, it appears that sustained legislative efforts can be expected in 2024, given indications from the Ministry of Justice that it would accelerate efforts to revise the Anti-Unfair Competition Law, and announcements by SAMR that it would begin formulating antitrust guidelines for the pharmaceutical sector, as well as horizontal merger guidelines.

II. Merger Control

In 2023, SAMR closed 797 merger review cases in total. Of these, 782 (~98%) received unconditional approval, four received conditional clearance, and eleven were withdrawn by the filing parties after SAMR’s acceptance of their case.

Overall, SAMR took an average of just over 3 weeks to close a case, which is likely because around 90% of cases were reviewed under the simplified procedure, and the fact that SAMR is increasingly delegating simplified cases to its provincial branches for more efficient reviews. In the context of conditional clearances, SAMR took an average of 309 days to complete its review, which is a decrease from the average of over 450 days in 2022. Notably, in the latter three conditional clearances of the year, SAMR consistently exercised its new power to extend the review period by “stopping the clock”—which it did for an average of 131 days. Stop-the-clock is considered SAMR’s new tool to extend its review period, and is likely to gradually phase out the previous practice of “pull and refile”.

As noted, SAMR issued four conditional clearances in 2023, which are summarized below. Three decisions are worth highlighting: the Broadcom/VMware megamerger (where Gibson Dunn represented VMware as global counsel), MaxLinear/Silicon Motion and Simcere/Tobishi (SAMR’s first-ever “below threshold” conditional approval).

(1) Broadcom/VMware. On 6 September 2022, Broadcom and VMware submitted their notification to SAMR, but SAMR did not formally accept the case until 25 April 2023. On 25 September 2023, SAMR decided to stop the clock, and resumed the clock on 17 November 2023.

SAMR finally issued a conditional approval on 21 November 2023. As part of the conditional clearance, SAMR imposed a set of behavioural remedies on a 10-year basis to address its antitrust concerns. These include:

No tying or bundling of the merged entity’s relevant products, or any restriction or discrimination against customers that purchase those products separately;
Requirements to maintain interoperability between VMware’s virtualization software and third-party hardware products sold in China;
Requirements for Broadcom to maintain its certification practice to ensure interoperability with third-party virtualization software; and
Measures to protect confidential information of third-party hardware manufacturers.

(2) MaxLinear/Silicon Motion. The MaxLinear/Silicon Motion case was conditionally cleared by SAMR in July 2023. The case was officially accepted for review on 28 October 2022. SAMR then decided to stop the clock on 6 January 2023, and only restarted the clock on 14 July 2023, marking an approximately 6-month suspension.

Substantively, SAMR raised several concerns regarding the market for NAND flash controllers. Despite effectively finding that the parties had no horizontal or vertical overlaps, SAMR imposed (among others) the following commitments:

Continue supplying Chinese customers on FRAND terms;
Maintain existing business contracts and relationships with Chinese customers;
Keep Silicon Motion’s existing China field engineers as part of the merged entity’s R&D function, such that Chinese customers of Silicon Motion’s NAND flash controllers can continue to receive technical support; and
Keep Silicon Motion’s NAND flash controller R&D functions in Taiwan.

(3) Simcere/Tobishi. This case marked the first time that SAMR has imposed remedies on a deal that fell below the merger notification thresholds. By way of context, Simcere had a monopoly over Batroxobin, an active pharmaceutical ingredient (“API”), in China. Post-transaction, the merged entity will have 100% market share in the relevant upstream and downstream markets. In addition, SAMR has previously fined Simcere for abuse of dominance back in January 2021. These were suspected to be the reasons why Simcere voluntarily notified SAMR of its acquisition of Tobishi, despite the deal falling below the filing thresholds.

As part of the conditional clearance, SAMR imposed a series of behavioural remedies on Simcere, for a period of 6 years:

Terminate its exclusivity agreement with DSM, which is the only global manufacturer of Batroxobin;
Divest all its assets for developing its Batroxobin injection, and supply the divestiture buyer with the API and necessary assistance to establish a direct supply relationship with DSM;
Reduce the price of Batroxobin injections by at least 20% post-transaction (or 50% if the divestiture is not completed), and guarantee supply to meet domestic demand in China;

(4) Wanhua/Juli. This concerned the acquisition of Yantai Juli Fine Chemical by Wanhua Chemical Group. This was one of the first conditional clearances that SAMR issued on a domestic acquisition. The behavioural remedies include SAMR’s typical measures, such as, requiring the parties to: (i) sell to customers on fair, reasonable and non-discriminatory terms; (ii) maintain or increase their production volumes; (iii) continue their research and development efforts; and (iv) stay away from coercive exclusive dealing.

III. Non-Merger Enforcement

Like previous years, the enforcement decisions published by SAMR indicate that enforcement efforts in 2023 continued to focus on the usual suspects, including public utilities, pharmaceutical corporations, energy suppliers, construction material manufacturers, and industry associations.

The number of major actions and the size of the fines brought against pharmaceutical companies stood out (although these remain very modest compared to fines in other jurisdictions). In total, SAMR and local AMRs brought enforcement actions against over ten companies in six cases of anticompetitive conduct, and imposed an average fine of ~RMB 196 million (~USD 27 million). Half of the published pharmaceutical enforcement actions were focused on abusive price gouging, and the remaining cases were primarily focused on anticompetitive agreements related to cartel behavior or resale price maintenance.

The largest single fine against a pharmaceutical company, which also appears to have been the largest single fine among the published decisions of 2023, was ~RMB 689 million (~USD 97 million). The fine was imposed on one of the entities involved in the Sph No. 1 Biochemical & Pharmaceutical case, where four pharmaceutical companies were penalized for having abused their collective total dominance of the Chinese market for polymyxin B sulfate injections.

IV. Antitrust Litigation

In September 2023, the Supreme People’s Court (“SPC”) published ten representative cases concerning monopoly and unfair competition issues. There are two cases worth highlighting:

The General Motors case[1], in which the SPC held that, where a regulator / authority has issued an administrative decision against an undertaking for monopolistic or anti-competitive conduct, the claimant in the follow-on actions for civil damages will have a lower burden of proof. Specifically, the claimant will not need to prove that the defendant engaged in monopolistic conduct (as that had already been established in the administrative decision), and will only need to prove that: (i) the defendant is indeed the undertaking referred to in the administrative decision; and (ii) the claimant suffered loss because of the defendant’s monopolistic conduct.
The Tobishi/Simcere case[2], in which the SPC held that, the jurisdiction of a refusal to deal case should be where the effect of the conduct took place. For example, in this case, Simcere refused to supply APIs to Tobishi , which prevented Tobishi from producing the relevant downstream product. The SPC found that the effects of Simcere’s refusal to deal took place where Tobishi’s factory was (i.e. in Beijing). Therefore, the Beijing Intellectual Property Court should have jurisdiction over the case.

There are also a number of interesting cases which offer valuable insights into the legal issues and possible interpretations of the AML from an antitrust litigation perspective:

JD.com v. Alibaba – In December 2023, the High People’s Court of Beijing ruled that Alibaba had engaged in coercive exclusivity conduct (known as “choose one out of two) and was in breach of the AML. The lawsuit first started in 2018, when JD.com filed a complaint against Alibaba for abusing its dominance of its online marketplace and mandating online merchants to choose between Alibaba and JD.com, thereby forcing merchants into exclusivity agreements. In the decision, the Court ordered Alibaba to pay JD.com RMB 1 billion, which is the largest damage award in the history of private antitrust litigation in China.
Li Zhen v. Alibaba – This concerned a claim filed by an individual consumer against Alibaba for abuse of dominance. Specifically, the plaintiff alleged that Alibaba and its affiliates forced consumers to only use Alipay’s payment services on Taobao and Tmall. In October 2023, the Shanghai Intellectual Property Court ruled in favour of Alibaba, noting that:
1. Payment service is not a standalone service but an integral part of the overall online-retail platform service. There is no independent transactional relationship between consumers or merchants on one hand, and payment service providers on the other hand. Therefore, no exclusivity or restrictions on the transaction can be imposed by Alibaba in this respect;
2. Since Alipay’s payment service is part of the wider online retail platform service, there is no payment or non-payment service separately sold to consumers and merchants on Taobao and Tmall. As a result, there is no basis to claim that Taobao and Tmall tied payment and non-payment services together; and
3. There was no evidence that Taobao and Tmall refused the access of third-party payment services to their platforms.

The plaintiff is now appealing the case to the SPC.

Hitachi Metals – In December 2023, the SPC overruled the finding that Hitachi Metals’ refusal to license a non-standard essential patent to four Chinese manufacturers amounted to an abuse of dominance. This marked the end of a 9-year lawsuit, and was also the first decision in China touching on refusal to license non-standard essential patent. In particular, the SPC rejected the lower court’s analysis and determined that Hitachi Metals did not possess the alleged level of market dominance, and hence the SPC did not proceed to examine the alleged abusive practices. The SPC also took the view that the patents in dispute were neither essential nor critical, and there were many alternative options available in the market.

V. Conclusion

Since the amendment of the AML, we have seen continued efforts by SAMR to establish a more defined and comprehensive antitrust framework. Going forward, we expect to see further guidelines and directions from SAMR to refine the applications of the amended AML. Indeed, as noted above, both the Ministry of Justice and SAMR have announced that efforts to further develop and sophisticate China’s antitrust regulatory framework are continuing in earnest. Businesses are encouraged to self-assess regularly and introduce internal antitrust compliance protocols to minimize any risk of infringement. In addition, reviews of concentrations in sensitive sectors (e.g. semiconductors) will continue to be challenging in view of the geopolitical climate.

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[1] Supreme People’s Court (2020) Supreme Law of the People’s Republic of China No. 1137

[2] Beijing Intellectual Property Court (2022) No. 1136 of Beijing 73 Minchu

The following Gibson Dunn attorneys prepared this update: Sébastien Evrard, Katie Cheung, and Peter Chau*.

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

Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Katie Cheung (+852 2214 3793, kcheung@gibsondunn.com)

*Peter Chau, a trainee solicitor in the Hong Kong office, is not admitted to practice law.

Attorney Advertising: These materials were prepared for general informational purposes only based on information available at the time of publication and are not intended as, do not constitute, and should not be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys, and employees) shall not have any liability in connection with any use of these materials. The sharing of these materials does not establish an attorney-client relationship with the recipient and should not be relied upon as an alternative for advice from qualified counsel. Please note that facts and circumstances may vary, and prior results do not guarantee a similar outcome.

The case illustrates the Hong Kong Court’s commitment to upholding party autonomy in arbitration and its longstanding policy of minimal curial intervention.

On 27 February 2024, the Honourable Madam Justice Mimmie Chan delivered her reasons for dismissing an application to set aside an arbitral award in CNG v G & G [2024] HKCFI 575.[1] Mimmie Chan J reiterated that such applications under section 81 of the Arbitration Ordinance (“Ordinance”) are of an “exceptional nature” and should not be lightly made. Her Ladyship urged legal professionals to play a more vigilant role in upholding Hong Kong’s policy of being supportive of arbitration agreements and awards, and to refrain from facilitating issuance of unmeritorious setting aside applications by “massaging” a case to fall within s 81 of the Ordinance.

Gibson Dunn represented the “G Parties”.

Background

This case involved a dispute between shareholders of a company (“SIL”) which owned and operated a mining project. The arbitration claimants (“G Parties”) claimed that the arbitration respondents (“CNG”) were in breach of the shareholders’ agreement by (i) failing to honour a right of first refusal to purchase CNG’s shareholding in SIL (“Share Transfer Claim”) and (ii) failing to honour a contractual Notice of Default with respect to an unauthorised shutdown of operations at the mining project (“Defaulting Shareholder Claim”).

By a First Partial Award issued on 8 February 2023 (“Award”), the Tribunal found in favour of the G Parties on the Share Transfer Claim and held that CNG was bound to sell its SIL shares to the G Parties in accordance with the shareholders’ agreement. The Tribunal further stated that, as the Defaulting Shareholder Claim was an alternative to the Share Transfer Claim, it was not necessary to make operative orders on the Defaulting Shareholder Claim.

CNG applied to the Hong Kong Court to set aside the Award on numerous grounds, including that the Tribunal allegedly failed to deal with issues and give reasons in the Award and that there was procedural unfairness resulting in CNG’s inability to present its case in the arbitration.

Mimmie Chan J’s Decision

2.1 Failure to deal with issues or give reasons

Mimmie Chan J rejected CNG’s argument that the Tribunal had failed to deal with key issues arising in the arbitration or to give reasons for its decision. Her Ladyship emphasised the relevant principles:

The approach of the Court is to read an award generously, remedying only meaningful and readily apparent breaches of natural justice. The Court will only draw an inference that a tribunal had missed a pleaded issue if such inference is “clear and virtually inescapable”.
A tribunal is not required to answer every question that qualified as an issue, nor is the tribunal obliged to structure its award in accordance with parties’ submissions. It is sufficient for the tribunal to deal with the essential issues for it to come fairly to its decision on the dispute.
A list of issues submitted by the parties does not dictate how the Tribunal deals with issues raised in the award – it is not an exam paper with compulsory questions for the Tribunal to answer.
To argue (as CNG did) that the tribunal had placed undue reliance on any aspect of the evidence is impermissible, as it is not the function of the Court to review the evidence again to make its own findings.

2.2 Procedural unfairness

Mimmie Chan J also rejected CNG’s complaints regarding alleged procedural unfairness in the arbitration. Such complaints were directed against, inter alia, the tight procedural timetable in the arbitration, late applications by the G Parties to admit secret recordings and the attitude of the President of the tribunal when CNG’s witnesses were examined, all of which (CNG argued) deprived it of its ability to present its case. Her Ladyship explained that:

The tribunal is the master of its procedures, and is in the best position to decide on the most appropriate manner in which the arbitration should be conducted. The Court will not interfere with the tribunal’s case management decisions unless there was a serious denial of justice.
Section 46 of the Ordinance only requires the tribunal to give the parties “a reasonable opportunity” (as opposed to a “full opportunity”) to present their case. No party can claim to be entitled to all the time it requires to prepare for a hearing.
Despite CNG’s present complaints, it was able to comply with all procedural deadlines in the arbitration and never sought an adjournment. The case took 1.5 years to come to the evidential hearing with both sides supported by large and sophisticated legal teams. Her Ladyship found that there were no unusual features for an international arbitration of this scale, and there was nothing referred to by CNG which can constitute serious and egregious errors on the part of the tribunal.

Comments

CNG v G & G is a prime illustration of the Hong Kong Court’s commitment to upholding party autonomy in arbitration and its longstanding policy of minimal curial intervention. As Mimmie Chan J noted, arbitration is a consensual process of final dispute resolution with only limited avenues of appeal and challenge to the award. It is not for the Court to sit on appeal against the tribunal’s findings of fact or law, and it is impermissible for aggrieved parties to “ask the Court after the event to go through the award with a fine-tooth comb, to look for defects and imperfections” or to “rehearse once again before the Court arguments already made before the Tribunal, or to have different counsel reargue its case with a different focus”. The Hong Kong Court routinely grants costs on an indemnity basis for unsuccessful challenges to arbitral awards.

Parties should bear in mind the above when considering whether to agree to submit their contractual disputes to arbitration.

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[1] Available here.

The following Gibson Dunn lawyers assisted in preparing this alert: Penny Madden KC, Brian Gilchrist, Elaine Chen, Alex Wong, and Andrew Cheng.

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

Penny Madden KC – London (+44 20 7071 4226, pmadden@gibsondunn.com)
Brian W. Gilchrist OBE – Hong Kong (+852 2214 3820, bgilchrist@gibsondunn.com)
Elaine Chen – Hong Kong (+852 2214 3821, echen@gibsondunn.com)
Alex Wong – Hong Kong (+852 2214 3822, awong@gibsondunn.com)
Andrew Cheng – Hong Kong (+852 2214 3826, aocheng@gibsondunn.com)

On March 1, 2024, a federal district court in Alabama ruled that the Corporate Transparency Act is unconstitutional. This alert briefly describes the ruling and what it means for CTA compliance moving forward. In short, the ruling enjoins enforcement of the CTA only as to the parties to the case, and FinCEN has made clear that it expects everyone else to continue to comply with the CTA.

In 2021, the Corporate Transparency Act (“CTA”) became law.[1] It is a law designed to help law enforcement investigate potential money laundering by requiring millions of U.S. and non-U.S. entities to file a form with the U.S. Financial Crimes Enforcement Network (“FinCEN”) identifying, among other information, the natural persons who are beneficial owners of the entity.[2]

The Ruling

In November 2022, the National Small Business Association (“NSBA”) and one of its individual members, Isaac Winkles, brought a lawsuit challenging the constitutionality of the CTA on various grounds.[3] On March 1, Judge Liles C. Burke of the U.S. District Court for the Northern District of Alabama granted the plaintiffs summary judgment.[4] Specifically, the court concluded that the CTA is unconstitutional because it exceeds Congress’ enumerated powers. In a lengthy opinion, the court held that the plaintiffs have standing and that the legislative powers cited by the government—including authority over foreign affairs and national security, the Commerce Clause, the taxing power, and the Necessary and Proper Clause—do not provide sufficient authority for the CTA.[5] The court did not address the plaintiffs’ arguments that the CTA violates the First, Fourth, and Fifth Amendments.[6]

In conjunction with the ruling, the court issued a final judgment in the case that did two things.[7] First, the court declared the CTA unconstitutional. Second, the court permanently enjoined the government from enforcing the CTA as to the plaintiffs in the case. The court did not issue a nationwide injunction preventing the law from being enforced against other entities.

U.S. Government Response

In response to the ruling, FinCEN issued a statement, declaring that:

The Justice Department, on behalf of the Department of the Treasury, filed a Notice of Appeal on March 11, 2024. While this litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction, as specified below, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.

FinCEN is complying with the court’s order and will continue to comply with the court’s order for as long as it remains in effect. As a result, the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.[8]

In addition to its appeal, the U.S. government may seek a stay of the district court’s ruling pending the appeal, which would pause the effect of the ruling until the Eleventh Circuit decides the case.

What It Means For Entities Subject To The CTA

In light of the narrow scope of the judgment in the case, FinCEN’s announcement regarding the case, and the government’s appeal, companies and persons that were not a plaintiff to the case or members of the NSBA as of March 1, 2024 should, at this time, assume that FinCEN continues to view them as subject to the CTA. Although the individual circumstances of companies may vary, in general, companies should be prepared to meet any timelines for filings required by the CTA.

Companies should also continue to monitor further proceedings in the Eleventh Circuit court as well as any similar lawsuits filed in other courts in the wake of the Northern District of Alabama’s decision. For example, in addition to seeking a stay of the Northern District of Alabama’s decision, the government may seek an expedited review of the merits, which (if granted) could result in the Eleventh Circuit resolving the case on a faster timeframe. If the Eleventh Circuit publishes its ultimate decision in the case, and assuming no Supreme Court review, then the opinion would create binding precedent on the unconstitutionality of the CTA in Alabama, Florida, and Georgia, which could create more certainty in those jurisdictions. In the wake of the Northern District of Alabama’s decision, new plaintiffs in other jurisdictions may raise similar challenges to the CTA to seek relief for additional entities. Ultimately, the issue would likely not be resolved nationwide without Supreme Court review (or review in each of the other federal courts of appeals), action from Congress, or the government’s acquiescence in the Northern District of Alabama’s decision. It may be several years before the federal judiciary provides a definitive answer.

