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On May 3, 2023, the Securities and Exchange Commission (“SEC” or “Commission”), in a 3-to-2 vote, adopted amendments to the disclosure requirements relating to companies’ repurchases of their equity securities. The amendments will require companies to: (i) disclose daily repurchase data in a new table filed as an exhibit to Form 10-Q and Form 10-K, (ii) indicate by a check box whether any executives or directors traded in the company’s equity securities within four business days before or after the public announcement of the repurchase plan or program or the announcement of an increase of an existing share repurchase plan or program, (iii) provide narrative disclosure about the repurchase program, including its objectives and rationale, in the filing, and (iv) provide quarterly disclosure regarding the company’s adoption or termination of any Rule 10b5-1 trading arrangements. The new amendments will invite enhanced scrutiny of companies’ share repurchase practices and rationales.

While reflecting a prescriptive and perhaps quixotic approach to a perceived potential for abuse that the SEC acknowledges is not present in many, or perhaps even most, share repurchases, the final rules reflect a significant paring back from the SEC’s initial proposal, which would have required daily reporting of repurchases on a next-day basis. The SEC also confirmed that companies that rely on recently amended Rule 10b5-1 will not be subject to a cooling-off period, any limitation on the use of multiple overlapping plans, any limitation on the use of single-trade plans or any disclosure regarding so-called “non-10b5-1 trading arrangements.” These changes reflect the SEC’s responsiveness to constructive and pragmatic comments received on its rule proposals, offering a sign of hope for other pending SEC rulemaking initiatives.

The 200+ page adopting release is available here and a Fact Sheet is available here. The final rules will become effective 60 days after publication in the Federal Register. For companies that file on domestic forms, the disclosure requirements will apply to Forms 10-K or 10-Q filed for the first full fiscal quarter beginning on or after October 1, 2023. For calendar year companies, this means that the new disclosures will first appear in their 2023 Form 10-K, showing any repurchases made (and disclosing any related Rule 10b5-1 trading arrangements entered into or terminated) during the fourth quarter. Later effective dates apply for foreign private issuers (“FPIs”) and listed closed-end funds, but there are no delays for other categories such as for smaller reporting companies.

Set forth below is a summary of the amendments and some considerations for companies in connection with these SEC rule amendments.

Summary of Amendments

New Periodic Reporting Requirements for U.S. Companies. The amendments introduce the following new periodic reporting requirements:

Daily Quantitative Transaction Disclosure, Reported Quarterly. Prior to the adoption of these amendments, Item 703(a) of Regulation S-K has required companies to include in their Forms 10-Q and 10-K a table reporting specified information on company repurchases of equity securities during each month of the previous quarter, on an aggregated monthly basis. The new amendments require tabular disclosure of the company’s daily repurchase activity during the prior quarter. The tabular disclosure will be filed as an exhibit to a company’s Form 10-Q or Form 10-K, with FPIs required to report the information quarterly on a new Form F-SR, and listed closed-end funds reporting the information in their semiannual and annual reports on Form N-CSR. There are no exceptions to the reporting requirements, including for smaller reporting companies or for classes of equity securities that are not exchange-traded.A copy of the required format for this table, which will appear as Exhibit 26, is included as an Exhibit to this client alert. The exhibit must be provided in XBRL-tagged format, and must report, for each day on which shares were repurchased:
- the date that the purchase of shares is executed,
- the class of shares repurchased,
- the average price paid per share,
- the total number of shares purchased, including the total number of shares purchased as part of a publicly announced plan,
- the aggregate maximum number of shares (or approximate dollar value) that may yet be purchased under a company’s publicly announced plan,
- the number of shares that were purchased on the open market,
- the number of shares purchased in transactions intended to qualify for the safe harbor in Rule 10b-18, and
- the total number of shares purchased pursuant to a plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c), together with a footnote disclosing the date of adoption or termination of the Rule 10b5-1(c) plan.
Check the Box Disclosure. Companies will be required to include a checkbox preceding the tabular disclosure, indicating whether any Section 16 officer or director purchased or sold shares that are the subject of a publicly announced plan or program within four business days before or after the company’s announcement of the stock repurchase plan or program, or the announcement of an increase in the number or amount of securities to be purchased under an existing plan or program. In response to comments, the SEC confirmed that a company may include additional disclosure to provide context to investors regarding any purchases or sales that trigger the checkbox requirement, and the SEC even noted that such disclosure would be required if material and necessary to prevent the required disclosures from being misleading.
Narrative Disclosure. In addition to requiring tabular disclosures, the new amendments expand upon the existing requirement for narrative disclosures of repurchases in periodic reports. In the section of their Forms 10-Q and 10-K where companies currently report aggregated monthly data on their share repurchases, companies will be required to disclose the following information, and to refer to the particular repurchases in the exhibit table that correspond to the different parts of this narrative:
- the objectives or rationales for each share repurchase plan or program,
- the process or criteria used to determine the amount of repurchases,
- the number of shares purchased other than through a publicly announced plan or program, and the nature of the repurchase transactions, such as whether the purchases were made pursuant to equity compensation arrangements, tender offers, etc., and
- any policies and procedures relating to the purchases and sales of the company’s securities during a repurchase program by its officers and directors, including whether there are any restrictions on such transactions.

As is currently the case, if a company’s repurchase plan or program was publicly announced, the disclosure also must state:

the date each plan or program was announced,

the dollar or share amount approved,

the expiration date, if any, of the plan or program,

each plan or program that has expired in the relevant period, and

each plan or program that the company has determined to terminate prior to expiration, or under which the company does not intend to make further purchases.

Disclosure Requirements for 10b5-1 Plans. In rules adopted last December, the SEC required companies to disclose in their periodic reports whether any executives or directors had entered into or terminated Rule 10b5-1 trading plans (including a modification that is treated as a termination and new plan), and to provide a description of the material terms of any such plans. The issuer repurchase rules adopted by the SEC require substantially similar disclosure regarding any Rule 10b5-1 plan adopted or terminated by the company. As with Rule 10b5-1 trading plans adopted by an executive or director, the company will be required to disclose the date on which it adopted or terminated a Rule 10b5-1 trading plan, the duration of the plan, and the aggregate number of shares to be purchased or sold pursuant to the arrangement. However, in contrast to the disclosure rules applicable to trading plans adopted by executives and directors, companies are not required to disclose whether they entered into an arrangement that meets the SEC’s definition of a “non-Rule 10b5-1 trading arrangement.” As noted above, the SEC also stated that it is not imposing additional conditions on the availability of the Rule 10b5-1 affirmative defense on companies, such as a cooling-off period, limitations on the use of multiple overlapping plans, or limitations on the use of single-trade plans.

New Periodic Reporting Requirements for Foreign Private Issuers and Listed Closed-End Funds. The amendments impose substantially similar requirements on FPI and listed closed-end funds as they do on domestic companies. The requirements that differ for FPIs and listed closed-end funds are described below:

Foreign Private Issuers. FPIs will be required to provide the disclosures described above under the new amendments quarterly in their Forms F-SR beginning with the first full fiscal quarter that begins on or after April 1, 2024. Prior to the adoption of these amendments, FPIs were required to annually disclose any company repurchases, aggregated on a monthly basis. Under the new amendments, any FPI that has a class of equity securities registered pursuant to Section 12 of the Exchange Act and does not file Forms 10-Q and 10-K will be required to file a Form F-SR within 45 days after the end of each quarter disclosing the aggregate stock repurchases made each day during the prior quarter. The narrative disclosures required of U.S. domestic company will be required in FPIs’ future Form 20-F filings. In his remarks dissenting from the adoption of the amendments, Commissioner Uyeda emphasized that the new requirements for FPIs represent a break from the SEC’s traditional deference to home country disclosure standards. Commissioner Uyeda expressed concern that these amendments could signal to international partners that the U.S. no longer respects the principles of mutual recognition and international comity which facilitate streamlined access to international securities markets. As such, Commissioner Uyeda expressed concern that these amendments could lead to a decline in the number of foreign companies listed in the U.S. and increase compliance costs for U.S. companies with international operations, ultimately harming U.S. investors and consumers.
Listed Closed-End Funds. Listed closed-end funds will be required to provide the disclosures described above under the new amendments semi-annually beginning with the Form N-CSR that covers the first six-month period that begins on or after January 1, 2024. Prior to the adoption of these amendments, listed closed-end funds were required to disclose semi-annually any company repurchases, aggregated on a monthly basis.

Considerations and Next Steps

Expect interpretive issues and (hopefully) guidance. The SEC noted that companies can continue to rely on the Commission Staff’s existing “Compliance and Disclosure Interpretations” addressing whether certain transactions are covered by the issuer repurchase disclosure rules. Thus, for example, a company’s acquisition of shares that are tendered to pay the exercise price of an employee stock option will continue to be a reportable repurchase, whereas withholding shares to pay taxes on the option exercise or upon vesting of restricted stock units will not be. Nevertheless, as with any new set of regulations, companies should expect a number of interpretive questions to arise. For example, while the instructions to the checkbox requirement state that companies generally can rely on Section 16 filings in determining whether they need to check the box, it is unclear whether transactions that are exempt from Section 16 reporting, such as dividend reinvestments and 401(k) plan transactions, trigger the checkbox requirement. While the Division of Corporation Finance has continued to express its willingness to address questions arising under its rules, guidance on recently adopted rules has been slow and sparse. Therefore, companies should closely review the new disclosure requirements in the near term and assess whether there are questions on how the rules apply to their own particular repurchase practices, so that the issues can be carefully vetted with in-house and outside counsel.

Companies will need to carefully consider and appropriately revise disclosures regarding the “objectives or rationales” for share repurchases. The SEC emphasized that a company’s discussion of its objective or rationales for repurchases should not be “boilerplate.” Indeed, the rules contemplate that different objectives or rationales could apply to different repurchases reported in the same quarterly report. For example, repurchases under equity compensation plans will have a different rationale than open-market repurchases designed to return excess capital to shareholders. Thus, it will be necessary for companies to tailor and adjust their disclosures from time to time as appropriate. In this regard, the SEC’s adopting release provides some examples of the types of topics that may be included in such disclosures, such as discussing how repurchases fit within the company’s capital allocation plans, whether repurchases were driven by a view that the company’s stock was undervalued, or addressing the source of funds for repurchases (such as whether proceeds from the disposition of a business unit were utilized to fund repurchases). We expect that for many companies with ongoing repurchase programs designed to return excess capital to investors, these “objectives or rationale” disclosures may not vary from quarter-to-quarter. Nevertheless, companies should establish disclosure controls to ensure that such disclosures are reviewed and confirmed or adjusted as appropriate each quarter. In addition, companies will want to ensure that comments by their executives on earnings calls and at other venues regarding the company’s share repurchases are consistent with the disclosures in their Forms 10-Q and 10-K.

Companies should document their processes for implementing share repurchases. The insider trading rule amendments adopted by the SEC in December 2022 require companies to file as exhibits to their Form 10-K any insider trading policies and procedures applicable to purchases and sales of the company’s securities by the company. While the SEC Staff has informally indicated that this insider trading policy exhibit requirement applies to calendar year companies starting with their 2024 Form 10-Ks, the new share repurchase rules require companies to disclose the “process or criteria used to determine the amount of repurchases” starting with calendar year companies’ 2023
Form 10-K. Companies should therefore bear in mind these separate but related disclosure requirements as they prepare to describe their processes around share repurchases.

Companies should consider whether to establish policies or procedures relating to the purchase or sale of shares by officers and directors during the time that a company’s repurchase program is active. Many companies with active and ongoing share repurchase programs do not preclude sales by executives and directors while the companies’ repurchases are ongoing. We believe allowing insider transactions in this context is entirely appropriate, and view the potential for abuse in these situations as largely theoretical. Moreover, compliance with Rule 10b-18, which is a safe harbor designed to prevent issuer repurchases from pushing up a company’s stock price, should provide additional comfort that same-day insider sales and company repurchases are not designed to benefit insiders, as should the use of Rule 10b5-1 trading plans. However, with the advent of trade-day reporting by companies, companies should expect that there will be greater scrutiny by the SEC, shareholders, and the press of insider sales and company repurchases that occur on the same day. Therefore, to the extent they do not already do so, companies should monitor and keep track of their insiders’ open market transactions, whether pursuant to Rule 10b5-1 plans or otherwise, so that they can evaluate the risks of corporate actions or significant announcements that might be viewed as questionable in hindsight. Companies also may want to consider whether to develop policies or procedures addressing potential appearance issues that could arise if they are effecting relatively isolated or unusually large repurchases (other than pursuant to a company’s Rule 10b5-1 buyback plan) on the same day as significant sales by insiders, particularly if those sales are effected by the CEO or by executives who might be expected to be involved in managing the company’s repurchase program, such as the CFO.

Exhibit: Tabular Disclosure Format

ISSUER PURCHASES OF EQUITY SECURITIES

Use the checkbox to indicate if any officer or director reporting pursuant to Section 16(a) of the Exchange Act (15 U.S.C. 78p(a)), or for foreign private issuers as defined by Rule 3b-4(c) (§ 240.3b-4(c) of this chapter), any director or member of senior management who would be identified pursuant to Item 1 of Form 20-F (§ 249.220f of this chapter), purchased or sold shares or other units of the class of the issuer’s equity securities that are registered pursuant to section 12 of the Exchange Act and subject of a publicly announced plan or program within four (4) business days before or after the issuer’s announcement of such repurchase plan or program or the announcement of an increase of an existing share repurchase plan or program.

(a) Execution Date	(b) Class of Shares (or Units)	(c) Total Number of Shares (or Units) Purchased	(d) Average Price per Share (or Unit)	(e) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(f) Aggregate Maximum Number (or Approximate Dollar Value of Shares or Units) that May Yet Be Purchased Under the Publicly Announced Plans or Programs	(g) Total Number of Shares (or Units) Purchased on the Open Market	(h) Total Number of Shares (or Units) Purchased that are Intended to Qualify for the Safe Harbor in Rule 10b-18	(i) Total Number of Shares (or Units) Purchased Pursuant to a Plan that is Intended to Satisfy the Affirmative Defense Conditions of Rule 10b5-1(c)

[insert additional rows as necessary for each day on which a repurchase was executed]

Total:

The following Gibson Dunn attorneys assisted in preparing this update: Ronald O. Mueller, James J. Moloney, Maggie Valachovic, Nicholas Whetstone, and Chris Connelly.