In the meantime, the CTA imposes imminent deadlines for many businesses, for which the law remains in effect. Specifically, for entities formed after January 1, 2024, beneficial ownership information must be reported to FinCEN within 90 days of their formation, unless one of the CTA’s 23 exemptions applies. Companies should consider prioritizing any required filings for entities that are subject to these accelerated deadlines. With respect to entities formed on or before December 31, 2023, beneficial ownership filings, if required, are due by January 1, 2025. For these filings, companies should generally ensure that they are taking steps to make any required filings by the end of the calendar year. For companies with a large number of entities subject to the January 1, 2025 deadline, it likely makes sense to continue the review of such entities and preparation of required forms, as analyzing the beneficial ownership of the entities that must make required filings can take considerable time for clients. As always, please reach out to us for advice related to your specific company’s situation, as the best approach may vary considerably across companies.

We note that this ruling deals only with the federal CTA passed by Congress, not similar legislation passed by states such as New York, which have enacted similar requirements.[9] Gibson Dunn will continue to monitor CTA developments closely.

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[1] See William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. 116-283, Div. F., § 6403 (adding 31 U.S.C. § 5336).

[2] Prior alerts by Gibson Dunn explaining the Corporate Transparency Act are available at: https://www.gibsondunn.com/top-12-developments-in-anti-money-laundering-enforcement-in-2023/; https://www.gibsondunn.com/the-impact-of-fincens-beneficial-ownership-regulation-on-investment-funds/.

[3] National Small Business United et al. v. Yellen et al., No. 5:22-cv-01448 (N.D. Ala. 2022).

[4] National Small Business United et al. v. Yellen et al., No. 5:22-cv-01448, Dkt. 51 (N.D. Ala. 2024).

[5] Id. at 9-52.

[6] Id. at 52.

[7] National Small Business United et al. v. Yellen et al., No. 5:22-cv-01448, Dkt. 52 (N.D. Ala. 2024).

[8] See Beneficial Ownership Information, FinCEN, https://www.fincen.gov/boi; see also National Small Business United et al. v. U.S. Department of the Treasury et al., No. 24-10736 (11th Cir. 2024).

[9] See S.995-B/A.3484-A.

The following Gibson Dunn attorneys assisted in preparing this update: Stephanie Brooker, M. Kendall Day, Matt Gregory, Kevin Bettsteller, Greg Merz, Ella Capone, Shannon Errico, and Chris Jones.

Gibson Dunn has deep experience with issues relating to the Bank Secrecy Act, other AML and sanctions laws and regulations, and challenges to Congressional statutes and administrative regulations.

For assistance navigating white collar or regulatory enforcement issues, please contact any of the authors, the Gibson Dunn lawyer with whom you usually work, or any of the leaders and members of the firm’s Anti-Money Laundering / Financial Institutions, Administrative Law & Regulatory, Appellate & Constitutional Law, White Collar Defense & Investigations, or Investment Funds practice groups.

Please also feel free to contact any of the following practice group leaders and key CTA contacts:

Anti-Money Laundering / Financial Institutions:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202.955.8220, kday@gibsondunn.com)
Ella Capone – Washington, D.C. (+1 202.887.3511, ecapone@gibsondunn.com)
Chris Jones – Los Angeles (+1 213.229.7786, crjones@gibsondunn.com)

Administrative Law and Regulatory:
Stuart F. Delery – Washington, D.C. (+1 202.955.8515, sdelery@gibsondunn.com)
Eugene Scalia – Washington, D.C. (+1 202.955.8673, dforrester@gibsondunn.com)
Helgi C. Walker – Washington, D.C. (+1 202.887.3599, hwalker@gibsondunn.com)

Appellate and Constitutional Law:
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 (+1 213.229.7758, jpoon@gibsondunn.com)

White Collar Defense and Investigations:
Stephanie Brooker – Washington, D.C. (+1 202.887.3502, sbrooker@gibsondunn.com)
Winston Y. Chan – San Francisco (+1 415.393.8362, wchan@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213.229.7269, nhanna@gibsondunn.com)
F. Joseph Warin – Washington, D.C. (+1 202.887.3609, fwarin@gibsondunn.com)

Investment Funds:
Kevin Bettsteller – Los Angeles (+1 310.552.8566, kbettsteller@gibsondunn.com)
Greg Merz – Washington, D.C. (+1 202.887.3637, gmerz@gibsondunn.com)
Shannon Errico – New York (+1 212.351.2448, serrico@gibsondunn.com)

In this webcast, Gibson Dunn attorneys provide an overview of the FCPA developments and emerging trends from 2023 and will discuss current and anticipated areas of focus for 2024. Intended to complement our Year-End FCPA Update, this webcast discusses in greater detail recent FCPA enforcement updates of note, including enforcement, compliance, and monitorship developments through the lens of particular resolutions, and DOJ’s use of opinion letters and declinations within the past year. We also discuss the SEC’s and DOJ’s increasing focus on compliance programs and what that means for companies in terms of law enforcement expectations and industry best practices.

PANELISTS:

Patrick F. Stokes is Co-Chair of the firm’s Anti-Corruption and FCPA Practice Group and a partner in the Washington, D.C. office, where he focuses his practice on internal corporate investigations, government investigations, enforcement actions regarding corruption, securities fraud, FDA regulatory issues, and financial institutions fraud, and compliance reviews. Mr. Stokes is ranked nationally and globally by Chambers USA and Chambers Global as a leading attorney in FCPA. Prior to joining the firm, Mr. Stokes headed the DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ’s Securities and Financial Fraud Unit. He is a member of the Maryland State Bar and the District of Columbia Bar.

John W.F. Chesley is a partner in the Washington, D.C. office. Mr. Chesley has been recognized repeatedly recognized for his white collar defense work by Global Investigations Review, Law360, and the National Law Journal, among others. He represents corporations, audit committees, and executives in internal investigations and before government agencies in matters involving the FCPA, procurement fraud, environmental crimes, securities violations, antitrust violations, and whistleblower claims. He also has served as the Interim Chief Ethics & Compliance Officer for a publicly-traded, multi-national food company. Mr. Chesley is a member of the bars of the State of Maryland and the District of Columbia and has held a Secret security clearance.

Courtney M. Brown is a partner in the Washington, D.C. office, where she practices primarily in the areas of white collar criminal defense and corporate compliance. Ms. Brown has experience representing and advising multinational corporate clients and boards of directors in internal and government investigations on a wide range of topics, including anti-corruption, anti-money laundering, sanctions, securities, tax, and “me too” matters. Ms. Brown has participated in two government-mandated FCPA compliance monitorships and has advised companies during the post-resolution reporting period. Ms. Brown completed a secondment at a Fortune 100 company where she advised global legal and business teams on compliance with anti-corruption laws. She was admitted to the Virginia Bar in 2008 and District of Columbia Bar in 2009.

Ella Alves Capone is Of Counsel in the Washington, D.C. office, where her practice focuses on advising multinational corporations and financial institutions in enforcement actions, internal investigations, and corporate compliance matters involving anti-corruption laws and a variety of financial services laws and regulations. She regularly counsels clients on the implementation, assessment, and enhancement of their compliance programs and internal controls. Ms. Capone is admitted to practice law in the District of Columbia and New York, as well as before the United States District Courts for the Eastern and Southern Districts of New York.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 2.0 credit hours, of which 2.0 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 2.0 hours in the General category.

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Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 2 hours toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

Application for approval is pending with the Colorado, Illinois, Texas, Virginia and Washington State Bars.

From the Derivatives Practice Group: This month, we’ve seen both domestic and international activity in the Voluntary Carbon Markets space. This issue addresses both an ISDA response to IOSCO, and the CFTC’s Climate-Related Market Risk Subcommittee.

New Developments

The Market Risk Advisory Committee’s Future of Finance and Climate-Related Market Risk Subcommittees to Meet on March 15. Two subcommittees of the Market Risk Advisory Committee will hold public meetings on Friday, March 15 from 9:30 a.m. to 12:30 p.m. (EDT) at the CFTC’s Washington, D.C. headquarters. The Future of Finance Subcommittee and Climate-Related Market Risk Subcommittee will, separately, continue workstreams, including examining the potential risks that emerge in connection with increasing adoption of artificial intelligence in global financial markets and the risks that arise in connection with carbon derivatives markets with a particular focus on fraud and greenwashing, market integrity, product design, and disclosure. [NEW]
CFTC’s Global Markets Advisory Committee Advances Three Recommendations. On March 7, the CFTC’s Global Markets Advisory Committee (GMAC), sponsored by Commissioner Caroline D. Pham, advanced three new recommendations intended to (1) promote U.S. Treasury markets resiliency and efficiency, (2) provide resources on the upcoming transition to T+1 securities settlement, and (3) publish a first-ever digital asset taxonomy to support U.S. regulatory clarity and international alignment.
CFTC’s Market Risk Advisory Committee to Meet. The CFTC’s Market Risk Advisory Committee (MRAC) will meet on April 9 at 9:30 am ET. The MRAC will consider current topics and developments in the areas of central counterparty risk and governance, market structure, climate-related risk, and emerging technologies affecting derivatives and related financial markets.
CFTC Staff Issues Advisory Regarding FBOT Regulatory Filings. On March 1, the CFTC’s Division of Market Oversight announced that it issued an advisory notifying all foreign boards of trade (FBOTs) registered under Part 48 of the CFTC’s regulations that, beginning April 1, 2024, certain regulatory filings (covered filings) should be submitted through the CFTC’s online filings portal, which has been updated for FBOT use. The portal has been available to registered FBOTs for the submission of public filings since March 1. Covered filings will be accepted via email until March 31. Beginning April 1, FBOTs should submit all Covered Filings exclusively through the portal.
CFTC Extends Public Comment Period for Proposed Rule on Real-Time Public Reporting Requirements and Swap Data Recordkeeping and Reporting Requirements. On February 26, the CFTC announced that it is extending the deadline for the public comment period on a proposed rule that makes certain modifications to the CFTC’s swap data reporting rules in Parts 43 and 45 related to the reporting of swaps in the other commodity asset class and the data element appendices to Parts 43 and 45 of the CFTC’s regulations. The deadline is being extended to April 11, 2024. The proposed rule was published in the Federal Register on December 28, 2023, with a 60-day comment period scheduled to close on February 26, 2024.

New Developments Outside the U.S.

SFC Issues Guidance on Disciplinary Process Under Virtual Assets Regime. On February 28, Hong Kong’s Securities and Futures Commission (SFC) published a guide outlining the disciplinary process under the new licensing regime for virtual asset trading platforms (AMLO VATP Regime). Under the new regime, introduced via an amendment to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), the SFC has the power to discipline its licensees, comprising firms, their responsible officers and those involved in their management, if it finds that such licensee’s conduct suggests that it is, or was at any time, guilty of misconduct or not fit and proper. The disciplinary process under the AMLO VATP Regime is based largely on the disciplinary process applicable to persons licensed by or registered with the SFC (including those involved in their management) under the Securities and Futures Ordinance (Cap. 571). The SFC indicated that when determining whether to take disciplinary action and the level of sanction, the SFC will consider, among other things, the nature and seriousness of the conduct, the amount of profits accrued or loss avoided, and circumstances specific to the firm or individual.

New Industry-Led Developments

ISDA Submits Response to IOSCO Voluntary Carbon Markets Consultation. On March 1, ISDA submitted a response to IOSCO’s Voluntary Carbon Markets Consultation Report. The response welcomes IOSCO’s work on developing good practices for regulation of voluntary carbon markets (VCMs), as well as its recognition of the critical role that financial market participants play in VCMs. ISDA explains that clear legal and regulatory categorization of voluntary carbon credits is key to building liquidity in order to support scaling VCMs and to develop safe, efficient markets in Voluntary Carbon Credit derivatives. [NEW]
ISDA Submits Response to the UK Financial Conduct Authority’s Money Market Funds Consultation. On March 8, ISDA responded to the UK Financial Conduct Authority’s (FCA) consultation on updating the regime for money market funds (MMF). In the response, ISDA highlights its support for using MMFs as collateral for non-cleared derivatives margin requirements and the advancement of tokenized MMFs to be used as collateral to increase collateral mobility, reduce collateral-related transaction costs and related settlement risks. [NEW]
ISDA Publishes Whitepaper Charting the Next Phase of India’s OTC Derivatives Market. On March 4, ISDA published a new whitepaper that explores the growth of India’s financial markets and makes a series of market and policy recommendations to encourage the further development of a safe and efficient over-the-counter (OTC) derivatives market. The whitepaper proposes several initiatives that industry participants and regulators could take that ISDA believes will create deeper and more liquid domestic derivatives markets and enhance risk management practices. The recommendations are centered on five key pillars: (1) Broaden product development, innovation and diversification; (2) Foster adoption of similar market and risk principles across regulatory regimes; (3) Enhance market access and diversification of participants in the OTC derivatives market; (4) Ensure growth in a safe and efficient manner; and (5) Encourage greater alignment with international principles and practices.
ISDA Extends Digital Regulatory Reporting InitiativeDRR: The Answer to Reporting Rule Rush. On February 26, ISDA reported that it has worked to extend its Digital Regulatory Reporting (DRR) initiative to cover the rush of reporting rules, which starts with Japan on April 1, followed by the EU on April 29, the UK on September 30 and Australia and Singapore on October 21. ISDA stated that iIn each case, regulators are revising their rules to incorporate globally agreed data standards in an effort to improve the cross-border consistency of what is reported and the format in which it is submitted – a process that started in December 2022 with the rollout of the first phase of the US Commodity Futures Trading Committee’s revised swap data reporting rules.

The following Gibson Dunn attorneys assisted in preparing this update: Jeffrey Steiner, Adam Lapidus, Marc Aaron Takagaki, Hayden McGovern, and Karin Thrasher.

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 Derivatives practice group, or the following practice leaders and authors:

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

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

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

Darius Mehraban, New York (212.351.2428, dmehraban@gibsondunn.com)

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

Adam Lapidus – New York (+1 212.351.3869, alapidus@gibsondunn.com)

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

Roscoe Jones Jr., Washington, D.C. (202.887.3530, rjones@gibsondunn.com)

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

David P. Burns, Washington, D.C. (202.887.3786, dburns@gibsondunn.com)

Marc Aaron Takagaki, New York (212.351.4028, mtakagaki@gibsondunn.com)

Hayden K. McGovern, Dallas (214.698.3142, hmcgovern@gibsondunn.com)

Karin Thrasher, Washington, D.C. (202.887.3712, kthrasher@gibsondunn.com)

Please join our team of Global Financial Regulatory experts as we discuss the latest legal and regulatory developments around the use of artificial intelligence (AI) by financial institutions across the world’s major financial centers. During this webcast, our market-leading team provides their insights into:

Regulatory issues and concerns in relation to the current and potential use cases of AI by financial institutions; and
The attitudes of financial regulators across the US, United Kingdom, Europe, Hong Kong, Singapore and the Middle East to the rapidly evolving use of AI by the institutions they regulate.

In addition, the team provides their predictions for the future of regulatory policy, supervision and enforcement in relation to the use of AI by financial institutions based on their extensive experience in these areas with the key global regulators.

PANELISTS:

William R. Hallatt (moderator) is a partner in the Hong Kong office. He is co-chair of the firm’s Global Financial Regulatory group and head of the Asia-Pacific Financial Regulatory practice. His full-service financial services regulatory practice provides comprehensive contentious and advisory support as a trusted advisor to the world’s leading financial institutions.

Michelle Kirschner is a partner in the London office, and co-chair of the firm’s Global Financial Regulatory group. She advises a broad range of financial institutions, including investment managers, integrated investment banks, corporate finance boutiques, private fund managers and private wealth managers at the most senior level. Michelle has a particular expertise in fintech businesses, having advised a number of fintech firms on regulatory perimeter issues.

Sara K. Weed is a partner in the Washington, D.C. office, and co-chair of the Global Fintech and Digital Assets Practice Group. Sara’s fintech’s practice spans both regulatory and transactional advice for a range of clients, including traditional financial institutions, non-bank financial services companies and technology companies.

Emily Rumble is an of counsel in the Hong Kong office, and is a member of the firm’s Global Financial Regulatory Practice Group. She advises firms on a wide range of contentious and non-contentious financial regulatory matters. Her contentious practice is focused on advising clients on their most significant regulatory investigations by the Hong Kong Securities and Futures Commission and Hong Kong Monetary Authority. Emily frequently advises a wide range of investment banking clients on complex non-contentious regulatory matters, with a particular focus on culture, conduct and governance matters.

Grace Chong is an of counsel in the Singapore office, and heads the Financial Regulatory practice in Singapore. She has extensive experience advising on cross-border and complex regulatory matters, including licensing and conduct of business requirements, regulatory investigations, and regulatory change. A former in-house counsel at the Monetary Authority of Singapore (MAS), she regularly interacts with key regulators, is closely involved in regional regulatory reform initiatives and has led discussions with regulators on behalf of the financial services industry.

Sameera Kimatrai is an English law qualified of counsel in the Dubai office, and a member of the firm’s Financial Regulatory Practice Group. She has experience advising governments, regulators and a broad range of financial institutions in the UAE including investment managers, commercial and investment banks, payment service providers and digital asset service providers on complex regulatory issues both in onshore UAE and in the financial free zones.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of Cybersecurity, Privacy and Data Protection-General. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour toward the areas of Technology in the Practice of Law.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

Gibson Dunn’s Workplace DEI Task Force aims to help our clients develop creative, practical, and lawful approaches to accomplish their DEI objectives following the Supreme Court’s decision in SFFA v. Harvard. Prior issues of our DEI Task Force Update can be found in our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update (listed below).

Key Developments:

On March 12, 2024, the Fourth Circuit affirmed in part and vacated in part the district court’s decision in Duvall v. Novant Health, Inc., — F.4th —, 2024 WL 1057768 (4th Cir. Mar. 12, 2024). The plaintiff, a white male marketing executive, sued Novant, alleging that he was fired without cause from his management position because of his race and sex. At trial, the plaintiff relied on evidence that Novant maintained a “goal of remaking the workforce to look like the community it served,” and argued that his firing fit a pattern of similar actions by Novant. A jury found in the plaintiff’s favor and awarded him $10 million in punitive damages, in addition to back pay and other damages. Novant filed a post-trial motion for judgment as a matter of law and a motion to set aside the jury’s damages award. The district court denied the motion for judgment as a matter of law but granted in part Novant’s motion to set aside punitive damages, reducing the award to the Title VII statutory maximum of $300,000. Novant appealed to the Fourth Circuit, which affirmed the district court’s refusal to enter judgment as a matter of law because “[t]here was more than sufficient evidence for a reasonable jury to determine that Duvall’s race, sex, or both motivated Novant Health’s decision to fire him.” This evidence included that the plaintiff was “fired in the middle of a widescale D&I initiative” that sought to “embed diversity and inclusion throughout” the company, including by “employing D&I metrics,” committing to “adding additional dimensions of diversity to the executive and senior leadership teams,” and incorporating “a system wide decision making process that includes a diversity and inclusion lens.” But the appellate court held that the plaintiff failed to present sufficient evidence that Novant exhibited “malice or . . . reckless indifference” because the plaintiff did not present affirmative evidence that the decisionmaker in the plaintiff’s termination had any personal knowledge of federal antidiscrimination law. Because the plaintiff failed to show that the decisionmaker acted with malice or reckless indifference, the court set aside the award of punitive damages.

On March 11, 2024, the Tenth Circuit affirmed the dismissal of a white male former employee’s hostile work environment claims against the Colorado Department of Corrections, in Young v. Colorado Dep’t of Corrections, — F.4th —, 2024 WL 1040625 (10th Cir. Mar. 11, 2024). The former employee claimed that the Department of Corrections’ training materials for its “Equity, Diversity, and Inclusion” programs subjected him to a hostile work environment by, among other things, “stating that all whites are racist [and] that white individuals created the concept of race in order to justify the oppression of people of color.” The District Court dismissed the case for failure to state a claim and the Tenth Circuit affirmed, holding that the plaintiff had failed to allege that the DEI training, which only occurred once during the plaintiff’s employment, constituted severe and pervasive harassment. However, the court did note that “Mr. Young’s objections to the contents of the EDI training are not unreasonable: the racial subject matter and ideological messaging in the training is troubling on many levels. As other courts have recognized, race-based training programs can create hostile workplaces when official policy is combined with ongoing stereotyping and explicit or implicit expectations of discriminatory treatment. The rhetoric of these programs sets the stage for actionable misconduct by organizations that employ them.”

On March 6, 2024, the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of medical advocacy association Do No Harm’s reverse discrimination claims against Pfizer based on lack of standing in Do No Harm v. Pfizer, Inc., — F.4th —, 2024 WL 949506 (2d Cir. Mar. 6, 2024). Suing on behalf of two anonymous members, Do No Harm alleged that Pfizer violated Section 1981, Title VII, and New York law by excluding white and Asian applicants from its Breakthrough Fellowship Program, which provides minority college seniors with summer internships, two years of employment post-graduation, mentoring, and a scholarship. In its opinion affirming the district court’s dismissal, the Second Circuit held that, under the “clear language” of Supreme Court precedent, an organization must name at least one affected member to establish Article III standing. The court explained that such a naming requirement ensures that the members are “genuinely” injured and “not merely enabling the organization to lodge a hypothetical legal challenge.” For a more fulsome discussion of this decision, see our March 11 Client Alert.

A district court in the Northern District of Texas issued an opinion on March 5, 2024, in Nuziard v. Minority Business Development Agency, No. 4:23-cv-00278-P, 2023 WL 3869323 (N.D. Tex.), holding that the racial presumption used in apportioning federal funds for minority business assistance violates the Fifth Amendment’s equal protection guarantee. Applying SFFA v. Harvard, the court held that the Minority Business Development Agency’s presumption of social or economic disadvantage does not satisfy strict scrutiny because, even though the Agency might have a compelling interest in addressing discrimination in government contracting, the Agency’s program for eliminating such discrimination was not narrowly tailored to achieve that interest. A more detailed discussion of this opinion can be found in our March 11 Client Alert.

On March 4, 2024, the Eleventh Circuit affirmed the district court’s order preliminarily enjoining operation of Florida’s “Stop WOKE Act” in Honeyfund.com, Inc. v. DeSantis, — F.4th —, 2024 WL 909379 (11th Cir. Mar. 4, 2024). Among other things, the “Stop WOKE Act” prohibits employers from requiring employees to participate in trainings that identify certain groups of people as “privileged” or “oppressors.” Florida argued that the Act did not fall within the purview of the First Amendment because it regulated conduct rather than speech. The Eleventh Circuit rejected this argument, holding that the law constituted both content and viewpoint discrimination that did not survive strict scrutiny. Writing for the court, Judge Britt C. Grant stated that “restricting speech is the point of the [Stop WOKE Act],” and opined that the merits of controversial views are “decided in the clanging marketplace of ideas rather than a codebook or a courtroom.”

Representatives James Comer (R-Ky.) and Pat Fallon (R-Tex.) sent a letter on March 1, 2024, to the EEOC “to better understand EEOC’s current posture ensuring the enforcement of longstanding prohibitions on racially discriminatory policies in employment practices.” Acting in their capacities as the Chair of the Committee on Oversight and Accountability and Chair of the Subcommittee on Economic Growth, Energy Policy, and Regulatory Affairs, respectively, Reps. Comer and Fallon referenced statements by government officials in the wake of SFFA v. Harvard, including comments by EEOC Commissioner Andrea Lucas and a letter by a group of Republican state attorneys general—both of which warned corporate leaders about the decision’s implications for corporate diversity programs. Emphasizing that the EEOC must take all possible steps to “prevent and end unlawful employment practices that discriminate on the basis of an individual’s race or color,” Reps. Comer and Fallon demanded that, by no later than March 15, 2024, the EEOC produce various documents and information, including Title VII enforcement guidance disseminated to employers, internal training materials, any documents containing “numerical accounting of enforcement actions” related to Title VII race discrimination, and any documents or communications related to SFFA v. Harvard. Reps. Comer and Fallon also instructed the EEOC to provide a staff-level briefing on the matter no later than March 8, 2024.

On February 29, 2024, Brian Beneker, a heterosexual, white male writer, sued CBS, alleging that its de facto hiring policy discriminated against him on the bases of sex, race, and sexual orientation in Beneker v. CBS Studios, Inc., No. 2:24-cv-01659 (C.D. Cal. 2024). In his complaint, Beneker alleges that CBS violated Section 1981 and Title VII by refusing to hire him as a staff writer on the TV show “Seal Team,” instead hiring several black writers, female writers, and a lesbian writer. Beneker is requesting a declaratory judgment that CBS’s de facto hiring policy violates Section 1981 and/or Title VII, injunctions barring CBS from continuing to violate Section 1981 and Title VII and requiring CBS to offer Beneker a full-time job as a producer, and damages. Beneker is represented by America First Legal (AFL).

Indiana Senate Bill 202 (S.B. 202) passed both chambers of the Indiana General Assembly with amendments and was sent to Governor Eric Holcomb’s desk on February 29, 2024. If enacted, S.B. 202 will direct the boards of trustees of state higher education institutions to refocus diversity committees and tenure decisions on “intellectual diversity”; prohibit traditional diversity statements in admissions, hiring, and contracting; dictate a policy of neutrality with respect to institutional viewpoints; and require annual reporting on DEI-related operations and spending. The American Association of University Professors has called for a veto of the bill, and DePauw University filed a formal opposition. Governor Holcomb has until March 15, 2024 to sign or veto the bill.

On February 28, 2024, the Wisconsin Institute for Law & Liberty (WILL) called upon the Board of Regents of the University of Wisconsin to investigate and reform various race-based programs implemented by the University and to make a public statement clarifying that the University does not condone such “discriminatory” programs. WILL commended the University’s initial compliance with the SFFA decision as it related to admissions and hiring, but identified ten examples of programs––including awards, scholarships, fellowships, internships, group therapy services, a mentorship program, and a housing program––that WILL alleges continue to consider race as either the sole criterion for eligibility or as one of multiple factors. WILL argues that these programs violate SFFA and has called for them to be opened to all students.

The Equal Protection Project (EPP) of the Legal Insurrection Foundation sent a letter on February 26, 2024, to the Office of Civil Rights (OCR) at the U.S. Department of Education, alleging that Western Illinois University (WIU) offers sixteen discriminatory scholarships. The letter complains that the scholarships restrict eligibility or give preference to black and Latino students and students that identify as LGBTQI+. EPP argues that these scholarships discriminate on the basis of race in violation of Title VI and on the basis of sex and sexual orientation in violation of Title IX. Because WIU is a public university, EPP also alleges that the scholarships violate the Equal Protection Clause of the Fourteenth Amendment. EPP has asked OCR to open a formal investigation into the University and impose any remedial relief that the law permits in holding the University accountable for its alleged misconduct.

Media Coverage and Commentary:

Below is a selection of recent media coverage and commentary on these issues:

New York Times, “Can You Create A Diverse College Class Without Affirmative Action?” (Mar. 9): Writing for the New York Times, Aatish Bhatia and Emily Badger report on an analysis the Times performed in conjunction with Sean Reardon, a professor at Stanford, and Demetra Kalogrides, a Stanford senior researcher, using statistical data to model four potential alternatives to “race-conscious” college admissions: (1) giving preference to low-income students; (2) giving preference to low-income students who attend higher poverty schools; (3) giving preference to students who outperform their peers with similar disadvantages; and (4) expanding the applicant pool. Each scenario focuses on increasing economic diversity as a means to bolster the number of minorities enrolled in the most elite colleges. According to the analysis, the fourth scenario that focuses on targeted recruiting by elite universities in areas with a critical mass of historically disadvantaged students best mirrors the minority admissions rate at elite colleges pre-SFFA. The authors note the logistical and financial challenges universities face in broadening their recruiting approaches. But as Jill Orcutt, the global lead for consulting with the American Association of Collegiate Registrars and Admissions Officers, observes, “this kind of outreach” is “everything.”
Bloomberg Law, “Business Is Booming for DEI Lawyers as Firms Ask ‘What’s Legal?’” (March 5): Simone Foxman of Bloomberg News reports on the increase in corporations seeking the help of law firms to navigate the tumultuous landscape of diversity, equity, and inclusion programs following SFFA. NYU Law Professor Kenji Yoshino explained that he sees “no end in sight” for companies seeking help from attorneys to navigate the emerging DEI landscape. Gibson Dunn Partner and Labor & Employment Group Co-Chair Jason Schwartz observed that “[l]ots of clients are wanting to do audits, review all DEI efforts, board diversity, socially conscious investing to assess risk and figure out what—if any—changes they want to make . . . There is a never ending tide.” Now, more than ever, corporations are deciding to revisit their previous DEI efforts with the help of subject-matter experts to minimize risks and liability while retaining the benefits of these programs.
JDJournal, “The Changing Landscape of Corporate Diversity, Equity, and Inclusion Programs” (March 5): JDJournal’s Maria Lenin Laus reports on the corporate world’s increased demand for DEI specialists following the “intensifying backlash against DEI initiatives, fueled by conservative groups and influential figures like Bill Ackman and Elon Musk.” She observes that “the discourse surrounding [DEI] programs has escalated to unprecedented levels, resulting in a surge in demand for specialists in this field.” She identifies Gibson Dunn’s Jason Schwartz as a specialist who has experienced a significant uptick in inquiries from the corporate world as companies seek to engage those with expertise in this rapidly evolving space.
BNN Bloomberg, “Wall Street’s DEI Retreat Has Officially Begun” (March 3): Writing for BNN Bloomberg, Max Abelson, Simone Foxman, and Ava Benny-Morrison examine how major companies have made public shifts away from their diversity and inclusion initiatives in the wake of “[t]he growing conservative assault on DEI.” As an example, the authors note Bank of America’s efforts to broaden eligibility for certain internal programs that previously had focused on women and minorities. The article pinpoints the Supreme Court’s decision in SFFA as the inflection point for increased scrutiny of diversity initiatives on Wall Street. In the authors’ view, DEI swiftly declined in importance to many corporations following the decision. But spokespeople for BNY Mellon, JPMorgan, and Goldman Sachs each reasserted their commitment to promoting an inclusive workplace with people from diverse backgrounds. And the article notes that no corporations have yet “signaled a full-blown retreat” from DEI.
NBC News, “University of Florida eliminates all diversity, equity and inclusion positions due to new state rule” (March 2): NBC News’s Rebecca Cohen reports on an administrative memo issued by the University of Florida that declared that the University has “eliminated all diversity, equity, and inclusion positions” to comply with Florida Board of Governor’s regulation 9.016. The University reallocated $5 million in funds previously dedicated to DEI initiatives and terminated the employment of dozens of university employees working in DEI-focused offices. Florida Governor Ron DeSantis took to “X” to celebrate the move, stating “DEI is toxic and has no place in our public universities. I’m glad that Florida was the first state to eliminate DEI and I hope more states follow suit.” But the decision has received much criticism from other politicians, with Congressional Black Caucus Chairman Steven Horsford saying University of Florida’s decision “is far out of step with the standards and values expected of a public institution of higher education.”

Case Updates:

Below is a list of updates in new and pending cases:

1. Contracting claims under Section 1981, the U.S. Constitution, and other statutes:

Do No Harm v. Lee, No. 3:23-cv-01175-WLC (M.D. Tenn. 2023): On November 8, 2023, Do No Harm, a conservative advocacy group representing doctors and healthcare professionals, sued Tennessee Governor Bill Lee, challenging state policies for appointing positions on the Tennessee Board of Podiatric Medical Examiners. Under Tennessee law dating back to 1988, the governor must “strive to ensure” that at least one board member of the six-member board is a racial minority. Do No Harm brought the challenge under the Equal Protection Clause and requested a permanent injunction against the law.
- Latest update: On February 2, 2024, Governor Lee moved to dismiss the complaint for lack of standing, arguing that (1) Do No Harm had not established that any of its members had been injured by the policy, since all seats reserved for practitioners on the board had been filled, precluding any chance for a Do No Harm member to be considered and rejected, and (2) the board currently has a member who belongs to a racial minority so there are no race-related barriers to board membership until the member’s term ends in 2027. On February 16, Do No Harm filed a response, arguing that (1) it satisfied standing requirements via anonymous declarations from Member A and Member B, and (2) the defendant did not provide sufficient evidence that a current board member is African American. On March 1, 2024, the defendant filed a reply, arguing that Do No Harm lacked standing because “pseudonymity is not a free pass to standing in the [Sixth] Circuit,” and contesting the plaintiff’s factual allegations regarding the board member’s race.
Nistler v. Walz, No. 24-cv-186-ECT-LIB (D. Minn. 2024): On January 24, 2024, Lance Nistler, a white, male farmer in Minnesota, sued Governor Walz and the Commissioner of the Minnesota Department of Agriculture, alleging that the state’s Down Payment Assistance Program (DPAP) violates the Equal Protection Clause. The DPAP grants farmers up to $15,000 to help purchase their first farms and prioritizes “emerging farmers,” including women, persons with disabilities, members of a community of color, and members of the LGBTQIA+ community. Plaintiff alleges that he applied, and was otherwise qualified, for the DPAP but was denied acceptance solely because of his race and gender. On February 13, Governor Walz was dismissed as a party.
- Latest update: On February 15, the Commissioner filed an answer, denying that the plaintiff would have received the grant if he had been a different race or gender, and denying that any stated preference for “emerging farmers” is not a “compelling state interest.”
Students for Fair Admissions v. U.S. Military Academy at West Point, No. 7:23-cv-08262 (S.D.N.Y. 2023): On September 19, 2023, SFFA sued West Point, relying on the Supreme Court’s decision in SFFA v. Harvard in arguing that the military academy’s affirmative action program violated the Fifth Amendment by taking applicants’ race into account when making admission decisions. SFFA also filed a motion for preliminary injunction to halt West Point’s affirmative action program during the course of the litigation. The district court denied SFFA’s request and the Second Circuit affirmed the district court’s order. On February 2, 2024, the Supreme Court denied SFFA’s request for an emergency order overturning the district court’s decision.
- Latest update: On February 19, 2024, SFFA filed an amended complaint, re-alleging that West Point’s consideration of race in the admissions process violates the Equal Protection Clause because race is “determinative for hundreds of applicants each year.” SFFA further argues that West Point’s justifications for its affirmative action program, including unit cohesion, battlefield lethality, recruitment, retention, and preservation of public legitimacy, are not furthered by admission based on race. West Point’s response to the complaint is due on April 22, 2024.
Do No Harm v. Edwards, No. 5:24-cv-16-JE-MLH (W.D. La. 2024): On January 4, 2024, Do No Harm sued Governor Edwards of Louisiana over a 2018 law requiring a certain number of “minority appointee[s]” to be appointed to the State Board of Medical Examiners. Do No Harm brought the challenge under the Equal Protection Clause and requested a permanent injunction against the law.
- Latest update: On February 28, 2024, Governor Edwards answered the complaint, denying all allegations including allegations related to Do No Harm’s standing.
Do No Harm v. National Association of Emergency Medical Technicians, No. 3:24-cv-11-CWR-LGI (S.D. Miss. 2024): On January 10, 2024, Do No Harm challenged the diversity scholarship program operated by the National Association of Emergency Medical Technicians (NAEMT). NAEMT awards up to four $1,250 scholarships to “students of color . . . who intend to become an EMT or Paramedic.” Do No Harm requested a temporary restraining order, preliminary injunction, and permanent injunction against the program. On January 23, 2024, the court denied Do No Harm’s motion for a TRO and expressed skepticism that Do No Harm had standing to bring its Section 1981 claim, because the Do No Harm member had “only been deterred from applying, rather than refused a contract.”
- Latest update: On February 29, 2024, NAEMT filed its answer and a motion to dismiss the complaint, arguing that Do No Harm and anonymous Member A lacked standing to bring the case and, in the alternative, that Do No Harm had failed to state a viable Section 1981 claim because NAEMT did not prevent Member A from applying due to her race. Also on February 29, 2024, Do No Harm withdrew its motion for a preliminary injunction, explaining that NAEMT had agreed not to close the application window or select scholarship recipients until the litigation is resolved.

2. Employment discrimination and related claims:

Bresser v. The Chicago Bears Football Club, Inc., No. 1:24-cv-02034 (N.D. Ill. 2024): On March 11, 2024, a white male law student filed a complaint against the Chicago Bears, alleging that the team refused to hire him as a “diversity legal fellow” based on his race and sex. The plaintiff alleges that, despite meeting the substantive job qualifications, the Bears rejected his application after a Bears employee viewed his LinkedIn profile, which contains his photo. The complaint asserts claims for race and sex discrimination under Title VII, Section 1981, and Illinois law, as well as conspiracy claims under Sections 1985 and 1986.
- Latest update: According to the docket, it does not appear that the complaint has yet been served.
Langan v. Starbucks Corporation, No. 3:23-cv-05056 (D.N.J. 2023): On August 18, 2023, a white female former employee filed a complaint against Starbucks, claiming she was wrongfully accused of racism and terminated after she rejected Starbucks’ attempt to deliver “Black Lives Matter” T-shirts to her store. The plaintiff alleged that she was discriminated and retaliated against on the basis of her race and disability as part of a policy of favoritism toward non-white employees. On December 8, 2023, Starbucks filed its motion to dismiss arguing that certain claims are beyond the statute of limitations, and that the plaintiff failed to plead a Section 1981 claim because she did not plead facts distinct from those supporting her Title VII claims and did not show that race was the but-for cause of the loss of a contractual interest.
- Latest update: On January 28, 2024, the plaintiff opposed Starbucks’ motion to dismiss, arguing that her claims were not time-barred and advocating for a different standard to be applied to her Section 1981 claim. On February 23, 2024, Starbucks filed its reply, reiterating that certain claims were time-barred and others should be dismissed because they failed to state a claim.
King v. Johnson & Johnson, No. 2:24-cv-968-MAK (E.D. Pa. 2024): On March 6, 2024, a fifty-nine year-old white male former employee sued Johnson & Johnson alleging violations of Title VII, Section 1981, and the ADEA. The plaintiff alleged that Johnson & Johnson reassigned him to a position that provided no career advancement opportunities, refused to hire him for any of the 30 internal positions for which he applied and was qualified, and ultimately terminated his employment as part of a corporate restructuring. The plaintiff alleged that each of these adverse employment actions can be traced to Johnson & Johnson’s DEI initiative, which has “vilified/stereotyped Caucasian males as problematic and inherently unaligned with the DEI program.”
- Latest update: According to the docket, it does not appear that the complaint has yet been served.