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

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York, NY (+1 212-351-2309, lzyskowski@gibsondunn.com)
Brian J. Lane – Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com)
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)
Thomas J. Kim – Washington, D.C. (+1 202-887-3550, tkim@gibsondunn.com)
Michael A. Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com)
Aaron Briggs – San Francisco, CA (+1 415-393-8297, abriggs@gibsondunn.com)
Julia Lapitskaya – New York, NY (+1 212-351-2354, jlapitskaya@gibsondunn.com)

Capital Markets Group:
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)

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

On May 1, 2023, Los Angeles’s single-use plastics ordinance went into effect for most restaurants and food facilities in unincorporated areas of Los Angeles.[1] This ordinance, passed in 2022, requires that all single-use food-service containers, cups, dishes, and cutlery used by restaurants and other food facilities be recyclable or compostable.[2]

The ordinance aims to cut down on single-use plastics in three ways. First, the ordinance bans single-use food service items such as utensils, plates, and cups that are not compostable or recyclable.[3] Second, the ordinance bans the use of “expanded polystyrene” foam (Styrofoam) products.[4] Third, the ordinance requires that sit-down restaurants provide guests with reusable dishes and silverware.[5] Single-use utensils may still be offered in conjunction with food delivery services, but only if a customer affirmatively chooses to request utensils in their order. Third-party delivery platforms are required to establish separate choices related to single-use utensils.[6]

Violations are deemed a public nuisance, and violators may be fined up to a maximum of $100 per day, to a maximum of $1,000 per year; the ordinance also allows for civil actions seeking injunctive relief as well as civil penalties of up to $1,000 for each day of the violation.[7] Given these potential penalties, the ordinance is taking effect in phases. While it goes into effect today for restaurants, it will go into effect for food trucks on November 1, 2023, and it will take effect on May 1, 2024 for temporary food facilities, such as farmers’ markets.[8]

Although this ordinance is limited in scope, clients should be aware that similar local ordinances and state laws are in effect or being contemplated elsewhere. For example, San Mateo and Marin County both passed similar legislation in recent years.[9] Additionally, California passed state-wide legislation last year to reduce single-use plastic. This law requires that 30% of plastic items sold or bought be recyclable by 2028.[10] Earlier this year, England passed a law banning a range of single-use plastics, including plates, cutlery, and food containers. That law will go into effect in October.[11] Clients may want to consider innovations that they can make in light of the increase in ordinances and laws like these.

__________________________

[1] Los Angeles County, Cal. Ordinance 12.86.015(G) (2022).

[2] See generally id. 12.86.

[3] Id. 12.86.015(A).

[4] Id. 12.86.050.

[5] Id. 12.86.040.

[6] Id. 12.86.025.

[7] Id. 12.86.090, 12.86.100.

[8] Id. 12.86.015(G).

[9] San Mateo County, Cal. Ordinance 4.107 (2022); Marin County, Cal. Ordinance 7.25 (2022).

[10] Cal. Pub. Res. Code § 14547.

[11] GOV.UK, Far-reaching ban on single-use plastics in England (Jan. 14, 2023), available at https://www.gov.uk/government/news/far-reaching-ban-on-single-use-plastics-in-england.

The following Gibson Dunn lawyers prepared this client update: Abbey J. Hudson, Perlette M. Jura, Emily Riff, and Al Kelly.

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

Environmental, Social and Governance (ESG) Group:
Susy Bullock – London (+44 (0) 20 7071 4283, sbullock@gibsondunn.com)
Abbey Hudson – Los Angeles (+1 213-229-7954, ahudson@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)
Selina S. Sagayam – London (+44 (0) 20 7071 4263, ssagayam@gibsondunn.com)

This edition of Gibson Dunn’s Federal Circuit Update summarizes the current status of several petitions pending before the Supreme Court, addresses a proceeding by the Judicial Council of the Federal Circuit, and summarizes recent Federal Circuit decisions concerning indefiniteness, inherency, obviousness, enablement, and patent-eligibility.

Federal Circuit News

Supreme Court:

As we summarized in our March 2023 update, on March 27, 2023, the United States Supreme Court heard oral argument in Amgen Inc. v. Sanofi (U.S. No. 21-757) on enablement under 35 U.S.C. § 112. A decision in this case is expected by the end of June.

Noteworthy Petitions for a Writ of Certiorari:

This month, there is a new potentially impactful petition pending before the Supreme Court:

NST Global, LLC v. Sig Sauer Inc. (US No. 22-1001): The petition raises questions regarding whether the Patent Trial and Appeal Board’s (“Board’s”) decision to sua sponte construe a patent’s preambles as limiting violates certain statutory and constitutional rights of the patentee, and whether the Federal Circuit’s practice of Federal Circuit Rule 36, which provides for summary affirmance without opinion, violates “constitutional guarantees, statutory protections under 35 U.S.C. § 144, and undermines public trust in the judicial system.” The response is due on May 15, 2023.

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

The Court is considering petitions in Avery Dennison Corp. v. ADASA, Inc. (US No. 22-822), Nike, Inc. v. Adidas AG et al. (US No. 22-927), and Ingenio, Inc. v. Click-to-Call Technologies, LP (US No. 22-873). After the respondents in these cases waived their right to file a response, the Court requested responses in all three cases. The responses are due May 2, 2023, May 18, 2023, and May 26, 2023, respectively.

The petitions in Arthrex, Inc. v. Smith & Nephew, Inc. (US No. 22-639), Interactive Wearables, LLC v. Polar Electro Oy (US No. 21-1281), and Tropp v. Travel Sentry, Inc. (US No. 22-22) are still pending. In Arthrex, a response was filed on April 12, 2023, and a reply was filed on April 28, 2023. The Solicitor General submitted its views in Interactive Wearables and Tropp, and the Court will consider these petitions during its May 11, 2023 conference.

The Court denied the petitions in Thaler v. Vidal (US No. 22-919) and Novartis Pharmaceuticals Corp. v. HEC Pharm Co., Ltd. (US No. 22-671).

Other Federal Circuit News:

Judicial Council of the Federal Circuit Proceeding. On April 14, 2023, the Judicial Council of the Federal Circuit released a statement confirming that a proceeding under the Judicial Conduct and Disability Act and the implementing Rules had been initiated naming Judge Pauline Newman as the subject judge. The full statement may be found here.

Upcoming Oral Argument Calendar

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

Key Case Summaries (April 2023)

Ironburg Inventions Ltd. v. Valve Corp., Nos. 21-2296, 21-2297, 22-1070 (Fed. Cir. Apr. 3, 2023): Ironburg sued Valve for infringing its video game controller patent. The case was tried before a jury over Zoom, and the jury returned a verdict finding that Valve willfully infringed certain claims of Ironburg’s patent. On appeal, Valve argued that the district court erred in concluding that the “elongate member” and “substantially the full distance between the top edge and the bottom edge” were not indefinite.

The majority (Stark, J., joined by Lourie, J.) affirmed on the indefiniteness issues and vacated and remanded on another issue. The majority reasoned that “elongate member,” which means a member that is longer than it is wide, was not indefinite even though it lacked objective guidance as to “how much longer than wider the member must be.” Despite the lack of “numerical precision,” the specification disclosed that the purpose of the elongate shape was to provide users of varying hand sizes the ability to engage the paddles in a comfortable position. The majority therefore concluded that a person of skill in the art could ascertain with reasonable certainty the scope of the claims. For similar reasons, the majority concluded that “substantially the full distance between the top edge and the bottom edge” was not indefinite.

Judge Clevenger dissented. In his view, an ordinary artisan “desiring to produce a non-infringing handheld controller” would need to know “where along the top edge to start the measurement, and where along the bottom edge to complete the measurement” to ascertain the “full distance” as recited in the claims. While the specification provides guidance for the top edge, because that is where the controls are mounted, there is no guidance for the bottom edge.

Arbutus Biopharma Corporation v. Modernatx, Inc., No. 20-1183 (Fed. Cir. Apr. 11, 2023): The Board determined that Arbutus’s U.S. Patent No. 9,404,127 directed to stable nucleic acid-lipid particles (“SNALP”) that have a non-lamellar structure and related methods was anticipated by another Arbutus patent, U.S. Patent No. 8,058,069. In particular, the Board found that the limitation reciting a non-lamellar morphology (the “morphology limitation”) is inherently disclosed by the ‘069 patent as a consequence of the composition of the disclosed SNALP and the method used to produce it.

The Federal Circuit (Reyna, J., joined by Schall and Chen, JJ.) affirmed. Because there was no dispute that the ‘069 patent did not explicitly teach the morphology limitation, the Court focused on whether the limitation was inherently disclosed and found no error in the Board’s conclusion that it was. In doing so, the Court rejected Arbutus’s argument that there is only a “probability” that the morphology limitation would result from controlling several variations of formulations and processes. Instead, it found that there are a “limited number of tools”—five formulations and two processes—that a person skilled in the art would follow that would result in a composition with the “inherent morphological property.”

Sanderling Management Ltd. v. Snap Inc., No. 21-2173 (Fed. Cir. Apr. 12, 2023): Sanderling sued Snap for infringing a patent directed to a method for distribution of dynamic digital promotional content. The district court granted Snap’s motion to dismiss because the patent claimed patent-ineligible subject matter under 35 U.S.C. § 101.

The Federal Circuit (Stark, J., joined by Chen and Cunningham, JJ.) affirmed. The Court concluded that the district court did not err by resolving the motion to dismiss without first undertaking claim construction. “If claims are directed to ineligible (or eligible) subject matter under all plausible constructions, then the court need not engage in claim construction before resolving a Section 101 motion.” The Court agreed with the district court that the claims were directed to the abstract idea “‘of providing information—in this case, a processing function—based on meeting a condition,’ e.g., matching a GPS location indication with a geographic location,” with no inventive concept.

UCB, Inc. v. Actavis Labs. UT, Inc., No. 21-1924 (Fed. Cir. Apr. 12, 2023): UCB developed and marketed Nuepro^®, a transdermal rotigotine patch to treat Parkinson’s. Nuepro^® used a drug-to-stabilizer ratio of 9:2, within the range of 9:1.5 to 9:5 claimed in UCB’s initial Nuepro^® patents. But in commercialization, the 9:2 ratio proved unstable. UCB reformulated to a ratio of 9:4 and was granted U.S. Patent No. 10,130,589, which claimed a range of 9:4 to 9:6. UCB then asserted the ‘589 patent in a Hatch-Waxman action against Actavis. Third Circuit Judge Kent Jordan, sitting as the trial judge by designation, held the asserted claims of the ‘589 patent to be invalid as anticipated and obvious over UCB’s earlier patents, which disclosed an overlapping range.

The Federal Circuit (Stoll, J., joined by Moore, C.J., and Chen, J.) affirmed on obviousness grounds only. The Court noted that UCB’s prior patents did not expressly disclose “a point” within the claimed range of 9:1.5 to 9:5 that fell within the newly claimed range of 9:4 to 9:6. As the Court explained, the disclosure of a range does not disclose points within the range. Nor is it sufficient that a skilled artisan might readily “envisage” points within the range. Instead, an overlapping range anticipates only if it describes the claimed range with “sufficient specificity” such that “there is no reasonable difference in how the invention operates over the ranges.” The Court thus determined that the district court misapplied the law on anticipation. But, as the Court noted, it need not resolve the issue of anticipation because an overlapping range creates a “presumption of obviousness,” and because the patentee failed to rebut that presumption, the Court upheld invalidity on that basis.

FS.com Inc. v. International Trade Commission (No. 22-1228) (Fed. Cir. Apr. 20, 2023): Corning filed a complaint with the International Trade Commission (“ITC”) alleging that FS was violating 19 U.S.C. § 1337 (“Section 337”) by importing high-density fiber optic equipment (commonly used in data centers) that infringed four of Corning’s patents. The administrative law judge (“ALJ”) determined FS violated Section 337 finding, in part, that certain claims were infringed, and rejecting FS’s invalidity challenges, including that certain claims were not enabled. The ITC declined to review the ALJ’s enablement determination and adopted the ALJ’s analysis.

The Federal Circuit (Moore, C.J., joined by Prost and Hughes, JJ.) affirmed. The claims at issue recited a fiber optic density of “at least” 98 or 144 fiber optic connections per U space. FS argued that these open-ended density ranges were not enabled because the specification only enables up to 144 fiber optic connections per U space and that the ITC erred in concluding that some inherent upper limit exists. The Court determined that the ITC properly construed these claims as covering only connection densities up to about 144 connections per U space in light of the specification and expert testimony that densities substantially above that were technologically infeasible.

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

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

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

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

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

London partner Penny Madden KC and of counsel Ceyda Knoebel are the authors of “Arbitrability and Public Policy Challenges,” [PDF] an extract from the third edition of Global Arbitration Review’s The Guide to Challenging and Enforcing Arbitration Awards published in April 2023.

The whole publication is available here.

Gibson Dunn’s Public Policy Practice Group is closely monitoring developments regarding the infrastructure permitting debate in Congress. We offer this alert summarizing and analyzing the U.S. Senate Environment and Public Works Committee’s hearing on April 26, 2023 to help our clients prepare for potential changes in infrastructure permitting and environmental authorization laws. We are also available to help our clients arrange meetings on Capitol Hill to discuss permitting reform proposals or to share real-world examples of how the permitting process has affected them.

* * *

On April 26, 2023, the U.S. Senate Committee on Environment and Public Works (the “Committee”) held a hearing addressing the need to improve the federal infrastructure permitting process. During the hearing, witnesses testified on the necessity of various changes to the current permitting process, focusing on energy projects. Witnesses included:

Christy Goldfuss, Chief Policy Impact Officer, National Resource Defense Council (“NRDC”)
Dana Johnson, Senior Director of Strategy and Federal Policy, WE ACT
Christina Hayes, Executive Director, Americans for a Clean Energy Grid
Jay Timmons, President & CEO, National Association of Manufacturers
Marty Durbin, Senior Vice President of Policy, U.S. Chamber of Commerce

The majority of senators who spoke at the hearing expressed interest in finding a bipartisan compromise on permitting reform. Chairman Tom Carper (D-DE) highlighted recent legislation that has increased the need for permitting reform—especially the Infrastructure Investment and Jobs Act (also known as the Bipartisan Infrastructure Law); the Inflation Reduction Act; and the CHIPS and Science for America Act. Those three laws directed billions of taxpayer dollars to developing infrastructure projects across the United States, many of which must obtain federal permits.

We provide a full hearing summary and analysis below. Of particular interest to clients, however:

Chairman Carper set out three main goals he said any bipartisan permitting reform package must meet. It must (1) result in lower emissions and protect bedrock environmental laws; (2) support early and meaningful community engagement, especially for projects that affect historically disadvantaged communities; and (3) provide businesses—in particular, clean energy businesses—with certainty and unlock economic growth across the country.
Ranking Member Shelley Moore Capito (R-WV) emphasized the need for permitting reform to proceed through regular order (i.e., for it to go through the committee process rather than developed by an informal “gang”).
Both Chairman Carper and Ranking Member Capito commented on the importance of real-world examples to convey the need for permitting reform to the American public.
All members agreed that improving front-end community engagement is crucial for any permitting reform package.

Key substantive issues surrounding permitting reform raised in the hearing include: (1) the effectiveness of the FAST-41 permitting reforms; (2) the need for early planning and community engagement; (3) the scope of permitting reform; (4) enforceable timelines and regulatory clarity; (5) litigation; (6) critical minerals and microchip manufacturing; and (7) agency funding.

Effectiveness of FAST-41 Permitting Reforms

In his opening statement, Chairman Carper praised the effectiveness of the FAST-41 program, which created the Federal Permitting Improvement Steering Council (“FPISC” or “Permitting Council”) and provides an agency coordination process for facilitating the permitting process for some of the largest infrastructure projects. He noted that from 2010 to 2018, on average, it took 4.5 years to create a project’s environmental impact statement, but for FAST-41 projects, it took only 2.5 years. Chairman Carper’s support for the FAST-41 framework suggests he may be open to permitting reforms that rely on a similar framework that provide for increased agency communication, coordination, and transparency. Note, too, that Senator Manchin’s 2022 permitting bill heavily drew from the FAST-41 framework.

Similarly, Senator Pete Ricketts (R-NE) suggested that the federal permitting agencies should employ the Lean Six Sigma managerial process, which aims to reduce waste and inefficiencies. He observed that the Lean Six Sigma process cut the timeline for one type of permit in Nebraska from 190 days to 65 days over the course of one year without loosening environmental restrictions. Ms. Goldfuss observed that the FAST-41 process includes some of those same principles, such as the designation of a lead agency to engage with a project proponent and a public, online dashboard that offers transparency into the permitting process for individual projects.