3. Actions against educational institutions:

Chu, et al. v. Rosa, No. 1:24-cv-75 (N.D.N.Y. 2024): On January 17, 2024, a coalition of education groups sued the Education Commissioner of New York, alleging that its free summer program discriminates on the bases of race and ethnicity. The Science and Technology Entry Program (STEP) permits students who are Black, Hispanic, Native American, and Alaskan Native to apply regardless of their family income level, but all other students, including Asian and white students, must demonstrate “economically disadvantaged status.” The plaintiffs sued under the Equal Protection Clause and requested preliminary and permanent injunctions against the enforcement of the eligibility criteria.
- Latest update: The defendant’s response to the complaint is due March 18, 2024.

DEI Legislation

Our DEI Task Force is tracking state and federal legislative developments relating to DEI. These developments span a variety of DEI-related bills, including those involving diversity statements, DEI officers and training, DEI contracting and funding, and regulation of higher education.

DEI Legislation Map

12		7		2		3		14		18
Enacted at least one anti-DEI bill		Passed at least one anti-DEI bill in at least one chamber		Enacted at least one pro-DEI bill		Passed at least one pro-DEI bill in at least one chamber		Introduced at least one bill		No bills this session

Current as of March 13.

The following Gibson Dunn attorneys assisted in preparing this client update: Jason Schwartz, Mylan Denerstein, Blaine Evanson, Molly Senger, Zakiyyah Salim-Williams, Matt Gregory, Zoë Klein, Mollie Reiss, Alana Bevan, Marquan Robertson, Elizabeth Penava, Skylar Drefcinski, Mary Lindsay Krebs, David Offit, and Lauren Meyer.

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 authors:

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)

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)

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949-451-3805, bevanson@gibsondunn.com)

An overview of intellectual property considerations in M&A transactions, which can impact valuation and the ability to operate after closing.

In today’s M&A transactions, intellectual property (“IP”) represents an increasingly critical component of a target company’s value. Therefore, during the due diligence process it is important to understand what IP a potential target actually owns, what third-party IP it relies on, whether the target may be infringing a third party’s IP, as well as how the proposed transaction could impact the buyer’s rights in the target’s IP.

Below, we highlight several IP considerations and red flags in U.S.-based M&A transactions. For transactions involving non-U.S. target companies or businesses, local law considerations may need to be assessed.

Scope of IP; Impact of Transaction Structure

Understanding the scope of IP that will be included in a particular transaction, and confirming whether the target company or seller actually owns the IP that it purports to own or sell, should be a primary concern for a potential buyer. A buyer should conduct global database searches to confirm the registered IP held by a target company or seller, as well as to identify any chain of title issues, recorded liens, and any legal or regulatory proceedings that may have been initiated with respect to such IP.

In an equity purchase transaction, the buyer will typically acquire all of the target’s (or its parent’s) equity interests, and therefore inherit all of the target’s IP holdings automatically by virtue of the transaction. Conversely, in a transaction structured as a purchase of assets, a buyer will only acquire the IP that is expressly transferred under the purchase agreement. As such, it is critical to understand what IP is included and what IP (if any) will remain with the seller, and confirm that the transferred IP is sufficient to operate the target’s business.

It is also important to review any outbound licenses to determine whether the target has granted to a third party any exclusivity or ownership rights in the target’s IP, and understand whether any of the target company’s contracts contain a “springing license” that could grant to a third party IP rights by virtue of the consummation of the proposed transaction, as this could impact the valuation of the target company.

In addition to understanding what IP a target owns, it is important for a buyer to understand what third-party licenses are required to operate the target’s business. A buyer should review those licenses to identify any restrictions on the buyer’s ability to receive the benefit of those licenses post-closing. While license agreements will often flow through automatically in a transaction structured as an equity purchase, in an asset purchase scenario each license agreement must be expressly assigned by the seller to the buyer, which in many cases may require the consent of a third party. Moreover, even in an equity purchase scenario, it is important to diligence and understand any change in control restrictions, including anti-assignment provisions, that may be triggered by the proposed structure. Unlike typical contracts, IP licenses are considered to be personal to the licensee and by default are not transferable without the consent of the licensor. Proper review of a business’s material license agreements is critical to avoid last minute surprises or situations in which a third party can create unanticipated hurdles to a smooth deal closing. If consent cannot be obtained, it is important to understand the effect losing the IP rights (or license fees or royalties) will have on the target’s business, as this may impact the deal’s valuation.

Comingling of Intellectual Property

In some instances, a seller may have comingled certain IP among the business it proposes to sell and the businesses it plans to retain. In such instances, both the buyer and the seller may need continued access to that IP following the closing of the transaction. Comingling of IP in this manner may require the buyer and seller to negotiate an ongoing license agreement between them, which will typically establish clearly defined purposes for which each party may (and may not) use the IP going forward. In some cases, the parties may negotiate time-limited restrictive covenants in addition to such ongoing license agreements. Restrictive covenants should always be reviewed by an antitrust expert to confirm they are drafted in an enforceable manner.

Treatment of IP in Employee and Consultant Agreements

It is important to evaluate the target’s forms of employee and independent contractor invention assignment agreements to confirm that such individuals have properly assigned to the target all applicable IP rights – or, if not, to identify critical gaps that must be remediated before the transaction can close. Best practice is that such agreements should contain presently effective assignment language that makes the IP assignment from the employee or contractor to the target company effective immediately, rather than requiring any future execution of documents. Companies hoping to be acquired in the near future may wish to review these forms and improve them before any deficiencies turn into a deal hurdle. Founders in particular should ensure that their companies are the proper owners of any founder-created IP, as buyers and even potential investors will be on the lookout for any possibility that a founder could replicate the business under a new company.

If any IP development work is performed outside of the United States, it is advisable to consult with local counsel in the relevant jurisdiction to ensure that the invention assignment provisions are enforceable under local law.

AI Generated Content

As companies are increasingly relying on artificial intelligence (“AI”), a buyer should review whether and how the target company uses AI in its business. Recently, the U.S. Copyright Office clarified its practices for examining and registering works containing material generated by AI. However, the use and ownership of AI is an area of the law that is currently under development as the legal system attempts to catch up with this new technology. If a target relies on AI tools to generate content considered material to the business value, careful analysis should be undertaken to determine whether the AI outputs are actually copyrightable, or whether they will be deemed outside the scope of copyright protection. Further, it is important to understand the inputs a target company uses to train its AI, as certain uses of third-party copyrighted materials can lead to claims of infringement or misappropriation.

Joint Ownership

Joint ownership of IP creates complications that many buyers and sellers may wish to avoid. For example, each joint owner of a patented invention can independently sell, license or otherwise exploit the patent without any duty to account to or seek consent from any other joint owner (including the right to license the patent to a third party that is in an infringement dispute with the other party over such patent). A buyer should therefore pay special attention to agreements that cover joint ventures or joint development of IP or technology, and growth-stage companies looking to make themselves attractive to future buyers should carefully weigh the benefits and potential risks of joint ownership before entering into any such arrangements.

Upward-Reaching Affiliate Issue

A buyer (especially if it has a valuable patent monetization program) should conduct a careful review of a target company’s license agreements – particularly any with the buyer’s direct competitors – to identify provisions that may become binding on the buyer of the target company upon closing. In many agreements, the term “affiliate” is defined broadly to include any entity that controls, is controlled by or is under common control with the licensor, such that, upon closing, the license granted by the target could be deemed to encompass the buyer’s entire IP portfolio as well.

Adequate Protection of Trade Secrets (Including Source Code)

For many companies, trade secrets are their most valuable IP asset. Therefore, it is important for a buyer to confirm that such trade secrets are adequately protected, including the source code to the target’s proprietary software. A buyer should confirm that all employees and contractors, as well as other third parties with access to the target company’s trade secrets, have executed non-disclosure agreements, and should review such agreements to ensure that they reasonably protect the target company’s trade secrets and other confidential information and prohibit recipients thereof from disclosing such information. It is also important for a buyer to confirm that the target company has industry-standard controls in place, including appropriate organizational, administrative, technical and physical measures, to ensure the confidentiality and security of the IT systems that house its trade secrets and other confidential information. If proprietary software is the target’s most valuable IP asset, the buyer should also confirm that the source code to the software has not been disclosed to (and is not required to be disclosed to) any third parties and review any source code escrow agreements to confirm that the proposed transaction would not trigger a release.

IP-related Disputes

Finally, a buyer should review any IP-related lawsuits, settlements, and coexistence arrangements, as well as any claims of IP infringement, including in the form of offers or invitations to obtain a license or requests for indemnification, and ascertain the status and materiality of, as well as the likely cost associated with resolving, any pending disputes.

Settlement agreements may include a covenant not to sue, whereby the target company agrees not to assert its IP rights against the counterparty for particular uses or products. A buyer should consider how this would impact its rights in the acquired IP, as well as whether an overly broad definition of “affiliate” could cause the buyer to be similarly bound not to enforce its IP against the other party, either of which could affect the target company’s valuation depending on the buyer’s go-forward plans.

The following Gibson Dunn lawyers prepared this update: Daniel Angel, Meghan Hungate, Robert Little, Saee Muzumdar, and Sarah Scharf.

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, any member of the firm’s Mergers & Acquisitions, Private Equity, or Technology Transactions practice groups, or the following authors and practice leaders:

Technology Transactions:
Daniel Angel – New York (+1 212.351.2329, dangel@gibsondunn.com)
Carrie M. LeRoy – Palo Alto (+1 650.849.5337, cleroy@gibsondunn.com)
Meghan Hungate – New York (+1 212.351.3842, mhungate@gibsondunn.com)

Mergers and Acquisitions:
Robert B. Little – Dallas (+1 214.698.3260, rlittle@gibsondunn.com)
Saee Muzumdar – New York (+1 212.351.3966, smuzumdar@gibsondunn.com)

Private Equity:
Richard J. Birns – New York (+1 212.351.4032, rbirns@gibsondunn.com)
Wim De Vlieger – London (+44 20 7071 4279, wdevlieger@gibsondunn.com)
Federico Fruhbeck – London (+44 20 7071 4230, ffruhbeck@gibsondunn.com)
Scott Jalowayski – Hong Kong (+852 2214 3727, sjalowayski@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310.552.8581, alanin@gibsondunn.com)
Michael Piazza – Houston (+1 346.718.6670, mpiazza@gibsondunn.com)
John M. Pollack – New York (+1 212.351.3903, jpollack@gibsondunn.com)

The 2024 presidential and congressional elections could bring seismic shifts in the way government interacts with individuals, businesses, and other entities. While the results of those elections cannot be predicted with certainty, it is not too soon to start preparing for possible scenarios. This webcast examines how public policy issues, congressional investigations, and administrative actions are likely to be shaped by the 2024 elections.

PANELISTS:

Michael Bopp is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He chairs the Congressional Investigations Practice Group practice and he is a member of the White Collar Defense and Investigations Crisis Management Practice Groups. He also co-chairs the firm’s Public Policy Practice Group and is a member of its Financial Institutions Practice Group. Mr. Bopp’s practice focuses on congressional investigations, internal corporate investigations, and other government investigations. Michael spent more than a dozen years on Capitol Hill including as Staff Director and Chief Counsel to the Senate Homeland Security and Governmental Affairs Committee under Senator Susan Collins (R-ME). Michael is a member of the bars of the District of Columbia and the State of New York.

Roscoe Jones is a partner in Gibson, Dunn & Crutcher’s Washington, DC office, co-chair of the Firm’s Public Policy Practice Group, and a member of the Congressional Investigations Practice Group. Roscoe’s practice focuses on promoting and protecting clients’ interests before the U.S. Congress and the Administration, including providing a range of public policy services to clients such as strategic counseling, advocacy, coalition building, political intelligence gathering, substantive policy expertise, legislative drafting, and message development. Roscoe spent a decade on Capitol Hill as a chief of staff, legislative director and senior counsel advising three US Senators and a member of Congress, including Senators Feinstein, Booker and Leahy and Rep. Spanberger. Roscoe is a member of the bars of the State of Maryland and District of Columbia and admitted to practice before the United States Courts of Appeal for the Fourth, Ninth, and Eleventh Circuits.

Stuart F. Delery is a partner in Gibson, Dunn & Crutcher’s Washington, DC office, where he is a member of the firm’s Litigation Department and Co-Chair of the Crisis Management Practice Group and Administrative Law and Regulatory Practice Group. Prior to re-joining the firm, Stuart served as White House Counsel for President Biden from 2022-2023. As Counsel to the President, he advised the President on the full range of constitutional, statutory, and regulatory legal issues, including on questions of presidential authority, domestic policy, and national security and foreign affairs. He managed responses to high-profile congressional and other investigations, and he assisted the President in nominating and confirming federal judges. Stuart also served as Deputy Counsel to the President from 2021-2022. Stuart is an experienced appellate and district court litigator who brings 30 years of experience at the highest levels of government and the private sector to help clients navigate major matters that present complex legal and reputational risks, particularly matters involving difficult statutory, regulatory and constitutional issues. His practice focuses on representing corporations and individuals in high-stake litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Stuart is a member of the District of Columbia bar.

Amanda H. Neely is of counsel in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the Public Policy Practice Group and Congressional Investigations Practice Group. Amanda previously served as Director of Governmental Affairs for the Senate Homeland Security and Governmental Affairs Committee and General Counsel to Senator Rob Portman (R-OH), Deputy Chief Counsel to the Senate Permanent Subcommittee on Investigations, and Oversight Counsel on the House Ways and Means Committee. She has represented clients undergoing investigations by congressional committees including the Senate Permanent Subcommittee on Investigations and the Senate Health, Education, Labor, and Pensions Committee. Amanda is admitted to practice law in the District of Columbia and before the United States Courts of Appeals for the District of Columbia Circuit and the Eleventh Circuit.

Danny Smith is of counsel in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of the Public Policy practice group. Danny’s practice focuses on advancing clients’ interests before the U.S. Congress and the Executive Branch. He provides a range of services to clients, including political advice, intelligence gathering, policy expertise, communications guidance, and legislative analysis and drafting. Prior to joining Gibson Dunn, Danny worked for Senator Cory Booker (D-NJ) for nearly a decade, most recently as his Chief Counsel on the Senate Judiciary Committee, Subcommittee on Criminal Justice and Counterterrorism. Danny is admitted to practice law in the District of Columbia and the state of Illinois.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General category.

Gibson, Dunn & Crutcher LLP is authorized by the Solicitors Regulation Authority to provide in-house CPD training. This program is approved for CPD credit in the amount of 1.0 hour. Regulated by the Solicitors Regulation Authority (Number 324652).

Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1 hour toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

Application for approval is pending with the Colorado, Illinois, Texas, Virginia and Washington State Bars.

New York partner Karin Portlock and associate Brian Yeh are the authors of “Precedent-Setting Decisions Show the Promise of New York’s Domestic Violence Survivors Justice Act” [PDF] published by the New York Law Journal on March 11, 2024.

Join us for a 60-minute briefing covering key aspects of the SEC’s adoption of the climate change disclosure rule. Gibson Dunn Partners Beth Ising, Tom Kim, Gene Scalia and David Woodcock discuss key aspects of the final rule, what companies need to prioritize in order to prepare for compliance, key implementation challenges and the prospects for litigation.

Topics discussed:

Primary differences between the proposed and final rules
Companies and transactions covered by the rule and exemptions, exceptions, and exclusions
Timing and transition periods
Open/unresolved issues
Key implementation and compliance priorities
Potential litigation

PANELISTS:

Elizabeth Ising is a partner in Gibson Dunn’s Washington, D.C. office and Co-Chair of the firm’s Securities Regulation and Corporate Governance and its ESG (Environmental, Social & Governance) practices. She also is a member of the firm’s Hostile M&A and Shareholder Activism team and Financial Institutions practice group. She advises clients, including public companies and their boards of directors, on corporate governance, securities law and, ESG and sustainability matters and executive compensation best practices and disclosures. Representative matters include advising on Securities and Exchange Commission reporting requirements, proxy disclosures, SASB and TCFD disclosures, director independence matters, proxy advisory services, board and committee charters and governance guidelines and disclosure controls and procedures. Ms. Ising also regularly counsels public companies on shareholder activism issues, including on shareholder proposals and preparing for and responding to hedge fund and corporate governance activism. She also advises non-profit organizations on corporate governance issues.

Thomas J. Kim is a partner in the Washington D.C. office of Gibson, Dunn & Crutcher, LLP, where he is a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Mr. Kim focuses his practice on a broad range of SEC disclosure and regulatory matters, including capital raising and tender offer transactions and shareholder activist situations, as well as corporate governance, environmental social governance and compliance issues. He also advises clients on SEC enforcement investigations – as well as boards of directors and independent board committees on internal investigations – involving disclosure, registration, corporate governance and auditor independence issues. Mr. Kim has extensive experience handling regulatory matters for companies with the SEC, including obtaining no-action and exemptive relief, interpretive guidance and waivers, and responding to disclosures and financial statement reviews by the Division of Corporation Finance. Mr. Kim served at the SEC for six years as the Chief Counsel and Associate Director of the Division of Corporation Finance, and for one year as Counsel to the Chairman.

Eugene Scalia is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, co-chair of the firm’s Administrative Law and Regulatory Practice Group, and a senior member of the firm’s Labor and Employment Practice Group and Financial Institutions Practice Group. He returned to the firm after serving as U.S. Secretary of Labor from September 2019 to January 2021. Mr. Scalia has a nationally-prominent practice in two areas: Labor and employment law, and advice and litigation regarding the regulatory obligations of federal administrative agencies. He also has extensive appellate experience. Federal regulatory actions he has challenged include the SEC’s “proxy access” rule; the CFTC’s “position limits’” rule; MetLife’s designation as “too big to fail” by the Financial Services Oversight Council; the Labor Department’s “fiduciary” rule; and OSHA’s “cooperative compliance program.”

David Woodcock is a partner in the Dallas and Washington offices of Gibson, Dunn & Crutcher. He is a co-chair of the firm’s Securities Enforcement Practice Group, and a member of the firm’s Securities Regulation and Corporate Governance, Accounting Firm Advisory and Defense; White Collar Defense and Investigations; Energy, Regulation and Litigation; Securities Litigation; and Oil and Gas Practice Groups. His practice focuses on internal investigations and SEC defense, with a particular emphasis on accounting and financial reporting, corporate compliance, and audit/special committee investigations. Mr. Woodcock regularly advises clients on corporate securities and governance, the role of the board, shareholder activism, and ESG-related issues, including the energy transition, climate disclosures, enterprise risk management practices, cybersecurity, and related U.S./European regulations. He also counsels investment advisors and private equity funds in the context of SEC examinations and investigations, ESG matters, and portfolio due diligence and compliance.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General category.

Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1 hour toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

Application for approval is pending with the Colorado, Illinois, Texas, Virginia and Washington State Bars.

We are pleased to provide you with Gibson Dunn’s ESG update covering the following key developments during February 2024. Please click on the links below for further details.

I. GLOBAL

Global Reporting Initiative revises biodiversity standards

On January 25, 2024, the Global Reporting Initiative (GRI) published a revised biodiversity standard, GRI 101: Biodiversity 2024, which updates and replaces GRI 304: Biodiversity 2016. The standard aims to deliver transparency throughout the supply chain, location-specific reporting on impacts, new disclosures on direct drivers of biodiversity loss and requirements for reporting impacts on society. The standard will come into force on January 1, 2026.

International Swaps and Derivatives Association Climate Risk Scenario Analysis for the Trading Book – Phase 2

On February 12, 2024, the International Swaps and Derivatives Association (ISDA) published Phase 2 of its “Climate Risk Scenario Analysis for the Trading Book“. This Phase 2 publication follows the development of the conceptual framework published in 2023, which was used to develop three short-term climate scenarios for the trading book – physical, transition and combined. The scenarios are intended to support banks in their climate scenario analysis capabilities and now cover a range of market risk factors, including country and sector specific parameters.

Loan Market Association issues guidance on external review process for Sustainability-Linked Loans

On January 25, 2024, the Loan Market Association (LMA) issued an updated version of its external review guidance for green, social, and sustainability-linked loans, superseding its 2022 edition. The guidance aims to streamline the process of external reviews in sustainable finance by establishing common terminology and standard review procedures. The guidance also sets out ethical and professional principles for external reviewers, including integrity, objectivity, and professional competence and addresses the organization requirements for review providers. Detailed content guidelines are also provided to promote consistency in terminology usage.

International Ethics Standards Board for Accountants launches public consultation on new ethical benchmark for sustainability reporting and assurance

The International Ethics Standards Board (IESBA), the independent global standards-setting board, has initiated a consultation on two Exposure Drafts, outlining a suite of global standards on ethical considerations in sustainability reporting and assurance. The first Exposure Draft, International Ethics Standards for Sustainability Assurance (IESSA), revises the existing Code Relating to Sustainability Assurance and Reporting. The second Exposure Draft, Using the Work of an External Expert, proposes an ethical framework for assessing external experts in sustainability matters. These standards aim to establish guidelines for sustainability assurance practitioners and professional accountants involved in reporting, aiming to combat greenwashing and enhance trust in sustainability information.

ISSB to assess jurisdictions’ level of alignment with standards

The International Sustainability Standards Board (ISSB) plans to assess the degree of alignment between jurisdictions choosing to implement its disclosure standards on both sustainability (IFRS S1) and the climate (IFRS S2). These measures were announced in the ISSB’s preview document of its Inaugural Jurisdictions Guide. The Guide will aid jurisdictions in their adoption of IFRS S1 and IFRS S2 and also intends to reduce the fragmentation and variation in the adoption of ISSB standards between jurisdictions. ISSB expects the alignment assessment to be part of its future jurisdictional profiles tool, which will describe the broad approach of each jurisdiction and any deviations from ISSB standards. As at December 2023, nearly 400 organizations from 64 different jurisdictions had committed to advancing the adoption or use of the ISSB standards, in addition to 25 stock exchanges and over 40 professional accounting organizations and audit firms.

II. UNITED KINGDOM

UK departs International Energy Charter Treaty

On February 22, 2024, the United Kingdom Government announced that it would leave the Energy Charter Treaty (ECT) after failed efforts to update the Energy Charter Treaty and align it with net zero ambitions. With European Parliament elections in 2024, the modernization of the treaty may be delayed indefinitely. A number of European Union member states, including France, Spain and the Netherlands, have already withdrawn or announced their withdrawal from the treaty.[1]

UK Financial Conduct Authority launches webpage for sustainability disclosure and labelling regime

As reported in our Winter Edition, the Financial Conduct Authority (FCA) recently published its policy statement containing rules and guidance on sustainability disclosure requirements and investment labels. On February 2, 2024, the FCA launched a new webpage setting out how firms should consider the regime and the steps to take ahead of the rules coming into effect. The FCA has highlighted that from May 31, 2024, firms are required to ensure that sustainability references are fair, clear and not misleading and proportionate to the sustainability profile of the product and service. Firms subject to the naming and marketing rules for asset managers are not required to meet the additional requirements until December 2, 2024. From July 31, 2024, firms may begin to use a label – though there is no deadline to use labels, firms must ensure that they meet the naming and marketing requirements for products using sustainability-related terms without labels by December 2, 2024.

Chartered Governance Institute publishes model terms of reference and guidance for ESG committees

The Chartered Governance Institute (CGI, formerly ICSA) published its model terms of reference and guidance for board-level ESG and sustainability committees. Although the new UK Corporate Governance Code (also referred to above) does not require companies to have an ESG committee at board level, the sample terms are designed to assist companies in setting out the scope, roles and responsibilities of board-level ESG and sustainability committees, which can be tailored to the needs of each company. The model terms will also assist companies in highlighting areas which may overlap with the remits of other committees and define the remit of the ESG committee to avoid such overlap.

Pensions and Lifetime Savings Association updates the Stewardship and Voting Guidelines

The Pensions and Lifetime Savings Association published its updated 2024 Stewardship and Voting Guidelines. The Guidelines have been updated to reflect the 2024 version of the UK Corporate Governance Code published by the Financial Reporting Council (FRC) and related guidance and they provide a framework for pension scheme trustees and investors to hold companies accountable during annual general meetings. The 2024 edition identifies five key themes: social factors, cybersecurity, artificial intelligence, biodiversity, and dual-class asset structures.

Financial Reporting Council launches review of the UK Stewardship Code 2020

On February 27, 2024, the FRC announced that it would commence a fundamental review of the UK Stewardship Code in accordance with a policy statement it issued on November 7, 2023. The Code’s stated purpose is to set high stewardship standards for asset owners and managers and also includes six principles for service providers. There are currently 273 signatories representing £43.3 trillion assets under management. Given the potential for a fundamental revision of the Code in 2024, the FRC are launching the review process in three phases: a targeted outreach to issuers, asset managers, asset owners and service providers; a public consultation in summer 2024; and the publication of a revised Code in early 2025. The Code will operate as usual throughout the review process. The Stewardship Code was last revised in 2019, taking effect from January 1, 2020. The significant revisions introduced at that time included signatories to integrate stewardship and investment including ESG matters and also required disclosure of important issues for assessing investments including ESG issues.

III. EUROPE

New EU regulation on ESG ratings activities

On February 5, 2024, the European Parliament and the European Council announced a provisional agreement on new rules for regulating ESG rating activities by improving transparency and integrity of operations of rating providers and preventing potential conflicts of interest. The provisional agreement provides that EU ratings providers will be authorized and supervised by the European Securities and Markets Authority (ESMA), and third-country ratings providers will need to be registered in the EU’s registry, be recognized on quantitative criteria or obtain an endorsement of their ESG ratings by an EU-authorized ratings provider. A temporary lighter-touch regime would apply for three years for small ESG ratings providers. The provisional agreement remains subject to the European Council and European Parliament’s formal adoption procedure. Once adopted and published in the Official Journal, the regulation will apply 18 months after its entry into force.

Vote on Corporate Sustainability Due Diligence Directive fails

As reported in our Winter Edition, there was a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD) in December 2023. The final text of the CSDDD was published on January 30, 2024. On February 28, 2024, the CSDDD failed to secure a qualified majority among EU member states. The CSDDD will need to be renegotiated and voted on by the European Council before it can be voted on by the European Parliament by the March 15, 2024 deadline.

Internal Market and Environment committees adopt position on how EU firms can validate their green claims

On February 14, 2024, the European Parliament announced that the Internal Market and Environment committees adopted their position on the rules relating to how firms can validate their environmental marketing claims. The rules require companies to seek approval before using environmental marketing claims, which claims are to be assessed by accredited verifiers within 30 days. Companies may be excluded from procurements for non-compliance, or could lose their revenues or face fines of at least 4% of their annual turnover. Confirming the EU ban on greenwashing, the rules specify that companies could still mention offsetting schemes if they have reduced emissions to the extent possible and use these schemes only for residual emissions. The rules are due to be voted on at the next plenary session of the European Parliament.

European Council and European Parliament strike deal to strengthen EU air quality standards

On February 20, 2024, the European Council announced that the presidency and the European Parliament’s representatives had reached a provisional political agreement on EU air quality standards, with the aim of a zero-pollution objective and net zero by 2050. The provisional agreement will next be submitted to the member states’ representatives in the European Council and to the European Parliament’s environment committee for endorsement. Once approved, it will need to be formally adopted by the European Council and the European Parliament, following which it will be published in the EU’s Official Journal and will enter into force. Following publication, each member state will have two years to transpose the directive into national law.

Provisional agreement on postponing sustainability reporting standards for listed SMEs and specific sectors

On February 8, 2024, the European Council and the European Parliament announced a provisional agreement to delay by two years the adoption of the European Sustainability Reporting Standards (ESRS) for certain sectors, small and medium sized enterprises and certain thirty-country companies, under the Corporate Sustainability Reporting Directive (CSRD) – which will now be adopted in June 2026. Application to third-country companies remains unchanged otherwise, i.e. reporting obligations under the CSRD and linked ESRS will apply for financial years commencing on or after January 1, 2028. The provisional agreement remains subject to endorsement and formal adoption by both the European Council and European Parliament and publication.

European Commission recommends 90% net GHG emissions reduction target by 2040

On February 6, 2024, the European Commission published a detailed impact assessment and based on its assessment and under the EU Climate Law framework, it recommended a reduction of 90% net greenhouse gas emissions by 2040 compared to 1990 levels. The EU Climate Law entered into force in July 2021 and enshrined in legislation the EU’s commitment to reach climate neutrality by 2050. The EU Climate Law also requires the European Commission to propose a climate target for 2040 within six months of the first Global Stocktake of the Paris Agreement (which took place in December 2023). Following adoption of the 2040 target, under the next Commission, the target will form the basis for the EU’s new Nationally Determined Contribution under the Paris Agreement.

European Council and European Parliament reach deal on Net-Zero Industry Act

On February 6, 2024, the European Council and the European Parliament announced a provisional agreement on the Net-Zero Industry Act (NZIA), a regulation aimed at boosting clean technology industries across Europe. Proposed in March 2023 as part of the Green Deal Industrial Plan, the NZIA targets scaling up manufacturing of key technologies for climate neutrality, including solar, wind, batteries, and carbon capture. The NZIA includes streamlined permit procedures for large projects, setting maximum timeframes of 18 months for projects exceeding one gigawatt and 12 months for smaller ventures. It promotes the establishment of net-zero acceleration “valleys” with the aim to create clusters of net-zero industrial activity. The NZIA also contains incentives for green technology purchases and defines sustainability and resilience criteria for public procurement. The provisional agreement remains subject to endorsement and formal adoption by both the European Council and European Parliament and publication.

Sweden proposes delays to Corporate Sustainability Reporting Directive reporting start date

Even as the European Union’s Corporate Sustainability Reporting Directive (CSRD) has been finalized at the EU level, its transposition into national law faces delays in many member states. In Sweden, the government has proposed legislation on February 15, 2024, to postpone CSRD reporting for Swedish companies by one year. The draft proposes applying reporting rules to listed firms with over 500 employees for the fiscal year starting after June 2024, with reporting commencing from the 2025 financial year. This is a deviation from the EU directive, which mandates reporting on data from the 2024 financial year. This proposal remains subject to approval by the Swedish Parliament.

European Parliament adopts Nature Restoration Law

By a close vote of 329 votes in favour, 275 against and 24 abstentions, on February 27, 2024, the European Parliament adopted a new nature restoration law which sets a target for the European Union (EU) to restore at least 20% of the EU’s land and sea areas by 2030 and all ecosystems which are in need of restoration by 2050. To reach these targets member states will need to restore by 2030 at least 30% of habitats covered by the proposed new law which includes wetlands, grasslands, rivers, lakes, coral beds and forests. The habitat restoration targets increase to 60% by 2040 and 90% by 2050. Member states will also be required to adopt national restoration plans detailing how they intend to achieve these targets. The proposed new law is subject to and conditional upon the European Council adopting the new text which will then be published in the EU Official Journal and enter into force 20 calendar days thereafter.

IV. NORTH AMERICA

Securities and Exchange Commission adopts sweeping new climate disclosure requirements for public companies

On March 6, 2024, the Securities and Exchange Commission (SEC or Commission), in a divided 3-2 vote along party lines, adopted final rules establishing climate-related disclosure requirements for U.S. public companies and foreign private issuers in their annual reports on Form 10-K and Form 20-F, as well as for companies looking to go public in their Securities Act registration statements. The Commission issued the Proposing Release in March 2022, which we previously summarized here, and received more than 22,500 comments (including more than 4,500 unique letters) from a wide range of individuals and organizations. The Adopting Release is available here and a fact sheet from the SEC is available here. Further details on these new requirements can be found in our recent Client Alert published on March 8, 2024.

Canadian Sustainability Standards Board launches public consultation on sustainability standards

On February 6, 2024, the Canadian Sustainability Standards Board (CSSB) announced that it will initiate a public consultation to progress the adoption of sustainability disclosure standards in Canada. Public consultation will be open through March 2024, on three documents shaping the inaugural sustainability standards: drafts of proposed Canadian standards for disclosing sustainability-related financial information and climate-related disclosures, along with a paper outlining proposed changes to align with the International Sustainability Standards Board (ISSB)’s standards for use in Canada. The CSSB’s proposed Canadian Sustainability Disclosure Standards 1 and 2, set for release in March 2024, will align with ISSB’s standards with Canadian-specific modifications. These modifications, including a Canadian-specific effective date and transition relief proposals, will be open for consultation until June 2024.

Canada implements anti-forced labor supply chain law

As of January 1, 2024, Canada’s Forced and Child Labour in Supply Chains Act mandates in-scope companies to publish board-approved reports outlining efforts to prevent and address forced labour and child labour in their supply chains. The Act applies to entities listed on Canadian stock exchanges or meeting specific criteria regarding assets, revenue, or employees. Covered entities must file annual reports by May 31, 2024, detailing policies, due diligence processes, risk mitigation measures, and remediation efforts related to forced and child labour. Foreign companies with Canadian subsidiaries subject to reporting requirements must also comply. Failure to publish accurate reports may result in fines of up to CAD 250,000 for companies and their officers.

V. APAC

China relaunches the China Certified Emission Reduction program

On January 22, 2024, China re-launched its voluntary carbon market: the China Certified Emission Reduction Scheme (CCER). The CCER had originally first launched in June 2012 but was suspended in March 2017 as a result of low trading volumes and an insufficient standardization in carbon audits. In its initial phase, the CCER will cover four sectors: (1) afforestation, (2) solar thermal power, (3) offshore wind power, and (4) mangrove creation. This reintroduction of the CCER seeks to complement China’s existing mandatory carbon market, the National Emission Trading Scheme which has been in operation since 2021.

Singapore launches the Singapore Sustainable Finance Association

On January 24, 2024, the Monetary Authority of Singapore (MAS) launched the Singapore Sustainable Finance Association (SSFA). It is the first cross-sectoral industry body in Singapore and has been established to support Singapore’s growth as a leading global centre for sustainable finance. SSFA members will include those from financial services, non-financial services, non-financial sector corporates, academia, non-governmental organisations, and other industry bodies. The SSFA is seeking to establish itself as a key platform for setting new standards in areas such as carbon credits trading and transition finance for best sustainable finance practices, driving innovative solutions by bringing together financial institutions and industry sectors to address barriers in scaling financing, and supporting upskilling initiatives through sustainable finance courses.

China announces Carbon Allowance Trading Regulations with effect from May 2024

On January 25, 2024, China announced its Regulations on the Administration of Carbon Allowance Trading which are due to come in force on May 1, 2024, and seek to regulate carbon emissions trading and related activities as well as strengthen the control of greenhouse gas emissions. The Regulations will govern China’s National Emissions Trading Scheme and will be enforced by the Ministry of Environment and Ecology (MEE), appointed responsible for supervising carbon allowance trading and related activities. Amongst other responsibilities, the MEE will set annual carbon emission quotas based on national greenhouse gas emission targets, consideration of economic and social development, industrial structure adjustment, industry development stage, historical emission conditions, market adjustment needs and other factors. The Regulations also prescribe stricter financial penalties of up to RMB 2 million (approximately USD 277,809) and/or a reduction of free allowances for violations, as China seeks to crack-down on entities falsifying carbon emissions data.

Three major Chinese Stock Exchanges announce proposals for mandatory sustainability reporting

On February 8, 2024, the three major stock markets in China (Shanghai Stock Exchange (“SSE”), Shenzhen Stock Exchange (“SZSE”) and Beijing Stock Exchange (“BSE”)) released their first guidelines on mandatory corporate sustainability reporting requirements for public consultation which ended on February 29, 2024. The guidelines seek to standardize sustainability reporting by listed companies in China, improve the quality of disclosures by listed companies, and build a comprehensive governance mechanism for sustainable development by focusing on four core pillars: (1) governance, (2) strategy, (3) impact, risk and opportunity management, and (4) indicators and objectives. The SSE and SZSE proposed guidelines require listed companies with either a large market capitalization or with dual listings to provide disclosure on a wide range of sustainability topics from 2026. The proposed guidelines for the BSE, which largely lists small and medium-sized innovative enterprises, encourages listed companies to make voluntary sustainability or ESG disclosures. No deadline has been set for the BSE guidelines due to their voluntary nature.

Australia finance sector warns Australian government against deviating from International Sustainability Standards Board baseline

Between February and March 2024, key members of the Australian finance sector (the Australian Sustainable Finance Institute, Principles for Responsible Investment, and the Investor Group on Climate Change) have each warned the Australian Government not to deviate from the global baseline of the International Sustainability Standards Board (ISSB) with respect to its policy for climate-related financial disclosures, flagging their serious concerns with interoperability should the proposed changes be enforced. The current draft legislation announced in January 2024 (the Treasury Laws Amendment Bill 2024) fails to adopt the ISSB Standards in full. Instead, the suggested changes include replacing all references to the term “sustainability” in the Australian International Financial Reporting Standards S1 (IFRS S1) with the term “climate”, reducing the scope of the Australian IFRS S1 to climate-related financial disclosures only, and diluting the Australian IFRS S2 for financial institutions by only requiring them to consider the applicability of disclosures related to their financed emissions. The proposals are open to feedback until March 1, 2024.