Need for Early Planning and Community Engagement

Senators and witnesses alike agreed that early planning and community engagement is crucial for improving the permitting process. For example, Ms. Goldfuss commented that project sponsors and the government should work together to plan and site development in ways that minimize impact before permitting begins. She also encouraged the federal government to partner with state agencies to share data, mitigation options, and guidance, and she advocated for the federal government to use Inflation Reduction Act funds to help states with planning and permitting.

Likewise, Ms. Johnson advocated for early and ongoing communication during the project planning process. She suggested undertaking community engagement with a neutral party facilitating the conversation and making the comment process more accessible for people who do not have access to computers or who cannot attend public hearings.

Ms. Hayes also endorsed early and meaningful communication with communities and suggested that project sponsors should provide community benefits and revenue sharing. In his opening, Chairman Carper commended a West Virginia project for providing grants for communities surrounding a turbine wind farm and ensuring that construction jobs went to the local labor force.

Senator Ben Cardin (D-MD) expressed concern that rushing permitting processes will prevent community participation. Ms. Johnson responded that Congress cannot prioritize speed over quality and suggested frontloading the engagement process before work on an environmental impact statement or environmental assessment begins.

Scope of Permitting Reform

One of the clear divides between Republicans and Democrats is the scope of permitting reform—both regarding the types of projects such reforms will help and the reforms themselves.

Regarding the types of projects, throughout the hearing, Democrats focused on the need for increased energy transmission and green energy infrastructure. Ranking Member Capito, however, emphasized permitting reform needs to help all infrastructure projects, “not just a small subset that are politically favorable to one group or another.” Other Republicans echoed this sentiment. Mr. Durbin expressed the need for permitting reform to support natural gas development, including interstate pipelines, as well as critical mineral mining and broadband expansion.

Regarding reforms themselves, Ranking Member Capito argued that to make substantive change, Congress will have to amend the underlying environmental statutes, including the Clean Water Act, Clean Air Act, and the National Environment Policy Act (“NEPA”). Senator Kevin Cramer (R-ND) also endorsed amending the environmental statutes.

On the other hand, Ms. Goldfuss contended that “NEPA is not the problem.” She said that instead of focusing on NEPA reforms, agencies should be encouraged to make greater use of programmatic environmental impact statements using a “design one, build many” model. Regarding transmission lines, she argued that the Federal Energy Regulatory Commission and the Department of Energy should move quickly to designate national interest corridors.

Enforceable Timelines and Regulatory Clarity

Ranking Member Capito stated that there need to be “enforceable timelines with clear time limits and predictable schedules for environmental reviews and consequences for when agencies fail to act in a timely fashion.” Mr. Timmons echoed her concern for enforceable timetables in his opening statement, particularly for hydrogen, natural gas, and nuclear infrastructure.

Mr. Timmons also argued that the Environmental Protection Agency and other agencies should refrain from issuing new or shifting regulations and that Congress should hold the federal government accountable for implementing the congressional intent of the One Federal Decision effort, enacted as part of the IIJA.

Litigation

Senator Dan Sullivan (R-AK) expressed concern that litigation is unnecessarily hampering energy projects. Mr. Durbin responded that litigation against natural gas pipelines increases costs for manufacturers and consumers. He emphasized that natural gas is part of the clean energy economy, but litigation affects its reliability and affordability. Mr. Timmons argued that judicial review should be “meaningful and timely.”

In response to questioning from Senator Jeff Merkley (D-OR), Ms. Goldfuss acknowledged that the NRDC opposed Senator Manchin’s permitting proposal last Congress, in part because of the limited timeline for judicial review for certain projects.

Critical Minerals and Microchip Manufacturing

Several senators and witnesses discussed the need to improve the permitting process for mining critical minerals given the national security concerns associated with China manufacturing and processing 80 percent of the critical minerals used in modern technology.

Senator Mark Kelly (D-AZ) expressed his interest in permitting reform to help accelerate microchip manufacturing in the United States. He noted that application of the NEPA process to CHIPS Act funding recipients may unnecessarily delay meeting the national security goal of onshoring chips manufacturing. Mr. Durbin argued that all projects need to have environmental review and community input, but Congress needs to make sure the process is functional and that decisions can be made quickly to advance the CHIPS Act goals.

Agency Funding

Senators Merkley and Ed Markey (D-MA) argued that the real cause of permitting delays is underfunding of federal agencies. Senator Markey suggested that Congress should wait to see the impact of the recently passed Inflation Reduction Act’s allocation of $1 billion to agencies before making any further reforms to the permitting process.

* * *

Senior members of Gibson Dunn’s Public Policy Practice Group have more than 40 years of combined experience on Capitol Hill. Our team includes former congressional staff and Administration officials who have significant experience tracking, developing, and implementing infrastructure permitting reform legislation and regulations. We also have strong working relationships with key members of Congress and Biden administration officials focused on federal permitting reform.

Our team is available to assist clients through strategic counseling; real-time intelligence gathering on federal permitting reform legislation; developing and advancing policy positions; drafting legislative text; shaping messaging; and lobbying Congress. We also work with clients to craft regulatory comment letters; advocate before executive branch agencies; and navigate legislative and regulatory changes to federal infrastructure permitting laws.

The following Gibson Dunn lawyers assisted in preparing this alert: Michael D. Bopp, Roscoe Jones Jr., David Fotouhi, Amanda Neely, Daniel P. Smith, and Miguel Mauricio.*

Gibson, Dunn & Crutcher’s 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 in the firm’s Public Policy or Environmental Litigation and Mass Tort practice groups, or the following authors:

Michael D. Bopp – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)

David Fotouhi – Washington, D.C. (+1 202-955-8502, dfotouhi@gibsondunn.com)

Amanda H. Neely – Washington, D.C. (+1 202-777-9566, aneely@gibsondunn.com)

Daniel P. Smith – Washington, D.C. (+1 202-777-9549, dpsmith@gibsondunn.com)

*Miguel Mauricio is a recent law graduate working in the firm’s San Francisco office who is not admitted to practice law.

On April 21, 2023, the Financial Stability Oversight Council (“FSOC”) proposed several changes to how the agency would designate nonbank financial companies as systemically important financial institutions (“SIFIs”), thereby subjecting them to supervision by the Federal Reserve and additional regulations. In the first of two proposed “interpretive guidance“ documents, FSOC would “revise and update” its 2019 Interpretive Guidance on several fronts, with the expressed goal of eliminating “hurdles” to FSOC’s ability to designate nonbank financial companies as systemically important. In the second proposed interpretive guidance document, FSOC sets forth an “analytic framework” that it would employ when assessing a company’s “potential risk or threat to U.S. financial stability,” and accordingly whether to designate the company as systemically important. FSOC has also issued factsheets for the first and second proposed interpretive guidances.

These new documents (together, the “Proposed Guidance”), if finalized, would implement several key changes to FSOC’s current Interpretive Guidance. Under the current Guidance, adopted in 2019, FSOC employed an “activities-based approach” to assess risk and would designate individual entities as SIFIs only as a “last resort.” The Proposed Guidance would eliminate any requirement to use an activities-based approach before designating individual entities. The Proposed Guidance would also remove any obligation that FSOC consider a company’s likelihood of material financial distress before designating that company. Finally, the Proposed Guidance eliminates any requirement that FSOC conduct a cost-benefit analysis before designating companies as SIFIs. These changes would expand FSOC’s ability to designate nonbank financial companies as SIFIs, and thus to subject them to additional regulation.

Below, we provide background information on FSOC’s designation process; Gibson Dunn’s challenge to FSOC’s designation of MetLife; the key changes that the Proposed Guidance would implement; the likely implications of those changes; and, finally, the steps to be taken now by concerned parties.

I. Background of FSOC’s Designation Process

Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) established FSOC and gave it the power to designate a nonbank financial company as a SIFI, meaning that FSOC has determined that material financial distress at the company, or the company’s nature, scope, size, scale, concentration, interconnectedness, or mix of activities, could pose a threat to U.S. financial stability. 12 U.S.C. § 5323(a)(1). This designation imposes on the designated nonbank financial company Federal Reserve examination, supervision, and enforcement authority, as well as enhanced prudential standards—including heightened capital and liquidity requirements, leverage limits, resolution planning, concentration limits, and stress testing and early remediation requirements. Id.

In 2012, FSOC promulgated guidance describing the manner in which the agency would make designation determinations. This guidance provided, for example, that FSOC would assess the company’s vulnerability to material financial distress before addressing the effect of that potential distress, and that the agency would assess the company’s threat to U.S. financial stability. See Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 77 Fed. Reg. 21,637, 21,653 (Apr. 11, 2012).

In FSOC’s thirteen years of existence, the agency has designated four nonbank financial companies as SIFIs: American International Group, Inc.; General Electric Capital Corporation; Prudential Financial, Inc.; and MetLife, Inc. Only MetLife challenged its designation.

Represented by Gibson Dunn, MetLife brought suit in federal district court, which court ruled that FSOC’s designation of MetLife was arbitrary and capricious and ordered FSOC to rescind the designation. See MetLife, Inc. v. Fin. Stability Oversight Council, 177 F. Supp. 3d 219 (D.D.C. 2016). The district court first held that FSOC had violated its own rules by failing to consider whether MetLife was vulnerable to material financial distress, and whether hypothetical distress at MetLife would pose a threat to U.S. financial stability. Id. at 233–39. The district court also held that FSOC’s designation decision was arbitrary and capricious because it failed to consider the costs of designating MetLife. Id. at 239–42. FSOC appealed the decision to the D.C. Circuit, but then voluntarily dismissed its appeal. See MetLife, Inc. v. Fin. Stability Oversight Council, No. 16-5086, 2018 WL 1052618, at *1 (D.C. Cir. Jan. 23, 2018). On remand, the district court denied a motion to vacate the portion of its opinion that held FSOC was required to perform a cost-benefit analysis. See Order, MetLife, Inc. v. Fin. Stability Oversight Council, No. 1:15-cv-00045-RMC, Dkt. 129 (D.D.C. Feb. 28, 2018).

By 2018, FSOC had rescinded all of its prior designations. Then, in 2019, FSOC amended its regulations, adopting many of the positions that MetLife had presented in the litigation. See Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 84 Fed. Reg. 71,740 (Dec. 30, 2019). In particular, the agency adopted an activities-based approach to assessing potential risks to U.S. financial stability, which focuses on working with other federal and state financial regulators to identify and regulate particularly risky activities, and considers designating individual companies to be a last-resort option. FSOC also committed to performing cost-benefit analyses during its designation decisions, and to assessing the likelihood that the entity would actually experience material financial distress.

II. FSOC’s Proposed Guidance Changes

FSOC’s new Proposed Guidance would disavow many of the changes that FSOC made in its 2019 Interpretive Guidance in response to the MetLife decision. As noted above, three changes in the Proposed Guidance would prove especially important.

First, FSOC’s Proposed Guidance would abandon its activities-based approach to preventing material financial distress in the U.S. economy. Under that approach, FSOC monitors the economy and works with federal and state financial regulators to identify particular activities that could pose a risk to U.S. financial stability in certain contexts. Once they identify a risky activity, FSOC works with those regulatory bodies to address the identified potential risk, and considers designating a particular company to be a last resort. This approach enables regulators to promulgate consistent and predictable rules that govern a particular market as a whole, rather than singling out certain entities for unique treatment. The Proposed Guidance, however, would drop that approach in favor of more aggressively designating individual firms based on “non-exhaustive” risk factors contained in the new “analytic framework,” including leverage, liquidity risk and maturity mismatch, interconnections, operational risks, complexity or opacity, inadequate risk management, concentration, and destabilizing activities.

Second, the Proposed Guidance would eliminate any requirement that FSOC consider a company’s likelihood of material financial distress before designating that company as a SIFI. The Proposed Guidance suggests that inquiring into the likelihood of material financial distress is neither “required [n]or appropriate” because such distress can be difficult to recognize or predict. Accordingly, when evaluating future designations, FSOC would “presuppos[e]” that a company is experiencing material financial distress—irrespective “of the likelihood” of such distress in the real world—and assess the impact that this hypothetical distress might have on the broader economy.

Third, the Proposed Guidance would eliminate any requirement that FSOC conduct a cost-benefit analysis before designating a nonbank financial company as a SIFI, despite the district court’s ruling in MetLife that failure to conduct that analysis was arbitrary and capricious and violated the Supreme Court’s ruling in Michigan v. EPA, 576 U.S. 743 (2015), which had held that when a statute allows an agency to regulate when “appropriate,” the agency must consider the costs of its regulation. The Proposed Guidance posits that weighing the increased costs from regulatory burdens against the potential benefits of designation is not “useful or appropriate,” given difficulties in assessing costs and the “potentially enormous” benefits of designation in averting financial crises. It portrays its loss in the district court as having no legal significance on this point. See FSOC, Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies at 16 n.16 (Apr. 21, 2023).

III. Implications of the Proposed Guidance

The goal of the Proposed Guidance is to broaden—and accelerate—FSOC’s ability to identify and designate certain nonbank financial companies as SIFIs, and thus to subject them to additional and potentially onerous supervision, examination, and regulation. The retreat from an activities-based approach would also limit companies’ ability to know in advance what activities would risk designation, and thus to plan their future behavior. Recent statements by financial regulators suggest that the targets of FSOC’s proposed approach may include traditional nonbank financial companies (for instance, insurers, hedge funds, open-end funds, and money-market funds), along with more recent market entrants (such as stablecoin issuers and other FinTechs engaged in financial activities, including nonbank peer-to-peer payments companies).

The Proposed Guidance may be vulnerable to many of the same objections that prevailed in the MetLife litigation. For example, footnote 16 of the Proposed Guidance asserts that FSOC need not conduct any cost-benefit analysis because MetLife was wrongly decided and has no “preclusive effect.” But, as noted above, the district court rejected the government’s attempt, after it had dismissed its appeal, to vacate the cost-benefit portion of the court’s opinion. Moreover, the district court had explained that its cost-benefit decision was compelled by the Supreme Court’s decision in Michigan v. EPA. See MetLife, 177 F. Supp. 3d at 240 (citing Michigan, 576 U.S. at 752). FSOC remains bound by the Supreme Court’s Michigan decision and any designation that ignores cost-benefits considerations will be vulnerable to the same argument on which Gibson Dunn prevailed in MetLife.

Similarly, the district court held that the text of the Dodd-Frank Act itself mandates an inquiry into a company’s likelihood of material financial distress, see MetLife, 177 F. Supp. 3d at 241 (citing 12 U.S.C. § 5323(a)(2)(K))—the same inquiry that the Proposed Guidance now seeks to discard.

IV. Next Steps

FSOC’s Proposed Guidance is subject to public notice and comment for 60 days following publication of the Proposed Guidance in the Federal Register. Incisive comments may have an effect on the substance of the final documents, and may also form the basis for any future court challenges to FSOC’s final guidance and to any nonbank financial company’s potential designation.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Administrative Law and Regulatory, Financial Institutions, or FinTech and Digital Assets practice groups, or the following authors:

Eugene Scalia – Washington, D.C. (+1 202-955-8673, escalia@gibsondunn.com)
Ashlie Beringer – Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com)
Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com)
Amir C. Tayrani – Washington, D.C. (+1 202.887.3692, atayrani@gibsondunn.com)
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com)
Jason J. Cabral – New York (+1 212-351-6267, jcabral@gibsondunn.com)
Lochlan F. Shelfer – Washington, D.C. (+1 202-887-3641, lshelfer@gibsondunn.com)

On April 6, 2023, President Biden signed an executive order entitled “Modernizing Regulatory Review” (the “Order”). The Order makes a number of significant changes to the process by which the White House Office of Information and Regulatory Affairs (“OIRA”) reviews significant regulatory measures. Under executive orders issued by previous presidents, all “significant regulatory actions” are subject to OIRA review, and agencies must perform a cost-benefit analysis of the action before it is undertaken. President Biden’s new Order narrows the definition of what constitutes a “significant regulatory action,” including by doubling the monetary threshold of annual effects on the national economy (raising it from $100 million to $200 million) and adjusting the threshold based on changes in Gross Domestic Product going forward.