Malaysia consults on adopting mandatory International Sustainability Standards Board sustainability disclosure standards

On February 15, 2024, Malaysia’s Advisory Committee on Sustainability Reporting (ACSR) began its consultation period for feedback from stakeholders on the adoption of the mandatory sustainability disclosure standards issued by ISSB in a new National Sustainability Reporting Framework for Malaysia (NSRF). The consultation is focused on the scope and timing of the implementation of the ISSB Standards (which consist of IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosure)), the transition reliefs required, and any issues related to assurance for sustainability disclosures. The ACSR propose that established companies that meet the quality, size and operations requirements (known as Main Market issuers) would be required to fully adopt the ISSB climate disclosure standards by FYE December 31, 2027. Companies assessed by sponsors to have growth prospects (known as Access, Certainty, Efficiency (ACE) Market listed issuers), and large non-listed companies with an annual revenue of RM 2 billion (approximately USD 427 million) would adopt similar standards by FYE December 31, 2029. The consultation period will end on March 21, 2024.

China to expand national carbon market “as soon as possible”

On February 27, 2024, China’s Ministry of Ecology and Environment (MEE) announced that China will expand its carbon trading market as soon as possible to include a further seven major carbon emitting industries. At present, the current market only contains the power generation sector. The MEE has already drafted a series of documents for the inclusion of the new industries, allocation of carbon emission allowances, and reports on carbon accounting verification. The new industries are expected to include petrochemicals, papermaking, chemicals, building materials, non-ferrous metals, steel, and aviation. The proposed expansion would result in approximately 75% of China’s total emissions being accounted for in the carbon trading market.

Indian Central Bank introduces mandatory climate disclosure rules for banks from FY 2025-2026

On February 28, 2024, in recognition of the need for a better, consistent and comparable disclosure framework for regulated entities, the Reserve Bank of India released a draft disclosure framework on climate-related financial risks for regulated entities. The disclosures cover four main themes: (1) governance, (2) strategy, (3) risk management, and (4) metrics and targets. Large non-banking financial companies, all scheduled commercial banks, and financial institutions will need to disclose their governance, strategy, and risk management findings from FY 2025-2026 onwards, with their metrics and targets to be disclosed from FY 2027-2028 onwards. Smaller co-operative banks will have one additional year (FY 2026-2027 and FY 2028-2029 respectively) before they must also report the equivalent information. Regulated entities will need to include these disclosures in their financial results or financial statements published on their website. The framework is open for comment until April 30, 2024.

Singapore introduces mandatory climate reporting to begin in FY 2025

On February 28, 2024, the Singapore Accounting and Corporate Regulatory Authority (ACRA) and Singapore Exchange Regulation (SGX RegCo) announced a new requirement for all listed companies in Singapore to make mandatory climate-related disclosures based on local reporting standards aligned with the ISSB. The announcement follows the conclusion of a public consultation by the Singapore Sustainability Reporting Advisory Committee. The disclosure requirements will be introduced in a phased manner, commencing with listed issuers in FY 2025, followed by large non-listed companies (defined as having annual revenues of at least SGD 1 billion (approximately USD 0.75 billion) and total assets of at least SGD 500 million (approximately USD 375 million)) in FY 2027. The measures form part of Singapore’s efforts to help companies strengthen their sustainability capabilities.

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

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

[1] Events since February 29, 2024: On March 7, 2024, the European Council resolved to exit the ECT thus marking a key step in the formal withdrawal of the EU from the ECT.

The following Gibson Dunn lawyers prepared this update: Ash Aulak*, Mitasha Chandok, Grace Chong, Natalie Harris, Elizabeth Ising, Cynthia Mabry, Selina S. Sagayam, and Daniel Szabo*.

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):
Susy Bullock – London (+44 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 20 7071 4263, ssagayam@gibsondunn.com)

*Ash Aulak and Daniel Szabo, trainee solicitors in the London office, are not admitted to practice law.

Private equity is a growing presence in the healthcare sector, but that trend has drawn a backlash from federal and state regulators.

Private equity firms have found increasing opportunities in the healthcare sector in recent years. More than 780 private equity deals in the U.S. healthcare sector were announced or closed in 2023, a slight decline from 2022 but still the third-highest on record. See Healthcare Dive, Healthcare PE deals third-highest on record in 2023: Pitchbook, Feb. 12, 2024. The Private Equity Stakeholder Project lists over 450 U.S. hospitals owned by private equity firms, including 22 in California. Private Equity Stakeholder Project, Private Equity Hospital Tracker, updated Jan. 2024. Private equity is a growing presence in nursing homes and hospice agencies. That trend has drawn a backlash from federal and state regulators, however.

In the last three months, Congress, antitrust regulators, and the Department of Justice have all announced efforts to target private equity firms in the healthcare industry. In December 2023, the Chair and Ranking Member of the United States Senate Budget Committee announced “a bipartisan investigation into the effects of private equity ownership on our nation’s hospitals.” U.S. Senate Budget Committee, Press Release, Dec. 7, 2023. The White House announced on December 7 that it was taking action to promote competition in healthcare, including greater scrutiny of acquisitions and “a cross-government public inquiry into corporate greed in health care.” The White House, FACT SHEET: Biden-⁠Harris Administration Announces New Actions to Lower Health Care and Prescription Drug Costs by Promoting Competition, Dec. 7, 2023. Following up on that announcement, the Federal Trade Commission, on March 5, 2024, convened a workshop “aimed at examining the role of private equity investment in health care markets.” And on February 22, 2024, Principal Deputy Attorney General Brian Boynton announced at a conference that the Department of Justice would be using the False Claims Act to target private equity firms that influence healthcare providers to engage in conduct that causes the submission of false claims. Brian M. Boynton, Remarks at the 2024 Federal Bar Association’s Qui Tam Conference, Feb. 22, 2024. Last year was a record year for new False Claims Act matters, and healthcare cases have constituted the majority of FCA recoveries in recent years. See Gibson Dunn’s False Claims Act 2023 Year-End Update, March 4, 2024. There can be little doubt that there will be an increase in cases involving private equity-owned healthcare providers.

State legislators and regulators in California have also been active in turning up the heat on private equity firms in the healthcare industry. On February 16, 2024, California Attorney General Rob Bonta and Assembly Speaker pro Tempore Jim Wood (D-Healdsburg) introduced a bill that would require private equity groups and hedge funds to obtain the written consent of the California Attorney General before acquiring or effecting a change of control with respect to a healthcare facility or healthcare provider group. See Asm. Jim Wood, Press Release, Feb. 20, 2024. The bill, AB 3129, would authorize the Attorney General to deny or impose conditions on such a transaction upon a determination that it poses a risk of anticompetitive effects or reduced access to healthcare.

Under existing law, the California Attorney General may block or impose conditions upon certain sales or transfers of control with respect to nonprofit healthcare facilities. See Cal. Corp. Code § 5914, et seq. This oversight has generated significant controversy, with many asserting that the review process is too stringent and often leads to debilitating conditions on these transactions. See Wall Street Journal, California Nonprofit Hospitals Turn to Bankruptcy for Leverage Against State, July 30, 2023. AB 3129 would expand upon this framework by creating an attorney general review and consent process for certain sales or transfers of control with respect to for-profit healthcare entities.

The proposed law would continue the trend of increasing state oversight of the healthcare sector in California. In 2022, the California Legislature passed a bill establishing the Office of Health Care Affordability (“OHCA”), and required written notice to OHCA of certain sales of, or transfers of control with respect to, health care entities. See SB-184 (2022). OHCA began accepting these submissions in January 2024. While OHCA cannot prevent or impose conditions on such transactions, it may issue a referral to the Attorney General “for further review of any unfair methods of competition, anticompetitive behavior, or anticompetitive effects.” Id. § 127507.2(d)(1).

AB 3129, by contrast, would directly require Attorney General review—not merely upon referral from OHCA. Additionally, the Attorney General would be granted express powers to deny or impose conditions upon certain transactions. As detailed below, those requirements could be based not only on concerns about the impact of the transaction on competition, but on concerns relating to healthcare access more generally.

AB 3129 was introduced with the express backing of the California Attorney General, who, in a statement of support for the bill, accused private equity of “maximizing their profits at the expense of access, quality, and affordability of healthcare for Californians.” Attorney General Rob Bonta, Press Release, Feb. 20, 2024. The legislation proposes several sections that would be codified in the California Health and Safety Code beginning with a new section 1190.

I. Framework

The bill requires private equity groups and hedge funds to provide written notice to the Attorney General at the same time that any other state or federal agency is legally required to be notified, and “otherwise . . . at least 90 days before the change in control or acquisition[.]” AB 3129, § 1190.10(a).

“Hedge fund” is defined broadly as “a pool of funds by investors, including a pool of funds managed or controlled by private limited partnerships, if those investors or the management of that pool or private limited partnership employ investment strategies of any kind to earn a return on that pool of funds.” Id. § 1190(a)(5). “Private equity group” is also broadly defined as “an investor or group of investors who engage in the raising or returning of capital and who invests, develops, or disposes of specified assets.” Id. § 1190(a)(9). These expansive definitions could have broad applicability to investors in the healthcare sector.

While the current draft of AB 3129 provides no deadline for the Attorney General to issue a decision after receiving notice, it implies that the default deadline for such a decision is 90 days. The Attorney General has broad authority to extend this period for an additional 45 days if, for example, it needs extra time “to obtain additional information[,]” or if the proposed transaction “involves a multifacility or multiprovider health system serving multiple communities.” Id. § 1190.10(b). The Attorney General may grant itself a further 14-day extension in order to hold a public meeting for the purpose of “hear[ing] comments from interested parties.” Id. §§ 1190.10(c), 1190.30(b). If a “substantive change or modification” to the transaction is submitted to the Attorney General after that public meeting takes place, the Attorney General may hold a second public meeting. Id. 1190.30(b).

Importantly, the Attorney General may stay its approval process “pending any review by a state or federal agency that has also been notified as required by federal or state law.” Id. § 1190.10(e).

II. Criteria for Approval

AB 3129 would grant the Attorney General significant discretion to grant, deny, or impose conditions on these transactions. To deny or impose conditions on the transaction, the Attorney General need only determine that it either (1) “may have a substantial likelihood of anticompetitive effects” or (2) “may create a significant effect on the access or availability of health care services to the affected community.” Id. § 1190.20(a) (emphasis added). As drafted, the bill arguably only requires the Attorney General to establish the mere possibility of either of these two negative outcomes.

In making this determination, the Attorney General must apply a “public interest standard,” which looks to whether the transaction is “in the interests of the public in protecting competitive and accessible health care markets for prices, quality, choice, accessibility, and availability of all health care services . . . .” Id. § 1190.20(b). Additionally, the bill stipulates that “[a]cquisitions or changes of control shall not be presumed to be efficient for the purpose of assessing compliance with the public interest standard.” Id.

Prior to issuing the determination, the Attorney General may convene a public meeting to hear from interested parties. Id. § 1190.30(b).

The Attorney General may waive these notice and consent requirements where a party to the transaction is at grave risk of immediate business failure and can demonstrate a substantial likelihood that it would have to file for bankruptcy absent a waiver. Id. § 1190.10(f).

For an acquisition or change of control involving smaller providers—a group of two to nine individuals that provides health-related services and has annual revenue of more than $4 million but less than $10 million—the private equity group or hedge fund is required to notify the Attorney General, but the latter’s consent to the transaction is not required. Id. § 1190.10(d).

III. Reconsideration and Appeal

After the Attorney General issues its written decision, any party to the transaction may apply for reconsideration—but only “based upon new or different facts, circumstances, or law.” Id. § 1190.30(c). The Attorney General must issue a decision as to reconsideration within 30 days. Id.

Additionally, where the Attorney General does not consent to the transaction, or gives only conditional consent, “any of the parties” to the transaction may appeal by writ of mandate to a California superior court. Id. § 1190.30(d). Such appeals must be sought within 30 days of the Attorney General’s decision. The superior court must issue a decision within 180 days, unless the parties otherwise consent, or there exist “extraordinary circumstances[.]” Id.

Pursuant to the text of the legislation, however, the court’s standard of review is highly deferential: whether the Attorney General’s decision was a “gross abuse of discretion.” Id.

IV. Additional Restrictions on Private Equity

AB 3129 also contains provisions prohibiting private equity groups and hedge funds from controlling or directing physician or psychiatric practices—such as by “influencing or setting rates[,]” influencing or setting patient admission, referral or other policies, or “influencing or entering into contracts on behalf of” such practices. Id. § 1190.40(a).

The bill would also prohibit physician or psychiatric practices from entering into arrangements in which private equity groups or hedge funds manage “any of” their “affairs” for a fee. Id. § 1190.40(b).

Finally, the bill prohibits certain non-compete and non-disparagement clauses in contracts that private equity groups and hedge funds enter into related to physician or psychiatric practices. Id. § 1190.40(c).

If enacted, the Attorney General will be authorized to enforce AB 3129 through actions for injunctive relieve and other remedies, including attorney’s fees and costs. Id. § 1190.40(d).

The earliest date on which AB 3129 may be heard in committee is March 18, 2024. The bill has been referred to the Health and Judiciary committees.

In California, at least, private equity firms in the healthcare industry must be cognizant not only of the increased scrutiny from federal regulators and enforcement agencies, but also of the expanding oversight role of the California Attorney General in the sector.

The following Gibson Dunn lawyers prepared this update: Benjamin Wagner, Winston Chan, Jonathan Phillips, and Zachary Gross.

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, the authors, or any leader or member of the firm’s White Collar Defense and Investigations, Private Equity or FDA and Health Care practice groups:

White Collar Defense and Investigations:
Stephanie Brooker (+1 202.887.3502, sbrooker@gibsondunn.com)
Winston Y. Chan (+1 415.393.8362, wchan@gibsondunn.com)
Nicola T. Hanna (+1 213.229.7269, nhanna@gibsondunn.com)
Benjamin Wagner (+1 650.849.5395, bwagner@gibsondunn.com)
F. Joseph Warin (+1 202.887.3609, fwarin@gibsondunn.com)

Private Equity:
Richard J. Birns – New York (+1 212.351.4032, rbirns@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310.552.8581, alanin@gibsondunn.com)
Michael Piazza – Houston (+1 346.718.6670, mpiazza@gibsondunn.com)
John M. Pollack – New York (+1 212.351.3903, jpollack@gibsondunn.com)

FDA and Health Care:
Gustav W. Eyler – Washington, D.C. (+1 202.955.8610, geyler@gibsondunn.com)
John D. W. Partridge – Denver (+1 303.298.5931, jpartridge@gibsondunn.com)
Jonathan M. Phillips – Washington, D.C. (+1 202.887.3546, jphillips@gibsondunn.com)

In vacating the NLRB’s new 2023 joint employer rule, the Texas district court determined that the test set forth in the rule is contrary to the National Labor Relations Act.

On March 8, 2024, U.S. District Judge J. Campbell Barker of the Eastern District of Texas vacated the National Labor Relation Board’s (“NLRB”) 2023 final rule that set forth a new standard for determining joint-employer status under the National Labor Relations Act (“NLRA”). The rule had been scheduled to take effect on March 11, 2024. As we discussed in a previous alert, the 2023 rule, if it were to take effect, would significantly expand the bases on which a joint employment relationship may be found under the NLRA. Instead, a Trump Administration rule adopted in 2020 remains in effect.

Separately, a Labor Department proposal to raise the required pay for exempt executive, administrative, and professional employees has taken a step closer to becoming a final rule.

In vacating the NLRB’s new 2023 joint employer rule, the Texas district court determined that the test set forth in the rule is contrary to the NLRA. In particular, the court held that the rule’s provisions that would make indirect or reserved control over working conditions sufficient to establish joint employer status sweep more broadly than, and are therefore inconsistent with, the common law test for employment codified in the NLRA.

The court also noted that the second step of the 2023 rule’s two-part joint employer test, which requires an assessment of whether an entity controls various working conditions, is coextensive with, and perhaps even more expansive than, the test’s first step, which asks whether an entity is a common law employer. Because a common law employer will always control key working conditions, the court reasoned, the test’s second part would likely do nothing to limit who qualifies as a joint employer. While noting that it need not decide the issue, the court suggested that the rule thus likely fails to articulate a comprehensible standard, and is therefore arbitrary and capricious.

The court also vacated the 2023 rule’s rescission of the agency’s previous joint employer rule issued in 2020, holding that the agency was incorrect that the 2020 rule is inconsistent with the NLRA and that the agency had failed to articulate a reason why the 2020 rule should be rescinded if the 2023 rule does not go into effect. The 2020 rule therefore remains operative.

The 2020 rule’s joint employer test is different from the 2023 rule in a few important ways that make it less likely that the 2020 rule will result in a determination that a joint employment relationship exists. Whereas the 2023 rule treats indirect or reserved control as sufficient to establish a joint employment relationship, the 2020 rule requires a showing that an entity possesses and exercises “such substantial direct and immediate control” over working conditions that would “warrant finding that the entity meaningfully affects matters relating to the employment relationship.”

Thus, under the 2020 rule, it is unlikely that an entity will be deemed a joint employer simply because it contracts with another business for services. By contrast, Judge Barker determined that the 2023 rule “would treat virtually every entity that contracts for labor as a joint employer because virtually every contract for third-party labor has terms that impact, at least indirectly, at least one of the specified ‘essential terms and conditions of employment.’” Chamber of Commerce et. al. v. National Labor Relations Board, et. al., No. 6:23-cv-00553, Dkt. 44 at 25 (Mar. 8, 2024).

Likewise, the 2020 rule’s enumeration of essential terms and conditions of employment––control over which may demonstrate joint employer status––is more limited than the list contained in the 2023 rule. Unlike the 2023 rule, the 2020 rule does not identify control over “work rules and directions governing the manner, means, and methods of performance,” or “working conditions related to the safety and health of employees” as probative of joint employer status. There are thus fewer bases on which joint employer status may be found under the 2020 rule as compared to the 2023 rule.

Finally, the 2020 rule provides that control over workers exercised on a sporadic, isolated, or de minimis basis is not sufficient to establish joint employer status––a provision that the 2023 rule would have eliminated. That also makes the 2020 rule’s test narrower and less likely to result in a joint employment determination.

In response to the ruling, NLRB Chair Lauren McFerran said that the agency “is reviewing the decision and actively considering next steps.” It is likely that the NLRB will appeal the decision. If the agency were to appeal, it may be as long as a year, if not longer, before the Fifth Circuit issues a decision, during which time the 2020 rule will remain in effect.

The rule has also attracted attention in Congress. In January 2024, the House of Representatives passed a resolution pursuant to the Congressional Review Act disapproving of the rule. In February, Senators Bill Cassidy and Joe Manchin wrote Chair McFerran to ask her to delay the effective date of the rule while the Senate considers the disapproval resolution. However, the White House has stated that President Biden would veto the disapproval resolution were it to pass.

* * * *

Separately, on March 1, 2024, the Department of Labor (“DOL”) sent the Office of Information and Regulatory Affairs (“OIRA”) a final rule revising DOL’s regulations implementing minimum wage and overtime exemptions for executive, administrative, and professional employees, among others, under the Fair Labor Standards Act (“FLSA”). The Department issued the proposal to revise its overtime regulations in August 2023, which we discussed in a prior alert. Over 15,000 comments were submitted on the proposal. OIRA review is typically the last step before issuance of a final rule.

It remains unclear if the Department made any modifications to its proposal to address the comments it received. If the final rule follows the approach DOL originally proposed, it will significantly change how the FLSA’s minimum wage and overtime exemptions operate. Among other things, DOL proposed substantial increases to the compensation thresholds for applying the FLSA’s exemptions, including raising the salary threshold to $1,059 per week—a nearly 55 percent increase over the current threshold––and increasing the annual compensation threshold for highly compensated employees to $143,988––an increase of approximately 34 percent. Further, in its proposal DOL left open the possibility that it may use more recent wage data when it finalizes the rule, which means that the thresholds in the final rule could be even higher. By some estimations, these increases could expand the number of workers who would be eligible for overtime wages by at least 3.6 million. DOL also proposed automatic increases to the thresholds every three years.

Although OIRA review can sometimes take a few months, it is likely that OIRA will complete its review—and that the final rule will be published—much sooner. Once the final rule is promulgated, legal challenges are possible. Indeed, DOL’s existing overtime regulations are already the subject of a lawsuit, currently on appeal in the Fifth Circuit, that argues that the Department lacks the authority to use salary thresholds to determine the applicability of the FLSA’s overtime exemptions. The case is Mayfield v. U.S. Dep’t of Labor, No. 23-50724 (5th Cir.). Similar arguments could likely be made in a challenge to DOL’s new overtime rule once it is issued.

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

The following Gibson Dunn lawyers prepared this update: Jason Schwartz, Eugene Scalia, Andrew Kilberg, Svetlana Gans, Michael Holecek, and Blake Lanning.

Gibson Dunn’s lawyers are available to assist in addressing 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, any member of the firm’s Labor and Employment or Administrative Law and Regulatory practice groups, or the following authors and practice leaders:

Svetlana S. Gans – Partner, Administrative Law & Regulatory, Washington, D.C.
(+1 202.955.8657, sgans@gibsondunn.com)

Michael Holecek – Partner, Labor & Employment, Los Angeles
(+1 213.229.7018, mholecek@gibsondunn.com)

Andrew G.I. Kilberg – Partner, Labor & Employment, Washington, D.C.
(+1 202.887.3759 ,akilberg@gibsondunn.com)

Eugene Scalia – Co-Chair, Administrative Law & Regulatory, Washington, D.C.
(+1 202.955.8210, escalia@gibsondunn.com)

Jason C. Schwartz – Co-Chair, Labor & Employment, Washington, D.C.
(+1 202.955.8242, jschwartz@gibsondunn.com)

The past five years have been particularly tumultuous in the biopharma sector. Strong capital markets and M&A activity into early 2020 were whipsawed during the pandemic, with equity valuations climbing significantly through early 2021 before dropping dramatically through the fourth quarter of 2023.

Join our team of seasoned attorneys and industry leaders where we provide a recap of 2023 highlights for capital markets, M&A activity, royalty finance transactions and clinical funding arrangements, along with expectations for the Life Sciences deal market in 2024.

PANELISTS:

Branden Berns is a partner in the San Francisco office of Gibson, Dunn & Crutcher, where he practices in the firm’s Corporate Transactions Practice Group, focusing on representing leading life sciences companies and investors. Branden advises clients in connection with a variety of financing transactions, including initial public offerings, secondary equity offerings and venture and growth equity financings, as well as complex corporate transactions, including mergers and acquisitions, asset sales, spin-offs, joint ventures, PIPEs and leveraged buyouts. Mr. Berns regularly serves as principal outside counsel for publicly-traded companies and advises management and boards of directors on corporate law matters, SEC reporting and corporate governance.

Todd Trattner, Ph.D. is Of Counsel in the San Francisco office of Gibson, Dunn & Crutcher, where he is a member of the firm’s Corporate Department with a practice focused on intellectual property transactions in the life sciences and technology industries. Todd represents public and private companies, investors, and academic institutions in the biotechnology, pharmaceutical, technology, medical device, and diagnostics industries in connection with licensing transactions, royalty financings, technology transactions, and mergers and acquisitions.

Melanie Neary is a senior associate in the San Francisco office of Gibson, Dunn & Crutcher, where she practices in the firm’s Corporate Transactions Practice Group, with a practice focused on advising clients in connection with a variety of financing transactions, including initial public offerings, secondary equity offerings and venture and growth equity financings as well as complex corporate transactions, including mergers and acquisitions. Melanie also regularly advises clients on corporate law matters, Securities and Exchange Commission reporting requirements and ownership filings and corporate governance.

Yasha Dyatlovitsky is a Managing Director in TD Cowen’s Private Capital Solutions Group focused exclusively on healthcare. Mr. Dyatlovitsky has over 20 years of experience in leveraged finance and structured credit products. Since 2020, he has helped companies raise over $7B in financing across debt, royalty, and preferred equity transactions. Mr. Dyatlovitsky joined TD Cowen in 2018 from Stifel, where he served as a Director in its Debt Capital Markets group. Mr. Dyatlovitsky started his career in the securitization group at Lehman Brothers, where he traded and securitized adjustable rate mortgage products.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact CLE@gibsondunn.com to request the MCLE form.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour.

California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit

A summary of recent developments and upcoming legislative changes in German corporate law that will impact the M&A market this year, originally published in M&A Review, M&A Media Services GmbH, 35. Volume 1-2/2024.

Gibson Dunn partner Sonja Ruttmann and of counsels Silke Beiter and Birgit Friedl from our Munich office co-authored M&A in 2024 – Relevant Legal Changes, An Outlook, originally published in M&A Review on February 10, 2024. The article summarizes some of the most recent developments and upcoming legislative changes in German corporate law that will impact the M&A market this year.

Please click HERE to view, download or print this article in English language.

Sonja Ruttmann, Silke Beiter und Dr. Birgit Friedl aus Gibson Dunns Münchner Büro geben in ihrem Artikel M&A im Jahr 2024 – Relevante Gesetzesänderungen, ein Ausblick, der am 10. Februar 2024 in der M&A Review erschien, einen Überblick über die wichtigsten aktuellen Entwicklungen und Gesetzesänderungen im deutschen Gesellschaftsrecht, die für den M&A-Markt in diesem Jahr von Bedeutung sein dürften.

Zum Beitrag in deutscher Sprache (im PDF-Format) gelangen Sie HIER.

The following Gibson Dunn lawyers prepared this article: Sonja Ruttman, Silke Beiter, and Birgit Friedl.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any leader or member of the firm’s Mergers and Acquisitions or Private Equity practice groups, or the authors in Munich:

Sonja Ruttmann (+49 89 189 33 256, sruttmann@gibsondunn.com)
Silke Beiter (+49 89 189 33 271, sbeiter@gibsondunn.com)
Birgit Friedl (+49 89 189 33 251, bfriedl@gibsondunn.com)

Please join our team of Global Financial Regulatory experts as we discuss the latest legal and regulatory developments around the use of artificial intelligence (AI) by financial institutions across the world’s major financial centers. During this webcast, which we will host twice to cover all time zones, our market-leading team will provide their insights into:

Regulatory issues and concerns in relation to the current and potential use cases of AI by financial institutions; and
The attitudes of financial regulators across the US, United Kingdom, Europe, Hong Kong, Singapore and the Middle East to the rapidly evolving use of AI by the institutions they regulate.

In addition, the team will provide their predictions for the future of regulatory policy, supervision and enforcement in relation to the use of AI by financial institutions based on their extensive experience in these areas with the key global regulators.

PANELISTS:

Jeffrey L. Steiner is a partner in the Washington, D.C. office. He is chair of the firm’s Derivatives practice group and co-chair of the firm’s Global Financial Regulatory practice group. Jeffrey is also the co-chair to the firm’s Global Fintech and Digital Assets practice group and a member of the firm’s Financial Institutions, Energy and Public Policy practice groups. He advises a range of clients, including commercial end-users, financial institutions, dealers, hedge funds, private equity funds, clearinghouses, industry groups and trade associations on regulatory, legislative, enforcement and transactional matters related to OTC and listed derivatives, commodities and securities.

William R. Hallatt is a partner in the Hong Kong office. He is co-chair of the firm’s Global Financial Regulatory group and head of the Asia-Pacific Financial Regulatory practice. His full-service financial services regulatory practice provides comprehensive contentious and advisory support as a trusted advisor to the world’s leading financial institutions.

MCLE CREDIT INFORMATION:

This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit.

Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour in the General category.

Neither the Connecticut Judicial Branch nor the Commission on Minimum Continuing Legal Education approve or accredit CLE providers or activities. It is the opinion of this provider that this activity qualifies for up to 1 hour toward your annual CLE requirement in Connecticut, including 0 hour(s) of ethics/professionalism.

Application for approval is pending with the Colorado, Illinois, Texas, Virginia and Washington State Bars.

San Francisco partner Ryan Murr, Washington, D.C. partner Stephen Glover and San Francisco partner Branden Berns are the authors of “Behind The ‘CVR Spin’ Method Of Unlocking Assets In M&A” [PDF] published by Law360 on March 11, 2024.

These decisions highlight how courts are continuing to grapple with challenges to DEI initiatives.

Last week, the Second Circuit and a district court in Texas issued decisions in cases involving challenges to DEI. In a case challenging a diversity scholarship program, the Second Circuit held that associations seeking to litigate based on injuries to their members must name at least one injured member to establish standing. And in deciding a challenge to a funding program administered by the federal Minority Business Development Agency, a district court in the Northern District of Texas held that the program violates the equal protection guarantee of the Fifth Amendment by presuming that certain racial groups are disadvantaged as part of determining their eligibility for assistance. Together, the decisions highlight how courts are continuing to grapple with challenges to DEI initiatives.

I. In Do No Harm v. Pfizer, the Second Circuit held that an association must name an injured member to establish standing.

On March 6, 2024, the United States Court of Appeals for the Second Circuit affirmed the district court’s dismissal of Do No Harm’s reverse-discrimination case against Pfizer in Do No Harm v. Pfizer, Inc., — F.4th —, 2024 WL 949506 (2d Cir. Mar. 6, 2024). The Second Circuit held that an organization must name at least one affected member to establish Article III standing under the “clear language” of Supreme Court precedent. The holding has implications for several other ongoing lawsuits in which plaintiff advocacy groups represented by the same law firm have relied on organizational standing to challenge diversity initiatives on behalf of anonymous members.

A. Background

On September 15, 2022, conservative medical advocacy organization Do No Harm filed suit against Pfizer, alleging that Pfizer discriminated against white and Asian students by excluding them from its Breakthrough Fellowship Program. Do No Harm v. Pfizer, Inc., 646 F. Supp. 3d 490 (S.D.N.Y. 2022). The program’s stated aim is to create a new generation of leaders from underrepresented groups by providing college seniors with summer internships, two years of employment post-graduation, mentoring, and a two-year scholarship for a full-time master’s program. To be eligible, applicants must “[m]eet the program’s goals of increasing the pipeline for Black/African American, Latino/Hispanic and Native Americans.” Do No Harm alleged that the criteria violate (1) Section 1981 of the Civil Rights Act of 1866 because the program is a contract that discriminates on the basis of race, (2) Title VI of the Civil Rights Act of 1964 because Pfizer receives federal funds to operate a racially discriminatory program, (3) the Affordable Care Act, and (4) multiple New York state laws banning racially discriminatory internships, training programs, and employment.

Do No Harm brought the suit on behalf of two purported members, anonymous Members A and B. Via anonymous declarations, Do No Harm stated that Member A is white, Member B is Asian-American, and both are Ivy League university juniors otherwise eligible for the scholarship and “able and ready” to apply. Do No Harm requested a temporary restraining order, and preliminary and permanent injunctions against the program’s eligibility criteria.

B. Analysis

In December 2022, a district court in the Southern District of New York denied Do No Harm’s motion for a preliminary injunction and dismissed the case for lack of subject matter jurisdiction. In particular, the court found that Do No Harm did not have Article III standing because it did not identify at least one member by name.

The association appealed to the Second Circuit, which heard oral argument on October 3, 2023.

In its opinion issued on March 6, the Second Circuit explained that the “decisive issues” in the appeal were (1) whether an association that relies on injuries to individual members to establish Article III standing on a preliminary injunction must name at least one injured member; and (2) whether a case should be dismissed or allowed to proceed if the plaintiff fails to establish Article III standing on a motion for preliminary injunction, but alleges facts sufficient to establish standing under the less onerous pleading standard.

On standing, the Second Circuit concluded that the district court was correct in its determination that Do No Harm lacked Article III standing because it did not name any member injured by Pfizer’s alleged discrimination. Relying on its decision in Cacchillo v. Insmed, Inc., 638 F.3d 401 (2d Cir. 2011), the court noted that the plaintiff’s burden to demonstrate standing for a preliminary injunction is “no less than that required on a motion for summary judgment.” As a result, the court was “not decid[ing] whether, at the pleading stage, Do No Harm was required to name names.”

Because Do No Harm was subject to a summary judgment burden of proof, it was required to “set forth by affidavit or other evidence specific facts” demonstrating that the association’s members suffered an injury in fact—here, by showing that members were ready and able to apply to the challenged program but for its allegedly discriminatory criteria. The court explained that while “a name on its own is insufficient to confer standing,” disclosure of members’ names “shows that identified members are genuinely ready and able to apply, and are not merely enabling the organization to lodge a hypothetical legal challenge.” As a result, the Second Circuit held that “an association must identify by name at least one injured member for purposes of establishing Article III standing under a summary judgment standard,” which is the same standard that is applicable on a motion for preliminary injunction.

Regarding the dismissal question, Do No Harm argued that even if it failed to establish standing on its motion for preliminary injunction, the fact that it had properly alleged standing under the pleading standard should preclude dismissal. Recognizing that other circuits have decided the issue differently, the Second Circuit upheld the district court’s dismissal of the case, explaining that “when a court determines it lacks subject matter jurisdiction, it cannot consider the merits of the preliminary injunction motion and should dismiss the action in its entirety.”

Judge Wesley wrote a concurring opinion, agreeing with the majority that Do No Harm lacked standing and that the proper action was to dismiss the case. But Judge Wesley disagreed about why Do No Harm lacked standing. In his view, Do No Harm lacked standing because it did not show an imminent injury from the program’s selection process. Judge Wesley noted that Do No Harm had submitted “virtually identical declarations” from anonymous members that were “vague and conclusory” and did not substantiate “a concrete readiness to apply” to the challenged program. According to Judge Wesley, under a summary judgment standard that was not enough to demonstrate standing.

II. Nuziard v. Minority Business Development Agency applies SFFA to a federal agency

On March 5, 2024, a federal district court held in Nuziard v. Minority Business Development Agency, No. 4:23-cv-00278-P, 2023 WL 3869323 (N.D. Tex.), that the racial presumption used in apportioning federal funds for minority business assistance violates the Fifth Amendment’s equal protection guarantee. The decision extends the Supreme Court’s reasoning in SFFA to federal agencies administering grant programs, holding that “[t]hough SFFA concerned college admissions, nothing in the decision indicates that the Court’s holding should be constrained to that context.”

A. Background

The Minority Business Development Agency (MBDA) is a federal agency within the Department of Commerce dedicated to assisting “socially or economically disadvantaged individuals.” 15 U.S.C. § 9501(9)(A). The MBDA’s formative statute defines the term “socially or economically disadvantaged individual” as “an individual who has been subjected to racial or ethnic prejudice or cultural bias . . . because of the identity of the individual as a member of a group, without regard to any individual quality of the individual that is unrelated to that identity.” 15 U.S.C. § 9501(15)(A). Under the statute, certain groups of people, like Black or African Americans, Hispanics or Latinos, American Indians or Alaska Natives, Asians, and Native Hawaiians or other Pacific Islanders, are presumed to be socially disadvantaged individuals. If individuals from other groups apply for funding through the MBDA, they must produce sufficient evidence to rebut the presumption that they are not disadvantaged in order to be eligible for assistance.

Three business owners sued the MBDA, alleging that they were able and ready to apply for MBDA programming, but the agency improperly required them to show why they were, in fact, socially or economically disadvantaged when it did not require this showing for other ethnic groups. The business owners claimed that this practice is unconstitutional.

B. Analysis

In a 93-page opinion, a district court in the Northern District of Texas held that the MBDA’s presumption that certain ethnicities are “socially or economically disadvantaged” violates the Fifth Amendment’s equal protection component.

Addressing the issue of standing first, the court held that two of the three plaintiffs had standing because they met the race-neutral criteria for the programs and took concrete steps to apply. While these two plaintiffs never actually applied for the program, the court found that they were harmed nevertheless because of the MBDA’s “imposition of additional obstacles [in the application process] because of their race.” The court reasoned that “it’s not that they were denied benefits they would otherwise certainly get, but that they didn’t have a shot because of their skin color.” The court held that the third plaintiff lacked standing because it was not clear that he manifested the requisite intent to apply for the funding.

The court then turned to the Agency’s argument that its presumption of social or economic disadvantage satisfies strict scrutiny because it remedies the effects of discrimination in access to credit and in private contracting markets. Regarding MBDA’s arguments about discrimination in access to credit, the court agreed that the “disenfranchisement” of minority business enterprise is “beyond dispute,” but held that the MDBA’s interest in remedying these inequalities “is not compelling because it concerns private-sector credit disparities, and the record does not show government participation contributed to such disparities.”

Regarding the MBDA’s assertion that it had a compelling interest in eliminating discrimination in private contracting markets, the court found this category to be too broad. However, the court agreed that the MBDA did have a compelling interest in addressing discrimination in government contracting, relying on the agency’s proffered statistical evidence of disparities.

Even so, the court held that the MBDA’s program for addressing its compelling interest in eliminating discrimination in government contracting was not narrowly tailored. Citing SFFA, the court held that the ethnicity classifications used by the MDBA were both over- and under-inclusive. They were underinclusive because they “arbitrarily exclude[d]” many disadvantaged individuals, like those from the Middle East and some parts of Asia, and they were overinclusive because they “include[d] large swaths of individuals without ever asking if individual applicants belonging to those groups have experienced discrimination.” The court also held that the presumption operated as a stereotype and did not have a logical endpoint, echoing the factors considered by the Supreme Court in SFFA.

In evaluating whether the program was narrowly tailored, the court also considered the factors set out by the Supreme Court in Paradise v. United States, 480 U.S. 149 (1987), which require that a narrowly tailored remedy be necessary, flexible, and minimally impactful to third parties. The court held that the MBDA’s presumption was neither necessary nor flexible enough to achieve the MDBA’s compelling interest, but that a “generous factfinder” could determine that available alternatives reduced the impact to third parties. Nevertheless, because the Agency’s presumption did not satisfy the other narrow-tailoring factors, it failed strict scrutiny.