The Order also directs the White House Office of Management and Budget (“OMB”) to propose revisions to OMB Circular A-4, which is the primary guidance document governing how executive branch agencies conduct cost-benefit analyses. On April 6, OMB issued its proposed revisions. They include changes to –

lower discount rates that convert future costs and benefits into current dollars;
provide greater weight to the distributional effects of a regulatory action; and
encourage the assessment of even highly uncertain effects of regulatory action.

If finalized, OMB’s proposed revisions would represent the most significant change to how agencies conduct cost-benefit analysis since Circular A-4 was first issued in 2003. In combination with the changes effected by the Order, OMB’s proposal would likely lead to more and faster regulatory action, by, for instance, reducing OIRA oversight and relieving agencies of their obligation to prepare cost benefit analyses for certain regulatory measures. Similarly, many of OMB’s changes could result in agencies more frequently concluding that a regulatory measure is cost-justified. For example, because the costs of new regulations are often incurred in the near-term, while the benefits often accumulate more gradually over longer periods of time, the lower discount rates OMB proposes may mean that agencies will be more likely to find that the benefits of a regulatory action outweigh its costs. This is particularly true for regulations that address longer term phenomena, such as climate change, which is an example OMB discusses in its proposal.

OMB’s proposed changes could also lead to greater litigation vulnerability for certain regulatory measures. In particular, a court may be more likely to find an action arbitrary and capricious if it is based on highly uncertain benefit assessments that are identified by commenters during the notice and comment process. Some of OMB’s revisions to how costs and benefits are weighed could create opportunities for commenters to challenge agencies’ analyses.

By its terms, the Order only applies to “executive departments and agencies.” Independent agencies, such as the FTC, SEC, and FCC, are apparently not covered. That makes sense because they are not subject to the regulatory review process that President Biden’s Order is modifying. Independent agencies will thus be largely unaffected by many of the changes the Order is introducing. However, in some instances, independent agencies voluntarily follow the guidance set forth in Circular A-4, or otherwise interact with OIRA regarding cost-benefit analyses, as in connection with the Congressional Review Act. To the extent independent agencies follow the guidance in Circular A-4, their regulatory analyses may therefore be affected by the proposed changes.

Interested parties have until June 6 to submit comments on OMB’s proposed changes to Circular A-4.

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 in the firm’s Administrative Law and Regulatory Practice or Public Policy groups, or the following authors in Washington, D.C.:

Eugene Scalia (+202-955-8210, escalia@gibsondunn.com)

Helgi Walker (+202-887-3599, hwalker@gibsondunn.com)

Michael Bopp (+202-955-8256, mbopp@gibsondunn.com)

Blake Lanning (+202-887-3794, blanning@gibsondunn.com)

We are pleased to provide you with Gibson Dunn’s Accounting Firm Quarterly Update for Q4 2022. The Update is available in .pdf format at the below link, and addresses news on the following topics that we hope are of interest to you:

PCAOB Announces New Enforcement Director
PCAOB Advisory Group Meeting Suggests Topics of Regulatory Interest
PCAOB Releases 2022 Annual Report
PCAOB and U.S. Senators Raise Questions About Crypto “Proof of Reserves” Reports
PCAOB Sued as Unconstitutional by John Doe Plaintiff
SEC Files Petition for Certiorari in SEC v. Jarkesy
CPAB Brings Rare Enforcement Action Against U.S. Firm
House Signals More SEC Oversight
Ninth Circuit and Ohio Supreme Court Issue Rulings of Interest on Employment Arbitration Agreements and Ransomware Attack Insurance
NLRB Issues Decision on Enforceability of Severance Agreement Provisions
SDNY Criminal Motion Alleges Conflict in Representing Both Company and Employee
Other Recent SEC and PCAOB Regulatory Developments

Read More

Accounting Firm Advisory and Defense Group:

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

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

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

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

Mass arbitration is a growing phenomenon in which thousands of plaintiffs—often consumers, employees, or independent contractors—bring arbitration demands against a company at the same time. Pursuing arbitrations in this manner can impose significant, even crippling, costs on companies, particularly in light of the hefty filing fees that many arbitration providers charge. Many companies, however, have deployed successful strategies for deterring and defending against mass arbitrations, primarily through the careful drafting of their arbitration agreements. This webcast describes some of these strategies, as well as recent developments in the law affecting mass arbitrations and the ethical concerns surrounding this issue.

PANELISTS:

Dhananjay (DJ) Manthripragada is a partner in the Los Angeles and Washington, D.C. offices of Gibson, Dunn & Crutcher. He is Chair of the firm’s Government Contracts practice group, and also a member of the Litigation, Class Actions, Labor & Employment, and Aerospace and Related Technologies practice groups. Mr. Manthripragada has a broad complex litigation practice, and has served as lead counsel in precedent setting litigation before several United States Courts of Appeals, District Courts in jurisdictions across the country, California state courts, the Court of Federal Claims, and the Federal Government Boards of Contract Appeals. He has first-chair trial experience and has successfully tried to verdict both jury and bench trials, and has served as lead counsel in arbitration and other alternative dispute resolution forums. His practice spans a wide range of industries, and he has represented some of the world’s leading aerospace and defense, logistics/transportation, high-technology, finance, and pharmaceutical companies in their most significant matters. Mr. Manthripragada is also highly regarded as a trusted advisor to clients regarding significant compliance/enforcement, contract, dispute resolution, and employment issues. He was recognized in The Best Lawyers in America® Ones to Watch in Commercial Litigation in 2021 and 2022.

Michael Holecek is a litigation partner in the Los Angeles office of Gibson, Dunn & Crutcher, where his practice focuses on complex commercial litigation, class actions, labor and employment law, and data privacy—both in the trial court and on appeal. Mr. Holecek has first-chair trial experience and has successfully tried to verdict both jury and bench trials, he has served as lead arbitration counsel, and he has presented oral argument in numerous appeals. Mr. Holecek has also authored articles on appellate procedure, civil discovery, corporate appraisal actions, data privacy, and bad-faith insurance litigation.

Jesenka Mrdjenovic is Of Counsel in Gibson, Dunn & Crutcher’s Washington, D.C. office, where she practices in the firm’s Litigation Department. Ms. Mrdjenovic represents clients in complex litigation and appellate matters, with a particular focus on class action defense. She has represented clients at the trial and appellate levels in matters involving constitutional, employment, intellectual property, consumer protection, and antitrust law. Ms. Mrdjenovic previously served as senior counsel for one of the nation’s largest mortgage lenders and Chief Litigation Officer to a holding company connecting more than 100 portfolio entities in a broad range of industries. In her role as an in-house attorney, Ms. Mrdjenovic managed complex litigation matters and advised senior management on a variety of legal, contract, and regulatory issues.

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 General hour.

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, Virginia, Texas and Washington State Bars.

Washington, D.C. partners Helgi Walker and Russell Balikian and associate Robert Batista are the authors of “In Axon, Justices Continue Reining In Administrative State,” [PDF] published by Law360 on April 21, 2023.

Washington, D.C. partner Lucas Townsend, Dallas partner Brad Hubbard and Los Angeles associate Matt Aidan Getz contributed to the article.

Washington, D.C. partner Elizabeth Ising, Dallas partner Krista Hanvey, Washington, D.C. associate Geoffrey Walter and Dallas associate Gina Hancock are the co-authors of “Executive Compensation Disclosure Handbook: A Practical Guide to the SEC’s Executive Compensation Disclosure Rules,” [PDF] published by Donnelley Financial Solutions in February 2023.

The New York City Department of Consumer and Worker Protection, or DCWP, released final rules on April 6 regarding the city’s Local Law 144 and announced that it would begin enforcement on July 5.

Local Law 144 restricts employers and employment agencies from using an automated employment decision tool in hiring and promotion decisions unless it has been the subject of a bias audit by an “independent auditor” no more than one year prior to use. The law also imposes certain posting and notice requirements to applicants and employees subject to the use of AEDTs.

The DCWP is vested with the authority to amend the Rules of the City of New York under the New York City Charter and New York City Administrative Code. As detailed below, the DCWP’s final rules make a number of noteworthy changes and attempt to clarify the law.

1. The rules attempt to clarify the scope of covered AEDTs.

Local Law 144 defines an AEDT as:

Any computational process, derived from machine learning, statistical modeling, data analytics, or artificial intelligence, that issues simplified output, including a score, classification, or recommendation, that is used to substantially assist or replace discretionary decision making for making employment decisions that impact natural persons.

The final rules seek to clarify two of the key phrases within this definition.

The final rules define “machine learning, statistical modeling, data analytics, or artificial intelligence” as a group of mathematical, computer-based techniques:

That generate a prediction, e.g., an assessment of a candidate’s fit or likelihood of success, or a classification, e.g., categorizing applicants based on skill sets or aptitude; and

For which a computer identifies, at least in part, the inputs and their relative importance and, if applicable, other parameters to improve the model’s predictive accuracy.

The phrase “to substantially assist or replace discretionary decision making” is defined as:

To rely solely on a simplified output (score, tag, classification, ranking, etc.), with no other factors considered; or
To use a simplified output as one of a set of criteria where the simplified output is weighted more than any other criterion in the set; or
To use a simplified output to overrule conclusions derived from other factors including human decision-making.

Notably, this definition appears to permit employers to use the AEDT without conducting a bias audit where an AEDT’s output falls outside the specified circumstances.

Local Law 144 provides several examples of tools outside the scope of covered AEDT, i.e., calculators, junk email filters and spreadsheets. The final rules, however, do not provide any further examples.

Read More

Reproduced with permission. Originally published by Law360, New York (April 19, 2023).

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 authors:

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

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

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

The Biden administration has been steadily evolving its views of national security risks and priorities—and what measures the executive branch will take to mitigate those risks. Last fall’s National Security Strategy called out critical technology and cybersecurity as key national security concerns. This focus sharpened with the release of the National Cybersecurity Strategy last month. And, most recently, the administration has submitted a $3.1 billion budget request for the Cybersecurity and Infrastructure Security Agency (CISA), a 22 percent increase from its request last year, to implement that strategy and fund other initiatives. While strategy is not policy, and budget proposals are not appropriations, these are strong signals of the shifting winds of the administration regarding the tools and incentives the administration will deploy to mitigate cybersecurity risks.

After years of relying on largely voluntary standards to encourage companies to harden their cybersecurity defenses, interspersed with incentives including funding and grants, the administration has definitively taken the position that it does not think companies have done enough. Accordingly, the new cybersecurity strategy calls for a heavier hand. Should the strategy be implemented, companies can expect to see direct liability, new regulations, and lawsuits from the federal government itself for companies that fail to make secure products, do not adopt minimum security measures, or misrepresent the actions they have taken. These new measures come as the administration is increasingly focused on strategic competition with China.

Below, we highlight the four main tools that companies should know about that the Biden Administration has vowed to use to secure critical infrastructure and industry from cyber threats.

1. Direct liability for software vendors. First, the Biden administration says that software companies and vendors should be directly liable for failing to adopt “reasonable” security measures into the programs used to power critical infrastructure and other areas. The administration said it has been unhappy with voluntary efforts to increase software security, which have made progress but has been inconsistent across industries. And, because the administration believes that software vendors and companies that control data are in the best position to address this liability, it said that they should bear responsibility for failing to adopt those reasonable measures and not their end users and infrastructure providers who will be impacted by those failures directly.

“We’re all walking around with unsafe technology. So we have to change the incentives,” CISA Director Jen Easterly told a House subcommittee recently as she sought funding for the federal government’s efforts. “We may need to look at certain liability for whether manufacturers have duty of care to be able to protect those consumers.”

The legislation the administration is contemplating to implement this liability would prohibit software terms of service from disclaiming all liability for security flaws, even if the flaw is from open-source software that has been integrated into the commercial project, and would also impose higher standards of care in high-risk areas.

2. New rulemaking and legislation to fill in regulatory gaps. Second, in addition to legislation on direct liability, the administration is planning new rulemaking and other legislation to close gaps in existing law that impose minimum security standards in a host of industries. In particular, cloud-based services are not all covered by existing regulations despite being integrated into systems across industries. These new regulations should be “performance-based,” the administration said, and modeled after voluntary frameworks from the National Institute of Standards and Technology (NIST) and CISA.

This comes in the wake of other rulemaking for such standards in the oil and gas pipeline, aviation, rail, and water sectors. And other legislative efforts have also advanced security measures, such as the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (CIRCIA) that requires critical infrastructure providers to notify federal authorities about cybersecurity incidents. The administration is advancing rulemaking to implement CIRCIA as well, with CISA in the lead.

The administration seeks to pair these new requirements with new funding and financial incentives to speed compliance. While some companies can absorb these costs, others have low margins that make this difficult. Thus, in those areas, the administration is encouraging regulators to tilt incentives to reduce these costs, such as through favorable tax and rate-setting arrangements. Such arrangements would be on top of the funding that the government is already pouring into this area through the CHIPS and Science Act, the Inflation Reduction Act, and the Bipartisan Infrastructure Law. Further, the administration said it is exploring a government-backed support for the cyber insurance market to protect it in the event of a catastrophic event.

3. Government to lead the way—including as a plaintiff. Third, in all of these areas, the administration also signaled that it will itself set the bar for private industry to follow, such as by updating its own technology and through procurement processes to test new cybersecurity requirements, and will update its own technology using standards that it wants private industry to adopt as well. For example, the administration is prioritizing cryptography upgrades to public computer networks to be resistant to quantum-based efforts to compromise those networks. This is not just to secure the government’s own networks but also to set the bar that it expects the private sector to follow.

The administration has also signaled it will increase regulatory harmonization, make it easier for companies reporting an incident to connect with the appropriate officials quickly, modernize federal technology, and engage in research and development efforts. Given the increasing patchwork of notification requirements and various government equities in cyber incidents, such harmonization is critical to reducing the regulatory burden on companies—particularly during the high operational tempo of cyber incident response.

The federal government has indicated that it will continue to bring actions to enforce cybersecurity commitments. For example, the Department of Justice has already used the False Claims Act to pursue companies that allegedly misrepresent cybersecurity commitments in their federal contracts. And the Department of Justice has also launched a new nationwide “disruptive technology strike force” with the Commerce Department to coordinate efforts to respond to threats to critical infrastructure.

4. Shifting focus from criminal groups to state actors. Finally, the administration has signaled that the central threat that it has built its strategy around is from state actors. While criminal groups using ransomware to extract groups are still addressed by the administration’s strategy, it is the governments of China, Russia, Iran, and North Korea where the strategy is focused. The administration has highlighted the efforts of those state actors, and in particular China, to carry out cyber attacks and compromise vulnerable infrastructure. In an echo of the National Security Strategy, the cybersecurity strategy highlights that China “now presents the broadest, most active, and most persistent threat.” And also without naming China, the strategy notes that domestic networks should reduce their dependence “on critical foreign products and services from untrusted suppliers,” pointing to the longstanding controversy over China-based companies that supply hardware and equipment for U.S. computer networks.

The administration’s cybersecurity strategy further highlights the administration’s increased cross-border efforts to coordinate cybersecurity efforts with Australia, the United Kingdom and other European countries, India, Japan, and others.

In sum, the key takeaways for private industry in the administration’s cybersecurity strategy, as reinforced by budget priorities, are that companies in an ever-wider set of industries will not only be tempted into compliance with new funding or cajoled from the bully pulpit to increase their cybersecurity measures, but will also have to contend with a more forceful response from government that will expect them to meet security standards and promises—and face liability if they fail to do so. This increased enforcement may also be complicated by multiple agencies pursuing the same actions, resulting in the potential for companies having to deal with overlapping and uncoordinated inquiries. And with the increasing focus on state actors in place of cybercriminals, the strategy shows less of a focus on private ransomware issues and an increasing national security response that may serve as a prioritization filter. While the strategic objectives outlined in the cyber strategy and backed by the budget proposal will require significant executive action prior to coming into effect, companies should prepare now to meet the shifting approach towards increased cybersecurity requirements and liability.

The following Gibson Dunn lawyers assisted in preparing this alert: Alexander Southwell, Stephenie Gosnell Handler, and Eric Hornbeck.

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

United States
S. Ashlie Beringer – Co-Chair, PCDI Practice, Palo Alto (+1 650-849-5327, aberinger@gibsondunn.com)
Jane C. Horvath – Co-Chair, PCDI Practice, Washington, D.C. (+1 202-955-8505, jhorvath@gibsondunn.com)
Alexander H. Southwell – Co-Chair, PCDI Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Matthew Benjamin – New York (+1 212-351-4079, mbenjamin@gibsondunn.com)
Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com)
David P. Burns – Washington, D.C. (+1 202-887-3786, dburns@gibsondunn.com)
Gustav W. Eyler – Washington, D.C. (+1 202-955-8610, geyler@gibsondunn.com)
Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)
Svetlana S. Gans – Washington, D.C. (+1 202-955-8657, sgans@gibsondunn.com)
Lauren R. Goldman – New York (+1 212-351-2375, lgoldman@gibsondunn.com)
Stephenie Gosnell Handler – Washington, D.C. (+1 202-955-8510, shandler@gibsondunn.com)
Nicola T. Hanna – Los Angeles (+1 213-229-7269, nhanna@gibsondunn.com)
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com)
Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com)
Vivek Mohan – Palo Alto (+1 650-849-5345, vmohan@gibsondunn.com)
Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com)
Rosemarie T. Ring – San Francisco (+1 415-393-8247, rring@gibsondunn.com)
Ashley Rogers – Dallas (+1 214-698-3316, arogers@gibsondunn.com)
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com)
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com)
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com)
Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com)

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

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

Dallas partner Allyson Ho is the co-author of “The Supreme Court Should Move to Protect Victims of True Threats,” [PDF] published by Bloomberg Law on April 17, 2023.

Decided April 14, 2023

Axon Enterprise, Inc. v. FTC (No. 21-86), SEC v. Cochran (No. 21-1239)

The Supreme Court held today in two related cases that federal district courts have jurisdiction to resolve certain challenges to the structure or existence of the Federal Trade Commission (“FTC”) and Securities and Exchange Commission (“SEC”), rejecting the argument that litigants can raise such challenges only on review of a final agency action before the court of appeals.

Background: Federal district courts have jurisdiction to hear “civil actions arising under the Constitution.” 28 U.S.C. § 1331. Federal courts of appeals also have jurisdiction to review certain agency actions, including final orders of the FTC and SEC. 15 U.S.C. §§ 45, 78y(a)(1).

Axon Enterprise, a company that was subject to an FTC enforcement action, and Michelle Cochran, a certified public accountant who was subject to an SEC enforcement action, each sued the respective agency in federal district court while their enforcement actions were pending. Axon and Cochran argued that the agencies’ basic structure and operations were unconstitutional and the pending enforcement actions were unlawful.

The district courts in both cases dismissed the complaints, holding that the specialized judicial-review provisions in the FTC Act and Exchange Act deprived them of jurisdiction by funneling review of final agency orders to the federal courts of appeals. The Fifth and Ninth Circuits reached different conclusions on that issue—the Ninth Circuit affirmed the dismissal for lack of jurisdiction, but the en banc Fifth Circuit reasoned that structural constitutional challenges to an agency’s jurisdiction were not the sort of claims Congress meant to funnel to the courts of appeals through the statutory review scheme.

Issue: Whether, by giving the courts of appeals jurisdiction to review final agency orders of the FTC and SEC, Congress stripped federal district courts of jurisdiction to hear constitutional challenges to the agencies’ structure or existence.

Court’s Holding:

Federal district courts have jurisdiction under 28 U.S.C. § 1331 to hear cases raising structural challenges to the FTC or SEC.

“[T]he review schemes set out in the Exchange Act and the FTC Act do not displace district court jurisdiction over Axon’s and Cochran’s far-reaching constitutional claims.”

Justice Kagan, writing for the Court

Gibson Dunn submitted an amicus brief on behalf of Raymond J. Lucia, Sr., George R. Jarkesy, Jr., and Christopher M. Gibson, in support of respondent in No. 21-1239: Michelle Cochran

What It Means:

Today’s decision allows people and businesses subjected to FTC and SEC (and potentially other) administrative enforcement actions to promptly raise certain structural challenges in court, without having to first complete long and costly agency proceedings (which often settle before a final order). As the Court recognized, permitting suits to proceed in federal district court allows regulated parties to vindicate the “here-and-now injury” of being subjected to unconstitutional administrative processes.
The Court’s holding likely implicates other agencies subject to similar review provisions, such as the Consumer Financial Protection Bureau.
More generally, the Court’s decision confirms that Congress’s establishment of special administrative review procedures does not necessarily require a claim to be channeled through that administrative process when: (1) doing so would preclude meaningful judicial review, (2) the claim is collateral to the administrative-review provisions, and (3) the claim is beyond the agency’s expertise to adjudicate.
The Court focused its holding on structural constitutional claims and did not specifically address whether other types of claims—fact-specific constitutional due-process claims, for example—may be raised directly in federal court or must instead proceed through the administrative-review process first.
The decision will likely keep pressure on the SEC to file contested claims in district court, providing regulated entities challenging SEC actions with greater procedural rights and protections than are available in administrative proceedings.
Today’s decision—issued with no dissent—reflects the current Court’s strong interest in reining in excesses of the administrative state by reinforcing constitutional limitations on the structure, composition, and operation of administrative agencies.

The Court’s opinion is available here.

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

Appellate and Constitutional Law Practice

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

Related Practice: Administrative Law and Regulatory Practice

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

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

Related Practice: Antitrust and Competition

Rachel S. Brass
+1 415.393.8293
rbrass@gibsondunn.com

Stephen Weissman
+1 202.955.8678
sweissman@gibsondunn.com

Related Practice: Securities Enforcement

Richard W. Grime
+1 202.955.8219
rgrime@gibsondunn.com

Mark K. Schonfeld
+1 212.351.2433
mschonfeld@gibsondunn.com

David Woodcock
+1 214.698.3211
dwoodcock@gibsondunn.com

Related Practice: Litigation

Reed Brodsky
+1 212.351.5334
rbrodsky@gibsondunn.com

Theane Evangelis
+1 213.229.7726
tevangelis@gibsondunn.com

Veronica S. Moyé
+1 214.698.3320
vmoye@gibsondunn.com

In an April 13, 2023 webcast, the CHIPS Program Office (“CPO”) at the Department of Commerce provided a deep dive on the Financial Information requirements for funding applications and pre-applications. We have provided a fulsome discussion of CHIPS Act funding in our previous alerts here and here. The key takeaway from this most recent discussion is that applicants need to prepare thorough financial statements both for their pre-applications and even more so for their final applications. The financial analysis needs to give the government confidence that the projects already have solid financial backing and strong future prospects for financial success.

In particular, the CPO addressed the evaluation criteria for Financial Information, the differences—both in form and substance—between Financial Information submitted at the pre-application and application stages, and published resources and templates that can guide the preparation of these materials.

The CPO stressed that this guidance applies only to applicants applying for funding pursuant to its first Notice of Funding Opportunities (“NOFO”).[1] Detailed application instructions for other applicants will be released after the publication of the second and third NOFOs, in late spring and fall 2023, respectively.

I. Evaluation Criteria for Financial Information

As discussed in our previous alert, the CPO will evaluate all applications and pre-applications according to six key criteria: (1) economic and national security objectives; (2) commercial viability; (3) financial strength; (4) technical feasibility and readiness; (5) workforce development; and (6) projects’ broader impacts.[2] During the April 13th webcast, CPO staff emphasized that the Financial Information an applicant provides will be the primary source by which their application’s commercial viability and financial strength will be assessed.[3]

Commercial Viability: To establish a project’s commercial viability, Financial Information should demonstrate:
- a demand for the product;
- the size and diversity of the product’s customer base;
- expected volume and pricing dynamics;
- the stability of key supplies; and
- the project’s ability to counter potential technological obsolescence.

This reinforces a continuing CPO CHIPS Act tenet of deploying CHIPS Act capital to projects that have the optimal path for a combination of commercial success, onshoring of fabrication (particularly for leading nodes), and/or bolstering of sensitive industry verticals such as defense applications.

Financial Strength: Applicants should use their Financial Information submissions to paint a clear picture of their own financial strength, as well as that of their project and their corporate parent (if applicable). Additionally, the CPO stressed that it will prioritize projects that demonstrate meaningful third party financial validation, and thus do not rely solely on CHIPS Act funding, but have secured commitments for concurrent third-party investments, loans and associate guarantees, and/or local or state government incentives.[4]

II. Differences Between Pre-Application and Application Financial Information

At a high level, CPO staff described the difference between pre-application and final application financials as the level of necessary granularity. Because the pre-application’s primary objective is to create a dialogue and opportunity for feedback from the CPO, Financial Information at this stage needs only to provide “sufficient preliminary information on the proposed project(s)” to enable meaningful feedback from the CPO.[5] (CPO staff emphasized, however, that the more detail they receive at the pre-application stage, the better they can evaluate the project’s strengths and weaknesses.)[6] When judging the merits of a final application, on the other hand, applicants’ Financial Information must be extensive and detailed.

In addition to this high-level guidance, the CPO noted specific differences between the materials required to complete the Financial Information portions of the pre-application and the application, listed below:[7]

Pre-Application	Full Application
I. Financial Information Narrative	I. Financial Plan
II. Financial Ownership Structure	II. Sources and Uses of Funds
III. Sources and Uses of Funds	III. Project Cash Flow, Balance Sheet, and Income Statement Projections
IV. Company Financials	IV. Scenario Analyses
V. Summary Financials	V. CHIPS Incentives Request
VI. CHIPS Incentives Request	VI. CHIPS Loan or Loan Guarantee Request

For example, whereas both the pre-application and application require some form of summary narrative, the application specifically requires a financial plan for each proposed project, including narratives on cash flow projections, key equity return and debt service metrics, and sensitivity analyses.

Applicants should be sure to consult the NOFO and the CPO’s Guiding Principles for Full Application Financial Model to ensure that the final application’s Financial Information moves beyond “preliminary information” and provides the level of granularity necessary to obtain funding.

III. Resources and Templates

The CPO has prepared and published a number of resources and templates for the preparation of applications and pre-applications under the first NOFO, including extensive materials on the Financial Information requirements.[8]

One of the most substantial aspects of the Financial Information is the need for a dynamic financial model including variable inputs for key assumptions. This model must be comprehensive, including variables such as funding sources and cash flows to (in the final application) scenario analyses, internal rates of return, and risk and debt service metrics. Companies are free to use their own financial models and plans to satisfy these requirements, but the CPO has also created a Pre-Application Example Financial Model (and accompanying Pre-Application Example Financial Model White Paper) to demonstrate the types of financial data needed at the pre-application stage. As applicants move to the final application stage, they should also consult the Guiding Principles for Full Application Financial Model. These models demonstrate the level of specificity and types of data the CPO expects to see in an application’s Financial Information. CPO staff reiterated, however, that they are merely examples. Depending on an applicant’s unique business needs, additional data fields may be necessary.[9]

While these reference guides are illustrative examples of the financials CPO expects to review, applicants will be required to submit templates for certain parts of their pre-application and application Financial Information. These required templates are:

Pre-Application	Application
Pre-Application Sources and Uses Template	Full Application Offline Template Sources and Uses Full Application Offline Incentives Request

Guidance on how to use these templates can be found in the Pre-Application Instructions and the Sources and Uses of Funds Instructions.

Additional resources and templates can be found at the CHIPS for America Guides and Templates webpage.

IV. How Gibson Dunn Can Assist

Gibson Dunn has an expert team tracking implementation of the CHIPS Act closely, including semiconductor industry subject matter experts and our Public Policy Practice Group professionals. Our team is available to assist eligible clients to secure funds throughout the application process. We also can engage with our extensive contacts at the Department of Commerce and other federal agencies to facilitate dialogue with our clients and discuss the structure of future CHIPS Act programs being developed.

________________________

[1] 5 U.S.C. § 4651(2); U.S. Dep’t of Commerce Nat’l Institute of Standards and Technology Notice of Funding Opportunity, CHIPS Incentives Program—Commercial Fabrication Facilities, https://www.nist.gov/system/files/documents/2023/02/28/CHIPS-Commercial_Fabrication_Facilities_NOFO_0.pdf [hereinafter, NOFO]; Department of Commerce Webcast (Apr. 13, 2023).

[2] NOFO at 58–64.

[3] Department of Commerce Webcast (Apr. 13, 2023).

[4] Id.

[5] Id.

[6] Id.

[7] NOFO at 35–37, 43–47.

[8] CHIPS for America Guides and Templates: CHIPS Incentives Program—Commercial Fabrication Facilities (last accessed Apr. 13, 2023), https://www.nist.gov/chips/guides-and-templates-chips-incentives-program-commercial-fabrication-facilities.

[9] Department of Commerce Webcast (Apr. 13, 2023).

The following Gibson Dunn lawyers prepared this client alert: Ed Batts, Michael Bopp, Roscoe Jones, Jr., Amanda Neely, Danny Smith, and Sean Brennan.*

Michael D. Bopp – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)

Ed Batts – Palo Alto (+1 650-849-5392, ebatts@gibsondunn.com)

Amanda H. Neely – Washington, D.C. (+1 202-777-9566, aneely@gibsondunn.com)

Daniel P. Smith* – Washington, D.C. (+1 202-777-9549, dpsmith@gibsondunn.com)

*Daniel P. Smith is of counsel working in the Washington, D.C. office who is admitted only in Illinois and practicing under supervision of members of the District of Columbia Bar under D.C. App. R. 49. Sean J. Brennan is an associate working in the firm’s Washington, D.C. office who currently is admitted to practice only in New York.

The German Government adopted the draft of the 11th amendment to the Act against Restraints on Competition on 5 April 2023. The initial draft had been published by the German Ministry of Economic Affairs and Climate Action on 26 September 2022 (see our earlier client alert of 30 September 2022 here).

The ministry’s initial draft of the 11th amendment to the German Act against Restraints of Competition (“ARC”) (“initial draft bill”) triggered a broad public debate and has been criticized by various stakeholders, including some of the largest business associations. In particular, it has been criticized that the initial draft bill provided for unbalanced and overreaching additional powers for the German Federal Cartel Office’s (“FCO”), including an ultima ratio power to unbundle undertakings. These concerns have partly been addressed in the revised draft bill (“revised draft bill”). In particular the revised draft bill increases the threshold for the new ultima ratio powers compared to the initial draft bill. Still, the revised draft bill marks a substantial shift towards a new era of antitrust law enforcement, with extensive powers of the FCO to intervene in markets, even without a need to establish antitrust law infringements.