The court concluded by granting summary judgment for two of the three plaintiffs on their equal protection claims, and permanently enjoining the MBDA from presuming that certain ethnicities were “socially or economically disadvantaged.” The court summed up its decision on the reasoning that “[r]ather than picking winners and losers based on skin pigmentation, if a ‘rising tide lifts all boats,’ a holistic, race-neutral approach to assisting marginalized businesses would serve [the Agency’s] interests just as well.”

The government has 60 days to appeal the district court’s decision.

Prior editions of our DEI Task Force Update may be found on our DEI Resource Center. Should you have questions about developments in this space or about your own DEI programs, please do not hesitate to reach out to any member of our DEI Task Force or the authors of this Update

Read More

The following Gibson Dunn lawyers prepared this update: Jason Schwartz, Katherine Smith, Mylan Denerstein, Zakiyyah Salim-Williams, Molly Senger, Blaine Evanson, Matt Gregory, Zoë Klein, Mary Lindsey Krebs*, and Lauren Meyer*.

Gibson Dunn’s lawyers are available to assist in addressing 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, any member of the firm’s DEI Task Force or Labor and Employment practice group, or the following authors and practice leaders:

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)

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)

Blaine H. Evanson – Partner, Appellate & Constitutional Law Group
Orange County (+1 949.451.3805, bevanson@gibsondunn.com)

Matt Gregory – Partner, Appellate & Constitutional Law Group
Washington, D.C. (+1 202.887.3635, mgregory@gibsondunn.com)

*Mary Lindsey Krebs and Lauren Meyer are associates in the firm’s Washington, D.C. office. Mary Lindsey currently is admitted to practice law only in Tennessee, and Lauren is a recent law graduate and not admitted to practice law.

An Overview of the Highlights and Key Differences to the Proposed Rules

On March 6, 2024, the Securities and Exchange Commission (“SEC” or “Commission”), in a divided 3-2 vote along party lines, adopted final rules establishing climate-related disclosure requirements for U.S. public companies and foreign private issuers in their annual reports on Form 10-K and Form 20-F, as well as for companies looking to go public in their Securities Act registration statements. The Commission issued the Proposing Release in March 2022, which we previously summarized here, and received more than 22,500 comments (including more than 4,500 unique letters) from a wide range of individuals and organizations. The Adopting Release is available here and a fact sheet from the SEC is available here. A summary table discussing in more detail the notable changes between the Adopting Release and the Proposing Release is provided below.

We will provide more resources. Register here for Gibson Dunn’s webcast covering key aspects of the final rules and litigation developments on Tuesday, March 12, 2024. Our review of the final rules and Adopting Release is ongoing. We will publish a revised and more detailed summary of the final rules and related topics.

Overview of the final rules. The final rules will require disclosure in annual reports and registration statements of:

Material impacts on operations. How any climate-related risks have had, or are reasonably likely to have, material impacts on a company’s results of operations, strategy, or financial condition.
Impact on the company. How any such climate-related risks have materially affected or are reasonably likely to materially affect a company’s outlook, strategy, and business model, as well as a new financial statement note reporting expenditures and costs above a de minimis threshold resulting from severe weather events, other “natural conditions,” and certain carbon offsets and renewable energy certificates (“REC”).
Risk management/oversight process. Board and management governance and practices related to climate-related risk identification, assessment, management, and oversight.
GHG emissions and assurance. Scope 1 and Scope 2 greenhouse gas (“GHG”) emissions, if material, for accelerated and large accelerated filers only, with phased-in assurance by an independent GHG emissions attestation provider.
Targets/goals. Information regarding climate-related targets or goals that have materially affected, or are reasonably likely to materially affect, the company’s results of operations, business, or financial condition.
Mitigation efforts. Transition plans to address material transition risks, scenario analyses used for assessing material climate-related risk impacts, and internal carbon pricing if its use is material to managing material climate-related risks.

Significant changes from the rule proposal. The Commission made several notable changes to the proposed requirements, including to:

eliminate Scope 3 GHG emissions reporting requirements;
limit the requirement to report Scope 1 and 2 GHG emissions only if material, and exempt non-accelerated filers, smaller reporting companies and emerging growth companies from emissions reporting;
prolong the phase-in period for third-party assurance requirements for emissions reporting, and require only large accelerated filers to eventually (by 2033) obtain attestation at a “reasonable assurance” level;
remove the requirement to disclose directors’ climate-related expertise;
limit the Regulation S-X (“Reg. S-X”) financial footnote requirement to (1) expenditures, charges, and losses incurred as a result of severe weather events and other natural conditions that are 1% or more of either net income before tax and/or stockholders’ equity, depending on whether such amounts are expensed or capitalized, and (2) carbon offsets and renewable energy credits that are a material component of a company’s plan to achieve its disclosed climate-related targets or goals; and
adopt a new requirement to disclose, outside of the financial statements, the amount of material expenditures incurred as a result of any transition plan.

More broadly, the final rules adopt “materiality” qualifiers for many of the disclosure requirements, and the number of prescriptive disclosure requirements has been reduced. The preamble to the final rules also states that “traditional” notions of “materiality” will apply, as defined in Supreme Court precedents. Notwithstanding these changes, the final rules impose a significant reporting burden on companies and require substantial planning to prepare to comply.

Compliance phase-in period. The final rules will become effective 60 days after publication in the Federal Register (available here). The requirement to comply with the final rules will phase in over time, based on a company’s filer status. Registration statements will be subject to these disclosure obligations based on the fiscal years being reported. The first required disclosures for U.S. public companies with a calendar-end fiscal year will begin with the annual report on Form 10-K filed in:

Disclosure Requirement	Large Accelerated Filers	Accelerated Filers*	Non-Accelerated Filers / Smaller Reporting Companies / Emerging Growth Companies
Reg. S-K & Reg. S-X requirements other than:	2026 for FY 2025	2027 for FY 2026	2028 for FY 2027
Certain quantitative & qualitative disclosures under Items 1502(d)(2), 1502(e)(2), & 1504(c)(2)	2027 for FY 2026	2028 for FY 2027	2029 for FY 2028
Scopes 1 & 2 GHG Emissions**	2027 for FY 2026	2029 for FY 2028	N/A
Limited Assurance of GHG Emissions	2030 for FY 2029	2032 for FY 2031	N/A
Reasonable Assurance of GHG Emissions	2034 for FY 2033	N/A	N/A
Inline XBRL Tagging for Reg. S-K Requirements***	2027 for FY 2026	2027 for FY 2026	2028 for FY 2027

* This applies only to Accelerated Filers that are not also Smaller Reporting Companies or Emerging Growth Companies.
** Scope 1 & 2 GHG emissions for the most recent fiscal year may be reported as late as the second quarter Form 10-Q deadline.
*** Reg. S-X requirements will be tagged with the first disclosure.

Disclosure Category	Proposing Release Standards	Adopting Release Changes
Climate-Related Risk Oversight & Management (Items 1501 & 1503, Reg. S-K)	Describe climate-related risk oversight and management, including the role of the board in overseeing and management in assessing and managing climate-related risks, and related risk management processes.	Adopted substantially as proposed. Notable Changes: Removed several prescriptive disclosure requirements related to directors’ climate-related expertise, board discussion and consideration of climate-related risks, board target setting, and board oversight of climate-related opportunities; added instruction providing examples of relevant management expertise to disclose; and focused on processes for identifying, assessing, and managing material climate-related risks.
Climate-Related Risks and Impacts (Item 1502, Reg. S-K)	Describe material climate-related risks, including: their impacts, timeframe, and nature, and how the company considers or incorporates them; the business strategy’s resilience against changes in climate-related risks, including use of scenario analyses; and the company’s transition plan(s) adopted for its management strategy for such risks, including relevant metrics, targets, and actions taken.	Adopted with significant revisions. Notable Changes: Removed requirement to discuss business strategy resilience against changes in climate-related risks; revised to focus only on transition plans adopted for managing material transition risks (rather than those adopted within the company’s climate-related risk management strategy); scenario analyses used for assessing material climate-related risk impacts to the company (rather than as a tool used for assessing business resilience); and internal carbon pricing material to evaluating and managing climate-related risks (rather than any maintenance of an internal carbon price); and removed requirement to discuss metrics and targets for the identification and management of transition and physical risks.
GHG Emissions Reporting Disclosures (Items 1504 & 1505, Reg. S-K)	All companies must disclose Scope 1 and Scope 2 GHG emissions. All companies (except smaller reporting companies) must disclose Scope 3 GHG emissions if (i) material to the company or (ii) the company has set a GHG emissions target that includes Scope 3. Attestation is required for Scope 1 and Scope 2 for large accelerated and accelerated filers, subject to a phase in from limited assurance to reasonable assurance within two to four fiscal years after the compliance date. No attestation is required for Scope 3.	Adopted, with significant revisions, as Items 1505 & 1506. Notable Changes: Eliminated Scope 3 GHG emissions disclosure requirements; limited Scope 1 and Scope 2 GHG emissions disclosure to large accelerated filers and accelerated filers, and only if material (e.g., to an investor’s voting or investment decision, or, if omitted, as significantly altering the total mix of information); delayed emissions reporting deadline for the most recent fiscal year to the second quarter Form 10-Q filing deadline (or 225 days after fiscal year end for Form 20-F or registration statement filers), instead of requiring inclusion in the annual report on Form 10-K (or Form 20-F); delayed “limited assurance” attestation requirement for Scope 1 and 2 GHG emissions until the third fiscal year after the compliance date; and limited requirement to transition to “reasonable assurance” attestation to large accelerated filers only, and extended phase-in to the seventh fiscal year after the compliance date.
Targets, Goals & Transition Plans Disclosures (Item 1506, Reg. S-K)	Describe GHG emission or other climate-related targets or goals, including pathway to achievement, progress made, and use of carbon offsets or RECs.	Adopted, with some revisions, as Item 1504. Notable Changes: Revised disclosure trigger to focus only on climate-related targets or goals that materially affect (or are reasonably likely to materially affect) the business, financial condition, or results of operations, rather than requiring disclosure whenever the company has set a GHG emissions reduction or other climate-related target or goal; and added disclosure requirements related to material impacts and expenditures from such targets or goals (or actions related thereto).
Climate-Related Financial Statement Disclosure (Rules 14-01 and 14-02 of Reg. S-X)	Disclose (i) climate-related financial metrics related to the impacts of severe weather events and activities to reduce GHG emissions or exposure to transition risks if the absolute value of those impacts or expenditures/costs, as applicable, represents at least 1% of its corresponding financial statement line item and (ii) the impact of climate-related events on estimates and assumptions. Disclosures must be provided for the company’s most recently completed fiscal year and for each historical fiscal year included in the financial statements in the filing.	Adopted with significant revisions. Notable Changes: Replaced the requirement to disclose changes representing 1% of a line item with a new requirement to disclose aggregated cost and charges (and separately, recoveries) due to severe climate events and other natural conditions that exceed one percent of net income before tax or stockholders’ equity, depending on whether such amounts are expensed or capitalized; replaced the requirement to disclose costs/expenditures for general transition activities and mitigating risks from climate-related events and conditions with a requirement to disclose whether any estimates/assumptions used in creating the consolidated financial statements had material impacts from climate-related targets or transition plans disclosed by the company (in addition to severe weather events or natural conditions); and added requirement to disclose expensed or capitalized carbon offsets and RECs if material to a company’s transition plan.

Disclosure Category

Proposing Release Standards

Adopting Release Changes

Climate-Related Risk Oversight & Management

(Items 1501 & 1503, Reg. S-K)

Describe climate-related risk oversight and management, including the role of the board in overseeing and management in assessing and managing climate-related risks, and related risk management processes.

Adopted substantially as proposed.

Notable Changes:

Removed several prescriptive disclosure requirements related to directors’ climate-related expertise, board discussion and consideration of climate-related risks, board target setting, and board oversight of climate-related opportunities;
added instruction providing examples of relevant management expertise to disclose; and
focused on processes for identifying, assessing, and managing material climate-related risks.

Climate-Related Risks and Impacts

(Item 1502, Reg. S-K)

Describe material climate-related risks, including:

their impacts, timeframe, and nature, and how the company considers or incorporates them;
the business strategy’s resilience against changes in climate-related risks, including use of scenario analyses; and
the company’s transition plan(s) adopted for its management strategy for such risks, including relevant metrics, targets, and actions taken.

Adopted with significant revisions.

Notable Changes:

Removed requirement to discuss business strategy resilience against changes in climate-related risks;
revised to focus only on transition plans adopted for managing material transition risks (rather than those adopted within the company’s climate-related risk management strategy); scenario analyses used for assessing material climate-related risk impacts to the company (rather than as a tool used for assessing business resilience); and internal carbon pricing material to evaluating and managing climate-related risks (rather than any maintenance of an internal carbon price); and
removed requirement to discuss metrics and targets for the identification and management of transition and physical risks.

GHG Emissions Reporting Disclosures

(Items 1504 & 1505, Reg. S-K)

All companies must disclose Scope 1 and Scope 2 GHG emissions. All companies (except smaller reporting companies) must disclose Scope 3 GHG emissions if (i) material to the company or (ii) the company has set a GHG emissions target that includes Scope 3.

Attestation is required for Scope 1 and Scope 2 for large accelerated and accelerated filers, subject to a phase in from limited assurance to reasonable assurance within two to four fiscal years after the compliance date. No attestation is required for Scope 3.

Adopted, with significant revisions, as Items 1505 & 1506.

Notable Changes:

Eliminated Scope 3 GHG emissions disclosure requirements;
limited Scope 1 and Scope 2 GHG emissions disclosure to large accelerated filers and accelerated filers, and only if material (e.g., to an investor’s voting or investment decision, or, if omitted, as significantly altering the total mix of information);
delayed emissions reporting deadline for the most recent fiscal year to the second quarter Form 10-Q filing deadline (or 225 days after fiscal year end for Form 20-F or registration statement filers), instead of requiring inclusion in the annual report on Form 10-K (or Form 20-F);
delayed “limited assurance” attestation requirement for Scope 1 and 2 GHG emissions until the third fiscal year after the compliance date; and
limited requirement to transition to “reasonable assurance” attestation to large accelerated filers only, and extended phase-in to the seventh fiscal year after the compliance date.

Targets, Goals & Transition Plans Disclosures

(Item 1506, Reg. S-K)

Describe GHG emission or other climate-related targets or goals, including pathway to achievement, progress made, and use of carbon offsets or RECs.

Adopted, with some revisions, as Item 1504.

Notable Changes:

Revised disclosure trigger to focus only on climate-related targets or goals that materially affect (or are reasonably likely to materially affect) the business, financial condition, or results of operations, rather than requiring disclosure whenever the company has set a GHG emissions reduction or other climate-related target or goal; and
added disclosure requirements related to material impacts and expenditures from such targets or goals (or actions related thereto).

Climate-Related Financial Statement Disclosure

(Rules 14-01 and 14-02 of Reg. S-X)

Disclose (i) climate-related financial metrics related to the impacts of severe weather events and activities to reduce GHG emissions or exposure to transition risks if the absolute value of those impacts or expenditures/costs, as applicable, represents at least 1% of its corresponding financial statement line item and (ii) the impact of climate-related events on estimates and assumptions.

Disclosures must be provided for the company’s most recently completed fiscal year and for each historical fiscal year included in the financial statements in the filing.

Adopted with significant revisions.

Notable Changes:

Replaced the requirement to disclose changes representing 1% of a line item with a new requirement to disclose aggregated cost and charges (and separately, recoveries) due to severe climate events and other natural conditions that exceed one percent of net income before tax or stockholders’ equity, depending on whether such amounts are expensed or capitalized;
replaced the requirement to disclose costs/expenditures for general transition activities and mitigating risks from climate-related events and conditions with a requirement to disclose whether any estimates/assumptions used in creating the consolidated financial statements had material impacts from climate-related targets or transition plans disclosed by the company (in addition to severe weather events or natural conditions); and
added requirement to disclose expensed or capitalized carbon offsets and RECs if material to a company’s transition plan.

The following Gibson Dunn lawyers prepared this update: Aaron Briggs, Elizabeth Ising, Thomas Kim, Brian Lane, Julia Lapitskaya, Cynthia Mabry, Lori Zyskowski, Natalie Abshez, Lauren Assaf-Holmes, Spencer Bankhead, Irina Dykhne, Amanda Estep, Hannah Gonzalez, Chad Kang, Stefan Koller, Marie Kwon, Antony Nguyen, Andrea Shen, Meghan Sherley, Jack Strachan, and Maggie Valachovic.

Gibson, Dunn & Crutcher’s 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, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance, Environmental, Social and Governance (ESG), Capital Markets, Administrative Law and Regulatory, and Environmental Litigation and Mass Tort practice groups:

Securities Regulation and Corporate Governance:
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
James J. Moloney – Orange County (+1 1149.451.4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com)
Brian J. Lane – Washington, D.C. (+1 202.887.3646, blane@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202.887.3550, tkim@gibsondunn.com)
Ronald O. Mueller – Washington, D.C. (+1 202.955.8671, rmueller@gibsondunn.com)
Michael Scanlon – Washington, D.C.(+1 202.887.3668, mscanlon@gibsondunn.com)
Mike Titera – Orange County (+1 1149.451.4365, mtitera@gibsondunn.com)
Aaron Briggs – San Francisco (+1 415.393.8297, abriggs@gibsondunn.com)
Julia Lapitskaya – New York (+1 212.351.2354, jlapitskaya@gibsondunn.com)

Environmental, Social and Governance (ESG):
Susy Bullock – London (+44 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)
Cynthia M. Mabry – Houston (+1 346.718.6614, cmabry@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, mmurphy@gibsondunn.com)
Selina S. Sagayam – London (+44 20 7071 4263, ssagayam@gibsondunn.com)
William E. Thomson – Los Angeles (+1 213.229.7891, wthomson@gibsondunn.com)

Capital Markets:
Andrew L. Fabens – New York (+1 212.351.4034, afabens@gibsondunn.com)
Hillary H. Holmes – Houston (+1 346.718.6602, hholmes@gibsondunn.com)
Stewart L. McDowell – San Francisco (+1 415.393.8322, smcdowell@gibsondunn.com)
Peter W. Wardle – Los Angeles (+1 213.229.7242, pwardle@gibsondunn.com)

Administrative Law and Regulatory:
Eugene Scalia – Washington, D.C. (+1 202.955.8543, escalia@gibsondunn.com)
Jonathan C. Bond – Washington, D.C. (+1 202.887.3704, jbond@gibsondunn.com)

Environmental Litigation and Mass Tort:
Stacie B. Fletcher – Washington, D.C. (+1 202.887.3627, sfletcher@gibsondunn.com)
Michael K. Murphy – Washington, D.C. (+1 202.955.8238, mmurphy@gibsondunn.com)
Abbey Hudson – Los Angeles (+1 213.229.7954, ahudson@gibsondunn.com)