The main aspects of the revised draft bill include: (i) a revision of the sector inquiry tool and related interventional powers of the FCO; (ii) the facilitation of disgorgements of economic benefits; and (iii) the implementation of the DMA in the national framework of public and private enforcement.

New intervention powers of the FCO after completion of a sector inquiry

The FCO can conduct a sector inquiry if it suspects that competition in the market under investigation is restricted or distorted, unrelated to a specific competition law infringement. Such a sector inquiry is generally concluded with a report on the competitive conditions on the market under investigation. As of today, the FCO can only impose remedies if it finds that the restraint of competition is based on an infringement of antitrust law.

The revised draft bill gives power to the FCO to intervene on the market on which it was found that competition has been disrupted, even when there is no infringement of antitrust law. This would be an absolute novelty to German antitrust law.
The interventional powers of the FCO require that there is a “substantial and continuing distortion of competition on at least one market which is at least nationwide, on several individual markets or across markets”. This is supposed to clarify that the distortion of competition must have a certain intensity and cannot be only temporary. It marks one of the changes compared to the initial draft bill where a “significant, persistent or repeated distortion of competition” was required. The revised draft bill includes a non-exhaustive list of factors relevant for the assessment of a distortion of competition on the one hand, as well as the continuance of this distortion of competition (continued in the previous three years and is not expected to end in the upcoming two years) on the other hand.
If the FCO determines that there is a substantial and continuing distortion of competition, it can impose behavioral or structural remedies against one or more undertakings, including:
- Granting access to data, interfaces, networks or other facilities;
- Specifications to the business relationships between companies in the markets under review;
- Establishing transparent, non-discriminatory and open norms and standards;
- Requirements for certain types of contracts or contractual arrangements also with regard to the disclosure of information;
- Prohibition of unilateral disclosure of information that favors parallel behavior by companies;
- The organizational separation of corporate or business units; and
- As a ultima ration, the FCO may impose unbundling remedies on companies with a dominant market position and companies with paramount significance for competition across markets according to (the recently introduced) Sec. 19a ARC. In contrast to the initial draft bill, the revised draft bill does not provide for these remedies if a dominant position or paramount significance for competition across markets cannot be established. However, according to the revised draft bill, assets only have to be sold if the sales price is at least 50% of the price determined by an auditor that has been engaged by the FCO. If the actual sales price is below the price determined by the auditor, an additional payment in the amount of half of the difference between the audited value and the actual sales price has to be paid to the selling company from federal funds.

Additional / extended merger control after completion of a sector inquiry

As already provided for in the initial draft bill, the FCO can impose an obligation on specific undertakings to notify any future concentrations even if they do not meet (i.e. fall below) the regular merger control notification thresholds. This notification requirement can be imposed on companies if there are “objectively verifiable indications that future mergers could significantly impede effective competition in Germany in one or more of the economic sectors” specified in the sector inquiry report. A de minimis exception applies to transactions in which the buyer generated turnover with customers in Germany in its last completed financial year of less than EUR 50 million and/or the target of less than EUR 500,000. This “special notification obligation” expires after three years, but it can be extended.

Simplified disgorgement of economic benefits

Pursuant to the existing Sec. 34 ARC, in cases of an infringement of antitrust law, the FCO can order the disgorgement of profits achieved by a company as a result of an antitrust infringement. However, since the legal requirements for such a disgorgement are rather high, this provision has not been applied much in practice in the past.

The revised draft bill aims at facilitating the use of this instrument by the FCO. It holds that the FCO no longer has to prove an intentional or negligent infringement of antitrust law before making use of the disgorgement mechanism of Sec. 34 ARC. Further, the revised draft bills facilitates the establishment of economic benefits associated with antitrust infringements. If a violation of antitrust law is determined, the revised draft bill includes a presumption that the antitrust law infringement has resulted in an economic benefit for the concerned undertaking. The amount of the economic benefit can be estimated by the FCO, and there is even a legal presumption that at least 1% of the national turnover of the concerned company relating to the products and services affected by the antitrust law infringement are subject to disgorgement. A rebuttal of this presumption requires that neither the legal entity directly involved in the infringement nor its group generated a profit in the respective amount during the relevant period. However, the amount to be paid must not exceed 10% of the total turnover of the undertaking in the fiscal year preceding the decision of the authority.

Regarding the time frame in which the FCO can disgorge economic benefits, the revised draft bill retains the current legal status: The disgorgement of economic benefits may be ordered only within a period of up to seven years after the termination of the infringement and for a maximum period of five years. The initial draft bill provided a time period of ten years after the termination of the infringement with an unlimited disgorgement period.

Enforcement of the EU Digital Markets Act (DMA)

As already included in the initial draft bill, the revised draft bill is intended to establish the legal basis for enforcement of the DMA in Germany. The FCO will be able to conduct investigations with regard to violations of the DMA. However, the FCO can only conduct investigations. The results of the investigations shall be forwarded to the European Commission. The FCO has no powers of its own to sanction non-compliance with the DMA.

In addition, private enforcement of the DMA will be facilitated. The civil law enforcement mechanisms are inspired by the enforcement mechanisms of the EC’s cartel damage claim directive. In particular, final decisions of the European Commission finding a violation of the DMA will have binding effect in damages proceedings before German courts.

The revised draft bill does not include any changes compared to the initial draft bill with regard to the provisions relating to the enforcement of the DMA.

Outlook

The revised draft bill has to take another step in the legislative process by passing the German Parliament [Bundestag] and the German Federal Council [Bundesrat]. There also is still no clarity yet as to when the revised draft bill will enter into force, but it is expected to come into force still this year.

As already mentioned in the previous Client Alert (available here), the competent Ministry is already working on a draft 12th amendment of the German Competition Act with a focus on establishing more legal certainty for sustainability cooperation between companies as well as stronger consumer protection.

The following Gibson Dunn lawyers assisted in preparing this client update: Georg Weidenbach, Kai Gesing, Jan Vollkammer, and Elisa Degner.

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 of the following leaders or members of the firm’s Antitrust and Competition practice group:

Kai Gesing – Munich (+49 89 189 33 180, kgesing@gibsondunn.com)
Georg Weidenbach – Frankfurt (+49 69 247 411 550, gweidenbach@gibsondunn.com)
Christian Riis-Madsen – Co-Chair, Brussels (+32 2 554 72 05, criis@gibsondunn.com)
Ali Nikpay – Co-Chair, London (+44 (0) 20 7071 4273, anikpay@gibsondunn.com)
Rachel S. Brass – Co-Chair, San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)
Stephen Weissman – Co-Chair, Washington, D.C. (+1 202-955-8678, sweissman@gibsondunn.com)

With the rapid proliferation of artificial intelligence across industries and sectors, state legislatures have taken notice.

In the past few months alone, there has been a flurry of action at the state government level, including Connecticut, Illinois and Texas introducing bills to create government task forces to study AI, Massachusetts proposing an act drafted with ChatGPT to regulate generative AI models and at least four proposed bills governing automated-decision-making tools in employment.

While many of these states are only starting to dip their toes into the regulatory ring in this space, California has been steadily building its foundation for over a year and is positioning itself as a key regulator of AI in employment. Indeed, there have been a number of noteworthy proposals in California focused on automated-decision-making tools.

This article focuses on two of California’s recent proposals — regulations from the California Civil Rights Council and Assembly Bill 331 — and five things employers should know about them.

Read More

Reproduced with permission. Originally published by Law360, New York (April 12, 2023).

Cassandra L. Gaedt-Sheckter – Palo Alto (+1 650-849-5203, cgaedt-sheckter@gibsondunn.com)

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

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

On March 29, 2023, Iowa’s Governor, Kim Reynolds, signed Senate File 262 into law, making Iowa—somewhat unexpectedly—the sixth state, following California, Virginia, Colorado, Utah and Connecticut, to enact comprehensive data privacy legislation. Meanwhile, the Colorado Office of the Attorney General filed a final draft of the Colorado Privacy Act Rules (“CPA Rules”) with the Colorado Secretary of State’s Office on March 15, 2023. Additionally, on February 3, 2023, the California Privacy Protection Agency (“CPPA”) Board voted to (1) adopt and approve the CPPA’s California Privacy Rights Act (“CPRA”) regulations and (2) invite pre-rulemaking comments from the public on the topics of cybersecurity audits, risk assessments, and automated decision making. Finally, Utah’s Governor, Spencer Cox, signed two bills that regulate social media companies with respect to children’s use of social media platforms into law on March 23, 2023.

Iowa’s Comprehensive Privacy Law

Iowa’s law will become effective on January 1, 2025, and applies to any person conducting business in the state of Iowa, or producing products or services that are targeted to consumers who are residents of the state, and that processes a certain number of Iowa consumers’ personal data during a calendar year, namely:

100,000 Iowa consumers;[1] or
25,000 Iowa consumers, if the person derives over fifty percent of gross revenue from the sale of personal data.[2]

This definition tracks the non-California laws, though does not additionally have the $25 million incremental requirement like Utah. As a result, small businesses that process a large number of Iowa consumers’ data might be covered. Further, like Virginia’s, Colorado’s, Utah’s and Connecticut’s laws, Iowa’s law defines “consumer” as a natural person acting only in an individual or household context, thereby excluding employee and business-to-business (B2B) data from the law’s applicability.[3]

Iowa’s law draws heavily from its predecessors elsewhere as well, and is most similar to, and even more business-friendly in many ways than, Utah’s privacy law. Like Utah’s law, Iowa’s does not grant consumers the right to correct their personal data or opt out of the processing of their personal data for purposes of profiling, and grants consumers the right to opt out of (as opposed to opt in to) the processing of their sensitive personal data.[4] Additionally, Iowa’s law does not explicitly grant consumers the right to opt out of the processing of their personal data for purposes of targeted advertising or cross-context behavioral advertising, making it the only comprehensive state privacy law that does not do so.[5] However, Iowa’s law does specify that a controller that engages in targeted advertising “shall clearly and conspicuously disclose such activity, as well as the manner in which a consumer may exercise the right to opt out of such activity”, suggesting that not including the right to opt out of the processing of personal data for purposes of targeted advertising under consumer data rights may have been a drafting error.[6] Iowa’s law allows controllers 90 days to respond to consumer requests, which period may be extended by an additional 45 days upon notice to the consumer, along with a reason for the extension;[7] by contrast, all of the other state laws require controllers to respond within 45 days and allow them to extend such period by an additional 45 days upon notice and explanation to the consumer. Unlike Utah’s law, and like Virginia’s, Colorado’s, and Connecticut’s laws, Iowa’s affords consumers the right to appeal a controller’s denial of a consumer request.[8] Like Utah’s law, and unlike the others, Iowa’s law does not require controllers respond to opt-out preference signals or conduct data protection assessments. Additionally, Iowa’s law does not require controllers to practice purpose limitation or data minimization.

Iowa’s law grants the state attorney general exclusive enforcement authority, subject to a (longer-than-others) 90-day cure period.[9] The attorney general may seek injunctive relief and civil penalties of up to $7,500 per violation.[10]

Colorado Privacy Act Rules

On March 15, 2023, the Colorado Office of the Attorney General filed a final draft of the CPA Rules, which will be published in the Colorado Register later this month and will go into effect July 1, 2023. The draft regulations – finalized after a review of 137 written comments, five virtual and in-person public input sessions, and a rulemaking hearing – clarify language around consumers’ rights, consent, universal opt-out mechanisms, duties of controllers, and data protection assessments. Below, we’ve highlighted what we believe to be some of the most interesting and potentially impactful rules.

Right to Delete. While the Colorado Privacy Act (the “CPA”) affords Colorado consumers the right to delete personal data concerning them,[11] the CPA Rules clarify that if the controller has obtained personal data concerning the consumer from a source other than the consumer, the controller may comply with a consumer’s deletion request with respect to such personal data by opting the consumer out of the processing of such personal data.[12] This brings Colorado’s rules in line with Virginia’s law, leaving Connecticut as the only state that truly affords consumers the right to delete personal data obtained about them.

Universal Opt-Out Mechanisms. The CPA allows consumers to exercise their right to opt out of certain processing through a universal opt-out mechanism.[13] The CPA Rules specify the required technical specifications for such mechanisms and create standards governing the way that opt-out mechanism requirements must be implemented. Specifically, the CPA Rules indicate that the mechanism must (1) allow consumers to automatically communicate their opt-out choice with multiple controllers; (2) allow consumers to clearly communicate one or more opt-out rights; (3) store, process, and transmit consumers’ personal data using reasonable data security measures; (4) not prevent controllers from determining (a) whether a consumer is a Colorado resident or (b) that the mechanism represents a legitimate request to opt out of the processing of personal data; and (5) not unfairly disadvantage any controller.[14] The CPA Rules also specify that universal opt-out mechanisms may not be the default setting for a tool that comes pre-installed.[15] Additionally, the CPA Rules require the Colorado Department of Law to maintain a public list of universal opt-out mechanisms that have been recognized to meet the foregoing standards, with an initial list to be released no later than January 1, 2024.[16] The Global Privacy Control (GPC), which is recognized by the California Attorney General, is likely to be included on such list. By July 1, 2024, controllers must respond to opt-out requests received through universal opt-out mechanisms included on such list, provided that the controller has had at least six months’ notice of the addition of new mechanisms; the controller may (but is not required to) recognize universal opt-out mechanisms that are not included in such list.[17] Finally, a controller may not interpret the absence of a universal opt-out mechanism after the consumer previously used one as a consent to opt back in.

Loyalty Programs. The CPA Rules contain extensive disclosure requirements for controllers maintaining a “bona fide loyalty program”, which it defines as “a loyalty, rewards, premium feature, discount, or club card program established for the genuine purpose of providing [an offer of superior price, rate, level, quality, or selection of goods or services] to [c]onsumers that voluntarily participate in that program, such that the primary purpose of [p]rocessing [p]ersonal [d]ata through the program is solely to provide [such benefits] to participating [c]onsumers.”[18] Specifically, the CPA Rules require controllers disclose: (1) the categories of personal data collected through the bona fide loyalty program that will be sold or processed for targeted advertising; (2) the categories of third parties that will receive the consumer’s personal data; (3) a list of any bona fide loyalty program partners, and the benefits provided by each such partner; (4) an explanation of why the deletion of personal data makes it impossible to provide a bona fide loyalty program benefit (if the controller claims that is the case); and (5) an explanation of why sensitive data is required for the bona fide loyalty program benefit (if the controller claims that is the case).[19]

Changes to a Privacy Notice. The CPA Rules require controllers to notify consumers of material changes to their privacy notices, and specify that material changes may include changes to: (1) categories of personal data processed; (2) processing purposes; (3) a controller’s identity; (4) the act of sharing personal data with third parties; (5) categories of third parties personal data is shared with; or (6) methods by which consumers can exercise their data rights request.[20]

Purpose Specification, Data Minimization, and Secondary Use. The CPA Rules clarify the CPA’s purpose specification, data minimization, and secondary use provisions.[21] Notably, the CPA Rules require controllers set specific time limits for erasure or conduct a periodic review to ensure compliance with data minimization principles, and specify that biometric identifiers, photographs, audio or voice recordings and any personal data generated from photographs or audio or video recordings should be reviewed at least annually.[22] The CPA Rules require controllers obtain consent before processing personal data for purposes that are not “reasonably necessary to or compatible with specified [p]rocessing purpose(s)”, and enumerate factors that controllers may consider to determine whether the new purpose is “reasonably necessary to or compatible with” the original specified purpose.[23]

Sensitive Data. The CPA prohibits controllers from processing a consumer’s sensitive data without first obtaining consent.[24] Among other clarifications (including that biometric data must be used or intended for identification), the CPA Rules create a new category of sensitive data called sensitive data inferences, which are defined as “inferences made by a [c]ontroller based on [p]ersonal [d]ata, alone or in combination with other data, which indicate an individual’s racial or ethnic origin; religious beliefs; mental or physical health condition or diagnosis; sex life or sexual orientation; or citizenship or citizenship status”, and specify that controllers must obtain consent in order to process sensitive data inferences unless such inferences are (1) from consumers over the age of thirteen, (2) the processing purposes are obvious, (3) such inferences are permanently deleted within 24 hours, (4) such inferences are not transferred, sold, or shared with any processor, affiliates, or third parties, and (5) the personal data and sensitive data inferences are not processed for any purpose other than the express purpose disclosed to the consumer.[25]

Consent. The CPA Rules contain detailed requirements for what constitutes and how to obtain valid consent, as well as a significant discussion of user interface design, choice architecture, and dark patterns.[26] Specifically, consent must be informed, specific, freely given, obtained through clear and affirmative action, and reflect the consumer’s unambiguous agreement, and the CPA Rules provide additional guidance on each of these elements.[27] The CPA Rules require that controllers refresh consent to continue processing sensitive data or personal data for a secondary use that involves profiling in furtherance of decisions that produce legal or similarly significant effects when a consumer has not interacted with the controller in the prior 24 months; however, controllers are not required to refresh consent when the consumer has access and ability to update their opt-out preferences at any time through a user-controlled interface.[28] The CPA Rules indicate that controllers need to obtain consent before January 1, 2024 in order to continue processing sensitive data collected prior to July 1, 2023.[29] The CPA Rules also specify that if a controller has collected personal data prior to July 1, 2023 and the processing purposes change after July 1, 2023 such that it is considered a secondary use, the controller must obtain consent at the time the processing purpose changes.[30]

Data Protection Assessments. The CPA requires controllers to conduct and document a data protection assessment before conducting a processing activity that presents a heightened risk of harm to a consumer.[31] The CPA Rules clarify the scope and requirements of such data protection assessments, making Colorado the first state to provide regulations governing data protection assessments conducted under a comprehensive state privacy law. The CPA Rules specify thirteen topics that must be included in a data protection assessment, including a short summary of the processing activity, the categories of personal data processed, the sources and nature of risks to consumers associated with the processing activity, measures and safeguards the controller will employ to reduce such risks, and a description of how the benefits of the processing outweigh such risks. The CPA Rules indicate that if a controller conducts a data protection assessment for the purpose of complying with another jurisdiction’s law or regulation, such assessment shall satisfy the requirements set forth in the CPA Rules if such assessment is “reasonably similar in scope and effect” to the assessment that would otherwise be conducted pursuant to the CPA Rules.[32] If the assessment is not reasonably similar, a controller may still submit that assessment, along with a supplement that contains any additional information required by Colorado.[33] The CPA Rules also clarify that data protection assessments are required for activities created or generated after July 1, 2023; the requirement is not retroactive.[34]

Profiling. Colorado is also the first state to enact regulations governing profiling in the context of a comprehensive state privacy law. With respect to the right of access, the CPA Rules clarify that “specific pieces of personal data” include profiling decisions, inferences, derivative data, marketing profiles, and other personal data created by the controller that is linked or reasonably linkable to an identified or identifiable individual.[35] With respect to the right to opt out of the processing of personal data for purposes of profiling in furtherance of decisions that produce legal or similarly significant effects, the CPA Rules clarify that a controller may decide not to take action on such a request if the profiling is based on “human involved automated processing” (i.e., “the automated processing of [p]ersonal [d]ata where a human (1) engages in a meaningful consideration of available data used in the [p]rocessing or any output of the [p]rocessing and (2) has the authority to change or influence the outcome of the [p]rocessing”), provided that certain information is provided to the consumer.[36]

California Privacy Rights Act Regulations

On February 3, 2023, the CPPA Board voted to adopt and approve the CPPA’s CPRA regulations promulgated and revised to date, and to direct staff to take all steps necessary to complete the rulemaking process, including the filing of the final rulemaking package with the Office of Administrative Law (“OAL”).[37] On February 14, 2023, the CPPA submitted the rulemaking package to the OAL for final review.[38] The OAL has 30 days from the date of submission to review the proposed regulations; while the 30 days have passed, an update has not explicitly been released. The details of the regulations have been detailed in prior Gibson Dunn alerts.[40]

The Board also voted to invite pre-rulemaking comments from the public on cybersecurity audits, risk assessments, and automated decision making, for which there have not been any regulations drafted.[41] Following the vote, on February 10, 2023, the CPPA issued an Invitation for Preliminary Comments on Proposed Rulemaking on these topics.[42] Interested parties were required to submit comments by 5:00 p.m. PT on Monday, March 27, 2023. A copy of the invitation that was issued is available here.

Utah Social Media Regulation Act

On March 23, 2023, Utah’s Governor, Spencer Cox, signed two bills into law that regulate social media companies with respect to children’s use of social media platforms. Both will take effect on March 1, 2024.

S.B. 152 requires “social media companies”, which it defines as “a person or entity that: (a) provides a social media platform that has at least 5,000,000 account holders worldwide; and (b) is an interactive computer service”, to verify the age of Utah residents seeking to maintain or open an account, obtain parental consent before allowing a Utah resident under the age of 18 to open or maintain an account, and implement specific restrictions for Utah residents under 18.[43] Specifically, S.B. 152 prohibits social media companies from (1) showing minors’ accounts in search results, (2) displaying advertising to minors’ accounts, (3) targeting or suggesting groups, services, products, posts, accounts or users to minors’ accounts or (4) collecting, sharing, or using personal information from minors’ accounts (with certain exceptions).[44] Additionally, S.B. 152 requires social media companies to (1) prohibit minors’ accounts from direct messaging “any other user that is not linked to the [minor’s] account through friending”, (2) limit hours of access (subject to parental or guardian direction), and (3) provide parents with a password or other means of accessing the minor’s account.[45]

H.B. 311 prohibits social media companies from using a practice, design or feature that it knows (or should know through the exercise of reasonable care) causes a Utah resident under the age of 18 to “have an addiction to” the social media platform.[46] H.B. 311 defines “addiction” as “use of a social media platform that: (a) indicates the user’s substantial preoccupation or obsession with, or the user’s substantial difficulty to cease or reduce use of, the social media platform; and (b) causes physical, mental, emotional, developmental, or material harms to the user.”[47]

The laws grant authority to administer and enforce their requirements to the Division of Consumer Protection.[48] S.B. 152 also delegates certain rulemaking authority to the Division of Consumer Protection.[49] Violations of S.B. 152 are punishable by an administrative fine of up to $2,500 for each violation, subject to a 30-day cure period.[50] Violations of H.B. 311 are punishable by (1) a civil penalty of $250,000 for each practice, design, or feature shown to have caused addiction and (2) a civil penalty of up to $2,500 for each Utah minor account holder who is shown to have been exposed to such practice, design or feature.[51] Additionally, the laws provide for private rights of action and specify that the person who brings action is entitled to (a) an award of reasonable attorney fees and court costs and (b) an amount equal to the greater of (i) $2,500 per violation or (ii) actual damages for financial, physical, and emotional harm incurred by the person bringing the action.[52]

In a previous client alert, we discuss the California Age-Appropriate Design Code Act, which is also aimed at protecting the wellbeing, data, and privacy of children under the age of 18 using online platforms. However, Utah’s laws go much further. Together, these laws evidence the increased attention children’s privacy is receiving from lawmakers and regulators, as they are more targeted in scope—and incremental—as compared to each state’s previous, comprehensive privacy law.

Other States

State legislative activity regarding data privacy appears to be at an all-time high. Proposed data privacy legislation has passed a legislative chamber in Hawaii, Indiana, Kentucky, Montana, New Hampshire, and Oklahoma. Numerous other states are also actively considering data privacy legislation, with drafting and negotiations at various phases.

We will continue to monitor developments in this area, and are available to discuss these issues as applied to your particular business.

___________________________

[1] This is a fairly significant threshold to meet, as it is about 3% of the state’s population.

[2] S.F. 262, 90th Gen. Assemb., Reg. Sess. §§ 2(1), 10 (Iowa 2023).

[3] Id. § 1(7).

[4] See id. § 3.

[5] See id.

[6] See id. § 4(6).

[7] Id. § 3(2)(a).

[8] Id. § 3(3).

[9] Id. §§ 8(1)-(2).

[10] Id. § 8(3).

[11] Colorado Privacy Act (“CPA”), S.B. 21-190, 73rd Gen. Assemb., Reg. Sess., § 6-1-1306(1)(d) (Colo. 2021) (to be codified in Colo. Rev. Stat. Title 6).

[12] Colo. Dep’t of Law, Colorado Privacy Act Rules (“CPA Rules”), to be codified at 4 Colo. Code Regs. § 904-3, r. 4.06(D), available at https://coag.gov/app/uploads/2023/03/FINAL-CLEAN-2023.03.15-Official-CPA-Rules.pdf.

[13] CPA, § 6-1-1306(1)(a)(IV).

[14] CPA Rules, r. 5.06.

[15] Id., r. 5.04(A).

[16] Id., r. 5.07(A).

[17] Id., r. 5.08(A)-(B).

[18] Id., r. 2.02.

[19] Id., r. 6.05(F).

[20] Id., r. 6.04(A).

[21] Id., r. 6.06-.08

[22] Id., r. 6.07(B).

[23] Id., r. 6.08(B)-(C).

[24] CPA, § 6-1-1308(7).

[25] CPA Rules, r. 2.01(A), 6.10(A)-(B).

[26] Id., pt. 7

[27] Id., r. 7.03

[28] Id., r. 7.08(A)-(B).

[29] Id., r. 7.02(B)(1).

[30] Id., r. 7.02(B)(2).

[31] CPA, § 6-1-1309(1).

[32] CPA Rules, r. 8.02(B).

[33] Id.

[34] Id., r. 8.05(F).

[35] Id., r. 4.04(A)(1).

[36] Id., r. 2.02, 9.04(C)

[37] Cal. Priv. Prot. Agency, News & Announcements, CPPA Board Unanimously Votes to Advance Regulations (Feb. 3, 2023), available at https://cppa.ca.gov/announcements/.

[38] Cal. Priv. Prot. Agency, News & Announcements, CPPA Files Proposed Regulations with the Office of Administrative Law (OAL) (Feb. 14, 2023), available at https://cppa.ca.gov/announcements/.

[39] Id.

[40] See, e.g., U.S. Cybersecurity and Data Privacy Outlook and Review – 2023 (January 30, 2023), available at https://www.gibsondunn.com/us-cybersecurity-and-data-privacy-outlook-and-review-2023/#_ednref2; Insights on New California Privacy Law Draft Regulations, Gibson Dunn (June 15, 2022), available at https://www.gibsondunn.com/insights-on-new-california-privacy-law-draft-regulations/.

[41] Cal. Priv. Prot. Agency, News & Announcements, CPPA Board Unanimously Votes to Advance Regulations (Feb. 3, 2023), available at https://cppa.ca.gov/announcements/.

[42] Cal. Priv. Prot. Agency, News & Announcements, CPPA Issues Invitation for Preliminary Comments on Cybersecurity Audits, Risk Assessments, and Automated Decision Making (Feb. 10, 2023), available at https://cppa.ca.gov/announcements/.

[43] S.B. 152, 2023 Gen. Sess., §§ 13-63-101(8), 13-63-102(1),(3) (Utah 2023).

[44] Id., § 13-63-103.

[45] Id., §§ 13-63-103(1), 13-63-104, 13-63-105.

[46] H.B. 311, 2023 Gen. Sess., § 13-63-201(2) (Utah 2023).

[47] Id., § 13-63-101(2).

[48] S.B. 152, § 13-63-202(1); H.B. 311, § 13-63-201(1)(a).

[49] S.B. 152, § 13-63-102(4).

[50] S.B. 152, §§ 13-63-202(3)(a)(i), (4).

[51] H.B. 311, § 13-63-201(3)(a).

[52] S.B. 152, § 13-63-301; H.B. 311, § 13-63-301.

The following Gibson Dunn lawyers assisted in preparing this alert: Cassandra Gaedt-Sheckter, Ryan T. Bergsieker, and Sarah Scharf.

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

Since the CHIPS and Science Act (“CHIPS Act”) was enacted into law in August 2022, the Biden Administration has been busy implementing its mandate to “incentivize investment in facilities and equipment in the United States for the fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.”[1] As discussed in our previous client alert, the administration published the first of three expected Notices of Funding Opportunities (“NOFO”) on February 28, 2023, and the U.S. Department of Commerce (the “Department”) began evaluating pre-applications and applications from leading-edge facilities last month.[2]

In an April 11, 2023 webcast, the CHIPS Program Office (“CPO”) discussed the application process for this first funding opportunity and critical elements of a successful pre-application. This alert highlights key details from that webcast that will assist clients preparing funding pre-applications.

I. Who Can Apply, and When?

The CPO emphasized that currently the pre-application guidance in this alert applies only to covered entities applying for funding under the first NOFO, and it is unclear whether future NOFOs will follow a similar pre-application process.[3] The first NOFO encompasses funding for the principle fabrication aspects of semiconductors: fabrication facilities themselves, as well as assembly, testing, and advanced packaging. The first NOFO covers in general the full spectrum of fabrication technology, including: leading-edge, current-generation, and mature-node facilities, as well as back-end production facilities.[4] In its April 11 webinar, however, the CPO indicated that all potential applicants for CHIPS funding—even those not eligible for funding under the first NOFO—are encouraged to submit a Statement of Interest at this time.[5] These Statements of Interest, which include applicant information and a brief description of the planned application, allow the Department to gauge interest and prepare for the review of applications and pre-applications.[6] Official instructions for submitting a Statement of Interest have been published online.

After filing the Statement of Interest, applicants must wait a minimum of twenty-one days before submitting an application or pre-application for funding.[7] Once this twenty-one day period has passed, potential applicants eligible for funding may submit a pre-application (or application), according to the following schedule:

March 31, 2023: Earliest submission date for applicants for leading-edge project funding to submit an optional pre-application or mandatory full application.
May 1, 2023: Earliest date for applicants for current-generation, mature-node, and back-end project funding to submit an optional pre-application.
June 26, 2023: Earliest date for applicants for current-generation, mature-node, and back-end project funding to submit a mandatory full application.

II. Benefits of Submitting a Pre-Application

The Department of Commerce does not require a pre-application to award CHIPS Act funds under the first NOFO.[8] Submitting a pre-application, however, creates an opportunity for dialogue with the CPO. While this dialogue is useful for all applicants, the CPO has indicated that areas other than leading-edge fabrication—specifically, current-generation, mature-node, and back-end production applicants are especially encouraged to submit a pre-application, presumably as the CPO will need to more closely evaluate the merits of funding current or legacy technology as opposed to cutting-edge nodes.[9]

After reviewing a pre-application, the Department will provide potential applicants with a written assessment of the pre-application’s strengths and weaknesses, along with recommendations for improvement. This written assessment will include a “recommendation for next steps,” ranging from submitting a revised pre-application or full application to not submitting any further application materials.[10] Moreover, the CPO will use the pre-application to assess the project’s likely level of review under the National Environmental Policy Act (“NEPA”), allowing applicants to avoid delays down the line.[11]

For current-generation, mature-node, and back-end production applicants, the Department has indicated that the choice to submit a pre-application—or not—will not affect the timeline of the full application’s review.[12] The Department will initially screen applications and pre-applications for eligibility in order of receipt. The subsequent comprehensive review order, however, will be determined based on the program priorities discussed in Section IV of this alert. The Department has thus far been reluctant to provide any estimated turnaround time for applications until it has a clearer picture of the volume of potential applications.[13]

III. Elements of the Pre-Application

The pre-application consists of six main sections, including a mix of narrative responses, data uploads, and web form responses. The form of the pre-application largely mirrors that of the final application, to allow the Department to provide as thorough of an assessment of the application’s strengths and weaknesses as possible.[14] Guides and templates for these pre-application elements are available on the CHIPS for America website.

Cover Page: The pre-application’s cover page is created by populating a number of required fields in a web-based form on the CHIPS Incentives Program Application Portal. These fields include the applicant’s organization and a descriptive name for the project, as well as whether the applicant is part of a consortium.[15]As part of this cover page, applicants must indicate whether they have registered for an account with the federal government’s System for Award Management (“SAM.gov”). CPO staff advised that all potential applicants apply for an account on SAM.gov as soon as possible to avoid delays and to receive a Unique Entity Identifier number, which should be included on the cover page when possible.[16]The pre-application cover page should also, if applicable, provide information about any other entities with which the applicant anticipates partnering for purposes of their project. Such partners may include, but are not limited to, customers, suppliers, investors, bankers, or advisors. The Department has emphasized that, so long as these partners are meaningfully involved in the proposed project, applicants should be as inclusive as possible when listing potential partners in their cover page.[17]

Project Plan

The Project Plan provides a space for applicants to describe each project expected to be included in the future full application and explain how these projects satisfy the evaluation criteria discussed in Section IV of this alert. The Project Plan should consist of:[18]

Description of Projects: Applicants must provide a detailed description of the proposed project(s) for each facility included in the application.This description should include, among other things: the products that each facility produces or will produce, these products’ end market application, the top ten customers for each major product, and key suppliers.

Estimated Project Timeline: This timeline should include an estimated schedule for capital expenditures, key construction and operations milestones, and an estimate of when the applicant may be ready to submit the full application.

Applicant Profile: Applicants should identify their headquarters, primary officers, ownership, main business lines, countries of operation, and, if applicable, the identity of any corporate parent.

Consortium Description (if applicable): If applying as one participating entity in a larger consortium, an applicant must identify all individual entities that are members of the consortium, along with the role of each entity and the governance structure of the consortium.

Cluster Profile: Applicants should describe how their project(s) will attract supplier, workforce, and other related investments.

CHIPS Incentive Justification: A narrative summary should describe how CHIPS Act funding will incentive investments in facilities and equipment in the U.S. that would not occur in the absence of this funding.

Summary Narrative Addressing the Evaluation Criteria: This narrative response should address each evaluation criteria discussed in Section IV and indicate how the proposed project would support these program priorities.

Financial Information

The Financial Information section of the pre-application aims to ascertain the financial strength of the applicant (including any parent entities) and the project, as well as the existence of any third-party investments and the reasonableness of the CHIPS Act funding request.

The Financial Information submission should include:

Summary Financials for Each Project: For each project described in the pre-application, applicants must submit the expected revenues, costs, and cashflows for the project, including key income statements, cash flow statements, and balance sheet information.[19]
The Department has created an example financial model that can guide applicants’ submissions for these summary financials.[20]

Company Financials: Applicants must provide audited financial statements, key performance metrics, and details on leverage and related debt coverage for both the applicant and, if relevant, its corporate parent.

Facility Ownership Structure: Though not relevant in all cases, the Department has indicated that a detailed ownership map will generally be helpful for their review.[21]

Sources and Uses of Funds: Working from a template, applicants must describe the proposed project’s costs—including capital investment, operating losses and cash outflows, and workforce development costs—as well as a detailed description of project capital sources. When calculating project capital sources, applicants should factor in the estimated value the benefit is expected to be eligible to receive from the Investment Tax Credit, if applicable, and other state and local tax incentives.[22]

CHIPS Incentives Request: Applicants must submit a summary of requested dollar amounts for CHIPS Direct Funding.

Environmental Questionnaire

Companies may not have complete information regarding potential environmental impacts of their proposals at the pre-application stage. However, applicants should provide as thorough responses as possible to the environmental questionnaire in order to prevent delays at later stages.

In particular, the CPO has emphasized that comprehensive pre-application questionnaires enable its Environmental Division to more effectively assess an applicant’s likely level of NEPA review. The CPO Office has indicated that it plans to work with applicants and their third-party contractors to facilitate the environmental review under NEPA, including working with applicants at the pre-application stage to ensure that all required environmental information is collected as early as possible.[23] Specifically, they noted they will provide resources such as webinars, templates, and consultation in preparing for environmental reviews.[24]

Workforce Development Information

As a key program priority of the CHIPS Act, applicants must provide detailed information about their planned efforts to recruit, train, and retain a “diverse and skilled” set of workers.[25] In addition to forward-looking goals, the CPO stressed its interest in understanding any early actions applicants have already taken to support workforce development efforts.[26]

This workforce development section must provide an estimated number of jobs that an applicant’s projects will create, proposed strategy to meet these workforce needs, proposed training and education strategies, and an applicant’s strategy to comply with the Good Jobs Principles published by the Departments of Commerce and Labor.

In its April 11 webcast, the CPO repeatedly stressed its focus on creating “opportunities to reflect America’s diversity.”[27] Therefore, all submissions should include proposed equity strategies to promote the hiring and retention of employees from historically underserved communities.

The Department has also emphasized the importance of strategic partnerships to help attract talent, increase awareness of employment opportunities within a community, provide wraparound support for employees, and retain and grow a company’s workforce.[28] These partners may include community-based organizations, labor unions, educational institutions, and local housing organizations. Applicants cannot merely gesture to these community groups: the CPO indicated that applicants must secure commitments from these strategic partners and are expected to engage with them on an ongoing basis.[29]

Applicants seeking more than $150 million in direct funding will be required at the final application stage to provide a plan for how they will provide childcare for their workers. Although it is encouraged if possible, applicants are not required to submit this childcare plan at the pre-application stage.[30]

Attestation and Submission

After a pre-application is submitted through the CHIPS Incentives Program Application Portal, the CPO will send an email confirming receipt of the application. Once the pre-application has been screened for eligibility, the Department will begin a comprehensive review of the application and may reach out to the applicant for additional information or for clarification before providing its written assessment and next steps.

IV. Confidentiality

Some elements of the pre-application may require applicants to reveal trade secrets or other confidential business information. The CHIPS Act expressly provides that “any information derived from records or necessary information disclosed by a covered entity to the Secretary” with respect to CHIPS funding is exempt from disclosure under the Freedom of Information Act (“FOIA”) and “shall not be made public.”[31] Applicants’ trade secrets and privileged commercial or financial information is also protected from disclosure by FOIA.[32] Additionally, CPO staff emphasized that the Office is in the process of “instituting robust protocols, technology solutions, and organizational practices” to keep applicants’ data safe. They noted that application materials will only be available to federal officials and contractors on a need-to-know basis.[33]

To ensure that all confidential business information is properly protected from disclosure, the Department provides detailed instructions for marking this information in Section III(C)(2) of the NOFO.[34]

V. Project Evaluation Criteria

All applications and pre-applications for funding under the first NOFO are evaluated based on their ability to satisfy six main criteria, based on CHIPS program priorities. These criteria are:

Economic & National Security Objectives

Because “[a]dvancing U.S. economic and national security is the principal objective of the CHIPS Incentives Program,”[35] the Department has indicated that projects’ ability to support these goals will receive the greatest weight in its review.[36] Strong applications must therefore explain how their projects will support U.S. economic and national security by, for example, mitigating against supply chain shocks associated with the current geographic concentration of semiconductor manufacturers or meeting the government’s need for safe and secure chips for modern defense systems.

Moreover, because the CHIPS Act aims to support the “next wave of U.S.-based production” of semiconductors, the Department will consider “the extent to which the applicant makes credible commitments of ongoing private investment” in the United States as part of its economic security analysis.[37]

Projects that remain vulnerable to cybersecurity risks or supply chain disruption may pose risks to U.S. national security. Therefore, applicants should address their risk management strategies designed to avoid supply chain exploitation, loss of intellectual property, and data security.[38]

Commercial Viability

The Department of Commerce has indicated that projects funded under the CHIPS Act should eventually be capable of “providing reliable cash flows that are sufficient to maintain continuity of operations and continued investment as necessary in the facility.”[39] Applications and pre-applications should therefore demonstrate a reasonable market environment and demand—including an assessment of the size and diversity of the expected customer base—for the types of semiconductor technology the projects will produce.

In its April 11 webcast, CPO staff indicated that evidence of existing customer demand can be particularly persuasive.[40] However, applications should address the commercial viability for the “entire estimated useful life” of the project, including by addressing any technology obsolescence risk.[41]

Financial Strength

As discussed in Section III, the Department will assess any application on the financial strength not just of the applicant, but also of its corporate parent and key intermediate entities.

When assessing the financial strength of any given project, the Department will consider all alternative sources of financing that an applicant has pursued, including through private equity and external debt financing. CPO staff indicated that applicants that have minimized the size of their CHIPS funding request by pursuing alternative funding sources will generally be preferred.[42]

Technical Feasibility & Readiness

The CHIPS Act’s success depends, in part, on the timely and effective construction and operation of funded facilities. Therefore, applicants must demonstrate not only that their projects are technically feasible, but also that the applicant has a clear project execution plan including construction and operational deadlines. Applicants who can demonstrate, for example, existing infrastructure and contractual arrangements for their projects may be more successful in securing funding.

Workforce Development

As discussed in Section III, a key priority of the CHIPS Act is the development of a highly skilled and diverse workforce, including both the construction workforce necessary to complete funded projects and the semiconductor workforce that will ultimately operate these facilities. Applicants must detail their plans to recruit, train, and retain these construction and facility workers on an equitable basis and in line with the Good Jobs Principles.

The Department of Commerce has published a detailed Workforce Development Planning Guide to assist applicants in developing these strategies.

Broader Impacts of the Project

The Department of Commerce has emphasized its interest in funding projects that will contribute to “community vitality” by supporting small businesses, engaging in appropriate environmental stewardship, and more.[43] Applicants should demonstrate that they will maximize benefits to taxpayers by supporting a wide variety of tangential impacts, such as:

Commitments to future investment in the U.S. semiconductor industry;

Support for CHIPS research and development programs;

Creating inclusive opportunities for businesses, including small businesses and minority-owned, women-owned, and veteran-owned businesses;

Demonstrated climate and environmental responsibility;

Community investments, including affordable housing, education, and transportation opportunities; and

Use of domestic manufacturing and raw materials in construction and operation of projects.

VI. How Gibson Dunn Can Assist

Gibson Dunn has an expert team tracking implementation of the CHIPS Act closely, including semiconductor industry subject matter experts and public policy professionals. Our team is available to assist eligible clients to secure funds throughout the CHIPS Act application process, including the pre-application process. We also can engage with our extensive political-appointee and career officials contacts at the Department of Commerce and other federal agencies to facilitate dialogue with our clients and discuss the structure of future CHIPS Act programs being developed.

__________________________

[1]      Pub. Law No. 117–167 Sec. 102(a) (funding the authorization of the semiconductor incentive program established under the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (15 U.S.C. §§ 4652, 4654, 4656, Pub. Law No. 116-283)).

[2]      5 U.S.C. § 4651(2); U.S. Dep’t of Commerce Nat’l Institute of Standards and Technology Notice of Funding Opportunity, CHIPS Incentives Program—Commercial Fabrication Facilities, https://www.nist.gov/system/files/documents/2023/02/28/CHIPS-Commercial_Fabrication_Facilities_NOFO_0.pdf [hereinafter, NOFO].

[3]      Department of Commerce Webcast (Apr. 11, 2023). During this webcast, the CPO reiterated that two additional NOFOs are expected to be published in the coming months: one focused on material suppliers and equipment manufactures in late spring 2023 and one for the construction of semiconductor research and development facilities in fall 2023. Id.

[4]      NOFO at 5.

[5]      Id.

[6]      NOFO at 11.

[7]      Id. at 1.

[8]      NOFO at 11.

[9]      Department of Commerce Webcast (Apr. 11, 2023).

[10]    Id.

[11]    NOFO at 11.

[12]    Department of Commerce Webcast (Apr. 11, 2023).

[13]    Id.

[14]    See NOFO at 38–39. The full application submission is made up of the following components, which include information captured in large part in the pre-application: Cover Page, Covered Incentive, Description of Project(s), Applicant Profile, Alignment with Economic and National Security Objectives, Commercial Strategy, Financial Information, Project Technical Feasibility, Organization Information, Workforce Development Plan, Broader Impacts, and Standard Forms.

[15]    CHIPS for America Guide: Instruction for Pre-Application Forms and Templates (Mar. 27, 2023), https://www.nist.gov/system/files/documents/2023/03/27/Pre-App-Instruction-Guide.pdf.

[16]    Department of Commerce Webcast (Apr. 11, 2023).

[17]    Id.

[18]    NOFO at 34–35.

[19]    NOFO at 36.

[20]    CHIPS for America Guides and Templates (last accessed Apr. 11, 2023), https://www.nist.gov/document/chips-nofo-commercial-fabrication-facilities-pre-application-sources-and-uses-template. The Department of Commerce published a white paper explaining the financial models contained within this example, available at: https://www.nist.gov/system/files/documents/2023/03/31/Pre-App-Financial-Model-White-Paper.pdf.

[21]    Department of Commerce Webcast (Apr. 11, 2023).

[22]    NOFO at 36.

[23]    Id.

[24]    Department of Commerce Webcast (Apr. 11, 2023).

[25]    NOFO at 37.

[26]    Department of Commerce Webcast (Apr. 11, 2023).

[27]    Id.

[28]    Id.

[29]    Id.

[30]    Id.

[31]    See 15 U.S.C. § 4652(a)(6)(G).

[32]    See 15 U.S.C. § 4652(a)(6)(G).

[33] Department of Commerce Webcast (Apr. 11, 2023).

[34]    NOFO at 30–31.

[35]    NOFO at 13.

[36]    Department of Commerce Webcast (Apr. 11, 2023).

[37]    NOFO at 14.

[38]    Id. at 15.

[39]    Id. at 16.

[40]    Department of Commerce Webcast (Apr. 11, 2023).

[41]    NOFO at 17.

[42]    Department of Commerce Webcast (Apr. 11, 2023).

[43]    Id.

The following Gibson Dunn lawyers prepared this client alert: Ed Batts, Michael Bopp, Roscoe Jones, Jr., Amanda Neely, Danny Smith, and Sean Brennan.*

Gibson, Dunn & Crutcher’s 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 in the firm’s Public Policy practice group, or the following authors:

Michael D. Bopp – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)

Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)

Ed Batts – Palo Alto (+1 650-849-5392, ebatts@gibsondunn.com)

Amanda H. Neely – Washington, D.C. (+1 202-777-9566, aneely@gibsondunn.com)

Daniel P. Smith – Washington, D.C. (+1 202-777-9549, dpsmith@gibsondunn.com)

*Sean J. Brennan is an associate working in the firm’s Washington, D.C. office who currently is admitted to practice only in New York.

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